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Court of Appeal, Fourth District, Division 3, California.

CALIFORNIA LAND TITLE COMPANY, a California corporation, Plaintiff and Appellant, v. Norma G. EMSLIE, Carl R. Emslie;  Anthony T. Oliver;  Beverly J. Oliver;  Northwestern National Insurance Company;  Del Brunning & Bridgeman Mortgage & Investment;  and Does 1 through 100, Inclusive, Defendants and Respondents.


Decided: December 18, 1985

Ross, Ivanjack & Alborg, Alexander Levy, Craig C. Knutsen and Randall L. Mason, Los Angeles, for plaintiff and appellant. Parker, Milliken, Clark, O'Hara & Samuelian and David B. Simpson, Los Angeles, for defendants and respondents Anthony T. and Beverly J. Oliver.


Plaintiff, California Land Title, appeals from an order dismissing its complaint against two of six named defendants after the demurrer of defendants Anthony T. and Beverly J. Oliver was sustained without leave to amend.


In July 1980, the Olivers listed their Fullerton property for sale.   The listing agent was Norma Emslie, whom the Olivers had employed for many prior land transactions.   The Olivers wanted to purchase a new home and instructed Emslie to obtain a $50,000 swing loan on the Fullerton residence.   To facilitate the loan, they signed and gave her several financial statements.

Emslie asked the Olivers to loan her $25,000, suggesting they request a $75,000 swing loan to include that amount.   On August 1, 1980, the Olivers, through Emslie, acquired a $75,000 loan from Valencia Bank secured by a trust deed on their Fullerton property.   On the same day, the Olivers loaned Emslie $25,000.

But Emslie was not satisfied.   In late August or early September 1980, she solicited a $30,000 loan on behalf of the Olivers from Bridgeman Mortgage & Investment Company.   This was done without the knowledge or consent of the Olivers.   Emslie used copies of the Olivers' financial statements and proposed the loan be secured by a trust deed on the Fullerton property.   Bridgeman approved the loan and escrow was opened with Exclusive Escrow Corporation.   Emslie forged the Olivers' signatures to the escrow instructions, the promissory note and the trust deed.   She notarized the documents.   The money for the loan came from the James D. Lee DDS Retirement Trust.   The trust was designated as the payee on the note and as the beneficiary on the trust deed.

As a condition of the loan, an existing second trust deed in the amount of $3,460.18 in favor of Mercury Savings and Loan was paid.   Exclusive paid Mercury through the loan escrow and distributed the remaining loan funds of $22,865 to the Olivers.   The check was delivered to Emslie.

Emslie asked the Olivers to endorse the check so she could cash it.   She told the Olivers the funds actually belonged to her.   She explained she deposited $23,000 of her own money into a “straw escrow” in order to induce lenders to make the swing loan in favor of the Olivers.   This procedure was necessary, she said, because no one would make the swing loan unless there was a pending escrow for the sale of the Fullerton property.   Based on this false representation, the Olivers endorsed the check.

California Land had issued a policy of title insurance insuring, among other things, the validity of the trust deed given to the trust to secure the $30,000 loan.   Emslie made payments on the loan until July or August 1981, when she defaulted.   The trust commenced nonjudicial foreclosure proceedings and, as a result, was informed by the Olivers the $30,000 note and trust deed were forgeries.

The trust made claim under the title insurance policy issued by California Land.   California Land paid the trust the sum of $30,500, representing the balance of the obligation secured by the forged trust deed.   Upon payment, California Land became subrogated to the rights of the trust under the terms of the title insurance policy.   In addition, the trust made a formal assignment of its rights to California Land.

California Land sued the Olivers for negligence, money had and received, and imposition of an equitable lien.   The trial court sustained, without leave to amend, the Olivers' demurrer to all three counts, finding the complaint failed to state facts sufficient to constitute a cause of action.   California Land appeals.


 The trial court sustained the Olivers' demurrer to the first cause of action finding no duty of care existed.   We disagree.

In Sun 'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 148 Cal.Rptr. 329, 582 P.2d 920, our Supreme Court reviewed the trial court's sustaining of a demurrer without leave to amend.   There the court examined the rights of an employer against a bank to recover funds embezzled by an employee.1  The appellate court found a duty existed between UCB and the plaintiff.   Although Sun 'n Sand involves a bank as a defendant, we find its reasoning applicable.

The court examined the relationship between a bank and the drawer of a check.   The fact no special relationship existed was insignificant.   It was the bank's “conduct in crediting the embezzler's account with checks drawn payable to [the bank] that form[ed] the basis for relief․”  (Id., at p. 693, 148 Cal.Rptr. 329, 582 P.2d 920.)

Our facts are equally convincing.   The trust's “allegations define circumstances sufficiently suspicious that [the Olivers] should have been alerted to the risk that [Emslie] was perpetrating a fraud.   By making reasonable inquiries, [they] could have discovered the fraudulent scheme and prevented its success.”  (Id., at pp. 694–695, 148 Cal.Rptr. 329, 582 P.2d 920.)

The Olivers argue Sun 'n Sand is inapposite.   They suggest, unlike a bank, they were not intended to be custodians of the property.   Thus they cannot be liable in tort for negligently misdelivering or disposing of the money.   In support of this proposition they cite footnote 5 of Sun 'n Sand. 2  However, this footnote relates to a discussion of code sections inapplicable to the negligence cause of action.   In other words, the defendant's status, as a bank, was important for some causes of action.   It was not, however, significant as to the negligence cause of action.   Indeed, the court's negligence discussion does not even mention the bank's status.

Nor are we convinced by the Olivers' remaining arguments.   They contend the facts alleged are insufficient to establish a duty “under the general criteria of Rowland v. Christian (1968) 69 Cal.2d 108 [70 Cal.Rptr. 97, 443 P.2d 561].”  Again, we look to Sun 'n Sand:  “[The Supreme Court has] often recognized that the imposition of a duty to exercise reasonable care in given circumstances depends on the balancing of a number of policy considerations.  (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 342 [134 Cal.Rptr. 375, 556 P.2d 737], and cases cited therein.)   The most important of these were set forth in Rowland v. Christian (1968) 69 Cal.2d 108, 113 [70 Cal.Rptr. 97, 443 P.2d 561], and include ‘․ the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, the policy of preventing future harm, 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 the availability, cost, and prevalence of insurance for the risk involved.’ ”  (Sun 'n Sand, Inc. v. United California Bank, supra, 21 Cal.3d at p. 695, 148 Cal.Rptr. 329, 582 P.2d 920.)

In Sun 'n Sand the court found the risk foreseeable.   The facts here are similarly compelling.  “[The Olivers] should have appreciated the indicia of [fraud]․”  (Ibid. )   And, like the Supreme Court, “[w]e are not persuaded that commerce will be so impeded by a duty of inquiry in this context that we should depart from the fundamental principle that actors are liable for reasonably foreseeable losses occasioned by their conduct.”  (Ibid. )

Economic havoc was not created by recognizing a duty under the facts of Sun 'n Sand.   We can foresee no such possibility here.  “The duty is narrowly circumscribed:  it is activated only when checks, not insignificant in amount, are drawn payable to the order of [an individual] and are presented to the [individual] by a third party seeking to negotiate the checks for his [or her] own benefit.   Moreover, the [payee's] obligation is minimal.   We hold simply that the [payee] may not ignore the danger signals inherent in such an attempted negotiations.   There must be objective indicia from which the [payee] could reasonably conclude that the party presenting the check is authorized to transact in the manner proposed.   In the absence of such indicia the [payee] pays at [his or her] peril.”  (Id., at pp. 695–696, 148 Cal.Rptr. 329, 582 P.2d 920.) 3

The Olivers suggest no other reported case has extended Sun 'n Sand beyond the banking context.   This may be true, but again it is insignificant.   There are no reported cases disapproving such an application.  Sun 'n Sand's progeny, E.F. Hutton & Co. v. City National Bank (1983) 149 Cal.App.3d 60, 196 Cal.Rptr. 614, Joffe v. United California Bank (1983) 141 Cal.App.3d 541, 190 Cal.Rptr. 443, and Fireman's Fund Ins. Co. v. Security Pacific Nat. Bank (1978) 85 Cal.App.3d 797, 149 Cal.Rptr. 883 all dealt with a bank's liability.   Obviously they did not discuss a nonbank defendant's duty.   But as previously discussed, the reasoning is the same.   As the court in E.F. Hutton & Co. v. City National Bank, supra, 149 Cal.App.3d 60, 68, 196 Cal.Rptr. 614, observed:  “[t]he Joffe decision did not limit the negligence cause of action only to the situation where the check or checks are drawn payable to the order of a bank, and neither do we.”


 California Land's second cause of action is a common count for money had and received based upon the facts alleged in the first cause of action.   In pleading such an action the plaintiff must allege a right to the money and the defendant's possession.   Any facts, if they show the defendant has possession of money which ought to be paid over to the plaintiff, are sufficient to state this cause of action.  (County of Santa Cruz v. McLeod (1961) 189 Cal.App.2d 222, 228–229, 11 Cal.Rptr. 249.)

We conclude the facts as pleaded here are sufficient to state a cause of action for money had and received.


 California Land's third cause of action is for imposition of an equitable lien.   By this cause of action California Land seeks subrogation to Mercury which received $3,460.18 to release its second trust deed.   California Land's insured, the trust, received nothing but a forged note.   The Olivers benefited without paying anything in return.   California Land alleges the Olivers were unjustly enriched and thus it is entitled to an equitable lien on the Fullerton property securing repayment of the $3,460.18 plus interest at the legal rate from the date of payment to Mercury.   California Land argues it should be repaid in accordance with the terms of the loan made by Mercury.

The trial court, relying on Fidelity & Deposit Co. of Maryland v. De Strajman (1963) 215 Cal.App.2d 10, 29 Cal.Rptr. 855, found “subrogation with innocent parties is not appropriate.”   In Fidelity, the defendants, residents of Argentina, bought California property in 1950.   The property was managed for them by Ila Irvine.   Irvine collected rents on the property but did not pay monthly mortgage installments or United States income taxes.   Bayview, the holder of the first mortgage on the property, recorded a notice of default and the United States filed liens against the property.

In May 1956, defendants, who were not aware of Irvine's derelictions, borrowed $27,000 to pay off the balance due on the first trust deed.   In order to obtain additional funds to pay off the liens, Irvine borrowed $4,500 from the Holcenbergs who took a note and second trust deed on the property as security.   Irvine forged defendants' signatures on both the note and the second trust deed.   The Holcenbergs obtained a title insurance policy on defendants' property.   The default with respect to the first and the United States liens were paid off from the proceeds of the Holcenberg loan.

Thereafter, the forgeries were discovered and admitted by Irvine.   The Holcenbergs filed a claim against Western Title which paid them $4,500.   Fidelity & Deposit Company of Maryland indemnified Western Title under its agreement to hold its insured harmless for losses sustained as a result of forgeries.   Fidelity, as assignee of the Holcenbergs and Western Title, brought an action to reinstate the Bayview and United States liens and to foreclose those liens for its benefit.   It claimed the defendants had been unjustly enriched at Fidelity's expense.

The appellate court upheld a dismissal after the defendants' demurrer was sustained.   It found the defendants were innocent parties with respect to the fraud of their agent, and therefore subrogation would not lie against them.   The court reasoned “the equitable right of subrogation [can] be involved only in cases in which justice demands its application, and the right of one asking subrogation must have a greater equity than those who oppose him․  [S]ubrogation is properly applied in favor of a surety on a fidelity bond only against persons who have participated in the wrong of its principal, never against an innocent person wronged by the principal's fraud.”  (Id., at p. 12, 29 Cal.Rptr. 855, emphasis added.)

We find California Land has stated a cause of action for subrogation.   It has pleaded facts sufficient to show the Olivers did participate in the wrong.   No one has alleged they knowingly perpetuated the fraud.   Certainly, however, their negligent actions preclude the definition of innocence.   Unlike the defendants in Fidelity who “did not participate in the wrongful act” (id., at p. 13, 29 Cal.Rptr. 855), the Olivers gave financial statements to Emslie.   They condoned a sham escrow account supposedly set up to obtain their swing loan;  they endorsed a check to Emslie for repayment of that escrow.   The loss in Fidelity perhaps could have been avoided by the defendants verifying the money had been paid.   Here the loss would not have occurred but for the Olivers' failure to investigate.

In Barclay Kitchen, Inc. v. California Bank (1962) 208 Cal.App.2d 347, 25 Cal.Rptr. 383, an employer's surety, forced to cover funds embezzled by an employee, sued a bank for subrogation.   The surety alleged the bank's negligence in accepting irregular deposits by the employee aided in concealing the fraud.   The bank argued “as between Bank and Surety, Surety should bear the loss;  that the right of subrogation does not exist in favor of a surety on a fidelity bond except against persons who participated in the wrongful act of the principal.  [¶] But in the present case, unlike the cases cited by Bank, Bank is not an innocent third party.   In Meyers v. Bank of America, 11 Cal.2d 92 [77 P.2d 1084], the court held the surety liable as against the bank where the bank, not being a wrongdoer, paid money in the ordinary course of its business upon checks, the genuineness of which it had no reason to doubt, and from which it received no benefits.   Here, Bank was not innocent.   Its negligence made possible the consummation of [the] fraudulent scheme.”   (Id., at pp. 356–357, 25 Cal.Rptr. 383, emphasis added.)

The Olivers are not innocent.   But for their alleged negligence, Emslie would not have been able to effectuate her wrongdoing.


 Next, the Olivers argue subrogation does not lie absent a showing that unjust enrichment would otherwise result.   They claim they paid the $3,460.18 to Emslie and should not be liable a second time.4  But their argument would undermine the very essence of subrogation.  “Subrogation is an equitable doctrine, recognized also at law and not depending upon contractual relationships, which is administered so as to secure justice without regard to form.”  (Employers Etc. Inc. Co. v. Pac. Indemn. Co. (1959) 167 Cal.App.2d 369, 376, 334 P.2d 658.)

And finally, the Olivers argue the third count fails to state a cause of action.   First, they suggest the complaint is faulty because it does not effectively plead Lee's trust, California Land's insured, made the actual payment to Mercury.   But the complaint does plead the Mercury debt was paid from the loan proceeds.   Because payment came from the proceeds of the loan rather than directly from Lee is simply of no moment.   It was Lee's money!

Second, the Olivers argue California Land failed to show Lee was compensated for his loss.   But the complaint alleges California Land “indemnified LEE pursuant to the terms of the Title Insurance Policy for sums which included the $3,460.18 paid by LEE to MERCURY SAVINGS.”   The issue is sufficiently pleaded.   The proof of the allegations is for the trial.

The judgment is reversed.   California Land has pleaded facts sufficient to state causes of action for negligence, money had and received and subrogation.

I agree with parts I and III of the majority opinion, but must respectively dissent from the determination in part II.

I believe the trial court properly sustained defendants' demurrer to California Land's second cause of action which purported to allege a common count for money had and received based upon the facts alleged in the first cause of action.   The essence of a common count is that defendant has become indebted to the plaintiff in a stated sum for some consideration such as money had and received.  (4 Witkin, Cal. Procedure (1985) Pleading, § 508, p. 543.)   Plaintiff's cause of action is one for tort damages based on allegations of negligence.   If what they seek is to waive the tort and sue in assumpsit, their pleading is defective because they fail to allege any consideration moving from plaintiff's subrogee to defendants upon which an implied promise to repay might be based.  (See Gold v. Los Angeles Democratic League (1975) 49 Cal.App.3d 365, 377, 122 Cal.Rptr. 732;  Zumbrun v. University of Southern California (1972) 25 Cal.App.3d 1, 14, 101 Cal.Rptr. 499;  Allen v. Powell (1967) 248 Cal.App.2d 502, 510, 56 Cal.Rptr. 715.)   The pleaded facts do not support a common count for money had and received, and the demurrer was properly sustained as to that cause of action.


1.   “The material facts alleged are as follows:  Plaintiffs are sister corporations (hereinafter collectively referred to as Sun 'n Sand) having the same shareholders and doing business from the same premises.   As a duty of her employment with Sun 'n Sand, Eloise Morales prepared checks for signature by a corporate officer.   Over a three-year period she made nine of such checks payable to United California Bank (UCB), each for a different, small amount.   She obtained authorized signatures on these checks from a Sun 'n Sand officer who believed they represented small sums his company owed to UCB.   No such debts were in fact owed.   Morales then altered the checks, increasing the amount in each case to several thousand dollars, and presented them to UCB.   Although UCB was the named payee, it ‘caused or permitted’ the proceeds of the checks to be deposited in a personal account maintained by Morales at UCB.  [¶ ] Sun 'n Sand had its company account with Union Bank.   UCB presented each of these checks to Union Bank, which paid them and charged Sun 'n Sand's account for their face amounts.   Morales concealed her actions by destroying some and manipulating other company records․”  (Id., at pp. 678–679, 148 Cal.Rptr. 329, 582 P.2d 920.)

2.   “UCB claims that liability may not be based on section 4207 because it was not a collecting bank in the transactions alleged herein.   Section 4105 defines a collecting bank as ‘any bank handling the item for collection except the payor bank.’   Official UCC comment 1 to that section explains that the definition ‘in general exclude[s] a bank to which an item is issued,’ but provides that such exclusion does not apply when ‘the item is issued to a payee for collection, as where a corporation is transferring balances from one account to another.’   The facts alleged herein, if true, establish that UCB treated the checks as though it was merely a nominal payee, named as such to facilitate collection.   Thus, it may not successfully demur on the ground that it was not a collecting bank.”  (Id., at p. 680, fn. 5, 148 Cal.Rptr. 329, 582 P.2d 920.)

3.   California Land claims the Olivers failed to exercise reasonable care in endorsing the check because they knew they were not the true payees of the check and they failed to investigate.   California Land alleged “By undertaking to endorse the check ․ knowing that the funds represented thereby did not belong to them, it was foreseeable by defendants, the OLIVERS, that should they transfer those funds by endorsement to someone other than their rightful owner, the rightful owner would thereby sustain a loss having been deprived thereby of his property.”

4.   They allege prior to the discovery of Emslie's scheme, Emslie informed them that as a condition to obtain their prior swing loan the Mercury debt had to be paid.   Emslie said in order to expedite matters she paid it.   Thus, at her request they reimbursed her for the $3,460.18 payment.

SONENSHINE, Associate Justice.

CROSBY, J., concurs.