Paperwork is an inevitable and often tedious part of doing business. When this paperwork becomes routine and time-consuming, the natural tendency is to skim through documents or rely on industry-developed shortcuts. While this may save you time in the short term, it risks exposing you and your business to massive liability. And while you can directly control your own actions, the risk of liability doesn’t end there. Many companies choose to outsource this paperwork to third parties and trust them to do their job. But even when you have good practices internally, when third parties working for you don’t follow best practices, you can still be put at risk. The recent decision of the California Court of Appeals in Bergstrom vs. Zions Bancorporation is a clear example of how reliance on third-party agents and the use of third-party shortcuts can expose your business to massive liability. 2022 WL 1419910 (2022).
Zions Bancorp (“Zions”) is a bank based in Los Angeles, California. Like most California corporations, it has contracted with a third party (in this case, Corporation Service Company (“CSC”)) to serve as its agent for service of process. As the service of process agent, one of CSC’s responsibilities was to accept legal documents and notify Zions when Zions needed to take action. In 2019, CSC received a levy notice from Bergstrom regarding funds in a Zion account to compensate him for an out-of-state court judgment. This notice of levy required Zions to freeze the debtor’s account assets to prevent the account holder from taking the money and leaving the creditor with nothing. Although a notice of levy is a relatively short legal form, an industry practice exists for bailiffs that the serving party will underline the name of the party to whom the legal document is addressed in order to expedite the process. of examination. This shorthand has developed independently of the law, but is heavily used by members of the industry.
However, in this case, the party serving the debit notice underlined the name of one of the account holders whose bank account was to be debited by Sion, rather than underlining the name of Sion (the party to whom the legal document was addressed) itself. As a result, CSC rejected the notice of levy, saying it was not a process service agent for the company it was intended for. In the eight days between that error and the creditor being able to challenge the rejection, the owner of the bank account withdrew nearly all of the assets from the account, leaving about $200 of the approximately $120,000 in the account at the time the direct debit notice was served. Having lost his ability to meaningfully collect from the debtor, Bergstrom filed suit against Zion, seeking compensation equal to the balance in the debtor’s account at the time his notice of collection was wrongfully denied.
The Court analyzed three main questions: (1) What is the standard of care for companies that receive a notice of levy? (2) is an officer reviewing legal documents negligent in relying on industry standards and practices to expeditiously review the document; and (3) whether implicit knowledge of the contents of a legal document served on an agent for service can be imputed to the principal.
First, the Court attempted to define the standard of care for responding to notices of collection. Under California Code of Civil Procedure Section 701.020, a party who receives a notice of levy but does not comply with it is liable to the judgment creditor unless they have “good cause” for refuse to honor it. However, this section of the code does not define “good cause”. Looking at other articles of the Code of Civil Procedure as well as the Civil Code, the Court held that someone has a “good reason” to ignore a notice of debit if he “did not know or had reason to know” the levy. Further, he held that a party could be charged with knowledge, even in the absence of actual knowledge, if the party was negligent not to get that knowledge or that information.
Second, having found that a standard of negligence applies, the Court asked whether the CSC officer acted negligently or unreasonably in relying on the common industry practice of underlining the party served for let her quickly review the document. California courts often defer to industry standards when defining a duty of care. See for example Soto v. Union Pacific Railroad Co., 45 Cal. App. 5th 168, 181 (2020) (granting summary judgment where defendant showed “that he exercised due care in accordance with industry standards” and that plaintiff “did not raise any issue of material fact on this question”.) However, the Bergstrom court applied a stricter standard in this case. Although he noted that industry practices can be relevant in defining the standard of care, the Court “decline” to use this industry standard to exempt CSC from carefully reviewing the underlying legal document.
While common industry practice may be relevant to the standard of care (at least where the standard of care does not require expert testimony), these common practices are not control because ‘[g]General negligence cannot be excused on the grounds that others in the same locality practice the same kind of negligence. The underlying may have hampered CSC, but we decline to consider it as exempting the CSC from consulting the part of the standardized form specifically intended to list the party to be served.
(emphasis added).
In other words, the Court found that the industry standard was so unreasonable that it could not be accorded the same respect as customary practices.
To finish, having concluded that CSC should have known of the notice of levy, the Court asked whether this knowledge could be attributed to the principal, Zions, who had in fact never received the document. The Court found that there was an irrebuttable presumption that Zions had knowledge of the notice.
It is a fundamental principle of agency law that a principal is deemed to know what his agent knows while acting within the authority of the agent. This presumption of “imputed knowledge” applies to what the agent has subjectively Is know as well as what the agent reasonably has should to know. This presumption is also irrebuttable.
(emphasis in original).
Thus, Zions was held accountable for its failure to act on a document only received by its agent.
What does this mean for your business?
First, if your business model involves holding assets for third parties, it is important to ensure that your process service agent carefully reviews all direct debit notices served on you. Even a small mistake or delay in responding caused by a negligent worker can expose you to massive liability.
Second, you should be careful when relying on industry standards, especially when reviewing written materials. While these may speed up short-term cases, the courts are under no obligation to accept them as reasonable. This seems to be especially true when it comes to the form of reviewing important documents or legal notices. If you receive legal advice, it is important that you contact a lawyer as soon as possible to ensure that your rights are protected.
Third, when using a third-party agent, it’s essential that you confirm that they have strong practices in place and are not relying on quick money-saving tricks. And it’s just as important to maintain regular contact with your agent to make sure they’re following protocol. While it can be easy to hire a third party and trust them to follow best practices, their mistakes can be your fault and can ultimately cost you thousands of dollars.
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