United States District Court, Western District of Pennsylvania
November 14, 1991
JODIE B. LICHTENSTEIN, AN INDIVIDUAL, PLAINTIFF,
KIDDER, PEABODY & CO. INCORPORATED, A DELAWARE CORPORATION, DEFENDANT, V. ALAN I. LICHTENSTEIN, THIRD-PARTY DEFENDANT.
The opinion of the court was delivered by: Cohill, Chief Judge.
Before us is plaintiff's Motion for Rescission of Order
Based Upon Newly Discovered Evidence and plaintiff's Motion
For Leave to Amend Complaint and to Name Charles W. Chewing,
Jr. as an Additional Defendant. For the following reasons, we
will grant plaintiff's motion for rescission and grant
plaintiff's motion to amend in part.
BACKGROUND AND PROCEDURAL HISTORY
On April 8, 1985, the plaintiff opened a "premium account"
with defendant Kidder, Peabody & Company. ("Kidder, Peabody").
This account permitted plaintiff to deposit cash and
securities with Kidder, Peabody and its affiliates, and to
draft checks against her deposits. From 1985 to 1987, the
plaintiff's husband, Alan I. Lichtenstein, allegedly forged
his wife's signature on various checks and other documents and
thereby depleted her account with Kidder, Peabody. The
plaintiff divorced her husband in July, 1988.
The plaintiff filed this action against Kidder, Peabody
attempting to recover the money that was withdrawn from her
account by her former husband. In her complaint, the plaintiff
alleged conversion, negligence, breach of fiduciary duty, and
breach of express and implied contract. Subsequently, Kidder,
Peabody, filed a third party complaint against the plaintiff's
former husband, alleging that Mr. Lichtenstein is liable for
any amount due and owing the plaintiff. On May 26, 1991,
Kidder, Peabody filed a motion for partial summary judgment
arguing that the one year statute of limitations set forth in
13 Pa.Cons.Stat. § 4406 prevents the plaintiff from recovering
the majority of her alleged losses.
This motion presented an issue of first impression in
Pennsylvania, and, to the best of our knowledge, in other
jurisdictions as well; whether a brokerage firm which offers
check-writing services to its clients should be considered a
"bank" within the meaning of section 4406. We answered this
question in the affirmative and granted Kidder, Peabody's
motion holding that the plaintiff could not recover against
Kidder, Peabody for any forged checks honored more than one
year prior to the time the plaintiff notified Kidder, Peabody
of the forgeries. See, Lichtenstein v. Kidder, Peabody & Co.,
Inc., 727 F. Supp. 975 (W.D.Pa. 1989). This reduced the amount
of the plaintiff's claim against the defendant by more than
In her motion for rescission, the plaintiff requests that we
rescind our prior order granting the defendant partial summary
judgment due to newly discovered evidence which the plaintiff
asserts shows the defendant had knowledge of the forgeries
prior to the time she notified it in writing, and that the
defendant's actions constituted constructive fraud. In her
motion to amend her complaint, the plaintiff seeks to add a
constructive fraud claim and to name Charles W. Chewing, the
Kidder, Peabody employee with whom she dealt, as an additional
defendant. The plaintiff's motions are based primarily upon
the following facts and allegations which the plaintiff
asserts are newly discovered.
(1) The plaintiff's former husband, Alan I.
Lichtenstein, testified during oral deposition
that Charles W. Chewing, Kidder Peabody's
employee in charge of the plaintiff's account,
told him that no one would notice if he signed
his wife's name
on checks drawn on her account, if she were
unavailable to sign
(2) Mr. Lichtenstein deposited money into the
(3) Kidder, Peabody was aware that many
transactions took place in the plaintiff's
account over a short period of time, despite the
plaintiff's statements to Mr. Chewing that she
wanted to preserve the principal of the account
(4) Checks were returned due to insufficient
Motion to Rescind
Mrs. Lichtenstein asserts two bases for her motion to
rescind. The first is that, taken as a whole, the facts listed
above put Kidder, Peabody on notice of the forgeries within
the one year limitations period imposed by 13 Pa.Cons.Stat.
§ 4406(d). Section 4406 states in relevant part:
(a) General rule. — When a bank sends to its
customer a statement of account accompanied by
items paid in good faith in support of the debit
entries or holds the statement and items pursuant
to a request or instructions of its customer or
otherwise in a reasonable manner makes the
statement and items available to the customer, the
customer must exercise reasonable care and
promptness to examine the statement and items to
discover his unauthorized signature or any
alteration on an item and must notify the bank
promptly after discovery thereof.
(d) Statute of limitations applicable to
consumer. — Without regard to care or lack of care
of either the customer or the bank, a customer who
does not within one year from the time the
statement and items are made available to the
customer (subsection (1)) discover and report his
unauthorized signature or any alteration on the
face or back of the item or does not within three
years from that time discover and report any
unauthorized indorsement is precluded from
asserting against the bank such unauthorized
signature or indorsement or such alteration.
13 Pa.Cons.Stat. § 4406.
The plaintiff's first argument is unpersuasive. Section
4-406(4) states that regardless of a bank's standard of care,
the customer bears the burden of notifying the bank of the
unauthorized use of his signature. Therefore, the plaintiff's
arguments that in this case Kidder, Peabody was put on notice
of the forgeries "with a duty of inquiry" is not relevant to
the applicability of section 4406(d).
The plaintiff's second argument, that section 4406(d) does
not bar actions based upon constructive fraud, is more
compelling. It raises another issue of first impression under
Pennsylvania law: when, if ever, will a bank lose the
protection afforded by section 4406.
When faced with a novel issue of state law, it is a federal
court's duty to predict how the state's highest court would
rule. Erie Castings Co. v. Grinding Supply, Inc., 736 F.2d 99,
100 (3d Cir. 1984), citing, Keystone Aeronautics Corp. v. R.J.
Enstrom Corp., 499 F.2d 146 (3d Cir. 1974). The decisions of
the state's intermediate appellate courts, as well as the
decisions of other courts and the policies underlying the
applicable legal doctrines should all be given due regard.
Connecticut Mutual Life Insurance Co. v. Wyman, 718 F.2d 63, 65
(3d Cir. 1983); Pennsylvania Glass Sand Corp. v. Caterpillar
Tractor Co., 652 F.2d 1165, 1167 (3d Cir. 1981).
Section 4406(d) specifically states that it applies
regardless of the standard of care of either the bank or the
customer. Justice and common sense suggest, however, that a
bank which has engaged in fraudulent conduct should not be
afforded the protection of section 4406. In fact, under New
Jersey law, conspiracy and fraud claims are outside the
protection of UCC section 4-406(4) (Pa.Cons.Stat. § 4406(d)).
Brighton, Inc. v. Colonial First National Bank, 176 N.J. Super. 101,
422 A.2d 433, (1980), aff'd 86 N.J. 259, 430 A.2d 902
(1981). Although the Brighton court failed to explain the basis
conclusion that section 4-406(4) does not bar fraud and
conspiracy claims, in our opinion, such a conclusion is
supported by UCC section 1-203 (13 Pa.Cons.Stat. § 1203) which
states: "[e]very contract or duty within this title imposes an
obligation of good faith in its performance or enforcement."
See also, Creeger Brick & Bldg. Supply, Inc. v. Mid-State Bank
& Trust Co., 385 Pa. Super. 30, 560 A.2d 151 (1989) (duty of
good faith applies to all UCC sections); Brighton, Inc. v.
Colonial First National Bank, 176 N.J. Super. 101, 422 A.2d 433
(1980) (party who acts in bad faith is not entitled to the
protection of UCC). It is our opinion, therefore, that a bank
which has engaged in fraudulent conduct has, as a matter of
law, acted in bad faith and is not entitled to the protection
of section 4406(d). In this case, however, the plaintiff is
alleging constructive fraud.
Constructive fraud "has been used to designate a breach of
duty which has a tendency to deceive others and operate to
their injury, even though there is no vicious intent."
Charleroi Lumber v. School District, 334 Pa. 424, 6 A.2d 88
(1939). Because intent is not an element of constructive fraud,
a party whose actions constitute constructive fraud might still
have acted in good faith. Good faith is defined by the Uniform
Commercial Code as honesty in fact in the conduct or
transaction concerned. 13 Pa.Cons.Stat. § 1201; Davis v.
Pennsylvania Co. for Ins. etc., 337 Pa. 456, 12 A.2d 66 (1940);
contra, Potoczny v. Dydek, 192 Pa.Super 550, 162 A.2d 70 (1960)
(bad faith is dishonesty). Whether a party's conduct
constitutes bad faith is normally a question for the jury.
Grimes v. Prudential Ins. Co., 401 Pa.Super 245, 585 A.2d 29
(1991). Because of the plaintiff's allegations in this case, we
cannot say as a matter of law whether or not the defendant
acted in good faith. We will therefore permit the jury to make
this determination. Unless the plaintiff proves that the
defendant Kidder, Peabody's actions constituted bad faith,
however, the protection afforded the defendant by section
4406(d) still applies.
Motion for Leave to Amend Complaint
The plaintiff also seeks to amend her complaint to add a
claim of constructive fraud and to name Charles W. Chewing as
an additional defendant. Under Federal Rule of Civil Procedure
15(a), plaintiffs may amend their complaint once as a matter
of course before a responsive pleading is served. Otherwise,
they may do so only by leave of court or by written consent of
the adverse party. Rule 15(a) also states that leave of court
shall be freely given when justice so requires.
We will permit the plaintiff to amend her complaint to add
her constructive fraud claim. We will not, however, permit the
plaintiff to join Charles W. Chewing as an additional
defendant at this late date. It would be unduly prejudicial to
require Mr. Chewing, who has not participated in discovery, to
attempt now to formulate a defense to the plaintiff's
allegations, particularly when discovery is already closed.
AND NOW, to-wit, this 14th day of November, 1991 it is
ORDERED, ADJUDGED and DECREED that plaintiff's Motion for
Rescission of Order Based Upon Newly Discovered Evidence be
and hereby is GRANTED and this Court's December 28, 1989 ORDER
is hereby VACATED. The plaintiff's Motion for Leave to Amend
Complaint and to Name Charles W. Chewning, Jr. as an
Additional Defendant be and hereby is DENIED in part and
GRANTED in part. The plaintiff may amend her complaint to
allege constructive fraud but may not name Charles W. Chewning
as an additional defendant.
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