Navigators Specialty Insurance Company, a New York Corporation v. California Bank and Trust

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
NAVIGATORS SPECIALTY INSURANCE
COMPANY, a New York Corporation,
Plaintiff-Appellant,
v.
CALIFORNIA BANK AND TRUST,
Defendant-Appellee.
No. 21-56161
D.C. No.
8:17-cv-00991-JLS-KES
MEMORANDUM*
Appeal from the United States District Court
for the Central District of California
Josephine L. Staton, District Judge, Presiding
Argued and Submitted October 17, 2022
Pasadena, California
Before: WATFORD and HURWITZ, Circuit Judges, and VITALIANO,** District
Judge.
* This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
** The Honorable Eric N. Vitaliano, United States District Judge for the
Eastern District of New York, sitting by designation.
FILED
DEC 13 2022
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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2
After a remand from this Court vacating a district court judgment based on
the statute of limitations, the district court granted summary judgment to appellee
California Bank & Trust on the merits, rather than on statute of limitations
grounds. That approach was not inconsistent with our mandate. See Hall v. City of
Los Angeles, 697 F.3d 1059, 1067 (9th Cir. 2012). And, reviewing the district
court’s summary judgment de novo, we affirm.
This case arose out of the fraudulent indorsement of a series of checks drawn
against the account of Deacon Corporation—a construction general contractor and
the subrogor of appellant Navigators Specialty Insurance Company—that were
payable to Deacon’s subcontractor, Champion Construction, and to certain of
Champion’s vendors. Upon presentment by Chase, Champion’s depository bank,
the fraudulently indorsed checks were honored by California Bank, Deacon’s bank.
Navigators, standing in Deacon’s shoes, sued California Bank.
1. Navigators first contends that California Bank cannot avail itself of the
protections of California Commercial Code § 3405 as they may be invoked only as
an affirmative defense. Dkt. 10 at 42–62. But even assuming, without deciding,
that § 3405 is an affirmative defense, a defendant may raise an affirmative defense
not raised in its initial pleading, so long as the delay does not prejudice the
plaintiff. Rivera v. Anaya, 726 F.2d 564, 566 (9th Cir. 1984). We find no
prejudice here.

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3
Trying to scrape together a claim of prejudice, Navigators asserts that its
legal position was harmed by California Bank’s late invocation of this provision of
§ 3405 because the statute would not allow Navigators to sue the depository
bank—Chase—until California Bank raised a § 3405 affirmative defense. By the
statute’s plain text, however, a party’s liability under § 3405 for failing to exercise
ordinary care in paying a check or other negotiable instrument is not contingent
upon a third party raising a § 3405 affirmative defense. Recovery is contingent
solely upon a showing that the bank to be charged under the section failed to
exercise “ordinary care” in receiving or paying a check bearing a fraudulent
indorsement made by an employee whom the employer had entrusted with
responsibility and that such failure contributed to the employer’s loss. See Lee
Newman, M.D., Inc. v. Wells Fargo Bank, 87 Cal. App. 4th 73, 82–84 (2001).
Thus, as soon as Navigators or its subrogor, Deacon, experienced the claimed loss
here, it had an unfettered right to sue Chase. It was not prejudiced in any way by
California Bank’s failure to invoke the protection of § 3405 as an affirmative
defense in its answer.
2. Appellant fares no better on its substantive challenge to the summary
judgment. California law is unambiguous: where the fraudulent indorsement of a
check is that of a trusted employee of the party incurring the loss—absent the
comparative fault of other parties—the employer and, ultimately, its insurer stand

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to bear the loss. See Cal. Com. Code § 3405(b); Unif. Com. Code § 3-405, cmt. 4.
Attempting to wriggle out of this statutory allocation of liability, Navigators argues
that Champion was not Deacon’s “employee” under § 3405. But under § 3405, an
independent contractor qualifies as an “employee,” and California Labor Code
§ 3353 applies the term to entities providing services like those provided by
Champion to Deacon. 7-ER-877–78; 7-ER-896–905. Navigators’ additional
argument that Champion lacked the “responsibility” necessary under § 3405 also is
unavailing because Champion supplied key information for the execution of the
instruments and handled their distribution.
Navigators might have sought to diminish its loss on a comparative fault
basis by plausibly pleading and showing that California Bank failed to exercise
ordinary care. But the record is barren of any evidence of such failure by
California Bank. Navigators contends only meekly that California Bank “fail[ed]
to individually review checks transferred to it for payment.” 8-ER-995; see 1-ER-
13. A drawee bank, however, has no duty to review the indorsements of checks
that are drawn against it. See HH Comp. Sys., Inc. v. Pac. City Bank, 231 Cal.
App. 4th 221, 229–30 (2014).
AFFIRMED.

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