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COMMONWEALTH PENNSYLVANIA v. NATIONAL BANK & TRUST COMPANY CENTRAL PENNSYLVANIA (10/08/76)

decided: October 8, 1976.

COMMONWEALTH OF PENNSYLVANIA
v.
NATIONAL BANK & TRUST COMPANY OF CENTRAL PENNSYLVANIA, APPELLANT



COUNSEL

Richard H. Wix, Wix & Wenger, Harrisburg, for appellant.

Heath L. Allen, Metzger, Hafer, Keefer, Thomas & Wood, Harrisburg, for appellee.

Jones, C. J., and Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ.

Author: Nix

[ 469 Pa. Page 190]

OPINION OF THE COURT

The Commonwealth of Pennsylvania (Commonwealth) instituted this assumpsit action to recover the sum of $21,138.07 with interest from the National Bank and Trust Company of Central Pennsylvania (National), which had accepted 136 checks drawn by the Commonwealth with the names of the payees fraudulently endorsed. The checks were those which the Department of Transportation (formerly the Department of Highways) delivered to its various district and county offices in the Commonwealth for distribution to named payees. For numerous reasons such as death of payee, error in amount, etc., certain checks were occasionally returned to the Department office in Harrisburg. A clerk placed these checks in an unlocked drawer and once a week they were returned to the Treasury Department. Over a period of 14 months, a supervisor in the payroll department stole these checks from the unlocked drawer, forged the names of the payees on the back, and cashed them at National. National then collected the amount of the checks from the respective drawee banks which, in turn, debited the Commonwealth's accounts. Subsequently, the Commonwealth secured assignments from the drawee banks and instituted this action to recover its loss.

A jury trial resulted in a verdict for National. The Commonwealth filed post-trial motions for Judgment n. o. v. and for a new trial. National also filed a motion for Judgment n. o. v., apparently to preserve its exception to the trial court's dismissal of its preliminary objections. After argument, the lower court granted the Commonwealth's motion for a new trial, concluding that it had erroneously charged the jury as to the degree of negligence on the part of the Commonwealth that it must find before relieving defendant-bank of liability. National timely appealed the grant of a new trial, and the

[ 469 Pa. Page 191]

Commonwealth Court affirmed.*fn1 This Court accepted allocatur to resolve the questions of statutory interpretation raised by this controversy.

The issue before us concerns the degree of negligence which a defending bank must prove in order to deny recovery to a drawer under Section 3-406 of the Uniform Commercial Code.*fn2 That section provides:

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 or in accordance with the reasonable commercial standards of the drawee's or payor's business. 12A P.S. ยง 3-406.

This section establishes no liability, but rather creates a conditional estoppel which shields a bank from liability where a drawer's negligence "substantially contributes" to an alteration or forgery. Hermetic Refrigeration Co., Inc. v. Central Valley National Bank, 493 F.2d 476 (9th Cir. 1974).

Prior to the passage of the Code, Pennsylvania law denied recovery to a drawer only where his negligence "directly and proximately" affected the conduct of the bank in the performance of its duties. Land Title Bank and Trust Company v. Cheltenham National Bank, 362 Pa. 30, 66 A.2d 768 (1949). In ...


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