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CUMIS INS. SOCY. v. GIRARD BANK

August 31, 1981

CUMIS INSURANCE SOCIETY, INC.
v.
GIRARD BANK



The opinion of the court was delivered by: DAVIS

I. Introduction

This is a diversity action brought by plaintiff insurer, as subrogee, to recover sums allegedly improperly debited from its insured's checking account by the defendant. Before the court are cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56. *fn1" After reviewing the memoranda in regard to the respective motions and holding oral arguments, for the reasons which follow, defendant's motion for summary judgment will be denied while the plaintiff's motion for partial summary judgment will be granted.

 The following facts are deemed uncontested. Frankford Arsenal Employees Federal Credit Union No. 1664 (hereinafter the Credit Union) opened an account with the defendant Girard Bank (hereinafter Girard) in October of 1977, and commenced using the account in January of 1978 pursuant to Girard's form printed documents of authorization. These documents, required by defendant before the opening of the account by the Credit Union, were approved by the Board of the Credit Union on October 18, 1977. One of the documents, entitled "certification of Resolution Authorizing a Facsimile Signature" (hereinafter Resolution) authorized Girard to honor checks when "... bearing or purporting to bear the facsimile signature or any signature or signatures resembling the facsimile specimens ..." of Viola Ferro or Edward Colgan "... with the same effect as if the signature or signatures were manual signatures ...". Furthermore, the Resolution stated that "the company (Credit Union) agrees to indemnify and hold harmless the Bank ..." from any damages the Bank may suffer "... by reason of its acting upon the Resolution ...".

 These terms are now at issue in the motions pending before the court as a result of a series of transactions occurring on or after September 14, 1979, when five checks were presented at various banking institutions in Puerto Rico, Miami, or Dallas. These checks were strikingly similar. Each bore an unauthorized, facsimile signature resembling the facsimile signature of Edward Colgan; *fn2" each was numbered check 01307; each was dated September 14, 1979, and each was made out for the amount of $ 20,000.00. *fn3"

 These checks were accepted and processed by the various banks to which they were presented, and were systematically forwarded to Girard Bank for final processing. Girard paid the five checks and thereafter credited $ 100,000.00 against the Credit Union's account. According to Girard's account reconcilement list, which indicates when an account is charged for the amount of a given transaction, three $ 20,000.00 checks were paid on September 28, 1979, another $ 20,000 check was paid on October 5, 1979, and another check was paid on October 11, 1979. However, none of the checks had ever been issued by the Credit Union, and none of the named payees of the five checks were actually authorized as payees or were members of the Credit Union. It is not known, and for the purpose of deciding the present motions, not relevant, whether these payees were fictitious or actually existed. *fn4"

 The Credit Union's checking account was the type in which an employee of Girard would reconcile the depositor's account before mailing out the monthly statement. It is at this point that the checks are physically inspected for the first time. The reconcilement is based upon an "issue" report, a carbon copy from the Credit Union showing that a check had been written.

 It was not until November 8, 1979, when the reconcilement of the Credit Union's account was undertaken for September, that the bank clerk noted that there were three checks without "issue," all for $ 20,000.00, and all with the same check number. As a result of these observations, the bank clerk notified her superior and called Edward Colgan, manager of the Credit Union. Mr. Colgan immediately went to Girard, and upon examination of the checks, advised the bank that the three checks, as well as two other checks which Girard had uncovered, each for $ 20,000.00, and each numbered 01307, had not been issued by the Credit Union. The following day, November 9, 1979, Mr. Colgan officially advised Girard in writing that the Credit Union had not issued the checks and requested that the $ 100,000.00 debited from the Credit Union's account be properly credited back to the account. This the bank refused to do. Because of Girard's refusal, the Credit Union called upon its insurance company, Cumis, *fn5" which paid the amount of the claim.

 Plaintiff Cumis instituted this action against Girard contending that Girard has converted funds belonging to the Credit Union and breached the contract of deposit by refusing to repay the $ 100,000.00 sum debited from the Credit Union's account based upon the unauthorized signatures. Girard, on the other hand, steadfastly maintains that the Credit Union's own negligence contributed to the alleged forgeries. *fn6" Moreover, defendant bank asserts that the Credit Union is barred from making the instant claim for $ 100,000.00 by the very terms of the "certification of Resolution Authorizing a Facsimile Signature."

 Based upon this Resolution, Girard contends: (1) the facsimile signature on the alleged forged checks resemble the authorized facsimile signature, (2) the Credit Union is precluded from denying the authenticity of the facsimile signature; and (3) the Credit Union agreed to indemnify Girard for any loss sustained as a result of its acting upon the Resolution. Accordingly, Girard requests that the plaintiff's complaint be dismissed.

 Plaintiff's position is that the "form" Resolution provides Girard no defense against plaintiff's claim for reimbursement. It argues that since it states only that facsimiles are to be treated the same as if they were manual signatures, and under Pennsylvania law, a bank is liable to the depositor when it pays out funds on the basis of an unauthorized signature. Furthermore, as an exculpatory clause, the plaintiff asserts that: (1) the clause is a contract of adhesion; (2) it is void since it violates public policy, and; (3) it violates the mandate of the Pennsylvania Commercial Code.

 II. Liability for Unauthorized Signatures

 Article Four *fn7" of the Pennsylvania Commercial Code (hereinafter the Code) is devoted to Bank Deposits and Collections, and in conjunction with Article Three, *fn8" governs the duties and liabilities of the parties in this case. Section 4401(a) of the Code states the general rule as to when a bank may lawfully charge the account of its customer. In pertinent part, it provides that "... a bank may charge against his (the customer's) account any item which is otherwise properly payable...." 13 Pa.C.S.C. § 4401(a). Section 3404 of the Code, however, prescribes the legal effect of unauthorized signatures stating that "(any) unauthorized signature *fn9" is wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it." 13 Pa.C.S.A. § 3404. The case law is clear that pursuant to Section 3404 an instrument containing a forged or unauthorized signature is not "properly payable" within the meaning of Section 4401. Perini Corp. v. First Nat. Bank of Habersham County, 553 F.2d 398, 403-04 (5th Cir.), reh. den., 557 F.2d 823 (1977); Winkie v. Heritage Bank of Whitefish Bay, 99 Wis.2d 616, 299 N.W.2d 829, 833 (1981); Hardex-Steubenville Corp. v. Western Pennsylvania Nat. Bank, 446 Pa. 446, 449, 285 A.2d 874, 876 (1971). *fn10" Together the foregoing sections of the Code codify the pre-UCC view that a bank's duty to its customer rests upon an implied contract to honor a depositor's checks which bear genuine signatures. Hence, in honoring a forged check the bank is deemed to have used its own money not the depositor's, and is liable on the contract of deposit to recredit its customer's account. *fn11" See O'Malley, Common Check Frauds and the Uniform Commercial Code, 23 Rutgers L.Rev. 189, 195 n.38 (1969) (citing Grubnau v. Centennial Nat'l Bank, 279 Pa. 501, 504, 124 A. 142, 143 (1924)).

 At this juncture, it must be noted that this is most probably a case of "double forgery," *fn12" although the parties submit that they are unable to determine whether the payees of the instruments were indeed fictitious. The legal consequences of such double forgery cases was set forth in Perini Corp. v. First Nat. Bank of Habersham County, supra, 553 F.2d 398 (5th Cir. 1977). In Perini, the court concluded that the controlling defect was the unauthorized signature of the drawer. Id. at 412, 415-16; Winkie, Inc. v. Heritage Bank of Whitefish Bay, supra, 99 Wis.2d 616, 299 N.W.2d at 836 and 838; Brighton, Inc. v. Colonial Nat. Bank, supra, 179 N.J.Super. 101, 422 A.2d at 440. Consequently, the drawee could not be held liable in conversion *fn13" for paying out on the forged endorsements. Perini Corp. v. First Nat. Bank of Habersham County, supra, 553 F.2d at 412 and 415. *fn14" In the instant action, therefore, liability must be assessed in accordance with the Code's disposition of items not "properly payable" due to the presence of the unauthorized signature of the drawer. *fn15"

 As stated earlier, the payment on a forged drawer's signature violates the duty of the bank to charge its customers' accounts for only properly payable items. Hardex-Steubenville Corp. v. Western Pennsylvania Nat. Bank, supra, 446 Pa. at 449, 285 A.2d at 876; Perini Corp. v. First Nat. Bank of Habersham County, supra, 553 F.2d at 404. Because of this strict liability under the Code as between a drawee bank and a drawer customer, the loss must be assumed by the bank. *fn16" Thus, the defendant bank is liable for the wrongful payments under its contract with the depositor, the Credit Union, absent special circumstances. Under the Code scheme, the drawee bank can escape liability if the drawer is: (1) precluded from denying the validity of the signature (13 Pa.C.S.A. § 3404(a)); (2) negligent in allowing the forgery or negligent in not discovering it (13 Pa.C.S.A. §§ 3406 and 4406); *fn17" (3) deemed to have ratified the unauthorized signature (13 Pa.C.S.A. § 3404(b)). See gen., Hudak and Miller, Bad Checks: The Effect of the Uniform Commercial Code, 10 U.C.C.L.J. 3, 12 (1977). It is the defendant's contention in substance that the plaintiff, as subrogee, is precluded from denying the validity of the unauthorized signature because the Resolution varies the normal contract relationship between ...


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