QDOS, Inc. v. Signature Financial, LLC ( 2017 )

Filed 11/29/17
CERTIFIED FOR PARTIAL PUBLICATION*
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
QDOS, INC., B279475
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC566521)
v.
SIGNATURE FINANCIAL, LLC,
et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los
Angeles County. Rita Miller and Victor Chavez, Judges.
Affirmed.
Law Offices of Damian D. Capozzola, Damian D. Capozzola
and Timothy R. Laquer for Plaintiff and Appellant.
Kolar & Associates, Elizabeth L. Kolar & Benjamin T.
Runge for Defendants and Respondents.
******
* Pursuant to California Rules of Court, rules 8.1100 and
8.1110, only the Factual and Procedural Background, Part I of
the Discussion, and the Disposition are certified for publication.
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”
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., Sun ’n Sand,
Inc. v. United California Bank (1978) 21 Cal.3d 671, 693 (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Sand), superseded on other grounds by Cal.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 (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the unpublished portion of our decision, we further conclude that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
I. Facts
Plaintiff and appellant QDOS, Inc. (QDOS) is in the
business of offering team-specific, sports-related content over the
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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
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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 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).
II. Procedural Background
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
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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, and Jenkins for
declaratory relief—specifically, a declaration that DeskSite’s title
to the car was superior to theirs.1
B. Kader’s Default
Kader did not respond to DeskSite’s operative complaint,
and the trial court entered a default against him.
C. Motion for Summary Adjudication
The Auto Gallery, Premier, Signature, and Jenkins filed a
motion for summary judgment and/or summary adjudication.
After full briefing and a hearing, the trial court granted summary
adjudication as to all five claims against The Auto Gallery, but
denied summary adjudication as to the declaratory relief claim
against Premier, Signature, and Jenkins (collectively, the
remaining defendants). With regard to the claims against The
Auto Gallery, the court ruled that The Auto Gallery had no “legal
duty to [DeskSite] to investigat[e] whether Kader’s statements to
[The] Auto Gallery were true.” Specifically, the court rejected the
notion that “every car dealer has to check to make sure the name
on the check exactly matches the name on the title” because such
1 The Auto Gallery, Premier, Signature, and Jenkins filed a
counter-complaint against DeskSite, but the trial court sustained
DeskSite’s demurrer to that counter-complaint without leave to
amend, and that ruling was never appealed. The Auto Gallery,
Premier, Signature, and Jenkins also filed a cross-complaint
against Kader for implied indemnity, apportionment of fault, and
declaratory relief; that action is also not before us on appeal.
5
a rule would create “a new burden . . . that . . . would throw . . .
any other business where [a merchant is] selling things or, at
least, large price tagged things into total disarray.” With regard
to 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.
After a multi-day trial, a jury returned a special verdict in
favor of the remaining defendants. Specifically, the jury found
that (1) Kader did not commit theft;2 (2) Kader had the “apparent
authority to buy the [car] with title in his own name”; and (3) the
remaining defendants were “bona fide purchasers for value.”
2 DeskSite subsequently asked the court to “clarify” that the
jury’s special verdict pertained only to Kader’s theft of the car
(rather than the $150,000 DeskSite loaned him to buy back the
car), but the trial court denied the motion.
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E. Default Judgment Against Kader
Several weeks after the jury returned its verdict, the trial
court held a hearing for DeskSite to prove up its damages against
Kader. In the proposed default judgment it lodged with the
court, DeskSite sought $901,098 in compensatory damages and
an equal amount in punitive damages. At the conclusion of the
hearing, the trial court ruled that DeskSite had proven up
$901,098 in compensatory damages, but declined to award any
punitive damages. DeskSite introduced evidence that Kader was
involved with one “active” corporation and two expired
corporations; that he was renting an “extremely opulent house”;
that he had bought an Audi for his wife at The Auto Gallery at
some point; and that he “maintains a flamboyant lifestyle.”
However, DeskSite was “not able to come up with any assets”
owned by Kader. This was consistent with DeskSite’s prior
representations to the court that it thought it was “unlikely
that . . . Kader has assets.” What DeskSite offered was its
investigator’s opinion that “[s]ince [the investigator] was not able
to find any such assets, . . . Kader has employed methods to
prevent his assets from being located and traced to him.” The
trial court found this showing to be insufficient: “You got no
evidence. All you are giving me is rhetoric. I have to hear
evidence of some net worth, and I haven’t heard it.”
F. Judgment and Appeal
Following the trial court’s entry of judgment, DeskSite filed
this timely appeal.
DISCUSSION
DeskSite raises three challenges to the trial court’s
judgment, arguing that the trial court (1) erred in concluding that
The Auto Gallery owed it no duty, and thus in granting summary
7
adjudication to The Auto Gallery, (2) erred in granting the
motions in limine excluding evidence of The Auto Gallery’s
alleged negligence during the remaining defendants’ declaratory
relief trial, and (3) erred in awarding no punitive damages
against Kader after the default prove-up hearing. We discuss
each challenge in turn.
I. Merchant’s Duty To Investigate
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; State of California
v. Continental Ins. Co. (2017) 15 Cal.App.5th 1017, 1031
[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 (2002) 22 Cal.4th 550, 559, 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 (Quelimane).) We also
8
independently review a trial court’s grant of summary
adjudication. (Jacks v. City of Santa Barbara (2017) 3 Cal.5th
248, 273.)
“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 (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; Summit Financial Holdings, Ltd.
v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705, 715
(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 (Centinela
Freeman); Quelimane, at p. 58.) Instead, it turns on whether
“‘public policy . . . dictate[s] the existence of a duty to third
parties.’” (Centinela Freeman, at p. 1013; Cabral, at p. 771
[“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.) The
considerations most relevant in the “business context” are set
forth in Biakanja v. Irving (1958) 49 Cal.2d 647, 650 (Biakanja).
(See Centinela Freeman, supra, 1 Cal.5th at pp. 1013-1014;
Summit Financial, supra, 27 Cal.4th at p. 715; Quelimane, supra,9
19 Cal.4th at p. 58.) 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.) Among these factors, foreseeability
is the “‘“chief factor”’” (Pedeferri v. Seidner Enterprises (2013) 216
Cal.App.4th 359, 366 (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; Bily
v. Arthur Young & Co. (1992) 3 Cal.4th 370, 399).
The Biakanja considerations are similar to, but not
identical with, the policy considerations set forth in Rowland
v. Christian (1968) 69 Cal.2d 108 (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.) 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.) Whether a court uses the
10
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; Ballard
v. Uribe (1986) 41 Cal.3d 564, 573-572, fn. 6.)
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 person has a duty (1) not to ignore
“red flags” or “suspicious” “circumstances” that may indicate that
a third party involved in that transaction3 is being defrauded,
and, in that instance, (2) not to proceed with the transaction
without first doing some investigation to dispel those suspicions.
(Sun ‘n Sand, supra, 21 Cal.3d at pp. 693, 695; Burns, supra,
173 Cal.App.4th at p. 489; Joffe v. United California Bank (1983)
141 Cal.App.3d 541, 556 (Joffe); Karen Kane, Inc. v. Bank of
America (1998) 67 Cal.App.4th 1192, 1195, 1198 (Karen Kane);
Software Design, supra, 49 Cal.App.4th at pp. 480-481, 483;
Chazen v. Centennial Bank (1998) 61 Cal.App.4th 532, 545.)
Courts have sorted the circumstances that constitute red
flags from those that do not. Red flags include: (1) when a bank’s
3 In the absence of “‘extraordinary and specific facts,’” banks
and merchants generally do not owe complete strangers to a
transaction any duty to investigate the suspicious activities of the
bank’s or merchant’s customers. (Gil v. Bank of America, N.A.
(2006) 138 Cal.App.4th 1371, 1381; Software Design &
Application, Ltd. v. Hoefer & Arnett, Inc. (1996) 49 Cal.App.4th
472, 479 (Software Design); Casey v. U.S. Bank Nat. Assn. (2005)
127 Cal.App.4th 1138, 1148-1151.) Courts are more reluctant to
recognize duties in this context because such duties run the risk
of “‘violat[ing]’” the bank’s or merchant’s “‘customers’ right to
privacy’” and of “‘forc[ing] [the bank or merchant] to act as the
guarantor of’” their customers’ transactions. (Casey, at p. 1149.)
11
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;
E. F. Hutton & Co. v. City National Bank (1983) 149 Cal.App.3d
60, 68 (E. F. Hutton); Sehremelis v. Farmers & Merchants Bank
(1992) 6 Cal.App.4th 767, 772-776 (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). 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); (2) when a check-cashing business’s customer
seeks to cash a business-to-business check (id. at pp. 1198, 1202-
1203); (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); 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 (Rodriguez)).
Because Kader presented two checks payable to The Auto
Gallery and bearing Gillam’s valid signature on behalf of
DeskSite, this case presents the question: Is it a red flag when a
merchant receives payment for merchandise through a check
from a person or entity other than its customer, such that the
merchant owes the drawer of the check some duty to investigate
whether the check is somehow fraudulent and whether the
12
check’s maker wants the merchant to follow special instructions
regarding the sale of the merchandise?4
We conclude that the answer to this question is “no,” and
do so for two reasons.
First, the policy considerations set forth in Biakanja and
Rowland counsel against the recognition of such a duty.
Foreseeability is the “chief” determinant of duty because
three of the considerations enumerated in Biakanja and Rowland
address it—namely, the foreseeability of harm to the plaintiff, the
degree of certainty that the plaintiff suffered injury, and the
closeness of the connection between the defendant’s conduct and
the injury suffered by the plaintiff. (Vasilenko v. Grace Family
Church (Nov. 13, 2017, S235412) __ Cal.5th __ [2017 Cal. Lexis
8738, at p. *9].) However, where, as here, a merchant is
presented with a check that is made out to the merchant, is
validly endorsed, and on its face contains no restrictions or
special instructions, the merchant has no reason to foresee—from
the fact, by itself, 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
4 DeskSite also points to the deposition testimony of some
employees of The Auto Gallery, who noted that Kader “portrayed
himself as a big shot” and a “pretentious” “wannabe,” but
DeskSite does not contend that these views of Kader’s penchant
for self-promotion are red flags that he was deceitful, particularly
in light of Kader’s presentation of a bona fide check from
DeskSite to The Auto Gallery with a memo line bearing Kader’s
initials.
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[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; Biakanja, supra, 49 Cal.2d
at p. 650 [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 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 [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.) This would “substantially impede[]” “the
flow of commerce.” (Karen Kane, supra, 67 Cal.App.4th at
p. 1199.) Burdening the merchant with investigating whether a
valid check from someone other than the customer has strings
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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; Karen Kane,
at p. 1199.)
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.) 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) 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.) 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.
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.) However, courts that are balancing the
15
policy considerations set forth in Biakanja and 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.)
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
16
the potential availability of insurance, but not to its “cost” or
“prevalence.” (Rowland, supra, 69 Cal.2d at p. 113.) It does not
alter our analysis.
Second, DeskSite contends that Sun ‘n Sand, supra,
21 Cal.3d 671 and its progeny (namely, Joffe, supra,
141 Cal.App.3d 541, E. F. Hutton, supra, 149 Cal.App.3d 60, and
Sehremelis, supra, 6 Cal.App.4th 767) 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; Joffe, at pp. 547-548, 556;
E. F. Hutton, at p. 68; Sehremelis, at pp. 772-776.) 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.) We are
loathe to ignore our Supreme Court’s own advice. DeskSite
acknowledges that the decision in Burns, supra, 173 Cal.App.4th
479 refutes the logic of its position, but declares that Burns was
wrongly decided. For the reasons set forth above, we disagree.
Third, DeskSite urges that the trial court erred in refusing
to consider the testimony of its expert witness that merchants
like The Auto Gallery have “a duty to” “investigat[e] and
conduct[] appropriate due diligence” whenever “one party is
paying and another party is receiving title” to merchandise. We
need not consider whether DeskSite, by challenging the trial
court’s refusal to consider this testimony for the first time in its
reply brief, waived the issue on appeal (Raceway Ford Cases
17
(2016) 2 Cal.5th 161, 178) because it is well settled that “expert
testimony is incompetent on the . . . question whether [a legal]
duty [of care] exists because this is a question of law for the court
alone” to decide (Carleton v. Tortosa (1993) 14 Cal.App.4th 745,
755; Benavidez v. San Jose Police Dept. (1999) 71 Cal.App.4th
853, 864-865).
Lastly, DeskSite posits that money laundering is a “known
concern” within the automobile industry, especially with high-
end exotic cars. Even if we accept this to be true, the use of a
third party’s check to pay for a car by itself is still not a red flag
of money laundering, particularly where, as here, the check
contains a memo line with the customer’s initials on it. Further,
courts have refused to fashion new duties to deal with similar
endemic problems such as identity theft and have justified that
refusal with reasoning that is equally applicable here: “Given the
scope of the problem and the consequences to the community of
imposing a noncontractual duty with resulting liability for
breach, a decision to shift the burden of loss from the actual
victim to a third party duped by the thief is one to be made, if at
all, by the Legislature, not the judiciary.” (Rodriguez, supra,
162 Cal.App.4th at p. 466.)
In sum, we independently conclude that The Auto Gallery
owed DeskSite no duty of care and, in the absence of such a duty
and any evidence indicating The Auto Gallery’s actual knowledge
of the oral agreement between DeskSite and Kader regarding
who should hold title to the car, the trial court properly granted
summary adjudication to The Auto Gallery on all of DeskSite’s
claims against it.
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II. Rulings on Motions in Limine
As a general rule, “a thief cannot pass title to stolen
property.” (People v. Hernandez (2009) 172 Cal.App.4th 715, 722;
Suburban Motors, Inc. v. State Farm Mut. Auto. Ins. Co. (1990)
218 Cal.App.3d 1354, 1361; Kelley Kar Co. v. Maryland Casualty
Co. (1956) 142 Cal.App.2d 263, 264; Schumann-Heink & Co.
v. United States Nat’l Bank (1930) 108 Cal.App. 223, 230.) More
to the point, such “a thief cannot convey valid title to an innocent
purchaser of stolen property.” (Naftzger v. American Numismatic
Society (1996) 42 Cal.App.4th 421, 432-433.) Given this
precedent, a central question to be resolved by the jury during
the trial on DeskSite’s claim for declaratory relief against the
remaining defendants regarding the title of the Lamborghini was
whether Kader was a thief: If he was, DeskSite would be entitled
to title to the car; if he was not, then the remaining defendants
would prevail if they could establish that they were bona fide
purchasers for value. (See Melendrez v. D & I Investment, Inc.
(2005) 127 Cal.App.4th 1238, 1251 [defining “bona fide purchaser
for value”].)
Prior to the declaratory relief trial, the trial court excluded
evidence regarding whether The Auto Gallery was negligent in
failing to investigate whether the DeskSite checks Kader
presented to buy the car came with any restrictions or special
conditions. DeskSite challenges that ruling on appeal. We
review a trial court’s evidentiary rulings for an abuse of
discretion. (People v. Clark (2016) 63 Cal.4th 522, 597.)
The court did not abuse its discretion in excluding evidence
of The Auto Gallery’s negligence. That is because whether Kader
was a thief turned on (1) the nature of the agreement between
Kader and DeskSite, and (2) whether Kader violated that
19
agreement. What The Auto Gallery suspected or should have
suspected regarding that agreement and Kader’s violation of it
sheds no light on the agreement itself or Kader’s compliance with
it. As a result, the evidence was irrelevant and properly
excluded. (Evid. Code, § 210.)
DeskSite raises three objections on appeal. First, it notes
that the trial court found this evidence to be relevant and
excluded the evidence because The Auto Gallery was no longer in
the case and “is not here to defend [itself].” However, our task is
to review the trial court’s ruling, not its reasoning. (People
v. Chism (2014) 58 Cal.4th 1266, 1295, fn. 12.) Its ruling is
sound. Second, DeskSite asserts that the trial court effectively
and impermissibly granted a nonsuit for the remaining
defendants when it excluded this evidence. To be sure, a court
may not grant a motion in limine on the ground that a plaintiff
cannot prove its case (Pantoja v. Anton (2011) 198 Cal.App.4th
87, 123-124) or use such motions to weigh evidence rather than
adjudicate admissibility (R & B Auto Center, Inc. v. Farmers
Group, Inc. (2006) 140 Cal.App.4th 327, 332-333). But the court
here committed neither of these sins. Lastly, DeskSite notes that
embezzlement is a form of theft (Pen. Code, § 490a; People
v. Gonzales (2017) 2 Cal.5th 858, 869 [so noting]), and urges that
it does not matter whether Kader committed theft or
embezzlement. We need not address this issue because whether
Kader committed theft or embezzlement still turns on his
agreement with DeskSite, not on what The Auto Gallery knew or
should have known about that agreement.
20
III. Refusal to Award Punitive Damages in Default
Judgment Against Kader
When a defendant in a civil case does not answer or
otherwise respond to a complaint with a procedurally appropriate
filing, the defendant is in default. (Code Civ. Proc., §§ 580, subd.
(a) & 585.) Where the relief sought by the plaintiff turns on “the
exercise of judgment to ascertain (such as emotional distress
damages, pain and suffering, or punitive damages),” the trial
court—rather than the clerk—must be the one to enter the
default judgment. (Kim v. Westmoore Partners, Inc. (2011)
201 Cal.App.4th 267, 287; Code Civ. Proc., § 585, subd. (b).) In
such instances, “the plaintiff must affirmatively establish [its]
entitlement to the specific judgment requested” by making a
“prima facie case” for the relief sought. (Kim, at p. 287; Johnson
v. Stanhiser (1999) 72 Cal.App.4th 357, 361-362; Code Civ. Proc.,
§ 585, subds. (b) & (d).) The court may only award relief “as
appears by the evidence to be just” (Code Civ. Proc., § 585, subd.
(b)), and the defaulting defendant’s absence imposes upon the
court a “duty . . . to act as gatekeeper, ensuring that only the
appropriate claims get through” (Heidary v. Yadollahi (2002)
99 Cal.App.4th 857, 868; Electronic Funds Solutions, LLC
v. Murphy (2005) 134 Cal.App.4th 1161, 1179).
In evaluating whether to award punitive damages, a court
must consider “(1) the reprehensibility of the defendant’s conduct;
(2) the actual harm suffered; and (3) the wealth of the defendant.”
(Zaxis Wireless Communications, Inc. v. Motor Sound Corp.
(2001) 89 Cal.App.4th 577, 581-582, citing Neal v. Farmers Ins.
Exchange (1978) 21 Cal.3d 910, 928.) Because the purpose of
punitive damages is “to punish wrongdoing,” “the key question
21
before [a] reviewing court is whether the amount of damages
‘exceeds the level necessary to properly punish and deter.’”
(Adams v. Murakami (1991) 54 Cal.3d 105, 110 (Adams), quoting
Neal, at p. 928.) Evidence of a defendant’s wealth or financial
condition is essential in evaluating whether a punitive damages
award is excessive; “[w]ithout such evidence,” the reviewing court
cannot do its job. (Adams, at pp. 111-112.) The plaintiff seeking
punitive damages bears the burden of presenting evidence of the
defendant’s financial condition. (County of San Bernardino
v. Walsh (2007) 158 Cal.App.4th 533, 546.)
There is no one measure of a defendant’s financial
condition. The key is “the defendant’s ability to pay” the punitive
damages award. (Adams, supra, 54 Cal.3d at p. 112.) A
defendant’s net worth is the most common measure of that
ability, but it is not “the only permissible measurement.”
(Cummings Medical Corp. v. Occupational Medical Corp. (1992)
10 Cal.App.4th 1291, 1299.) A defendant’s earnings are generally
insufficient by themselves because they do not take into
consideration debts and liabilities. (Lara v. Cadag (1993)
13 Cal.App.4th 1061, 1064-1065.) The courts are split on
whether the profits wrongfully gained by the defendant are a
sufficient measure. (Robert L. Cloud & Associates, Inc.
v. Mikesell (1999) 69 Cal.App.4th 1141, 1152 [noting split].)
DeskSite challenges the trial court’s finding that DeskSite
failed to introduce sufficient evidence of Kader’s financial
condition. We review the damages awarded (or not awarded) in
default prove-up proceedings to see whether they are “so
disproportionate to the evidence as to suggest that the [judgment]
was the result of passion, prejudice, or corruption” or “so out of
proportion to the evidence that it shocks the conscience.” (Uva
22
v. Evans (1978) 83 Cal.App.3d 356, 363-364.) “Damages for
which there is no substantial evidence, a fortiori, satisfy this
standard.” (Ostling v. Loring (1994) 27 Cal.App.4th 1731, 1746.)
The trial court’s refusal to award punitive damages was
supported by substantial evidence because DeskSite presented no
evidence of Kader’s financial condition. DeskSite offered no
evidence of Kader’s net worth or even any assets that he owned,
as DeskSite frankly admitted. Instead, DeskSite offered its
expert’s opinion that his inability to find any assets was proof
that Kader was hiding his assets. Like the trial court, we reject
as speculative an expert’s opinion that the lack of evidence of a
fact is itself evidence of that fact. (E.g., People v. Brooks (2017)
3 Cal.5th 1, 120 [“‘speculation is not substantial evidence’”].)
DeskSite raises two further arguments. First, it asserts a
court may ignore the absence of any evidence of Kader’s financial
condition in light of his “failure to obey a court order to produce
his financial records.” (Mike Davidov Co. v. Issod (2000)
78 Cal.App.4th 597, 610.) However, this is not a case where
Kader willfully ignored a court order to produce his records; this
is a case where Kader defaulted. We decline to hold that there is
no cap to punitive damages in default cases. Second, DeskSite
contends that it is seeking a modest punitive damages award
that equals the amount of compensatory damages. The modesty
of the award does not compensate for the absence of any evidence
to support it.
23
DISPOSITION
The judgment is affirmed. The Auto Gallery, Signature,
Premier, and Jenkins are entitled to their costs on appeal.
CERTIFIED FOR PARTIAL PUBLICATION.
______________________, J.
HOFFSTADT
We concur:
_________________________, Acting P. J.
ASHMANN-GERST
_________________________, J.*
GOODMAN
* Retired judge of the Los Angeles Superior Court, assigned
by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.
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