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UNIVERSAL PREMIUM ACCEPTANCE CORP. v. YORK BANK &

September 29, 1994

UNIVERSAL PREMIUM ACCEPTANCE CORPORATION
v.
THE YORK BANK & TRUST CO.



The opinion of the court was delivered by: HARVEY BARTLE, III

 Bartle, J.

 September 29, 1994

 This is a diversity action in which plaintiff, Universal Premium Acceptance Corp. ("UPAC"), has sued defendant, the York Bank & Trust Co. ("York"), regarding York's alleged mishandling of various negotiable instruments issued by UPAC. Before the court are the parties' cross-motions for summary judgment. Pennsylvania law is applicable.

 The material facts are undisputed. UPAC is in the business of providing financing to third parties to pay insurance policy premiums. In the fall of 1991, Walter Talbot ("Talbot") of the W. Talbot Insurance Agency contacted UPAC. Talbot sought to obtain financing for his clients for premiums they would owe on policies to be issued by Great American Insurance Company ("Great American"). UPAC agreed to provide the financing.

 In order that Talbot could process the premium financings, UPAC sent him blank drafts on UPAC's account at Landmark Bank ("Landmark") in St. Louis, Missouri. *fn1" These forms contained the preprinted language, "PAY AND DEPOSIT ONLY TO THE CREDIT OF: INSURANCE CO." Talbot was to fill in the name of the insurance company and the amount payable. It appears that Talbot was also to sign the draft, as no signature of any UPAC representative appeared on the blank draft forms UPAC had provided.

 Between September of 1991 and July of 1992, Talbot filled out and signed more than $ 1,000,000 in UPAC drafts naming Great American as the payee. *fn2" These drafts purported to pay the premiums of Talbot's clients for Great American insurance policies. However, these policies did not exist, and Talbot did not deliver the drafts to Great American. Instead, Talbot and a confederate, James Smith ("Smith"), forged the indorsement of Great American on the UPAC drafts Talbot had prepared and deposited them into an account they controlled at York entitled "Small Businessman's Service Corp." The front and back sides of one such draft is reproduced below. UPAC eventually recovered some of the misappropriated funds from Talbot and Smith, who are currently serving prison sentences, and seeks to recover the remainder, approximately $ 700,000, from York.

 [SEE DIAGRAM A AND DIAGRAM B IN ORIGINAL]

 The Uniform Commercial Code ("UCC"), codified in Pennsylvania as 13 Pa. Cons. Stat. Ann. §§ 1101 et seq. (1979), *fn3" defines a "draft" as a writing signed by the maker or drawer containing an unconditional order to pay. § 3104. A draft is a "check" if it is drawn on a bank and is payable on demand. Id. Although the UPAC instruments are drawn on a bank, Landmark, the parties refer to them as drafts, not checks, apparently because of UPAC's contention that they are not payable on demand.

 The parties agree that when a depositary bank such as York presented the UPAC instruments to Landmark for collection, Landmark sought and received UPAC's approval before paying on them. It would appear from the face of the instruments that the named payee could receive payment on demand, however. Section 3108 states that instruments payable on demand include those "in which no time for payment is stated." No time for payment is stated on those at issue here. Moreover, it is undisputed that York paid on them at the time they were presented. As the issue of whether these instruments are properly deemed "drafts" or "checks" is irrelevant to the decision at hand, this court will employ the terminology used by the parties and refer to them solely as "drafts."

 Under the UCC, a forged indorsement generally is ineffective to authorize a drawee bank such as Landmark to pay on an instrument. Prudential-Bache Secs., Inc. v. Citibank, N.A., 73 N.Y.2d 263, 536 N.E.2d 1118, 1121, 539 N.Y.S.2d 699 (N.Y. 1989). The forger is liable for losses due to payments resulting from forged indorsements. Ronald Anderson, 6 Uniform Commercial Code, § 3-405:11 (1993). If the forger is unavailable or unable to repay the full amount, the first party taking the instrument from the forger, here, York, suffers the loss. Prudential-Bache, 536 N.E.2d at 1121. This rule is predicated on the policy that a party such as York, a depositary bank accepting an instrument from the forger, is generally the one most able to detect the fraud and prevent the loss from occurring. As the parties agree that York paid the drafts as a result of a concededly forged indorsement, UPAC contends that York is liable for the loss. See McAdam v. Dean Witter Reynolds, Inc., 896 F.2d 750, 759 (3d Cir. 1990).

 While not contesting the general rule, York argues that the situation at bar is governed by an exception known as the fictitious or nominal payee rule. This exception states:

 
(a) General rule. - An indorsement by any person in the name of a named ...

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