argument on the undisputed fact that "UPAC had the final say as to whether to accept or reject the drafts presented for payment." However, the statutory provision discussing the effect of indorsements in blank draws no distinctions between checks and drafts. Section 3204(b) states only that "an instrument payable to order and indorsed in blank becomes payable to bearer and may be negotiated by delivery alone until specially indorsed." (Emphasis added.)
UPAC also argues that regardless of whether the language "PAY AND DEPOSIT ONLY TO THE CREDIT OF" appearing on the front of the draft can be considered a restrictive indorsement, York's failure to follow this language subjects York to liability. The cases UPAC cites for this proposition do not concern the question of a bank's liability. See Rhone v. State Auto. Mut. Ins. Co., 858 F.2d 1507 (11th Cir. 1988); C.R. by Dunn v. Travelers, 426 Pa. Super. 92, 626 A.2d 588 (Pa. Super. 1993). As stated above, once the indorsement of Great American, the named payee, was forged in accordance with § 3405(a)(2), the indorsement effectively made the draft payable to bearer despite terms elsewhere on the draft purporting to restrict its transferability.
Next, UPAC claims that York's failure to require an indorsement on behalf of the "Small Businessman's Service Corp." before permitting the draft to be deposited into its account amounted to bad faith which would render the protection of § 3405(a)(2) unavailable. York argues that since the forged indorsement of the named payee in blank made the draft bearer paper, no further indorsement was necessary.
Commentary and case law support York's position. "There is nothing which prevents a bank from making payment to the holder of a bearer [instrument] without requiring such holder to make an indorsement on the [instrument]." 5A Anderson, supra, § 3-204:7. It is "common contemporary practice [to] accept unindorsed checks for deposit." Perini, 553 F.2d at 411; see also § 4205(a). Accordingly, York's acceptance of the draft for deposit with the purported indorsement of the payee but without the indorsement of its customer does not evidence a lack of good faith precluding the application of § 3405(a)(2).
UPAC contends, however, that York can still be held liable for other negligent acts by York despite the applicability of § 3405(a)(2). Several of the cases UPAC cites, such as Engle Ford, Inc. v. Fulton Bank, 113 Dauph. 164 (C.P. 1993) and Underpinning & Found. Constr., Inc. v. Chase Manhattan Bank, N.A., 46 N.Y.2d 459, 386 N.E.2d 1319, 414 N.Y.S.2d 298 (N.Y. 1979), hold that a bank's failure to heed restrictive indorsements will subject it to liability for negligence despite the fictitious payee rule. These cases are inapplicable because, as discussed above, the drafts at issue did not contain restrictive indorsements. Another case cited by UPAC, Lichtenstein v. Kidder Peabody & Co., 840 F. Supp. 374 (W.D. Pa. 1993) is inapplicable because it did not involve § 3405(a).
York argues that negligence of a depositary bank is immaterial if the bank is protected by § 3405(a). The commentary to the revised version of § 3405(a) supports York's position. Revised § 3405(a) states that under the previous version, applicable in this case, "the fact that the bank acted negligently did not shift the loss to the bank so long as the bank acted in good faith." This court, following "the overwhelming majority of jurisdictions considering the question," holds that "simple negligence" will not bar application of § 3405(a) "to claims resulting from the collecting bank's acceptance of an [instrument] over a forged indorsement." Shearson Lehman Bros., Inc. v. Wasatch Bank, 788 F. Supp. 1184, 1193 (D. Utah 1992); see also In re Lou Levy & Sons Fashions, Inc., 988 F.2d 311 (2d Cir. 1993).
Courts have held that depositary or collecting banks may be liable despite the applicability of § 3405 where the bank's actions in accepting the instruments are so "commercially outrageous" as to call into question the bank's good faith. See McAdam, 896 F.2d at 761. However, UPAC concedes that the drafts "showed no evidence of an 'unauthorized signature or any alteration on an item.'" UPAC cannot establish that the actions of York in accepting facially regular drafts were so outrageous as to amount to a lack of good faith.
York is entitled to summary judgment on UPAC's negligence claims.
UPAC's claim for breach of warranty of the validity of the indorsements must fail because § 3405(a)(2) makes the forged indorsement effective. See Anderson, supra, § 3-405:34. As such, this court need not consider York's argument that York's warranties run only to Landmark, not to UPAC. See James J. White & Robert S. Summers, 1B Uniform Commercial Code, 3d ed. (1993), § 15-5. Similarly, UPAC cannot maintain its conversion claims against York because § 3405(a)(2) operated to make the instrument properly payable.
York is therefore entitled to summary judgment on all counts.
AND NOW, this 29th day of September, 1994, for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that the motion for summary judgment of defendant, The York Bank & Trust Co., is GRANTED and that the motion for summary judgment of plaintiff, Universal Premium Acceptance Corporation, is DENIED.
Judgment is entered in favor of defendant, The York Bank & Trust Co., and against plaintiff, Universal Premium Acceptance Corporation.
BY THE COURT:
Harvey Bartle, III, J.