JPMorgan Chase Bank, N.A. v. Superior Court

Citation: Not availableDocket: A164519M

Court: California Court of Appeal; December 11, 2022; California; State Appellate Court

Original Court Document: View Document

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The Court of Appeal of California modified an opinion regarding two petitions from JPMorgan Chase Bank and U.S. Bank concerning a qui tam action under the California False Claims Act (CFCA). The plaintiffs allege the banks failed to report and deliver unclaimed cashier’s checks to the State as escheated property. The banks sought writ relief after the trial court overruled their demurrers. The Court rejected the banks' claim that a CFCA action requires prior notice from the California State Controller under Code of Civil Procedure section 1576. It affirmed that the plaintiffs adequately alleged the banks' obligation to report and deliver these funds, dismissing the banks' due process concerns. The petitions for rehearing were denied, and no changes were made to the judgment. The opinion was certified for publication, indicating its significance.

California’s Unclaimed Property Law (UPL) governs the escheatment of abandoned property to the state, which occurs when the owner is unknown or has refused to accept the property. Under Code Civ. Proc. § 1300, property escheats to California if the last known address of the apparent owner is in the state, aligning with the federal priority rule established in Texas v. New Jersey. Section 1511 specifies that certain financial instruments, such as money orders and travelers checks, escheat if they were purchased in California and meet conditions outlined in Section 1513. The law mandates that holders of unclaimed property report annually to the Controller, providing details of owners with property valued at $25 or more, and deliver the unclaimed funds by the following June. The Controller has the authority to examine records of suspected non-compliant holders and can initiate legal action to enforce compliance. Penalties for non-compliance include fines for failing to report or deliver escheated property, with daily fines up to $10,000 and more significant fines for willful non-payment. A person is not deemed willfully non-compliant unless they fail to respond to a certified notification from the Controller. Ken Elder, the qui tam plaintiff, has filed separate actions against JPMorgan Chase Bank and U.S. Bank, alleging they did not deliver millions in unclaimed cashier's checks to the state as required by the UPL.

Complaints allege that two banks submitted knowingly false annual abandoned property reports to California to conceal violations of the Unclaimed Property Law (UPL). The banks incorrectly claimed that unclaimed cashier's checks were escheated by Ohio, their domicile state, which has more favorable escheat provisions than California. The complaints assert three violations of the California False Claims Act (CFCA): 1) wrongful conversion of funds intended for California; 2) a reverse false claim for concealing their obligation to deliver money owed on the cashier's checks to California; and 3) a second reverse false claim for submitting false reports regarding the same obligation. 

In response, the banks demurred, arguing that the complaints lacked allegations of prior notice from the Controller regarding UPL violations, which they claimed was necessary for liability under both the UPL and CFCA. They also contended that the complaints did not establish their obligation to report and deliver the money owed, and argued that enforcing California’s UPL on property claimed by another state would violate their due process rights. 

Initially, the trial court sustained the banks' demurrers, citing a precedent which required notice of potential UPL violations. However, after the California Attorney General contested this ruling, the court allowed further briefing and ultimately overruled the demurrers. The court determined that notice from the Controller is not a prerequisite for CFCA actions and dismissed the banks' remaining arguments.

Subsequently, JP Morgan and U.S. Bank filed petitions for a writ of mandate to challenge the trial court's order, which have been consolidated for review. The appellate court expressed a willingness to review the demurrer rulings due to significant legal implications concerning the interaction of the CFCA and UPL.

In a writ proceeding, the standard for reviewing a demurrer is de novo, meaning all facts in the complaint must be accepted as true to determine if the demurrer should be overruled. The California False Claims Act (CFCA) aims to enhance governmental efforts in identifying and prosecuting fraudulent claims against state entities, allowing for civil penalties and treble damages against individuals who knowingly present false claims. False claims can involve the improper handling of public property or money and the avoidance of obligations to pay the state. The CFCA includes qui tam provisions, enabling private individuals to act on behalf of the state to address violations. This encourages citizens to report fraud, with the CFCA being interpreted broadly to fulfill its purpose.

The banks argue their demurrers should be upheld because the complaints do not indicate prior notice from the Controller regarding funds that may be escheated. They assert that liability under the CFCA for failing to report escheated property requires proof of willful failure as defined by section 1576 of the Unclaimed Property Law (UPL), which necessitates notification from the Controller. They reference the Bowen case, claiming it established that CFCA violations cannot be based on unreported escheated property without such notice. However, the court disagrees, noting that Bowen only determined that certain reconveyance fees were not subject to escheat due to the absence of a clear obligation to report them at the relevant time. Additionally, the plaintiff did not demonstrate that contracts mandated the return of these fees or that a judgment was entered for their disgorgement.

The court in Bowen referenced section 1576's requirement for Controller notice regarding penalties for willful failure to report under the Unclaimed Property Law (UPL) at two points in its opinion. In the background section, it described the statutory scheme and penalties. In the conclusion, it noted the plaintiff lacked standing for a breach of contract claim or class action to recover reconveyance fees, arguing instead that the UPL provided grounds for imposing reverse false claims liability despite no notice being given to defendants. The plaintiff claimed an obligation to refund the fees was liquidated and certain, but the waiver of other damages did not establish enforceability at the time of the alleged violations. The banks argued that Bowen set a precedent requiring Controller notice for a California False Claims Act (CFCA) action based on UPL violations, but this interpretation was contested. The court clarified that Bowen only addressed the plaintiff's failure to allege a reporting obligation and did not rule out the possibility of such an obligation existing without prior notice. Subsequent cases cited Bowen but did not establish Controller notice as a prerequisite for CFCA actions. In Grayson, the dismissal was based on a jurisdictional public disclosure bar, and in McCann, the court explicitly noted that its decision did not hinge on section 1576. Prior notice from the Controller is not necessary for CFCA liability; however, penalties under section 1576 do require notice. The CFCA provisions violated by the banks address specific conduct without regard to willfulness or punishability under the UPL.

Complaints allege violations of Government Code section 12651, specifically subdivisions (a)(4) and (a)(7), related to the possession and delivery of government property and false claims to the state. These violations do not require prior notice from the Controller or a predicate statute for enforcement. The Unclaimed Property Law (UPL) does not mandate notice for imposing liability under the California False Claims Act (CFCA). The Controller has the authority to initiate civil actions without prior notice to examine records or compel property delivery. Violators of reporting deadlines incur a 12% interest penalty on escheated property, also without prior notice. Businesses failing to maintain records of certain financial instruments face a $500 civil penalty. The Attorney General can pursue claims on behalf of the state without advance notice. Legislative history indicates that CFCA liability operates independently from UPL provisions, as evidenced by a 1999 amnesty program that acknowledged CFCA liability despite waiving interest for undelivered funds. The CFCA requires that false claims be made "knowingly," defined as having actual knowledge, acting in deliberate ignorance, or acting in reckless disregard of the truth. This aligns with the federal False Claims Act (FCA) definition, which seeks to address situations where individuals fail to inquire about the validity of claims. The banks' argument for a stricter notice requirement to avoid CFCA liability is rejected, as it would allow immunity even in cases of knowing misreporting without prior notice from the Controller.

The banks argue against claims brought under the California False Claims Act (CFCA) based on alleged violations of the Anti-Kickback Statute (AKS). For a valid FCA claim tied to an AKS violation, a plaintiff must prove the defendant acted with knowledge and willfulness. However, unlike the AKS, willfulness is not a necessary element in CFCA cases. Adding this requirement would undermine the CFCA's intent, which is to encourage reporting of fraud by individuals with inside knowledge. The trial court noted that requiring notification from the Controller before a CFCA action would reward fraudulent behavior by allowing defendants to rectify underpayments without consequence. 

The banks claim the complaints are deficient because they do not demonstrate an obligation to report uncashed checks to the state. The court disagrees, asserting that the complaints sufficiently allege such an obligation, which is defined as a duty arising from various relationships or statutes. The CFCA requires that allegations related to fraud be stated with particularity, but knowledge and intent can be expressed using definitive language. This specificity is crucial for providing the defendant with clear charges to address.

Fraud pleadings require specificity to ensure that courts can identify nonmeritorious claims. The complaints assert that the banks' obligations arise under section 1511 of the UPL, which mandates that certain financial instruments escheat to California if purchased there. Elder argues that cashier's checks qualify as "similar written instruments" to money orders and travelers checks, thus subject to escheatment. The banks counter that there is no statutory obligation or authority equating cashier's checks with money orders and travelers checks. The complaints also reference the last-known-address rule in section 1510, asserting that the banks maintain the last known addresses of check purchasers, including addresses for entities like the State Bar of California and the California DMV. Prior federal court rulings have supported these allegations, indicating that they do not present federal questions. Elder claims that the banks have failed to escheat cashier’s checks when both the purchaser and payee reside in California. The courts have recognized that cashier's checks are sufficiently similar to money orders and travelers checks for pleading purposes, as they are direct obligations of a depository institution under federal law. Thus, the complaints adequately allege a failure to report and deliver property based on the owner's last known address.

Cashier's checks are financial instruments issued upon payment, obligating the issuer to deliver funds to the bearer upon presentation. The California Uniform Commercial Code classifies a cashier's check as a draft from the same bank acting as both drawer and drawee. Money orders are also defined as checks under the Code, and banks can sell them as they do cashier's checks. Legal commentary suggests that money orders are fundamentally similar to cashier's checks.

In the case of Bowen, the court determined that the plaintiff did not demonstrate a legal obligation for banks to report reconveyance fees as unclaimed property, as the relevant Civil Code requiring refunds was enacted after the period in question. Similarly, in McCann, the plaintiff's claims were based on alleged fraudulent practices without establishing a legal obligation for banks to investigate and credit unidentified amounts.

The banks contend that ongoing litigation in the Moneygram case raises uncertainty about the classification of cashier's checks relative to money orders, which could negate claims of knowing violations under the Unclaimed Property Law (UPL). However, this argument, introduced late in the proceedings, may be disregarded. Even if considered, it does not undermine the allegations that the banks were aware of their potentially unlawful conduct. The Moneygram case focuses on whether certain checks qualify as similar instruments under federal law, with the banks' argument not definitively stating that cashier's checks are dissimilar to money orders or travelers checks, highlighting the complexity of resolving such issues at the pleading stage.

Following a detailed analysis of expert testimony, the banks aim to demonstrate that the contested cashier’s checks differ significantly from money orders and travelers checks, thus exempting them from section 1511. However, the complaints sufficiently allege an obligation under the California False Claims Act (CFCA). The banks further contend that granting relief sought in these complaints would breach their due process rights by imposing a "double escheat" scenario, requiring them to report the same unclaimed property to both California and Ohio. This argument references the Supreme Court case Western Union Tel. Co. v. Pennsylvania, where due process was violated due to conflicting claims from other states. In the present case, there are no claims or judgments from Ohio or any other state regarding the money associated with the cashier’s checks. Ohio's unclaimed property law does not conflict with California’s, as it does not consider funds owed to out-of-state owners as unclaimed. Additionally, the CFCA penalties sought are distinct from the funds tied to the cashier’s checks. The current pleadings do not indicate any due process violation. Consequently, the petitions for writ of mandate are denied, and costs are awarded to Elder. The court declines to take judicial notice of certain filings in the Moneygram case but notes a recent ruling in a related case, which found ambiguity in the term “other similar instrument” and questioned the sufficiency of allegations regarding knowledge of escheatment. However, the court disagrees that such allegations are necessary under California's pleading standards.