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Universal Premium Acceptance Corp. v. York Bank & Trust Co.

October 26, 1995





Before: HUTCHINSON *fn*, ROTH, and WEIS, Circuit Judges

WEIS, Circuit Judge.

Argued June 29, 1995

Filed October 26, l995


Defendant bank accepted drafts drawn on plaintiff containing the direction "PAY AND DEPOSIT ONLY TO THE CREDIT OF [payee]" and on which the payee's endorsements were forged. Reasoning that the drafts were in effect negotiable, the district court in this diversity case entered judgment for the bank, based on Article 3 of the Uniform Commercial Code as adopted in Pennsylvania. We conclude that the explicit direction on the drafts precluded transfer and made them nonnegotiable. Moreover, we hold that the endorsements in blank did not make the drafts bearer paper. Accordingly, we will reverse the judgment in favor of the bank and remand the matter for resolution of the plaintiff's claims under the bank collection provisions of the Uniform Commercial Code and the common law.

Universal Premium Acceptance Corporation, having its principal office in St. Louis, Missouri, provides financing to policyholders to pay their insurance premiums. In the fall of 1991, Walter Talbot of the W. Talbot Insurance Agency in Lancaster, Pennsylvania, requested Universal to provide financing for his customers who needed funds to pay premiums on policies issued by the Great American Insurance Company.

Universal accepted Talbot's proposal and sent him the necessary documents, including blank drafts. The face of each instrument contained Universal's name and address in the top left corner, and a large UPAC logo in the top center. Below UPAC's address was printed "PAY AND DEPOSIT ONLY TO THE CREDIT OF: __________ INSURANCE CO." with a space for the amount. On the lower right side of the instrument were blanks for the policyholder's name, the insurance agency name, and a line for "SIGNATURE OF PRODUCER OF RECORD/BROKER/AGENT." In the lower right corner beneath the signature line appear the name and address of the Landmark Bank.

The back of each instrument contained pre-printed language: "Acceptance of this draft acknowledges Universal Premium Acceptance Corporation's interest in the unearned or return premium(s) and that we have issued a policy(ies) to the named applicant (insured) in the amount of the premium indicated."

Between September 1991 and July 1992, Talbot signed drafts for more than $1 million in favor of Great American, but did not deliver them to the insurance company. Instead, he arranged for his confederates to forge the endorsement of Great American and deposit the drafts in an account they opened at defendant York Bank under the name of "Small Businessman's Service Corporation." York deposited the drafts without securing the endorsement of Small Businessman's Service Corporation and transmitted them to Landmark (later renamed Magna Bank of Missouri), Universal's bank in St. Louis.

As part of the scheme, Talbot and his associates set up a dummy "Great American Insurance Company" office in Lancaster and furnished its address and telephone number to Universal. To verify that Great American had issued a policy, Universal would contact that office. After assurance from Talbot's cohorts there that the transaction was in order, Universal would then authorize Landmark to pay the draft.

After the fraud was discovered, Talbot was convicted and imprisoned. Universal recovered part of its loss from Talbot and then filed suit in its own behalf and as assignee of Landmark against York. The complaints asserted claims under Articles 3 and 4 of the Uniform Commercial Code as enacted in Pennsylvania at 13 Pa. Cons. Stat. Ann. 3101-4504, as well as for negligence and conversion.

The district court granted summary judgment for York. Essentially adopting the theories the bank had advanced, the court decided that:

1. The drafts were to be treated as if they were negotiable. Although they did not contain the terms "to the order of" or "to bearer," they could be viewed as negotiable under 13 Pa. Cons. Stat. Ann. Section(s) 3805.

2. Talbot signed the drafts on behalf of Universal.

3. Because Talbot did not intend Great American to have any interest in the drafts, 13 Pa. Cons. Stat. Ann. 3405(a), the fictitious payee provision, applied and shielded York from what otherwise would have been its liability for paying on a forged indorsement.

4. The forged endorsement of Great American was in blank and thereby made the drafts payable to bearer.

5. Because the drafts had become bearer paper, York did not act in bad faith in depositing them in the Small Businessman's Service Corporation account.

Accordingly, the district court found that York was not liable under either the Uniform Commercial Code or common law.

Universal has appealed, contending that the limiting language as to the payee on the drafts did not permit York to deposit them in the Small Businessman's account, that the fictitious payee provision does not apply, and that the ...

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