Hirsch v. Bank Of America

132 Cal.Rptr.2d 220 (2003)

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Nature of the Case

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Facts

Ps are property owners who placed funds in escrow with various title companies which in turn deposited those funds in demand deposit accounts maintained by Ds. Ps sued Ds on their behalf and similarly situated others, as well as the general public. California law mandates that (1) all funds received by a title insurance company in connection with any escrow must be deposited with a financial institution and (2) the funds so deposited belong to the person entitled thereto under the escrow terms. Any interest received on those funds 'shall be paid over by the escrow to the depositing party to the escrow unless the escrow is otherwise instructed by the depositing party, and shall not be transferred to the account of the title insurance company . . . .' The Federal Reserve Act prohibits member banks of the Federal Reserve System from paying, either directly or indirectly, any interest on any demand deposit. The Federal Reserve Board has endorsed various arrangements by which banks can provide benefits to depositors without violating the Federal Reserve Act or Regulation Q. A bank can absorb or reduce charges for banking services since the bank does not actually pay funds to the depositor, even though the depositor benefits from the absorption of charges. A bank can make loans to its customers at a reduced rate of interest based on earnings credits attributed to compensating balances maintained in demand deposit accounts. The amount of credit the bank would extend would be determined with reference to the historical average demand deposit account balances. Loan proceeds would be used to purchase commercial paper, treasury bills and other investment instruments pledged as security for the loans. Ps claims Ds knowingly diverted interest earned on Ps' escrow funds to the title companies through the artifices of earning credits and monthly revolving credit facilities. Ds extended earnings credits to title companies based on the average daily escrow funds on deposit with them. The earnings credits were used to pay for normal banking services provided to title companies by Ds or by third party vendors under contract with Ds. Ds also paid earnings credits for services that were not normal banking functions, e.g., invoices were paid for tax preparation; voicemail systems; office supplies and furniture; and installation and upgrading of computer equipment in branch offices (even though the equipment was used primarily for nonescrow services). Ds paid earnings credits for services that were never rendered, based on invoices they knew were not related to normal banking services. Earnings credits went to shell companies that had no independent existence, employees or payroll expenses, based on phony invoices. The shell companies in turn funneled or rebated the payments to the title companies. Earnings credits were paid to subsidiaries of the title companies for services invoiced at inflated, above-market rates. The MRCF process was used to purchase treasury bills, certificates of deposit, and highly rated commercial paper. Ds charge a nominal amount of interest on the credit extended to the title companies to purchase the assets, but the securities generate a market rate of return, guaranteeing monthly profit to the companies. Ps pled five causes of action: (1) aiding and abetting conversion of interest; (2) aiding and abetting breach of fiduciary duty; (3) aiding and abetting breach of agent's duties to principal; (4) unjust enrichment; and (5) violation of the unfair competition law (UCL). Ps sought general and punitive damages, and an order 'directing restitution of all improperly assessed charges and interest obtained, and the imposition of an equitable constructive trust over such amounts for the benefit of Ps, the Class members and the general public . . . .' The trial court ultimately sustained Ds' demurrers to the complaints without leave to amend. Even if Ds violated Regulation Q that violation did not harm Ps. Ps appealed.