A California Court of Appeal recently found a bank liable to a judgment creditor under California’s Enforcement of Judgments Law for the bank’s registered agent’s mistake in misreading, and subsequently rejecting, a notice of levy.  Although the bank itself did not have knowledge of the mistake, the Court held the bank responsible through principles of agency, rendering the bank liable for amounts that the account holder drained from the account when the levy should have been in effect.

In Bergstrom v. Zions Bancorporation, N.A., the judgment creditor had a $4.1 million judgment against Northamerican Sureties, Ltd. and Robert S. Michaels.  In seeking to collect on the judgment, the judgment creditor learned that Michaels’ wife, Cheryl Pitcock, held two bank accounts at Zions, totaling $118,010.97.  Since California allows community property held by a debtor’s spouse to be used to satisfy a judgment against the debtor, the creditor served Zions’ registered agent, Corporation Service Company (CSC), a notice of levy on “all accounts standing in the name of” Northamerican, Michaels, and/or his spouse.

At the time CSC received the notice of levy, someone had underlined the words “Northamerican Sureties, Ltd.”  Unfortunately, the CSC employee mistakenly believed that the underlined entity was the party to be served, and erroneously rejected the notice because its principal was Zions, not Northamerican.  Upon notice of the rejection, the creditor immediately notified CSC of the mistake, but Pitcock had already substantially drained the accounts in the interim.

Pursuant to the applicable section of California’s Enforcement of Judgments Law, at the time of a levy, or promptly thereafter, a financial institution shall deliver the property unless it has “good cause” for failure or refusal.  The trial court accepted Zion’s argument that good cause existed for its failure to deliver the property because CSC followed the “custom and practice” of assuming the underlined entity was the person to whom the notice was directed.

The Court of Appeal reversed.  It explained that “good cause” includes a showing that the institution did not know or have reason to know of the levy.  The question of whether CSC – and, by extension, its principal, Zion – had reason to know turned on whether CSC acted unreasonably under the circumstances, i.e., whether it was negligent.

Turning to whether CSC was negligent, the Court of Appeal held that CSC’s conduct was unreasonable as a matter of law, reasoning that CSC’s very job is to read papers served on it, and that the custom and practice of reading only what was underlined was not controlling as to the standard of care.  In turning to the law of agency, the court emphasized the fundamental tenet that a principal is deemed to know what its agent knows while acting within the scope of the agent’s authority.  In rejecting Zions’ argument that CSC was merely its agent “for service of process, not its general agent,” the court held that the scope of CSC’s agency was precisely intended for this context.

Zions was able to avoid liability for a portion of the funds drained from the account.  Zions argued that its internal policy of responding to notices of levy includes freezing the affected funds by 4:00 p.m. the business day after the notice of levy is served, which the court found consistent with the statute requiring “prompt delivery.”  Therefore, Zions was only liable for the spouse’s withdrawals made after the bank would have instituted the hold, consistent with its internal policies. 

The Bergstrom decision demonstrates that depository institutions can be held liable for their registered agents’ mishandling of a levy.  For that reason, depository institutions should carefully vet their registered agents, and try to obtain appropriate protections in their agreements with their registered agents.