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Home My WebLink About89-4312 Civil PAVEX, INC. and : IN THE COURT OF COMMON PLEAS OF LIBERTY EXCAVATORS, INC., : CUMBERLAND COUNTY, PENNSYLVANIA Plaintiffs : : v. : YORK FEDERAL SAVINGS : AND LOAN ASSOCIATION and : YORK FINANCIAL CORP., : Defendants and : Third Party Plaintiffs : : v. : CIVIL ACTION - LAW : DOROTHY J. KAUFFMAN HECK : A/K/A DOROTHY J. HECK, : Third Party Defendant : NO. 4312 CIVIL 1989 IN RE: MOTIONS FOR SUMMARY JUDGMENT BEFORE BAYLEY, HESS and OLER, JJ. ORDER OF COURT AND NOW, this 2~ day of August, 1994, after careful consideration of Plaintiffs' Motion for Summary Judgment and of Defendants' Motion for Summary Judgment, as well as the briefs and oral arguments presented in the matter, both motions are DENIED. BY THE COURT, ~r. ~esley Ole~,) ~. ' PAVEX, INC. and : IN THE COURT OF COMMON PLEAS OF LIBERTY EXCAVATORS, INC., : CUMBERLAND COUNTY, PENNSYLVANIA Plaintiffs : : v. : YORK FEDERAL SAVINGS : AND LOAN ASSOCIATION and : YORK FINANCIAL CORP., : Defendants and : Third Party Plaintiffs : : v. : CIVIL ACTION - LAW : DOROTHY J. KAUFFMAN HECK : A/K/A DOROTHY J. HECK, : Third Party Defendant : NO. 4312 CIVIL 1989 IN RE: MOTIONS FOR SUMMARY JUDGMENT BEFORE BAYLEY, HESS and OLER, JJ. OPINION and ORDER OF COURT Oler, J. At issue in the present case are cross motions for summary judgment filed by Plaintiffs and original Defendants. For the reasons stated in this Opinion, both motions will be denied. Statement of Facts The facts of this case, for present purposes, may be summarized as follows: During the period from February 16, 1986, through April 7, 1989, Dorothy Heck (Heck) was employed by Plaintiffs (Pavex, Inc., and Liberty Excavators, Inc.) as their No. 4312 Civil 1989 payroll clerk.~ While employed during this time period, Heck caused over 882 payroll checks of Plaintiffs to be generated to former and/or existing employees of Plaintiffs for services which were never rendered by said employees.2 Without the knowledge or permission of Plaintiffs, Heck misappropriated the fictitious checks, endorsed the checks in the names of the payees, and deposited the checks during a three-year period between 1986 and 1989 into her personal checking account at Defendant York Federal Savings and Loan Association (York Federal), a subsidiary of Defendant York Financial Corporation.3 The total value of the payroll checks deposited at York Federal was approximately $266,000.4 On their motion for summary judgment, Defendants claim, inter alia, that they are entitled to the relief requested because Section 3405(a)(3) of Pennsylvania's Uniform Commercial Code, as it existed prior to certain amendments enacted in 1992, provides ~ Plaintiffs' Brief in Support of Motion for Summary Judgment on Liability, at 1; Brief in Support of Defendants' Motion for Summary Judgment, at 2. 2 Plaintiffs' Brief in Support of Motion for Summary Judgment on Liability, at 1; Brief in Support of Defendants' Motion for Summary Judgment, at 2. 3 Plaintiffs' Brief in Support of Motion for Summary Judgment on Liability, at 2; Brief in Support of Defendants' Motion for Summary Judgment, at 2. 4 Plaintiffs' Brief in Support of Motion for Summary Judgment on Liability, at 2; Brief in Support of Defendants' Motion for Summary Judgment, at 2. 2 No. 4312 Civil 1989 Defendants with an absolute defense to Plaintiffs' claim, in that Defendants acted in good faith with respect to the transactions in question. On their motion, Plaintiffs claim, inter alia, that they are entitled to summary judgment because Defendants are not entitled to the protection of Section 3405(a)(3) of the Pennsylvania Uniform Commercial Code, in that Defendants did not pay on the illicit checks in good faith. Statement of Law Summary Judqment. Pennsylvania Rule of Civil Procedure 1035(b) provides that summary judgment "shall be rendered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." In this regard, "[t]he moving party has the burden of proving the nonexistence of any genuine issue of fact." Thompson Coal Co. v. Pike Coal Co., 488 Pa. 198, 204, 412 A.2d 466, 468-469 (1979). "The record must be examined in the light most favorable to the non-moving party." Schacter v. Albert, 212 Pa. Super. 58, 62, 239 A.2d 841, 843 (1968). Additionally, "[a]ll doubts as to the existence of a genuine issue of a material fact must be resolved against the moving party." Thompson Coal Co. v. Pike Coal Co., 488 Pa. 198, 204, 412 A.2d 466, 469 (1979). A court should grant summary judgment "only in the No. 4312 Civil 1989 clearest of cases, where the right is clear and free from doubt." Id. Good faith as material fact. The pertinent part of Section 3405 of the Pennsylvania Uniform Commercial Code stateds the following: (a) General rule. -- An endorsement by any person in the name of a named payee is effective if: ... (3) an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest.6 This provision of the Pennsylvania Uniform Commercial Code (Title 13 of the Pennsylvania Consolidated Statutes) carries with it an obligation of good faith: "Every ... duty within this title imposes an obligation of good faith in its performance .... -? If a party fails to fulfill this obligation of good faith, then the party is no longer entitled to the preclusionary effect of Section 3405(a)(3) of the Pennsylvania Uniform Commercial Code. This s Section 3405(a)(3) of the Pennsylvania Uniform Commercial Code as it existed prior to amendments enacted in 1992 is applicable to this case. 6 Act of Nov. 1, 1979, P.L. 255, Sl, 13 Pa. C.S.A. §3405(a)(3). 7 Act of November 1, 1979, P.L. 255, ~1, 13 Pa. C.S.A. §1203. 4 No. 4312 Civil 1989 concept is more fully explained in an official comment to the present Section 3-405 of the Uniform Commercial Code:8 With respect to cases governed by former Section 3-405(1)(c),9 [new] Section 3-405 is more favorable to employers in one respect. The bank was entitled to the preclusion provided by former Section 3-405(1)(c) if it took the check in good faith. The fact that the bank acted negligently did not shift the loss to the bank so long as the bank acted in qood faith. Under revised Section 3-405 the loss may be recovered from the bank to the extent the failure of the bank to exercise ordinary care contributed to the loss. "[T]hose courts addressing the issue consistently note that bad faith on the part of a bank precludes the imposition of the 'fictitious payee defense' or creates liability notwithstanding the applicability of the fictitious payee defense." General Accident Ins. Co. of America v. Fidelity and Deposit Co. of Md., 598 F. Supp. 1223, 1237 (E.D. Pa. 1984). When an unresolved issue of fact exists as to a bank's lack of good faith, dismissal of the claims against the bank under the "fictitious payee defense" is not appropriate. Id. 8 present Section 3-405 of the Uniform Commercial Code, like present Section 3405 of the Pennsylvania Uniform Commercial Code, represents a revision of the provision previously in effect and applicable to this case. The official comment to present Section 3-405, however, is instructive as to the meaning of the previous provision. 9 Former Section 3-405(1)(c) of the Uniform Commercial Code is identical to former Section 3405(a)(3) of the Pennsylvania Uniform Commercial Code. No. 4312 Civil 1989 ~eaninq of qood faith. Section 1201 of the Pennsylvania Uniform Commercial Code defines good faith in the following manner: "Honesty in fact in the conduct or transaction concerned." The concept of good faith in the context of Section 3405 of the Pennsylvania Uniform Commercial Code has apparently not yet been addressed definitively by a Pennsylvania appellate court. Other courts, however, have defined bad faith in a Section 3405 context as encompassing a bank's .qross violation of its own policies and conscious and deliberate decision to ignore the existence of a fraudulent scheme despite irregularities on the face of transactions. McAdam v. Dean Witter Reynolds, Inc., 896 F.2d 750 (3d Cir. 1990); Shearson Lehman Bros., Inc. v. Wasatch Bank, 788 F. Supp. 1184 (D. Utah 1992); Kraftsman Container v. United Counties Trust Co., 169 N.J. Super. 488, 404 A.2d 1288 (1979). Other courts have held that a bank's failure to comply with its own policies generally will not constitute a lack of good faith. British Caledonian Airways v. First State Bank of Bedford, Texas, 819 F.2d 593, 597 (5th Cir. 1987); Retail Shoe Health Comm'n v. Manufactures Hanover Trust Co., 558 N.Y.S.2d 949 (1990). These courts, however, seem to agree that a lack of gOod faith can be shown by qross violations of the bank's own policies. Whether a bank has committed qross violations of its own policies is a question of fact that must be determined by a jury. "The determination of whether a party acts in good faith is usually a 6 No. 4312 Civil 1989 question for the finder of fact and an improper one for disposition through summary judgment." Coy v. Ford Motor Credit Co., 422 Pa. Super. 76, 84, 618 A.2d 1024, 1027 (1993). Application of Law to Fact~ Proof of the following allegations made by Plaintiffs would tend to support the position that York Federal acted in bad faith: First, the bank violated its own written policies by allowing the forged-endorsement checks to be deposited without a second endorsement. Second, the bank accepted 273 checks with endorsements that did not match the name of the payee to be deposited and negotiated. Third, although the bank recognized that these were irregular transactions, it considered but rejected contacting Pavex or Liberty to determine that propriety of these transactions. Instead, the bank accepted wholesale Heck's explanation as to why these payroll checks were being deposited, without requiring any corroboration of her explanation. Specifically, the bank failed to require written evidence or authorization from any of the check payees or from Pavex or Liberty. Instead, it required only that Heck add the name of her "father" to her account, because he was supposedly cashing the payroll checks. Even then, the bank allowed Heck to take a blank signature card and return it with the "father's" forged signature. Fourth, the bank continued to allow the checks to be deposited for a time period which exceeded two years, even though it had 7 No. 4312 Civil 1989 continued notice of the irregular nature of these transactions, it had prior knowledge of account overdrafts in an account owned by Heck's husband, and it had declined to loan Heck money during the time period in which she was depositing the forged-endorsement checks because her credit was not up to par. Proof of the following allegations made by Defendants would tend to support the position that York Federal acted in good faith: First, on at least two occasions York Federal employees questioned Heck regarding the checks and were told by Heck that her alleged father, James Dormer, was cashing checks of fellow employees at his place of employment; a number of checks were made payable to James Dormer. Second, York Federal employees instructed Heck to add James Dormer, Heck's alleged father, to the account. Third, the employees noted that Heck was a well-known customer of the bank with other accounts and there were no problems with her accounts. Fourth, York Federal required that the checks be deposited rather than cashed. Fifth, there is no evidence that any York Federal employee at the Camp Hill branch knew Heck socially outside of the bank. Sixth, the employees of the branch allegedly discussed contacting Pavex but concluded that they were unable to do so because it would breach the customer's right to privacy/confidentiality. The question of York Federal's lack of good faith, in the context of a Section 3405(a)(3) defense under the Pennsylvania Uniform Commercial Code, constitutes a genuine issue of material No. 4312 Civil 1989 fact which precludes the granting of summary judgment on behalf of either Plaintiffs or Defendants. Therefore, the following order will be entered: ORDER OF COURT AND NOW, this ~ day of August, 1994, after careful consideration of Plaintiffs' Motion for Summary Judgment and of Defendants' Motion for Summary Judgment, as well as the briefs and oral arguments presented in the matter, both motions are DENIED. BY THE COURT, s/ J. Wesley Oler, Jr. J. Wesley Oler, Jr., J. Andrew B. Cohn, Esq. Korn & Cohn, P.C. Suite 360, 600 W. Germantown Pike Plymouth Meeting, PA 19462 Attorney for Plaintiffs Rebecca S. McClure, Esq. P.O. Box 15068 York, PA 17405-7068 Attorney for Defendants Jordan D. Cunningham, Esq. Farr & Cunningham, P.C. P.O. Box 1855 Harrisburg, PA 17105-1855 Attorney for Third Party Defendant :rc 9 Andrew B. Cohn, Esq. Korn & Cohn, P.C. Suite 360, 600 W. Germantown Pike Plymouth Meeting, PA 19462 Attorney for Plaintiffs Rebecca S. McClure, Esq. P.O. Box 15068 York, PA 17405-7068 Attorney for Defendants Jordan D. Cunningham, Esq. Farr & Cunningham, P.C. P.O. Box 1855 Harrisburg, PA 17105-1855 Attorney for Third Party Defendant : re