Menichini v. Grant

• Decision Date: 07 June 1993
• Docket Number: No. 92-1380,92-1380
• Parties: 20 UCC Rep.Serv.2d 959 Gerard C. MENICHINI, t/a Best Legal Services, v. Lissa L. GRANT; Mellon Bank (East), Mellon Bank (East) National Association, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 1224

995 F.2d 1224

20 UCC Rep.Serv.2d 959

Gerard C. MENICHINI, t/a Best Legal Services, v. Lissa L. GRANT; Mellon Bank (East) Mellon Bank (East) National Association, Appellant.

No. 92-1380.

United States Court of Appeals Third Circuit.

Argued Jan. 11, 1993.

Decided June 7, 1993.

Daniel S. Bernheim (argued), Patterson & Weir, Philadelphia, PA, for appellant.

Ivan Wille (argued), Law Offices of Ivan Wille, Huntingdon Valley, PA, for appellee Gerard C. Menichini, t/a Best Legal Services.

Before HUTCHINSON, SCIRICA and ROSENN, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

In this diversity suit, Gerard C. Menichini t/a Best Legal Services alleges Mellon Bank converted his property by accepting checks embezzled by Menichini's employee Lissa Grant. Two issues are presented on appeal: (1) whether the Pennsylvania Supreme Court would apply the tolling principle known as the "discovery rule" where an innocent party, i.e. a party not engaged in fraudulent concealment, invokes the statute of limitations as a defense to a check fraud action; and (2) whether Menichini negligently facilitated Grant's forgeries. The district court applied the discovery rule, concluded Menichini was not negligent, and granted judgment in Menichini's favor. Because we believe the Pennsylvania Supreme Court would refuse to apply the discovery rule in these circumstances, and because we believe Menichini negligently facilitated his employee's forgeries, we will reverse and remand.

I.

Menichini founded Best Legal Services in 1981 as a sole proprietorship ¹ providing various nonprofessional support services to attorneys and law firms. In 1986 Menichini hired his first full-time employee, law student Lissa Grant, as receptionist. In time, Menichini entrusted Grant with greater responsibilities, such as opening and receiving mail, sending invoices to clients, overseeing billing, recording checks, helping acquire new business, and assisting in client relations. Grant eventually became Best's bookkeeper and office manager. After Best installed a computer accounting system, Grant became exclusively responsible for recording invoices and payments.

Although Grant prepared deposit slips for Best's accounts, Menichini made all bank deposits, indorsing checks with a rubber stamp which bore Best's name, account number, and the designation "FOR DEPOSIT ONLY--JEFFERSON BANK." The rubber stamp was kept locked in his desk drawer. Although Grant occasionally used the stamp under Menichini's supervision, he never authorized her to sign his name or to indorse checks made out to Best.

Grant proved an unfaithful guardian. From April 4, 1988 to December 22, 1989, Grant intercepted 150 checks made out to Best, depositing them in her personal account at Mellon Bank after printing "Pay to the Order of Lissa Grant" or "Pay to Lissa Grant" on the reverse side of the check, under which she forged Menichini's signature. After signing her name and personal account number under the forged signature, Grant deposited the checks into her personal account at Mellon Bank through "remote" automatic teller machines, i.e., ATMs not physically connected to a Mellon branch office. Mellon Bank accepted the instruments for deposit, presented them to the various drawee banks, accepted payment for the checks from those banks, and credited payment to Grant's account.

Grant's bookkeeping responsibilities gave her access to Best's mail and billing process, enabling her to conceal her embezzlement for twenty months. Under her scheme, Grant invoiced certain customers without recording the invoice in the company's accounts receivable. Then she intercepted the incoming checks and deposited them in her personal account at Mellon Bank. Although Menichini and his accountants periodically reviewed Best's financial records, Grant's deceit kept them from discovering her actions. When Grant prepared the business records for the accountants, she expunged any inculpatory information.

Grant's deceitful practices came to light on December 22, 1988, when another employee observed her entering a check payable to Best on a deposit slip to her personal account at Mellon Bank. After being apprised, Menichini spoke to Mellon Bank's branch manager the next business day. When the branch manager told him bank policy shielded Grant's account, Menichini contacted clients in order to obtain copies of canceled checks paid to Best.

On January 8, 1990, Menichini and his attorney confronted Grant. Grant confessed and acknowledged that she had not kept records of the invoices to or payments from clients whose checks she had misappropriated. Working together, Menichini and Mellon Bank calculated Grant had stolen 150 checks totalling $61,431.98.

On December 21, 1990, Menichini t/a Best Legal Services filed this diversity action, alleging defendants Grant and Mellon Bank converted Best's property. Default judgment was entered against Grant. After a bench trial, the district court granted judgment in favor of Menichini against Mellon Bank in the amount of $61,431.98. Mellon Bank appeals.

II.

The district court had jurisdiction under 28 U.S.C. § 1332 (1988) and we have jurisdiction under 28 U.S.C. § 1291. The parties agree Pennsylvania law controls the resolution of this dispute. ²

The district court's findings of fact are subject to the clearly erroneous standard, and its conclusions of law are subject to plenary review. Martin v. Selker Bros. Inc., 949 F.2d 1286, 1293 (3d Cir.1991).

III.

Menichini sued Mellon Bank for conversion under § 3-419 of the Pennsylvania Uniform Commercial Code. Section 3-419(a) codifies the tort of conversion: "An instrument is converted when: .... (3) it is paid on a forged indorsement." Mellon Bank raised two defenses: on the 1988 forgeries, it interposed Pennsylvania's two-year statute of limitations; on the 1989 forgeries, Mellon Bank asserted Menichini's negligence barred recovery under the Code.

A. The 1988 Forgeries

Menichini filed suit on December 21, 1990. If applicable, the two-year statute of limitations would bar Menichini's claims on the 1988 forgeries. ³ At issue is whether, in a case involving conversion of negotiable instruments, the "discovery rule" applies when a party not engaged in fraudulent concealment invokes the statute of limitations. ⁴ The Pennsylvania Supreme Court has not answered this question. Relying on Pocono International Raceway, Inc. v. Pocono Produce, Inc., 503 Pa. 80, 468 A.2d 468 (1983), the district court predicted the Pennsylvania Supreme Court would apply the discovery rule and held that "it was not plaintiff's lack of diligence, but defendant's fraudulent concealment of the wrong that prevented plaintiff from asserting his rights at an earlier date." Because Menichini did not discover the misappropriation until December 22, 1989, the district court concluded the statute of limitations did not time-bar recovery of losses attributable to the 1988 forgeries.

Because the UCC does not specify a statute of limitations for conversion of negotiable instruments, ⁵ we must look elsewhere for an appropriate statute. See 13 Pa.Cons.Stat.Ann. § 1103 (1984) (supplementary general principles of law applicable to commercial transactions). The applicable Pennsylvania statute specifies a two-year limitations period. 42 Pa.Cons.Stat.Ann. § 5524. ⁶

The district court believed the Pennsylvania Supreme Court's decision in Pocono International Raceway, supported application of the discovery rule. We disagree. First, Pocono did not involve negotiable instruments and did not address the important UCC policies of negotiability, finality, and uniformity. Second, we do not view this case as an instance of "blameless ignorance" but rather a situation where Menichini ignored an obvious risk with predictable consequences. Finally, the district court's reasoning that "defendant's fraudulent concealment of the wrong ... prevented plaintiff from asserting his rights at an earlier date," rests on an equivocation in the word "defendant's." If "defendant's" referred to Mellon Bank, it would be decisive. However, it is undisputed that the only defendant engaging in concealment was Grant, not Mellon Bank.

The parties have not cited, and we have not found, any Pennsylvania cases applying the discovery rule to a case of check fraud. Faced with a question of first impression involving the UCC, Pennsylvania courts look to other jurisdictions for guidance. See Commonwealth v. National Bank & Trust Co., 469 Pa. 188, 194, 364 A.2d 1331, 1335 (1976) (sister states' decisions "entitled to even greater deference where consistency and uniformity of application are essential elements of a comprehensive statutory scheme like ... the Uniform Commercial Code"); 1 Pa.Cons.Stat.Ann. § 1927 ("[s]tatutes uniform with those of other states shall be interpreted and construed to effect their general purpose to make uniform the laws of those states which enact them").

Although a few courts apply the discovery rule to negotiable instrument theft on essentially equitable grounds, ⁷ the tide of case law runs strongly against this approach. ⁸ Where a party not engaging in fraudulent concealment asserts the statute of limitations defense, most courts have refused to apply the discovery rule to negotiable instruments, finding it inimical to UCC policies of finality and negotiability. The Iowa Supreme Court's analysis in Husker News Co. v. Mahaska State Bank, 460 N.W.2d 476 (Iowa 1990), illustrates this approach. There, on similar facts, the court refused to apply the discovery rule to a § 3-419 conversion action based on a forged indorsement. Plaintiff Husker's employee, Hopf, collected customer payments, forged Husker's indorsement on the checks, and deposited the funds into his personal account. Hopf concealed his embezzlement by "juggling accounts." Husker never saw the forged indorsements because the checks were routed to the various drawee banks through banking...