The California Court of Appeal, Second Appellate District, recently reversed a trial court’s ruling, and held that a defendant bank owed the plaintiff law firm a duty of care based on the special relationship the bank had with the law firm as an intended beneficiary of a probate court’s blocked account order.
In so ruling, the Appellate Court explained that, although banks do not generally have a duty to police customer accounts for suspicious activity, the bank here owed the law firm a duty to act with reasonable care in limiting distributions from the blocked account to those authorized by court order.
A copy of the opinion in The Law Firm of Fox and Fox v. Chase Bank is available at: Link to Opinion.
A law firm filed an action against a bank, claiming negligence in the disbursement of funds from an account containing estate funds to the sole signatory on the account, the administrator of the estate. Specifically, the law firm alleged that the bank was negligent in disbursing the entirety of the estate funds to the administrator despite a probate court order specifying that the administrator would receive at most $16,000 from the account, with most of the remaining funds to be paid to the law firm and then to other beneficiaries.
The trial court granted the bank’s motion for summary judgment, concluding that the bank owed no duty of care to the law firm and had complied with the probate court order. The law firm timely appealed.
On appeal, the law firm contended it raised triable issues of fact with respect to whether the bank owed a duty to the firm, whether the bank breached any such duty, and whether the bank’s conduct in distributing the funds to the administrator, who absconded with the funds, was the proximate cause of the law firm’s damages.
In finding a duty of care, California courts consider the factors articulated by the California Supreme Court in Biakanja v. Irving (1958) 49 Cal.2d 647: (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. Id. at 650. However, “[d]eciding whether to impose a duty of care turns on a careful consideration of the ‘the sum total’ of the policy considerations at play, not a mere tallying of some finite, one size-fits-all set of factors.” Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 401.
Here, the Second District ruled that the bank and the law firm had a special relationship because the law firm was an intended beneficiary of the blocked account order, which limited distribution of the estate funds. Therefore, the Court applied the Biakanja factors to determine whether the bank owed a duty of care to the law firm in making distributions from the blocked account.
Although banks do not generally have a duty to police customer accounts for suspicious activity, the Second Appellate District concluded that application of the Biakanja factors revealed that the bank here did owe the law firm, as an intended beneficiary of the blocked account order, a duty to act with reasonable care in limiting distributions from the blocked account to those authorized by court order.
First, the Court found that the blocked account order, by preventing disbursement of the estate funds in the blocked account without a court order authorizing payment, was intended to affect the law firm, which had a priority right to those funds. Second, it was foreseeable that distributing the entirety of the funds in the blocked account to one beneficiary, without a court order directing disbursement of the funds, would harm the other beneficiaries, including the law firm. Third, the law firm suffered injury as a result of the bank allowing the administrator to withdraw all the funds in the blocked account, depriving the law firm of any payment. Fourth, there was likewise a close connection between the bank’s conduct in distributing all the funds to the administrator and the law firm’s injury. Finally, the goal to prevent future harm supported the conclusion that a bank owes a duty of care to an intended beneficiary where a bank releases funds from a blocked account without court authorization.
The bank contended that it did not breach any duty owed to the law firm because it followed the probate court order in releasing the funds in the blocked account to the administrator as the only authorized signatory on the account. However, the Second Appellate District agreed with the law firm that the language of the court order did not direct the bank to unblock the account for release of all the funds to the administrator. While possibly the administrator’s signature would have been necessary to effectuate the release of funds to the law firm and other beneficiaries, that did not mean she could withdraw any funds from the blocked account without a court order directing the bank to release the funds to her.
Accordingly, the Second District held that there were triable issues of fact as to whether the bank breached its duty and whether that breach caused the law firm harm by allowing the administrator to withdraw all the funds in the account. Thus, the Court reversed the trial court’s summary judgment in favor of the bank.