First District Affirms Dismissal of Qui Tam Action for Failure to Identify a “Liquidated and Certain Obligation”
The First District Court of Appeal affirmed the dismissal of a qui tam action without leave to amend, holding that plaintiffs failed to identify a “liquidated and certain obligation” owed by Bank of America. State of California ex rel. Joseph McCann v. Bank of America, N.A., No. A126494, — Cal.Rptr.3d —-, 2011 WL 72177 (Cal. Ct. App. 1st Dist. Jan. 11, 2011). Joseph McCann and Douglas Valdetero (Plaintiffs or Appellants) brought a qui tam action against Bank of America (BOA) in the name of the State of California under the California False Claims Act (CFCA; Govt. Code, s 12650 et seq.). Id. *1. Plaintiffs alleged that BOA defrauded the State by failing to pay over to the State amounts that they contend should escheat as abandoned or unclaimed property under the California Unclaimed Property Law (UPL; Code of Civ. Proc. s 1500 et seq.). Id. The trial court sustained BOA’s demurrer to Appellants’ first amended complaint (FAC) without leave to amend on the basis that it failed to plead a CFCA claim with the required specificity and failed to establish a violation of the UPL. Id.
Plaintiffs alleged that as a check clearing bank, BOA diligently researched errors which could result in debits (i.e., money due) to BOA, but pursued errors which would result in credits (i.e., money payable) to the presenting banks “much less regularly.” Id. *2. They contended that, as a result of a policy decision by BOA not to research credits due at the end of each processing date to presenting banks, they became “unidentified credits” which could not be traced to their rightful owners. Id. They allege that BOA’s practice was to transfer these monies to a suspense account for a short period of time, and to then appropriate them into income. Id. Plaintiffs contended that these unidentified credits are subject to escheat to the State as unclaimed property subject to the UPL.
Plaintiffs brought claims pursuant to the California False Claims Act (“CFCA”) and the Unclaimed Property Law (“UPL”). Id. The CFCA is modeled on the federal false claims act (31 U.S.C. s 3729 et seq.), and “permits the recovery of civil penalties and treble damages from any person who ‘[k]nowingly presents or causes to be presented [to the state or any political subdivision] . . . a false claim for payment or approval.’ Id. (quoting Govt. Code s 12651, subd. (a)(1)). ” A “claim” under the CFCA means “any request or demand … for money … presented to any officer, employee, or agent of the state….” Id. (citing Govt. Code s 12650, subd. (b)(1)(A)). False claims include “knowingly present[ing] or caus[ing] to be presented a false or fraudulent claim for payment or approval” (Govt. Code, s 12651, subd. (a)(1)), but also include “knowingly and improperly avoid[ing], or decreas[ing] an obligation to pay or transmit money or property to the state or to any political subdivision” (Govt. Code, s 12651, subd. (a)(7)). The first type is referred to as a traditional false claim and the latter is known as a reverse false claim. Id. Plaintiffs claimed that, by failing to report and deliver the unidentified credits to the State under the UPL, BOA made a “reverse” false claim against the State, in violation of the CFCA. Id. *3.
The Unclaimed Property Law
The UPL establishes the conditions under which certain unclaimed personal property escheats to the state. Id. The UPL is not a permanent or “true” escheat statute, but instead, it gives the state custody and use of unclaimed property until such time as the owner claims it. Id. Its dual objectives are “to protect unknown owners by locating them and restoring their property to them and to give the state rather than the holders of unclaimed property the benefit of the use of it, most of which will never be claimed. Id. Code of Civil Procedure section 1501.5, subdivision (a) provides in pertinent part that “property received by the state under this chapter [the UPL ] shall not permanently escheat to the state.” “The state holds the property as a custodian until the property’s rightful owner can claim the property.” Id. (citing Fong v. Westly (2004) 117 Cal. App. 4th 841, 844.) “The UPL compels holders of certain classes of abandoned property subject to escheat to report and deliver the property to the State Controller (Controller), who is responsible for enforcing the UPL . . . .” Id. (citing Code. Civ. Proc. ss 1530, 1532, 1571.) The UPL imposes penalties for the willful failure to report and deliver abandoned property subject to escheat but only after the Controller has given notice by certified mail of the violation and the violator has failed to respond. Id. (citing Code Civ. Proc. s 1576(c)).
BOA demurred to the first amended complaint. At the hearing, the court first noted that a “[q]ui tam action is different than other actions in that the pleading requirements on a qui tam action require … a greater amount of specificity” and that the FAC did “not specify any particular amount or original claimant or owner.” Id. *3. The trial court found the FAC deficient in failing to “precis[ely]” allege “the property that is subject to escheatment.” Id. Thetrial court also found that the FAC failed to establish a claim under the UPL because it did not identify “a California bank with a [purported unidentified] credit.” Id. Plaintiffs acknowledged that they would be unable to further amend their pleadings to provide any greater specificity, so the court sustained the demurrers to the FAC, without leave to amend. Id. *4.
The trial court discussed the lack of specificity in the FAC, observing:
And I think the law is that for this kind of action, there has to be precision as to what is the property that is subject to escheatment. Where did it come from, and is it something over which the State of California can exercise control. And that specificity has to be more than common sense or more than it is likely that if this stuff happened in California, it must have involved a California bank with a credit. . . . I mean basically what this case is about is that banks clear lots of checks. And sometimes at the end of the day there’s stuff [lying] on the floor. And the question becomes what do you do with those. [P] The allegation here is that [BOA] intentionally doesn’t sort them out. But there is no allegation that there is a legal obligation to do so. [P] And the question becomes, can the State of California jump into the middle of this without knowing any specificity on any particular piece of property that should be escheated, view this debit credit process as resulting in remaining property, and state a cause of action to take it. [P] And I think on those facts the answer is no, it’s not pleaded with sufficient particularity.
Plaintiffs argued that they were unable to identify any presenting bank to whom unidentified credits are due only because of BOA’s conduct in “stripping the identity of the presenting bank from the unidentified credit,” and that BOA is seeking to take advantage of its own intentional conduct in “not researching the source of unidentified credits arising from its check clearing operations.” Id. Plaintiffs asserted that the domicile of a presenting bank is in any event irrelevant since there is a presumption in the UPL that all unclaimed funds escheat to the State, and that BOA cannot obtain a “windfall” because one or more of the presenting banks might be domiciled outside of California. Id.
The Court of Appeal held that plaintiffs failed to allege the existence of any legal obligation for BOA to do otherwise, or to directly identify an amount or account–a liquidated and certain obligation–due to any specified presenting bank (in California or elsewhere) that would be subject to escheat under the UPL. Id. *7.
The heightened pleading requirement for fraud allegations “serves not only to give notice to defendants of the specific fraudulent conduct against which they must defend, but also ‘to deter the filing of complaints as a pretext for the discovery of unknown wrongs, to protect [defendants] from the harm that comes from being subject to fraud charges, and to prohibit plaintiffs from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis.’ [Citations.]” (Bly-Magee v. California, supra, 236 F.3d at p. 1018.) While Appellants identified a practice they alleged to be fraudulent (i.e., failure to investigate unidentified credits and to then credit them to presenting banks), they still fail, as the trial court noted, to allege the existence of any legal obligation for BOA to do otherwise, or to directly identify an amount or account–a liquidated and certain obligation–due to any specified presenting bank (in California or elsewhere) that would be subject to escheat under the UPL. [FN11] Whether viewed as a lack of pleading specificity, or as a substantive defect in failure to allege a necessary element of their cause of action, it is fatal to the complaint in either instance.
The UPL Claim
The essential predicate for the false claims case Appellants seek to pursue is the existence of property that the State Controller could properly claim under the UPL. Id. Appellants’ position is that the undifferentiated sums held in a suspense account by BOA and resulting from the .01 percent error rate in clearing checks are unclaimed personal property as defined by the UPL. The court rejected this claim.
Appellants have not pled, and admittedly cannot plead, the existence of a certain and liquidated sum payable or distributable to any presenting bank. Significantly, there is no indication that any presenting bank has ever made or pursued any such claim against BOA. Were there such identifiable and quantifiable debts due and owing by BOA, it is difficult to conceive that the sophisticated financial institutions who are the parties to these transactions could be presumed to have “abandoned” them (or how the State would then fulfill its duty under the UPL to attempt to restore the property to the true owner). (See Douglas Aircraft Co. v. Cranston, supra, 58 Cal.2d at p. 463.) Whether BOA receives, as Appellants complain, a “significant windfall” from the check clearing process is entirely irrelevant.
The CFCA Requirement of a Liquidated and Certain Claim
The court held that “Not only does Appellants’ predicate UPL claim fail for this reason, but we believe that the CFCA imposes its own requirement that there be a liquidated and certain obligation otherwise owed to the State.” Id.
As relevant here, the CFCA provides for damages and penalties against any person who “[k]nowingly makes, uses, or causes to be made or used a false record or statement [to conceal, avoid, or decrease] an obligation to pay or transmit money or property to the state or to any political subdivision.” (Govt.Code, s 12651, subd. (a)(7).) ” ‘Obligation,’ as used in the [CFCA], has been construed to mean a legal obligation in existence at the time the alleged false record was filed. ‘The obligation cannot be merely a potential liability: instead, in order to be subject to the penalties of the [CFCA], a defendant must have had a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness.
Judges and Attorneys
Justice Terence L. Bruiniers wrote the opinion for the Court, with Justice Barbara J.R. Jones and Presiding Justice Henry E. Needham, Jr. concurring
Appeal from an order of Judge Richard A. Kramer, Superior Court of San Francisco County, No. CGC 08-474067.
Cotchett, Pitre & McCarthy, Frank M. Pitre and Ara Jabagchourian; Freshman & Freshman, Jerald A. Freshman for Plaintiffs and Appellants.
Arnold & Porter, Nancy L. Perkins and Laurence J. Hutt for Defendants and Respondents.
By CHARLES JUNG