Travelers Indem. Co. v. Stedman
| Decision Date | 28 December 1995 |
| Docket Number | No. 93-3684.,93-3684. |
| Citation | 910 F. Supp. 203 |
| Parties | The TRAVELERS INDEMNITY COMPANY, a/s/o American Lung Association, Plaintiff, v. Nancy STEDMAN and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Defendants, v. MAIN LINE FEDERAL SAVINGS BANK, Counter-Defendant. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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Elizabeth K. Ainslie, Philadelphia, PA, Gary P. Lightman, Bruce J. Meltzer, Lightman & Associates, Philadelphia, PA, for Travelers Indemnity Company, a/s/o American Lung Association.
William A. De Stefano, De Stefano & Warren, P.C., Philadelphia, PA, for Merrill Lynch, Pierce, Penner & Smith Incorporated.
Gerald E. Burns, III, William J. Brennan, Virginia Hinrichs McMichael, Dilworth, Paxson, Kalish & Kauffman, Philadelphia, PA, for Main Line Federal Savings Bank.
Plaintiff the Travelers Indemnity Company ("Travelers") brings this action as subrogee of the American Lung Association of Philadelphia and Montgomery Counties ("ALA") against defendants Nancy Stedman and Merrill Lynch, Pierce, Fenner and Smith Incorporated ("Merrill Lynch"). This action arises out of losses sustained by ALA because of forgeries committed by defendant Stedman with respect to checks drawn on the Working Capital Management Account maintained by ALA with Merrill Lynch. This Court has jurisdiction over this case pursuant to 28 U.S.C. § 1332 as the parties are of diverse citizenship and the amount in controversy is in excess of $50,000, exclusive of interest and costs.
Currently before the Court is the motion by plaintiff for summary judgment against Merrill Lynch and the cross-motion by Merrill Lynch for summary judgment. (Document Nos. 23, 25) For the following reasons, the motion by plaintiff will be granted in part and denied in part and the cross-motion by Merrill Lynch will be granted in part and denied in part.
The following facts are undisputed.
In 1990, 1991 and 1992, while she was employed by ALA, Nancy Stedman illegally deposited in her own bank account or cashed for her own benefit seventeen checks drawn on the Working Capital Management Account ("WCMA") maintained by ALA with Merrill Lynch. On twelve of those checks, totalling $100,215.31, she forged one or both of the maker signatures; the numbers for these checks were: 1980, 1982, 2390, 2475, 2609, 2675, 2783, 2918, 3061, 3128, 3131 and 3180. On four of those checks, totalling $29,211.92, she only forged the endorsements; the numbers for these checks were: 1639, 1731, 1883 and 2142. One check is no longer at issue, as plaintiff has now conceded that Merrill Lynch is entitled to judgment with regard to check number 1586 which was for $200.00. See memorandum of plaintiff in reply to response of defendant Merrill Lynch at 15.
In April 1992, the new Executive Director of ALA, Patty Cline, discovered the forgeries by Stedman. ALA then submitted a claim to plaintiff pursuant to its insurance policy with plaintiff, and plaintiff paid ALA $124,568.23, which was the amount of the seventeen checks minus $5,059.00 repaid by Stedman to ALA. Then, as subrogee of ALA, plaintiff brought this instant action against Stedman, Merrill Lynch, and Main Line Federal Savings Bank ("Main Line"), where plaintiff had deposited some of the checks. All of claims by plaintiff against Main Line were dismissed by an Order of this Court dated December 6, 1994, although Main Line remains a party in this case as a defendant to the cross-claim of Merrill Lynch.
Under Federal Rule of Civil Procedure 56(c), summary judgment may be granted when, "after considering the record evidence in the light most favorable to the nonmoving party, no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law." Turner v. Schering-Plough Corp., 901 F.2d 335, 340 (3d Cir.1990). For a dispute to be "genuine," the evidence must be such that a reasonable factfinder could return a verdict for the non-moving party, and for a fact to be "material" it must be one "that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The nonmoving party must produce evidence to support its position, and may not rest on conclusory allegations or bare assertions alone. Lujan v. National Wildlife Fed'n, 497 U.S. 871, 888, 110 S.Ct. 3177, 3188, 111 L.Ed.2d 695 (1990).
Plaintiff and Merrill Lynch agree that Pennsylvania law applies to this case and that under the Pennsylvania adoption of the Uniform Commercial Code ("U.C.C.") a drawee bank is generally liable to a drawer customer for paying on a check containing a forged maker signature. See 13 Pa.Cons. Stat.Ann. §§ 1201 (), 3401(a) (), 3404(a) (), 4401(a) (); Hardex-Steubenville Corp. v. Western Pennsylvania Nat'l Bank, 446 Pa. 446, 285 A.2d 874, 876 (1971) (). In addition, the parties agree that under Pennsylvania law a bank must ordinarily bear the loss occasioned by forgery of an endorsement. Philadelphia Title Ins. Co. v. Fidelity-Philadelphia Trust Co., 419 Pa. 78, 212 A.2d 222, 224 (1965).
The dispute between plaintiff and Merrill Lynch centers on three exceptions to these general rules; these exceptions shift liability for forged checks away from the drawee bank. The first exception is applicable to all of the checks at issue here; this exception arises when any person, including a customer, has through her or his negligence allowed the forgery to occur and the bank has paid the forged check in good faith and in accordance with reasonable commercial standards. See 13 Pa.Cons.Stat.Ann. § 3406 (Pennsylvania codification of U.C.C. § 3-406). The second exception only applies to the checks with forged maker signatures; it arises when a customer is negligent in examining her or his statement and/or cancelled checks such that a repeat forger is able to continue forging checks over a period of time, and it only applies if the bank has exercised ordinary care in paying the forged checks. See 13 Pa.Cons.Stat.Ann. § 4406 (Pennsylvania codification of U.C.C. 4-406). The third exception only applies to the checks with forged endorsements; it arises if the person who illegally took the proceeds of the check at issue was involved in preparing the check for the customer but never intended that the designated payee have an interest in that check. See 13 Pa.Cons.Stat.Ann. § 3405 (Pennsylvania codification of U.C.C. § 3-405). Each of these exceptions will be discussed below.
As all of the events in this case occurred before the 1992 amendments to the Pennsylvania codification of the U.C.C., the statutory sections which are applicable to this case and which are cited in this opinion are the sections that were in effect prior to those amendments. See Universal Premium Acceptance Corp. v. York Bank & Trust Co., 69 F.3d 695, at n. 1 (3d Cir.1995).
The first exception, which applies to all of the checks at issue here, is provided by 13 Pa.Cons.Stat.Ann. § 3406:
Any person who by his negligence substantially contributes to a material alteration of the instrument or to the making of an unauthorized signature is precluded from asserting the alteration or lack of authority against a holder in due course or against a drawee or other payor who pays the instrument in good faith and in accordance with the reasonable commercial standards of the business of the drawee or payor.
In order to take advantage of this exception, the burden is on defendant Merrill Lynch to prove that (1) ALA was negligent; (2) its negligence substantially contributed to the making of the unauthorized signature; and (3) Merrill Lynch acted in good faith and in accordance with reasonable commercial standards. Menichini v. Grant, 995 F.2d 1224, 1234 (3d Cir.1993) (citing Jacoby Transp. Sys. v. Continental Bank, 277 Pa.Super. 440, 419 A.2d 1227, 1231 (1980)).
With regard to the third element, it is uncontradicted that during the relevant time period, "it was not a prescribed Bank One procedure to compare signatures on the WCMA checks presented to Bank One for payment with WCMA customer signature cards, a process known as `sight-paying.'" Ryan Cert. ¶ 3. Bank One processed and paid WCMA checks on behalf of Merrill Lynch during the relevant time period. Id. at ¶ 2. Merrill Lynch argues that not sight-paying any of the WCMA checks was in line with reasonable commercial standards because it was consistent with general banking usage. In support of this argument, Merrill Lynch points to a statement by Mr. Ryan, a Bank One employee, that "general banking usage did not include the sight-paying of all checks presented for payment." Ryan Cert. ¶ 4 (emphasis added). Unfortunately for Merrill Lynch, this statement is only evidence in support of the proposition that it was general banking usage to not sight-pay all checks; this statement does not support the proposition that it was general banking usage to not sight-pay any checks. Merrill Lynch has therefore failed to present any evidence that its failure to compare any WCMA checks with customer signature cards conformed with reasonable commercial standards.
In addition, courts outside of Pennsylvania have uniformly held that a bank fails to meet reasonable commercial standards when it fails to check the signatures on any checks....
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