BANC OF CALIFORNIA NATIONAL ASSOCIATION v. FEDERAL INSURANCE COMPANY (2023)

ORDER RE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT [169]

Before the Court is Plaintiff Banc of California's (“Banc”) Motion for Summary Judgment on its breach of contract claim against Defendant Federal Insurance Company (“Federal”). This matter comes to the Court on remand from the Ninth Circuit Court of Appeals. (See Mem. of Ninth Circuit Ct. of Appeals, Docket No. 146).

I. BACKGROUND

This case concerns insurance coverage for a $15 million loan Banc made to a fraudster. In 2017, Banc purchased an insurance policy (the “Policy”) from Federal that contained clauses covering forgery and “extended forgery.” (Banc's Statement of Genuine Disputes of Material Fact (“Banc SDF”), Docket No. 188-3 ¶¶ 1–3). The Policy covers “[l]oss resulting directly from the [Banc] having, in good faith ․ acquired, sold or delivered, or given value, extended credit or assumed liability, in reliance on any original ․ Evidence of Debt [or] Security Agreement ․ which bears a Forgery.” (Federal Separate Statement of Undisputed Material Facts (“Federal SUF”), Docket No. 179-1 ¶ 9).

During the policy period, Barry Rothman, an attorney and client of Banc, introduced a woman named Mary Carole McDonnell to Banc's Vice President of Relationship Management. (Id. ¶¶ 7–8). McDonnell was looking for a multi-million-dollar loan. (Id. ¶ 7). Banc investigated and learned that McDonnell had a credit score of 545 (Decl. of Leah Godesky (“Godesky Decl.”), Docket No. 179-2, Exh. 6); that she had committed check fraud in 2016 (Id., Exh. 8 at 1); that a judgment was entered against McDonnell in 2017 for approximately $2.3 million (Id., Exh. 3); that the Los Angeles Superior Court had issued an injunction against Bellum Entertainment, of which McDonnell was the CEO, related to non-payment of a short-term loan (Id.); and that news articles indicated Bellum Entertainment did not pay its employees and vendors (Id.).¹ McDonnell and Rothman, however, represented that McDonnell was the heir to a large fortune and that her trust assets were temporarily frozen. (Banc SDF ¶ 10; Godesky Decl., Exh. 58). McDonnell also supplied Banc with an account statement showing that she was the beneficiary of a Family Trust account at Northern Trust Securities, Inc. (“Northern Trust”) that had a balance of more than $28 million. (Id. ¶ 11; see also Godesky Decl., Exh. 12).

Because of McDonnell's spotted financial history, there was disagreement at Banc as to whether it should issue a loan to her on any terms. Banc's Chief Risk Officer (“CRO”) recommended that Banc not proceed with the loan. (Godesky Decl., Exh. 51 at 65:11–13). Banc's Bank Secrecy Act (“BSA”) Department, which had investigated McDonnell in December 2017, also made a recommendation not to loan to her. (Federal SUF ¶ 22). Nevertheless, after acknowledging the results of the BSA Department's investigation, the Head of Commercial Banking wrote in a memorandum that he was “comfortable moving forward with the loan.” (Id. ¶ 111; Godesky Decl., Exh. 3).

There was general agreement at Banc that if it proceeded with the loan to McDonnell, the loan needed to be cash-secured. For example, Banc's CEO emailed Banc's Head of Commercial Banking and Chief Credit Officer (“CCO”) on January 30, 2018, regarding McDonnell, saying, “Bank fraud, did not pay her people, short of funds ․ If it is too good to be true it probably is—really dig in on this one please.” (Godesky Decl., Exh. 44). The Head of Commercial Banking responded that “[t]he risk is not being 100% sure we are FULLY collateralized with cash ․ We will not sign unless there is 100% confidence that we are cash-secured.” (Id.). Because the loan was supposed to be cash-secured, “McDonnell's problematic credit history” became “largely irrelevant and the loan earned Banc's lowest internal risk rating.” (Banc SDF ¶ 15).

The loan was ultimately structured so that McDonnell's $28 million Northern Trust account would serve as collateral. (Id.). The evidence shows further internal disagreement at Banc over whether an interest in a trust account at a different financial institution counted as “cash-secured.” Notes from an internal meeting show that Banc's legal counsel characterized the loan as “not cash-secured,” but “security-secured.” (Godesky Decl., Exh. 24). Banc's CRO has testified that the terms of the loan “didn't fully make sense to me” and that he told Banc's interim CCO that it “sounded fraudulent.” (Id., Exh. 51 at 33:2–5, 64:14–16). “It was supposed to be cash secured,” he said, but he was also made aware that “the securities would be available at some point soon.” (Id.) (emphasis added). He told Banc's CCO that for the loan to be cash-secured, McDonnell's cash would have had to be at Banc—not in an account at Northern Trust.” (Id., Exh. 63).

Meanwhile, no one at Banc could reach anyone at Northern Trust to verify McDonnell's Northern Trust account. (Id., Exh. 60 at 61:10–62:9). McDonnell had represented that she was working with the Senior Vice President (“SVP”) at Northern Trust to eventually transfer her assets to Banc. (See, e.g., id., Exh. 31). McDonnell told Banc that no one from Banc could call Northern Trust to talk about the loan without her or Rothman's participation. (Id., Exh. 42). Unaware of this restriction, Banc's interim CCO called Northern Trust's SVP and left a voicemail. (Banc SDF ¶ 25; see also id., Exh. 52 at 100:3–5). Instead of receiving a call back, Banc received two letters on Northern Trust letterhead purporting to be from the SVP. (Banc SDF ¶ 26; see also Godesky Decl., Exhs. 4, 31).

The first letter, dated January 31, 2018, confirmed the amount in McDonnell's trust account and stated that the account would be frozen and subject to a control agreement with Banc (the “Control Agreement”). (Godesky Decl., Exh. 31). The previous day, McDonnell had sent an email to Banc's VP of Relationship Management with the exact language that appeared in the January 31 letter. (Id., Exh. 9). The second letter, dated February 1, 2018, instructed that “there [was] to be no further verbal communication with Northern Trust” from Banc. (Id., Exh. 4). That letter contained language that McDonnell had emailed Banc's VP of Relationship Management earlier the same day. (Id.).

On January 31, 2018, McDonnell signed a Bank Account Control Agreement between McDonnell, Northern Trust, and Banc (the “Control Agreement”). (Id., Exh. 15). The SVP of Northern Trust purportedly signed the Control Agreement the same day. (Id.). Both signatures were notarized. (Id.). The Control Agreement “(a) represented that McDonnell owned the Northern Trust account; (b) granted Banc control over the account to perfect Banc's security interest ․; and (c) represented that in the event of default on the loan, Banc was entitled to seize the account to the extent of McDonnell's unpaid obligation.” (Banc SDF ¶ 19). McDonnell is now believed to have forged the signature of Northern Trust's SVP on the Control Agreement. (Id., Exh. 5).

On February 1, 2018, McDonnell forwarded to Banc's VP of Relationship Management an email chain between McDonnell and the SVP of Northern Trust, showing that McDonnell “wanted to work with” the SVP at Northern Trust but that it “did not work out.” (Id., Exh. 4). That same day, Banc's VP of Relationship Management signed the Control Agreement. (Id., Exh. 15). Banc issued McDonnell the $15 million loan effective February 1, 2018. (Banc SDF ¶ 27).²

On February 2, 2018, McDonnell transferred $5 million to herself. (Id. ¶ 28; Federal SUF ¶ 157; Godesky Decl., Exh. 2). By February 8, 2018, McDonnell had transferred roughly half of the loan proceeds out of Banc. (Godesky Decl., Exh. 2). That day, the interim CCO raised concerns that the loan proceeds were being misused. (Banc SDF ¶ 30). Banc retained outside counsel to investigate the potential misuse. (Federal Redacted SUF ¶ 164). On February 14, 2018, McDonnell made another transfer request, this time for $4.5 million. (Id. ¶ 168). Banc's outside counsel advised that Banc “would likely have to provide the wire transfer or be subject to liability for breach of the loan agreement,” and Banc made the transfer. (Id. ¶ 170). By March 5, 2018, Banc had disbursed all remaining funds from the loan to McDonnell. (Id. ¶ 174; Godesky Decl., Exh. 2).

On March 9, 2018, Banc's outside counsel learned that a Banc representative received a call from a fraud examiner at Northern Trust. (Id. ¶ 176). The examiner advised Banc that “(1) Ms. McDonnell did not have an interest in the [Northern Trust] Account; (2) the [Northern Trust] Account was in the name of ‘McDonald,’ an unrelated person; and (3) the [Northern Trust] Account was closed in December 2017.” (Id.). On March 13, 2018, Banc notified McDonnell in writing of her default on the loan. (Banc SDF ¶ 38). The FBI investigated the fraud and indicted McDonnell on five counts. (Id. ¶ 39). Banc obtained a judgment against McDonnell, but McDonnell is believed to have fled the country, and Banc has been unable to recover. (Id. ¶ 41).

In January 2019, Banc filed a claim with Federal, seeking coverage for its loss. (Id. ¶ 43). On April 5, 2019, Federal denied the claim. (Id. ¶ 45). On January 21, 2020, Banc filed this lawsuit, alleging breach of contract and breach of the covenant of good faith and fair dealing. (Compl., Docket No. 1).

The parties filed cross-motions for summary judgment in August of 2021. (Mots. for Summ. J., Docket Nos. 81, 84). The district court granted summary judgment on both claims in favor of Federal.³ (Order, Docket No. 129 at 15). Banc appealed the ruling on the breach of contract claim to the Ninth Circuit. (Mem. of Ninth Circuit Ct. of Appeals).

The Ninth Circuit reversed the ruling. (Id.). In order to be covered under the Policy, six elements must be met: “(1) the forgery appeared on one of the eight listed types of collateral [in the Policy], including, a ‘Security Agreement’ or an ‘Evidence of Debt’; (2) the loan was issued ‘in good faith’; (3) the forged document was ‘original’; (4) the loss was one ‘resulting directly’ from giving the loan; (5) the document ‘b[ore] a Forgery’; and (6) the insured relied on the forged document in making a loan.” (Id. at 2 n.1). The Ninth Circuit concluded that, contrary to the district court's finding, the first element was met. (Id. at 3). The Ninth Circuit remanded “for the district court to consider the other elements required for coverage in the first instance.” (Id.).

II. LEGAL STANDARD

A motion for summary judgment must be granted when “the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The moving party bears the initial burden of identifying the elements of the claim or defense and evidence that it believes demonstrates the absence of an issue of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. 2548 (1986). Once the moving party meets this burden, the burden shifts to the opposing party to set out specific material facts showing a genuine issue for trial. See Liberty Lobby, 477 U.S. at 248–49, 106 S.Ct. 2505.

The Court must draw all reasonable inferences in the light most favorable to the nonmoving party. In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9th Cir. 2010) (citing Liberty Lobby, 477 U.S. at 255, 106 S.Ct. 2505). Where, taken in that light, the record “could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial,’ ” and the court must grant summary judgment. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). “[S]ummary judgment will not lie,” however, “if the dispute about a material fact is ‘genuine,’ that is, if the evidence is such that a reasonable [factfinder] could return a verdict for the nonmoving party.” Liberty Lobby, 477 U.S. at 248, 106 S.Ct. 2505.

III. DISCUSSION

As discussed, the six prongs that must be met for Banc to have coverage are: “(1) the forgery appeared on one of the eight listed types of collateral [in the Policy], including, a ‘Security Agreement’ or an ‘Evidence of Debt’; (2) the loan was issued ‘in good faith’; (3) the forged document was ‘original’; (4) the loss was one ‘resulting directly’ from giving the loan; (5) the document ‘b[ore] a Forgery’; and (6) the insured relied on the forged document in making a loan.” (Mem. of Ninth Circuit Ct. of Appeals at 2 n.1). The Ninth Circuit found that the Control Agreement met the first prong and tasked the court with evaluating the remaining five prongs “in the first instance.” (See id. at 3).

A. Prong Two: The Loan Was Issued in Good Faith

The parties dispute whether the loan was issued in “good faith.” (See, e.g., Opp'n to Mot. for Summ. J., Docket No. 179 at 8–15; Reply in Supp. of Mot. for Summ. J., Docket No. 188 at 2–7). Generally, good faith “means honesty in fact and the observance of reasonable commercial standards of fair dealing.” Cal. Com. Code § 1201; see also E. W. Bank v. Axis Ins. Co., No. CV1110792MWFPLAX, 2012 WL 13012667, at *2 (C.D. Cal. Aug. 31, 2012) (discussing using California Commercial Code definition). Federal relies on FDIC v. Cincinnati Insurance Cos., Inc., 981 F. Supp. 2d 1324, 1337 (N.D. Ga. 2013) to establish that a breach of good faith requires only “gross negligence or knowing indifference to ‘red flags.’ ” (See Opp'n at 9). Federal argues that because Banc ignored a myriad of red flags in issuing the loan, it did not issue the loan in good faith.

FDIC v. Cincinnati, however, did not consider California law. In this case—a California breach of contract claim based on diversity jurisdiction—the Policy is interpreted under California law. PMI Mortg. Ins. Co. v. Am. Int'l Specialty Lines Ins. Co., 394 F.3d 761, 764–65 (9th Cir. 2005), opinion amended on denial of reh'g, No. 03-15728, 2005 WL 553004 (9th Cir. Mar. 10, 2005). In California, section 533 of the California Insurance Code must “be read into all insurance policies.” J. C. Penney Cas. Ins. Co. v. M. K., 52 Cal. 3d 1009, 1019, 278 Cal.Rptr. 64, 804 P.2d 689 (1991). Section 533 states that “[a]n insurer is not liable for a loss caused by the wilful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured's agents or others.” Cal. Ins. Code § 533. California courts have interpreted section 533 to “preclude[ ] indemnification for liability arising from deliberate conduct that the insured expected or intended to cause damage.” Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 743, 15 Cal.Rptr.2d 815 (1993); see also Unified W. Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d 1106, 1112 (9th Cir. 2006) (quoting Shell). It does not, however, “preclude coverage for acts that are negligent or reckless.” J. C. Penney Cas. Ins., 52 Cal. 3d at 1021, 278 Cal.Rptr. 64, 804 P.2d 689.

Insurance Code section 533 therefore prohibits the Court from adopting the “gross negligence or knowing indifference to red flags” standard that Federal advocates. The many red flags that came up during Banc's investigation of McDonnell—the inability to independently verify the trust account with Northern Trust, the letters purportedly from Northern Trust's SVP that copied verbatim emails McDonnell sent to Banc, and the concerns that McDonnell was misusing the loan proceeds, among others—cannot be the basis for precluding coverage because none of these red flags amounted to actual knowledge that the trust account did not exist.

That does not mean that Banc is off the hook. “A ‘wilful act’ under Insurance Code section 533 has been defined as an act deliberately done for the express purpose of causing damage or intentionally performed with knowledge that damage is highly probable or substantially certain to result.” California Amplifier, Inc. v. RLI Ins. Co., 94 Cal. App. 4th 102, 116–17, 113 Cal.Rptr.2d 915 (2001) (quotation omitted) (emphasis added) (citing Shell, 12 Cal. App. 4th at 742, 15 Cal.Rptr.2d 815; Mez Indus., Inc. v. Pac. Nat. Ins. Co., 76 Cal. App. 4th 856, 875–76, 90 Cal.Rptr.2d 721 (1999)). This is a subjective standard that hinges on what the insured believed. Id. It does not depend on whether the loan actually meets the definition of “cash-secured.” Id. Here, as established above, Banc knew that McDonnell was an extremely high-risk customer. As a result, everyone at Banc agreed that it would only lend to McDonnell on the condition that the loan was cash-secured. This is evidenced by, for example, an email that Banc's Head of Commercial Banking sent to the CEO and CCO after the CEO raised concerns about McDonnell, which said that “[t]he risk is not being 100% sure we are FULLY collateralized with cash” and that “[w]e will not sign unless there is 100% confidence that we are cash-secured.” (Godesky Decl., Exh. 44). Banc therefore knew that damage was highly probable if the loan was not cash-secured.

There is a genuine issue of fact, however, regarding whether anyone at Banc actually believed the loan was cash-secured. Some employees of the Banc, including Banc's legal counsel, told others during a meeting the loan was “not cash-secured,” but “security-secured.” (Godesky Decl., Exh. 24). More importantly, Banc's CRO—the executive responsible for risk management—testified that the terms of the loan “didn't fully make sense” because, even though “[i]t was supposed to be cash secured,” he was also told by others at Banc that “the securities would be available at some point soon.” (Id., Exh. 51 at 15:6–14; 33:2–10) (emphasis added). The CRO explained that he raised these concerns with the CCO and even told the CCO that the transaction “sounded fraudulent” because of the lack of true cash security:

Q: [Y]ou [said] that, in your view anyway, it was not going to be cash-secured if [McDonnell] had to wait for the money; right?

A: Yeah. Obviously, you know, Webster's definition of secured, that doesn't meet it. So that was just—it didn't make any sense. It was being explained as a cash-secured loan, but [the interim CCO] was suggesting that she had to wait for a period of time to get the cash. I just—so I just—I just told him it didn't make any sense, it sounded fraudulent, and that he should talk to [the CEO] about it.

(Id. at 64:5–16).

In sum, the evidence shows that the executive charged with managing risk at Banc raised his concerns that the loan was not truly cash-secured with other key decisionmakers. Again, “good faith” is a subjective standard that hinges on what the insured believed at the time.⁴ Based on this evidence, a factfinder could find that even though Banc knew damage was highly likely to result if it issued McDonnell a loan without cash security, Banc issued the loan without in fact believing it was cash-secured. In other words, a factfinder could find that Banc issued the non-cash-secured loan “with knowledge that damage [was] highly probable or substantially certain to result.” California Amplifier, 94 Cal. App. 4th at 116–17, 113 Cal.Rptr.2d 915. If that were the case, Banc's loss would not be the result of “good faith,” but the result of willful conduct as it has been interpreted under section 533. Coverage under the Policy would be precluded.

Because there is a factual inquiry on this prong, the Court DENIES summary judgment for Banc.

B. Prong Three: The Forged Document Was “Original”

This prong focuses on whether Banc relied on an original copy of the Control Agreement when it issued the loan. (See Banc SDF ¶ 4). Federal disputes that Banc has established it had the original Control Agreement in its possession when it approved the McDonnell loan. (Id. ¶ 44). As evidence, Federal points to a deposition of Banc's VP of Relationship Management in which he testified that he collected the original Control Agreement “the evening [he] signed [the] loan document,” (Godesky Decl., Exh. 56 at 66:1–13)—which was February 1, 2018—but later testified that he could not recall whether he had the agreement with Clark's original signature as of February 2, 2018. (Id. at 68:13–69:10). Additionally, in an email to him from McDonnell on February 2, 2018, McDonnell stated she would need a scanned copy of the Control Agreement to deliver to the Northern Trust SVP “at the hospital.” (Id., Exh. 38).

Federal has not established a genuine material fact for trial here. A reasonable jury could not find based on this evidence that Banc did not possess the original Control Agreement on February 1, 2018. If anything, the email from McDonnell on February 2, 2018, demonstrates that Banc did have the original copies, which McDonnell wanted to be scanned to her. There is no genuine issue with regard to this prong.

C. Prong Four: Direct Loss Resulting From the Loan

The Policy insured “[l]oss resulting directly from” Banc having extended the loan in reliance on the forgery. (Federal SUF ¶ 9). Under California law this prong hinges on whether the forgery was the “efficient proximate cause” of—i.e., the predominating factor in—Banc's loss. This is a factual question that precludes summary judgment.

Section 530 of the California Insurance Code says,

An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause.

Cal. Ins. Code § 530. California courts have interpreted section 530 to mean that where two or more events combine to cause a loss, and at least one of those events is not covered by insurance, “[c]overage should be determined by a jury under an efficient proximate cause analysis.” Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 412, 257 Cal.Rptr. 292, 770 P.2d 704 (1989). The efficient proximate cause is the “predominant” cause of the loss. Id. at 402, 257 Cal.Rptr. 292, 770 P.2d 704.

In Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747, 754, 27 Cal.Rptr.3d 648, 110 P.3d 903 (2005), the California Supreme Court held that “[p]olicy exclusions are unenforceable to the extent that they conflict with section 530 and the efficient proximate cause doctrine.” That is, parties to an insurance policy cannot contract out of the efficient proximate cause standard of section 530. Id.

Since Julian, California state and federal courts have recognized that the efficient proximate cause standard must be read into insurance contracts under California law. Among other types of insurance, Courts have applied this to homeowner's insurance, see Sabadin v. Hartford Cas. Ins. Co., No. SACV131928JLSANX, 2015 WL 12672750, at *5 (C.D. Cal. Jan. 13, 2015) (citing Julian, 35 Cal. 4th at 754, 27 Cal.Rptr.3d 648, 110 P.3d 903) (“While the Policy's plain language might appear to preclude coverage because earth movement ‘contributed to or aggravated’ the damage, that language is clearly unenforceable to the extent it conflicts with the efficient proximate cause doctrine.”); television production insurance, see Universal Cable Prods., LLC v. Atl. Specialty Ins. Co., 929 F.3d 1143, 1161 (9th Cir. 2019) (quoting Julian, 35 Cal. 4th at 754, 27 Cal.Rptr.3d 648, 110 P.3d 903) (“Policy exclusions are unenforceable to the extent that they conflict with section 530 [of the California Insurance Code] and the efficient proximate cause doctrine ․ Here, the record demonstrates that the efficient proximate cause for the [production] relocation was Hamas’ rocket fire from Gaza into Israel.”); and business insurance, see Pyramid Techs., Inc. v. Hartford Cas. Ins. Co., 752 F.3d 807, 821 (9th Cir. 2014).

The Court has located two district court cases from this circuit that held that section 530 does not apply to fidelity insurance policies. Valley Community Bank v. Progressive Cas. Ins. Co., 854 F. Supp. 2d 697 (N.D. Cal. 2012); Fremont Reorganizing Grp. V. Fed. Ins. Co., No. 809CV1208JVSANX, 2012 WL 12884052 (C.D. Cal. Mar. 15, 2012). In both cases, the district court relied on Ninth Circuit precedent to hold that when it comes to fidelity insurance, “direct means direct” and is “narrower than proximate cause.” Valley Community, 854 F. Supp 2d at 709–10 (citing Vons Co. v. Fed. Ins. Co., 212 F.3d 489, 492–93 (9th Cir. 2000)); Fremont, 2012 WL 12884052, at *10 (same). In so holding, however, the cases relied on federal precedent that pre-dated the California Supreme Court's ruling in Julian.⁵

This Court disagrees with the decision in Valley Community and Fremont, and specifically their reliance on pre-Julian federal cases. Importantly, the Court has found no state law authority nor any published Ninth Circuit authority holding that the California standard of efficient proximate cause does not apply to fidelity insurance policies.⁶

Whether the forgery was the efficient proximate cause of Banc's loss is a question for the trier of fact. See Pyramid Techs., 752 F.3d at 821 (reversing summary judgment for business insurer because “[u]nder California's efficient proximate cause doctrine, whether the damage” was caused by a covered event “is an issue for the jury”). The Court therefore DENIES summary judgment on this prong as well.

D. Prong Five: The Document “B[ore] a Forgery”

It is undisputed that Northern Trust believes its SVP's signature on the Control Agreement was forged. (Banc SDF ¶ 34). There is no genuine factual dispute on this prong.

E. Prong Six: The Insured Relied on the Forged Document

Federal disputes that Banc has demonstrated it “would not have extended the loan to McDonnell in the absence of the Control Agreement.” (Id. ¶ 27). The evidence shows otherwise. As discussed above, the evidence shows that executives at Banc agreed that because of the high-risk McDonnell posed, if Banc were to lend to McDonnell, the loan needed to be cash-secured. (See, e.g., Godesky Decl., Exh. 44). Because the loan was supposed to be cash-secured, “McDonnell's problematic credit history” became “largely irrelevant and the loan earned Banc's lowest internal risk rating.” (Banc SDF ¶ 15). It is clear that the “cash-secured” nature of the loan mattered greatly to Banc, which is why the entire loan was structured so that McDonnell's Northern Trust account would serve as collateral. (Id.).

Federal agrees that the Control Agreement “granted Banc control over the account to perfect Banc's security interest”—in other words, it purported to perfect the very collateral that Banc required in order to proceed with the loan. (Id. ¶ 19). While Federal points out that there may have been other motives for Banc to proceed with the loan (see id. ¶ 20), this prong does not require that Banc relied solely on the Control Agreement in extending the loan. Whether Banc's reliance on the forged Control Agreement was the predominant cause of its loss is a prong four inquiry. See section III.C, supra. Federal has not established a genuine issue of material fact on this prong.

IV. CONCLUSION

Banc's Motion for Summary Judgment is DENIED, because questions of material fact remain as to the second and fourth prongs.

IT IS SO ORDERED.

FOOTNOTES

1.   On summary judgment, the facts presented in the evidence must be admissible, but the evidence need not be in admissible form. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). To the extent the Court relies on the parties’ evidence, it has considered the objections to that evidence and overrules them. The Court overrules all other objections as moot.

2.   It is disputed whether anyone from Banc was in possession of the original Control Agreement bearing the fraudulently notarized signatures of McDonnell and the Northern Trust SVP when it issued the loan. (Banc SDF ¶ 44). At his deposition, the VP of Relationship Management testified that he collected the original Control Agreement “the evening [he] signed [the] loan document.” (Godesky Decl., Exh. 56 at 66:1–13). Later he testified that he could not recall whether he had the agreement with Clark's original signature as of February 2, 2018. (Id. at 68:13–69:10). In an email to him from McDonnell on February 2, 2018, McDonnell stated she would need a scanned copy of the Control Agreement to deliver to the Northern Trust SVP “at the hospital.” (Id., Exh. 38).

3.   This matter was originally before the Honorable David O. Carter but has since been reassigned to this Court.

4.   At oral argument the Banc argued that the Court should not rely on the post-transaction “musings” of various Banc employees to decide this question. The fact that these musing occurred at the time of the decision on the issuance of the loan makes them relevant to the analysis.

5.   In addition to Vons, a Ninth Circuit case from 2000, Valley Community’s holding relied on State Farm Fire & Casualty Co. v. Martin, 872 F.2d 319, 321 (9th Cir. 1989), and United Sec. Bank v. Fid. & Deposit Co., No. 96-16331, 1997 WL 632606, at *1 (9th Cir. Oct. 9, 1997).

6.   Federal argues that the Court should adopt the “worthless collateral” doctrine. The “worthless collateral” doctrine posits that, even if the forged signature had been authentic, the bank would have suffered the same loss anyway because the collateral itself was in fact worthless. See Valley Community, 854 F. Supp. 2d at 707–09 (explaining rationale for doctrine and citing cases). The Valley court adopted the doctrine after rejecting the “efficient proximate cause” standard. (Id.). The Ninth Circuit approved of this doctrine in an unpublished case applying Montana law. Bank of Bozeman v. BancInsure, Inc., 404 Fed. App'x. 117, 119 (9th Cir. 2010). Just as the Court disagrees with Valley Community's rejection of the “efficient proximate cause” standard mandated by section 530, the Court disagrees with Valley Community’s use of the worthless collateral doctrine as a causation standard. In the absence of California authority adopting the “worthless collateral” or “fictitious collateral” doctrine and thereby incorporating it into California insurance contracts, this Court declines to adopt the doctrine. See also FDIC v. RLI Ins. Co., 784 F.3d 1104, 1110 (7th Cir. 2015) (“Our primary reason for rejecting RLI's argument is straightforward: we are bound by the plain language of the bond, and this bond does not make coverage dependent on the quality of the collateral. It requires only a document bearing a forged signature, and good-faith reliance on that document that caused the bank's loss.”). The Court might have a different view if the Ninth Circuit had adopted the worthless collateral doctrine in a published opinion interpreting California law.

WESLEY L. HSU, UNITED STATES DISTRICT JUDGE