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TRAVELERS INDEM. CO. v. STEDMAN

November 13, 1995

THE TRAVELERS INDEMNITY COMPANY, a/s/o American Lung Association, Plaintiff,
v.
NANCY STEDMAN and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Defendants, v. MAIN LINE FEDERAL SAVINGS BANK, Counter-Defendant.



The opinion of the court was delivered by: REED

 Reed, J.

 November 13, 1995

 Currently before the Court is the motion by plaintiff for summary judgment against Merrill Lynch and the cross-motion by Merrill Lynch for summary judgment. (Document Nos. 23, 25) For the following reasons, the motion by plaintiff will be granted in part and denied in part and the cross-motion by Merrill Lynch will be granted in part and denied in part.

 I. BACKGROUND

 The following facts are undisputed.

 In 1990, 1991 and 1992, while she was employed by ALA, Nancy Stedman illegally deposited in her own bank account or cashed for her own benefit seventeen checks drawn on the Working Capital Management Account ("WCMA") maintained by ALA with Merrill Lynch. On twelve of those checks, totalling $ 100,215.31, she forged one or both of the maker signatures; the numbers for these checks were: 1980, 1982, 2390, 2475, 2609, 2675, 2783, 2918, 3061, 3128, 3131 and 3180. On four of those checks, totalling $ 29,211.92, she only forged the endorsements; the numbers for these checks were: 1639, 1731, 1883 and 2142. One check is no longer at issue, as plaintiff has now conceded that Merrill Lynch is entitled to judgment with regard to check number 1586 which was for $ 200.00. See memorandum of plaintiff in reply to response of defendant Merrill Lynch at 15.

 In April 1992, the new Executive Director of ALA, Patty Cline, discovered the forgeries by Stedman. ALA then submitted a claim to plaintiff pursuant to its insurance policy with plaintiff, and plaintiff paid ALA $ 124,568.23, which was the amount of the seventeen checks minus $ 5,059.00 repaid by Stedman to ALA. Then, as subrogee of ALA, plaintiff brought this instant action against Stedman, Merrill Lynch, and Main Line Federal Savings Bank ("Main Line"), where plaintiff had deposited some of the checks. All of claims by plaintiff against Main Line were dismissed by an Order of this Court dated December 6, 1994, although Main Line remains a party in this case as a defendant to the cross-claim of Merrill Lynch.

 II. DISCUSSION

 Under Federal Rule of Civil Procedure 56(c), summary judgment may be granted when, "after considering the record evidence in the light most favorable to the nonmoving party, no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law." Turner v. Schering-Plough Corp., 901 F.2d 335, 340 (3d Cir. 1990). For a dispute to be "genuine," the evidence must be such that a reasonable factfinder could return a verdict for the nonmoving party, and for a fact to be "material" it must be one "that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). The nonmoving party must produce evidence to support its position, and may not rest on conclusory allegations or bare assertions alone. Lujan v. National Wildlife Fed'n, 497 U.S. 871, 888, 110 S. Ct. 3177, 111 L. Ed. 2d 695 (1990).

 Plaintiff and Merrill Lynch agree that Pennsylvania law applies to this case and that under the Pennsylvania adoption of the Uniform Commercial Code ("U.C.C.") a drawee bank is generally liable to a drawer customer for paying on a check containing a forged maker signature. See 13 Pa. Cons. Stat. Ann. §§ 1201 (defining "unauthorized signature or indorsement" as including a forgery), 3401(a) (stating that "no person is liable on an instrument unless his signature appears thereon"), 3404(a) (stating that "any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it"), 4401(a) (stating that only items which are "otherwise properly payable" may be charged by a bank against an account of a customer); Hardex-Steubenville Corp. v. Western Pennsylvania Nat'l Bank, 446 Pa. 446, 285 A.2d 874, 876 (Pa. 1971) (holding that a bank breaches its contract with a customer when it pays the holder of a forged check). In addition, the parties agree that under Pennsylvania law a bank must ordinarily bear the loss occasioned by forgery of an endorsement. Philadelphia Title Ins. Co. v. Fidelity-Philadelphia Trust Co., 419 Pa. 78, 212 A.2d 222, 224 (Pa. 1965).

 The dispute between plaintiff and Merrill Lynch centers on three exceptions to these general rules; these exceptions shift liability for forged checks away from the drawee bank. The first exception is applicable to all of the checks at issue here; this exception arises when any person, including a customer, has through her or his negligence allowed the forgery to occur and the bank has paid the forged check in good faith and in accordance with reasonable commercial standards. See 13 Pa. Cons. Stat. Ann. § 3406 (Pennsylvania codification of U.C.C. § 3-406). The second exception only applies to the checks with forged maker signatures; it arises when a customer is negligent in examining her or his statement and/or cancelled checks such that a repeat forger is able to continue forging checks over a period of time, and it only applies if the bank has exercised ordinary care in paying the forged checks. See 13 Pa. Cons. Stat. Ann. § 4406 (Pennsylvania codification of U.C.C. 4-406). The third exception only applies to the checks with forged endorsements; it arises if the person who illegally took the proceeds of the check at issue was involved in preparing the check for the customer but never intended that the designated payee have an interest in that check. See 13 Pa. Cons. Stat. Ann. § 3405 (Pennsylvania codification of U.C.C. § 3-405). Each of these exceptions will be discussed below.

 As all of the events in this case occurred before the 1992 amendments to the Pennsylvania codification of the U.C.C., the statutory sections which are applicable to this case and which are cited in this opinion are the sections that were in effect prior to those amendments. See Universal Premium Acceptance Corp. v. York Bank & Trust Co., 69 F.3d 695, 1995 U.S. App. LEXIS 30855, Nos. 94-2047, 94-2048, 1995 WL 626543, at n.1 (3d Cir. Oct. 26, 1995).

 A. Negligence Before Forgery

 The first exception, which applies to all of the checks at issue here, is provided by 13 Pa. ...


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