Pazmany Brothers Landscaping Inc. v. Citigroup, Inc.

Background

Pazmany alleged that its former bookkeeper, Guadalupe Lola Reed, wrote unauthorized checks from Pazmany’s account between approximately 2014 and February 2017. Reed allegedly deposited the checks into Citi accounts that she maintained or controlled. Pazmany alleged that Bank of America, which held Pazmany’s account, honored the checks and paid Citi, and that Reed embezzled more than $722,000. Reed was prosecuted and convicted of embezzlement.

Pazmany’s first amended complaint asserted four causes of action: negligence based on alleged violations of the Uniform Commercial Code, common-law negligence, money had and received, and unfair business practices under California Business and Professions Code section 17200. Citi moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim.

UCC-Based Claim

Pazmany relied on California provisions concerning transfer warranties and presentment warranties for checks. The court held that Pazmany was the drawer of the checks, not the transferee. Therefore, Pazmany was not the recipient of the transfer warranty under California Commercial Code section 4207. The court also held that the presentment warranty under section 4208 protected Pazmany’s bank, Bank of America, rather than Pazmany itself.

Because the warranties did not extend to Pazmany, the court dismissed the first cause of action for negligence and UCC violations without leave to amend. The court found that amendment would be futile.

Common-Law Negligence

Under California law, negligence requires a legal duty of care, a breach of that duty, and an injury caused by the breach. Citi argued that it owed no duty to Pazmany because Pazmany was not a Citi customer.

The court recognized that banks generally do not owe noncustomers a duty to investigate or disclose suspicious activity by an account holder, but stated that specific and unusual facts can create such a duty. The court found Pazmany’s allegations sufficient at the pleading stage: Reed allegedly deposited dozens of checks totaling more than $722,000 into her own accounts, even though the checks were payable to other people and lacked endorsements. The court therefore denied Citi’s motion to dismiss the common-law negligence claim.

Money Had and Received

The parties agreed that Pazmany’s money-had-and-received claim depended on its negligence claim. Because the court denied dismissal of the common-law negligence claim, it also denied dismissal of the money-had-and-received claim.

Unfair Business Practices

Pazmany based its California unfair-business-practices claim on the statute’s “unlawful” and “unfair” grounds. The court rejected the unlawful-ground theory because Pazmany had not adequately pleaded a UCC violation. However, the court held that Pazmany had alleged enough to proceed under the unfair-ground theory. The allegations addressed the banking system’s benefits, Pazmany’s harm, Citi’s conduct, and why the alleged harm outweighed the practice’s utility. The court therefore denied dismissal of the section 17200 claim.

Disposition

Judge Susan Van Keulen ordered that Citi’s motion to dismiss be granted in part without leave to amend and denied in part. Pazmany’s first cause of action for negligence and UCC violations was dismissed without leave to amend. The motion to dismiss Pazmany’s second cause of action for common-law negligence, third cause of action for money had and received, and fourth cause of action for unfair business practices was denied. The court also scheduled an initial case-management conference.