QDOS, Inc. v. Signature Fin., LLC

circumstances that may indicate the third party is being defrauded, and in that instance (2) not to proceed with the transaction without doing some investigation. (E.g.,

with his name on it. However, at no point during this transaction did QDOS/DeskSite contact The Auto Gallery directly or otherwise instruct The Auto Gallery to place title to the car in its name or to place a lien on the car in its favor. Because The Auto Gallery received no special instructions and had received payment in full, in December 2011, it placed title to the car in the name of Kader and his wife and listed no liens.

In July 2012, Kader sold the car back to The Auto Gallery for $428,111 and a trade-in car. Two weeks later, The Auto Gallery sold the car to defendant and respondent Premier Financial Services, LLC (Premier), who financed its purchase with a loan from defendant and respondent Signature Financial, LLC (Signature). Premier then leased the car to defendant and respondent Rick Jenkins, M.D., Inc. (Jenkins).

A. QDOS/DeskSite's Operative Complaint

In the operative first amended complaint, DeskSite sued Kader, The Auto Gallery, Premier, Signature, and Jenkins. Specifically, DeskSite sued Kader for (1) breach of contract, (2) breach of fiduciary duty, (3) fraud, (4) fraudulent concealment, (5) conversion (of the car), and (6) conversion (of an additional $150,000 that DeskSite loaned Kader so Kader could obtain a loan to pay off DeskSite's $516,000 investment in the car). DeskSite sued The Auto Gallery for (1) aiding and abetting Kader's breach of fiduciary duty, (2) aiding and abetting Kader's fraud, (3) aiding and abetting Kader's fraudulent concealment, (4) aiding and abetting Kader's conversion of the car, and (5) negligence. All of the those claims were premised on The Auto Gallery's conduct in "helping" Kader with the transaction and/or not investigating why Kader was paying with QDOS/DeskSite's checks. DeskSite sued Premier, Signature,

the declaratory relief claim, the court found that the remaining defendants had "failed to meet their burden" of showing entitlement to summary adjudication.

D. Trial on Declaratory Relief Claim

In anticipation of the trial on DeskSite's declaratory relief claim, the remaining defendants filed motions in limine to exclude evidence regarding (1) any alleged negligence by The Auto Gallery, and (2) DeskSite's claims against The Auto Gallery. The trial court granted both motions. At the hearing on the motions, DeskSite acknowledged that the question whether The Auto Gallery was negligent and the question whether Kader was a "thief" incapable of passing title (hence entitling DeskSite to declaratory relief) were "totally separate questions," but nevertheless urged that "one could inform the other." The trial court was unpersuaded, ruling that it would not "allow testimony about [The] Auto Gallery [because] [t]hey're not" in the case.

default prove-up hearing. We discuss each challenge in turn.

Summit Financial , supra , 27 Cal.4th at p. 715, 117 Cal.Rptr.2d 541 , 41 P.3d 548 ; Quelimane , supra , 19 Cal.4th at p. 58, 77 Cal.Rptr.2d 709 , 960 P.2d 513 .) The Biakanja considerations are: (1) "the extent to which the transaction was intended to affect the plaintiff," (2) "the foreseeability of harm to [the plaintiff]," (3) "the degree of certainty that the plaintiff suffered injury," (4) "the closeness of the connection between the defendant's conduct and the injury suffered," (5) "the moral blame attached to the defendant's conduct," and (6) "the policy of preventing future harm." ( Biakanja , at p. 650, 320 P.2d 16 .) Among these factors, foreseeability is the " ' "chief factor" ' " ( Pedeferri v. Seidner Enterprises (2013) 216 Cal.App.4th 359 , 366, 163 Cal.Rptr.3d 55 ( Pedeferri )), but "[f]oreseeability of financial injury to third persons alone is not a basis for imposition of liability for negligent conduct" ( Quelimane , at p. 58, 77 Cal.Rptr.2d 709 , 960 P.2d 513 ; Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370 , 399, 11 Cal.Rptr.2d 51 , 834 P.2d 745 ).

The Biakanja considerations are similar to, but not identical with, the policy considerations set forth in Rowland v. Christian (1968) 69 Cal.2d 108 , 70 Cal.Rptr. 97 , 443 P.2d 561 ( Rowland ) that bear on the recognition of a duty of care among persons not parties to a business or financial transaction. Rowland enumerates seven considerations: The first five Rowland considerations are identical to second through sixth Biakanja considerations. (See Rowland , at pp. 112-113, 70 Cal.Rptr. 97 , 443 P.2d 561 .) Where the list of considerations differs is that (1) Rowland does not consider "the extent to which the transaction was intended to affect the plaintiff" (because there is no transaction), and (2) Rowland adds two further considerations that flesh out "the policy of preventing future harm" consideration-namely, (a) "the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach," and (b) "the availability, cost, and prevalence of insurance for the risk involved." ( Rowland , at p. 113, 70 Cal.Rptr. 97 , 443 P.2d 561 .) Whether a court uses the Biakanja factors, the Rowland factors, or an amalgamation of both, the "factors are evaluated at a relatively broad level of factual generality." ( Cabral , supra , 51 Cal.4th at p. 772, 122 Cal.Rptr.3d 313 , 248 P.3d 1170 ; Ballard v. Uribe (1986) 41 Cal.3d 564 , 573-572, fn. 6, 224 Cal.Rptr. 664 , 715 P.2d 624 .)

As a general rule, courts have recognized that a person or entity-whether it be a bank or a merchant-engaged in a financial transaction with a

Joffe v. United California Bank (1983) 141 Cal.App.3d 541 , 556, 190 Cal.Rptr. 443 ( Joffe ); Karen Kane, Inc. v. Bank of America (1998) 67 Cal.App.4th 1192 , 1195, 1198, 79 Cal.Rptr.2d 712 ( Karen Kane ); Software Design , supra , 49 Cal.App.4th at pp. 480-481, 483, 56 Cal.Rptr.2d 756 ; Chazen v. Centennial Bank (1998) 61 Cal.App.4th 532 , 545, 71 Cal.Rptr.2d 462 .)

Courts have sorted the circumstances that constitute red flags from those that do not. Red flags include: (1) when a bank's customer tries to have the proceeds of the third party's check that was made out to someone else placed in the customer's own personal account ( Sun 'n Sand , supra , 21 Cal.3d at pp. 693-695, 148 Cal.Rptr. 329 , 582 P.2d 920 ; E. F. Hutton & Co. v. City National Bank (1983) 149 Cal.App.3d 60 , 68, 196 Cal.Rptr. 614 ( E. F. Hutton ); Sehremelis v. Farmers & Merchants Bank (1992) 6 Cal.App.4th 767 , 772-776, 7 Cal.Rptr.2d 903 ( Sehremelis )); or (2) when a bank's customer tries to have the proceeds of the third party's check that was made out to an escrow account placed in the customer's own personal account in contravention of the escrow notation on the face of the check ( Joffe , supra , 141 Cal.App.3d at pp. 547-548, 556, 190 Cal.Rptr. 443 ). Red flags do not include: (1) when a check-cashing business's customer presents a check endorsed by hand (rather than with a stamp) ( Karen Kane , supra , 67 Cal.App.4th at p. 1198-1199, 79 Cal.Rptr.2d 712 ); (2) when a check-cashing business's customer seeks to cash a business-to-business check ( id. at pp. 1198, 1202-1203, 79 Cal.Rptr.2d 712 ); (3) when a brokerage firm's customer has frequent transactions involving large sums of money ( Software Design , supra , 49 Cal.App.4th at p. 483, 56 Cal.Rptr.2d 756 ); or (4) when a bank's customer opens up an account in a name other than her own ( Rodriguez v. Bank of the West (2008) 162 Cal.App.4th 454 , 466, 75 Cal.Rptr.3d 543 ( Rodriguez )).

Because Kader presented two checks payable to The Auto Gallery and bearing Gillam's valid signature on behalf of DeskSite, this case presents

that the check is drawn on the account of someone other than the merchant's customer-that the check is not valid, that the check is subject to restrictions or instructions, or that the customer will not convey or otherwise adhere to any restrictions or instructions he has agreed to with the check's maker. (Accord, Burns , supra , 173 Cal.App.4th at p. 489, 93 Cal.Rptr.3d 130 [merchant has no reason for foresee injury to third party because merchant had no reason to foresee that the third party's bank would not detect the fact that a check was unauthorized].)

The remaining factors also counsel against recognizing any duty. In evaluating " 'the extent to which the transaction [is] intended to affect the plaintiff,' " we must ascertain the " 'primary purpose' " of the transaction and ask whether the plaintiff's interest is central or " 'collateral' " to that purpose. ( Summit Financial , supra , 27 Cal.4th at p. 715, 117 Cal.Rptr.2d 541 , 41 P.3d 548 ; Biakanja , supra , 49 Cal.2d at p. 650, 320 P.2d 16 [looking to the " 'end and aim' " of the transaction].) Here, the primary purpose of a merchant's sale of merchandise to its customer is (obviously) to sell merchandise; verifying that checks made out to the

DeskSite raises four sets of arguments in response.

First, it urges a different weighing of the pertinent policy considerations. More specifically, DeskSite argues that we may not consider its own negligence in failing to monitor Kader's use of its money because doing so would run afoul of the rule that a party's contributory negligence is no longer a bar to tort relief in California. (E.g., City of Santa Barbara v. Superior Court (2007) 41 Cal.4th 747 , 779, 62 Cal.Rptr.3d 527 , 161 P.3d 1095 .) However, courts that are balancing the policy considerations set forth in Biakanja and

A bank or merchant has a common law duty, when conducting a transaction with its customer that also involves a third party, (1) not to ignore "red flags" or "suspicious"

Sun 'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671 , 693, 148 Cal.Rptr. 329 , 582 P.2d 920 ( Sun 'n Sand ), superseded on other grounds by Cal. U. Com. Code, § 3404 ; Burns v. Neiman Marcus Group, Inc. (2009) 173 Cal.App.4th 479 , 489, 93 Cal.Rptr.3d 130 ( Burns ).) Can the third party sue a merchant for negligence in breaching these duties when the merchant sells a high-end sports car to its customer and the customer pays for most of the car with two checks the third party made out to the merchant? In other words, is a customer's payment with a check not in the customer's own name, by itself, a red flag? We conclude the answer is "no," and affirm the trial court's grant of summary adjudication dismissing the third party's negligence and related claims against the merchant. In the unpublished portion of our decision, we further conclude that the trial court did not err (1) in excluding evidence of the merchant's alleged negligence during the trial against the car's current owners to declare who owns the car, and (2) in declining to award punitive damages against the merchant's customer after a default judgment was entered against him. Accordingly, we affirm the judgment.

FACTS AND PROCEDURAL BACKGROUND

Plaintiff and appellant QDOS, Inc. (QDOS) is in the business of offering team-specific, sports-related content over the Internet and on mobile devices. QDOS does business as "DeskSite." Richard Gillam (Gillam) is DeskSite's CEO.

In early 2011, DeskSite asked Fazliq Dean Kader (Kader) to raise funds for its business, although DeskSite never hired him as an employee. In late 2011, Kader secured a $3 million investment.

In December 2011, Kader approached Gillam with a "unique business proposal"-namely, DeskSite would put up the money to buy a 2012 Lamborghini Aventador and then immediately resell the car for a profit of at least $200,000, and the profit would be deemed additional fundraising revenue for DeskSite. Kader suggested buying the car from The Auto Gallery, which was operated by defendant and respondent Motorcars West, LLC. Kader was one of The Auto Gallery's "preexisting client[s]," and Kader had previously told The Auto Gallery's employees that he owned "hundreds of companies." Gillam agreed to the proposal. Because Gillam "trusted" Kader, Gillam did not at that time put anything in writing and just orally told Kader to vest title to the car in DeskSite's name. The exact nature of DeskSite's funding of the car purchase was disputed by Gillam himself: Contemporaneously, he referred to the money used to buy the car as a "loan," but after litigation started, said it was "not ... a loan."

Gillam and Kader moved forward with their plan. Kader put down a $15,000 deposit using his own personal check. Gillam then authorized two checks drawn on QDOS/DeskSite's account to be made out to The Auto Gallery-the first for $300,000, and the second for $216,000-and then Gillam signed those checks. In the memo line, both checks noted "Auto DKL," which Gillam said stood in part for "Dean Kader." Consistent with Kader's statements to The Auto Gallery that he owned QDOS and that he would be buying the car with company checks, Kader personally handed both QDOS/DeskSite checks to The Auto Gallery's employees. Kader did not give The Auto Gallery any QDOS/DeskSite business cards or letterhead

Summary adjudication, like summary judgment, is appropriate when the moving party shows "[it] is entitled to a judgment as a matter of law" ( Code Civ. Proc., § 437c, subd. (c) ) because, among other things, the nonmoving party (here, DeskSite) cannot establish "[o]ne or more of the elements of [its] cause of action" ( Code Civ. Proc., § 437c, subd. ( o )(1) ; see id. , subd. (p)(2)). ( Tustin Field Gas & Food, Inc. v. Mid-Century Ins. Co. (2017) 13 Cal.App.5th 220 , 226, 219 Cal.Rptr.3d 909 ; State of California v. Continental Ins. Co. (2017) 15 Cal.App.5th 1017 , 1031, 223 Cal.Rptr.3d 716 [summary adjudication is " 'procedurally identical to [a] motion[ ] for summary judgment ...' "].) " ' "[T]he existence of a duty" ' " of care running from the defendant to the plaintiff is " ' " [t]he threshold element of a cause of action for negligence." ' " ( Paz v. State of California (2000) 22 Cal.4th 550 , 559, 93 Cal.Rptr.2d 703 , 994 P.2d 975 , italics added.) Because DeskSite does not argue that The Auto Gallery knew of Kader's fraudulent misuse of DeskSite's money, the viability of DeskSite's negligence as well as aiding and abetting-based claims against The Auto Gallery turns solely on whether The Auto Gallery unreasonably failed to uncover Kader's fraud and hence on whether The Auto Gallery had a duty to investigate. Whether a duty of care exists is a question of law for our independent review. ( Quelimane Co v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26 , 57, 77 Cal.Rptr.2d 709 , 960 P.2d 513 ( Quelimane ).) We also independently review a trial court's grant of summary adjudication. ( Jacks v. City of Santa Barbara (2017) 3 Cal.5th 248 , 273, 219 Cal.Rptr.3d 859 , 397 P.3d 210 .)

"The general rule in California is that '[e]veryone is responsible ... for an injury occasioned to another by his or her want of ordinary care or skill in the management of his or her property or person ....' " ( Cabral v. Ralphs Grocery Co. (2011) 51 Cal.4th 764 , 771, 122 Cal.Rptr.3d 313 , 248 P.3d 1170 ( Cabral ), quoting Civ. Code, § 1714, subd. (a).) In the business context, however, "[r]ecognition of a duty [under negligence law] to manage business affairs so as to prevent purely economic loss to third parties in their financial transactions is the exception, not the rule." ( Quelimane , supra , 19 Cal.4th at p. 58, 77 Cal.Rptr.2d 709 , 960 P.2d 513 ; Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705 , 715, 117 Cal.Rptr.2d 541 , 41 P.3d 548 ( Summit Financial ).) Whether a court will nevertheless recognize such a duty does not turn on privity of contract. ( Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc. (2016) 1 Cal.5th 994 , 1013, 209 Cal.Rptr.3d 280 , 382 P.3d 1116 ( Centinela Freeman ); Quelimane , at p. 58, 77 Cal.Rptr.2d 709 , 960 P.2d 513 .) Instead, it turns on whether " 'public policy ... dictate [s] the existence of a duty to third parties.' " ( Centinela Freeman , at p. 1013, 209 Cal.Rptr.3d 280 , 382 P.3d 1116 ; Cabral , at p. 771, 122 Cal.Rptr.3d 313 , 248 P.3d 1170 ["courts should create [a duty] only where 'clearly supported by public policy' "].)

To assess whether public policy dictates the recognition of a duty of care, courts "balanc[e] ... a number of policy considerations." ( Sun 'n Sand , supra , 21 Cal.3d at p. 695, 148 Cal.Rptr. 329 , 582 P.2d 920 .) The considerations most relevant in the "business context" are set forth in Biakanja v. Irving (1958) 49 Cal.2d 647 , 650, 320 P.2d 16 ( Biakanja ). (See Centinela Freeman , supra , 1 Cal.5th at pp. 1013-1014, 209 Cal.Rptr.3d 280 , 382 P.3d 1116 ;

merchant that on their face appear valid are, in fact, valid and free of any special conditions would seem to be collateral to that primary purpose. No "moral blame" attaches to the merchant's conduct because the merchant is simply accepting a check validly made payable to it. ( Burns , supra , 173 Cal.App.4th at p. 490, 93 Cal.Rptr.3d 130 [noting that "the person deserving of moral blame" is the dishonest customer, "not" the merchant].) And the "policy of preventing future harm" strongly counsels against imposing this duty to investigate upon merchants because the burdens it would impose far outweigh any benefits. Requiring an investigation whenever a check not in the customer's name is presented means that merchants "would have to stop [their] business every time [they] received such a check in order to make an independent inquiry of the" check's maker. ( Burns , at pp. 489-490, 93 Cal.Rptr.3d 130 .) This would "substantially impede[ ]" "the flow of commerce." ( Karen Kane , supra , 67 Cal.App.4th at p. 1199, 79 Cal.Rptr.2d 712 .) Burdening the merchant with investigating whether a valid check from someone other than the customer has strings attached and with thereafter enforcing those strings-rather than having the check's maker make those strings known and enforce those strings itself-also places the burden on the wrong party. "It is that person who has the most control and the most to win or lose ... with whom the investigative tasks should rest." ( Software Design , supra , 49 Cal.App.4th at p. 483, 56 Cal.Rptr.2d 756 ; Karen Kane , at p. 1199, 79 Cal.Rptr.2d 712 .)

Second, Burns has already held, in a similar but slightly different context, that "the fact that an account payment came from a third party is not enough to put [a merchant] on notice of a potential fraud." ( Burns , supra , 173 Cal.App.4th at pp. 486, 488, 93 Cal.Rptr.3d 130 .) There, the plaintiff's secretary paid off her Neiman Marcus credit card debt using checks she forged from plaintiff's bank account. ( Id . at pp. 483-486, 93 Cal.Rptr.3d 130 ) Plaintiff sued Neiman Marcus for negligence on the ground that its customer's use of checks not in her name to pay her credit card bills was a red flag that triggered a duty to investigate. After evaluating the policy considerations set forth in Rowland , Burns refused to recognize and impose such a duty upon a retail merchant. ( Id. at pp. 487-492, 93 Cal.Rptr.3d 130 .) Burns' s logic applies with equal force here, such that a merchant's customer's use of a third party check, by itself, also triggers no duty to investigate.

Rowland are not considering a plaintiff's negligence for the purpose of imposing a bar to relief against the plaintiff in that specific case. Instead, they are considering the plaintiff's negligence as a proxy for whether the class of people in the plaintiff's position are better poised to avoid the complained-of injury than the class of people in the defendant's position. This is valid part of assessing "the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach." ( Rowland , supra , 69 Cal.2d at p. 113, 70 Cal.Rptr. 97 , 443 P.2d 561 .) Indeed, the statute governing the scope of duties of care specifically provides that no duty of care will lie where the putative plaintiff "has, willfully or by want of ordinary care, brought the injury upon himself or herself." ( Civ. Code, § 1714, subd. (a).)

DeskSite next argues that the burden can be lessened if the duty to investigate is limited to merchants who receive third party checks that are used to pay for a substantial portion of bigger ticket items. However, this argument poses more questions than it answers: What is a bigger ticket item? What is a substantial portion of the item's price? More to the point, this narrowing at most reduces the universe of merchants or transactions so burdened, but in no way alters our analysis of the other Biakanja and Rowland factors as to that smaller universe, all of which counsel against recognizing a duty.

DeskSite further asserts that merchants can buy general purpose insurance to cover any liability they might incur if they do not investigate or, even if they investigate, if they do not successfully ferret out restrictions or special instructions accompanying third party checks. This assertion speaks only to the potential availability of insurance, but not to its "cost" or "prevalence." ( Rowland , supra , 69 Cal.2d at p. 113, 70 Cal.Rptr. 97 , 443 P.2d 561 .) It does not alter our analysis.

Second, DeskSite contends that Sun 'n Sand , supra , 21 Cal.3d 671 , 148 Cal.Rptr. 329 , 582 P.2d 920 and its progeny (namely, Joffe , supra , 141 Cal.App.3d 541 , 190 Cal.Rptr. 443 , E. F. Hutton , supra , 149 Cal.App.3d 60 , 196 Cal.Rptr. 614 , and Sehremelis , supra , 6 Cal.App.4th 767 , 7 Cal.Rptr.2d 903 ) dictate a result in its favor. They do not. As explained above, the transactions in those cases involved a bank customer's attempt to deposit the proceeds from a check made out to someone else into the customer's personal account or an attempt to deposit into the customer's own account the proceeds from a check with an escrow account restriction on its face. ( Sun 'n Sand , at pp. 693-695, 148 Cal.Rptr. 329 , 582 P.2d 920 ; Joffe , at pp. 547-548, 556, 190 Cal.Rptr. 443 ; E. F. Hutton , at p. 68, 196 Cal.Rptr. 614 ; Sehremelis , at pp. 772-776, 7 Cal.Rptr.2d 903 .) These are circumstances far more suspicious, and far less common, than the simple use of third party's check to buy merchandise. Indeed, Sun 'n Sand itself acknowledged that the duty it was recognizing was "narrowly circumscribed." ( Sun 'n Sand , at p. 695, 148 Cal.Rptr. 329 , 582 P.2d 920 .) We are loathe to ignore our Supreme

Court's own advice. DeskSite acknowledges