Appeal from judgment of Court of Common Pleas, Civil Division, of Allegheny County, Oct. T., 1970, No. 723, in case of West Penn Administration, Inc., a corporation, et al. v. The Union National Bank of Pittsburgh, a national banking association.
B. A. Karlowitz, with him John P. Papuga, Henry S. Pool, and Tucker, Arensberg & Ferguson, for appellants.
Robert F. Patton, with him Stephen A. George, Warren W. Ayres, Clayton A. Sweeney, and Buchanan, Ingersoll, Rodewald, Kyle & Buerger, for appellee.
Watkins, P. J., Jacobs, Hoffman, Cercone, Price, Van der Voort, and Spaeth, JJ. Opinion by Price, J. Concurring Opinion by Jacobs, J. Cercone, J., joins in this concurring opinion.
[ 233 Pa. Super. Page 317]
This appeal raises four issues, all of which concern the Commercial Paper*fn1 and Bank Deposits and Collections*fn2 chapters of the Uniform Commercial Code, as they apply to the payment of a check on a forged endorsement.
Appellant, West Penn Administration, Inc., ("West Penn"), a non-profit corporation,*fn3 brought this suit in trespass, on a theory of conversion, against the Union National Bank of Pittsburgh ("UNB") to recover the proceeds of 122 checks deposited with forged endorsements in UNB. UNB filed Preliminary Objections. West Penn amended its complaint by listing as additional plaintiffs eighteen separate welfare and pension trusts and unincorporated labor associations whose funds were represented by the 122 checks. UNB filed Preliminary Objections to the Amended Complaint alleging that Pittsburgh National Bank ("PNB") was the real party in interest. The lower court sustained the Preliminary Objections and required that West Penn obtain PNB's right, title and interest, if any, in the 122 checks and proceeds. West Penn filed the Second Amended Complaint, in the name of West Penn and the trustees of 21 pension and welfare trusts and unincorporated labor associations, to which UNB filed an Answer and New Matter denying liability. Appellant filed a Reply to New Matter, and the case proceeded
[ 233 Pa. Super. Page 318]
to trial,*fn4 with West Penn excepting to the finding that PNB was the real party in interest.
A verdict in favor of West Penn and against UNB was entered on October 11, 1972, requiring UNB to deliver to West Penn all the assets which UNB recovered from the forger, John F. Miller, or others, and all increments thereto as a result of investment or sale. The verdict was not in the form of a fixed dollar amount.*fn5
Following the denial of post-trial motions, West Penn filed this appeal, seeking an amendment of the judgment to permit a recovery of its entire loss from UNB. Appellant contends that the lower court erred in finding that PNB was the payee of the checks; that PNB and West Penn substantially contributed to the forged endorsements by their negligence; that UNB acted in a commercially reasonable manner in accepting the checks for collection; and that PNB was estopped from denying the unauthorized endorsements by reason of its payment of the checks.
The facts, as found by the lower court, follow:
Certain employers engaged in the construction industry entered into a collective bargaining agreement with union representatives of their employees. The agreement required the employers to contribute money to trustees of certain pension and welfare trusts, created for the benefit of their employees. It also required the trustees to invest the contributions and to pay the increments from investments, less administrative expenses, into the trust corpus. In accordance with the trust agreements, the trustees later dispersed funds from the trust to eligible employees.
[ 233 Pa. Super. Page 319]
As part of the agreement, the employers decided to create "Employer Contribution Reports" periodically. The reports list the names of each employee (union member) who is eligible as a beneficiary of the trust, the number of hours the employee worked during the reporting period, the dollar amount due by the employer for each employee, and the aggregate sum due. The reports, accompanied by the employers' checks in the aggregate amount are delivered by the employers to appellant, West Penn, the manager of the funds. Approximately 90 per cent of all checks written by employers were mailed directly to West Penn's offices. The remaining ten per cent were sent to PNB, the collecting bank, but were re-delivered to West Penn for processing.
West Penn was created by the employers and the unions for the purposes of receiving and processing the Employers' Contribution Reports and accompanying checks, and of managing the trust funds. West Penn also verifies the correctness of each Employer Contribution Report by field audits and pursues employers who fail to pay sums of money found to be due.*fn6
Pursuant to its authority as manager of the trust funds, West Penn established four employer contribution accounts with PNB in 1964, by trades. They are: Laborers Contribution Account, Carpenters Contribution Account, Teamsters Contribution Account and Operating Engineers Contribution Account.
West Penn deposited all checks it received from the employers with PNB for credit to one of these four accounts, after having processed the checks at the West Penn offices. The procedure employed by West Penn in handling the checks follows:
Employer Contribution Reports and accompanying checks are received by West Penn's mailroom employees,
[ 233 Pa. Super. Page 320]
who then distribute the reports and checks to Reports Department clerks. In the Reports Department, the mathematical correctness of the reports and checks is verified, the checks are bundled and delivered to PNB, and the reports are delivered to keypunchers who prepare computer input cards. Although the dollar amount received is credited to each employer account at West Penn, the information is not recorded in a journal but is instead stored in the computer memory bank.
Some Employer Contribution Reports received by West Penn are not accompanied by checks. Each of these reports is stamped "Report Without Payment" by an account auditor before it is delivered to the keypunch clerks. Again, the clerks prepare computer input cards, but these cards indicate the amount due by the employer, and when fed into the computer, generate an account receivable. West Penn then pursues the delinquent employer to collect the sum due, and when it is received, creates a "Journal Voucher" indicating the amount paid. When this information is put into the computer, the former accounts receivable stored in the data banks are erased.
The system employed by West Penn enabled one of its employees, an account auditor and experienced bookkeeper named John F. Miller, to divert employer contribution checks to his own use. He devised the following scheme:
When mailroom employees sent Employer Contribution Reports with accompanying checks to Mr. Miller, he embezzled the checks and stamped on the reports: "Report Without Payment." As to each report so stamped, a false account receivable was generated and stored in the computer. Later, he completed a journal voucher indicating that a check for the amount due, as shown on the Report marked "Report Without Payment," had been received by West Penn. Miller then delivered that journal voucher to the keypunchers, who prepared an input card
[ 233 Pa. Super. Page 321]
which erased the false account receivable "due" from the affected employer.*fn7 Miller then destroyed the false journal voucher. His next step was to type a forged endorsement on the obverse side of the check, add "For Deposit Only to a Union National Bank # [____,"*fn8 and deposit the check in that account.
The employer contribution checks were drawn to the order of "Pittsburgh National Bank Carpenters*fn9 Contribution Account." On certain checks, the words "Carpenters Contribution Account" appeared on a line beneath the words "Pittsburgh National Bank." On others, the account name appeared on the same line, but following, the bank name.*fn10
[ 233 Pa. Super. Page 322]
When Miller presented his first forged check to the UNB teller, he told the teller that the maker of the check had made it out to the wrong payee. The teller wondered if the endorsement was correct, asked one of her superiors, received approval, and processed the check. The additional 121 forged checks were deposited in a similar fashion. UNB accepted all such checks (in a total of fifteen transactions) because the first and all subsequent checks were paid without question. Once the checks had cleared, Miller wrote in his name as payee on his employer's check,*fn11 withdrew the funds from the UNB accounts, and deposited them in his own savings accounts maintained in other banks. Later, he withdrew funds from the savings accounts and invested them. The total amount of money Miller diverted to his personal use through his scheme was $444,527.57.
Miller fell ill shortly after he began to forge the endorsements, and did not work for three months. During that time, a chief officer at West Penn learned of the apparent discrepancy in the employer account for which Miller had made the first false journal voucher. The fictitious voucher was located and examined, but no investigation was conducted to find the cause of the discrepancy. Thus, West Penn had the opportunity to prevent the next 121 forgeries, but failed to do so.
Approximately eight months after Miller deposited the first check, West Penn inadvertently discovered the fraud while investigating an employer account which was not related to Miller's transactions. Miller was not suspected, but thought he was, and fled to Oklahoma. Shortly thereafter, he surrendered himself to the FBI and subsequently pled guilty to criminal charges.*fn12
Upon receipt of notice of Miller's frauds, UNB successfully garnished Miller's assets held by banks in the
[ 233 Pa. Super. Page 323]
City of Pittsburgh. UNB recovered $390,187.20 worth of cash, proceeds, stock, unliquidated claims, ...