July 16, 1997
MICHELLE MANFREDI, APPELLANT
DAUPHIN DEPOSIT BANK V. COZEN & O'CONNOR, LOUIS A. MANFREDI AND CHARLOTTE M. MANFREDI, APPELLEES
Appeal from the Order of the Court of Common Pleas of York County, Civil Division at No. 94 SU 02960 01. Before CASSIMATIS, J.
Before: Cavanaugh, Popovich and Olszewski, JJ. Opinion BY Popovich, J.
The opinion of the court was delivered by: Popovich
OPINION BY POPOVICH, J.:
Filed July 16, 1997
This is an appeal from an order of the Court of Common Pleas of York County granting summary judgment in favor of Dauphin Deposit Bank (Dauphin Deposit) in an action for conversion and violation of the Uniform Fiduciaries Act (UFA). *fn1 After examining the Uniform Commercial Code (UCC) *fn2 and the UFA, the lower court determined that appellant had no right of action against Dauphin Deposit for conversion and that Dauphin Deposit had a good faith defense under the UFA. Accordingly, the lower court granted summary judgment in favor of Dauphin Deposit. We agree that appellant cannot sue Dauphin Deposit for conversion under the UCC. However, we find that Dauphin Deposit is liable under the UFA.
Our scope of review is plenary when reviewing the propriety of a lower court's entry of summary judgment. Schriver v. Mazziotti, 432 Pa. Super. 276, 638 A.2d 224, 225 (1994), alloc. denied, 539 Pa. 638, 650 A.2d 52 (1994). We must examine the entire record in the light most favorable to the non-moving party and resolve all doubts against the moving party when determining if there is a genuine issue of material fact. Chrysler Credit Corp. v. Smith, 434 Pa. Super. 429, 643 A.2d 1098, 1100 (1994). We will only reverse the lower court's grant of summary judgment if there is a manifest abuse of discretion. Accu-Weather, Inc. v. Prospect Communications, Inc., 435 Pa. Super. 93, 644 A.2d 1251 (1994). Pursuant to Pennsylvania Rule of Civil Procedure 1035(b), summary judgment shall be rendered "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law."
The parties agree that there is no genuine issue of material fact and that the pertinent, undisputed facts are as follows: On May 9, 1987, appellant Michelle Manfredi, a minor, was injured in a motor vehicle accident. Shortly thereafter, appellant, by her parents and natural guardians, Louis and Charlotte Manfredi, filed a suit seeking compensation for her injuries. On September 26, 1988, the lower court approved a settlement of the suit and ordered that $34,480.07 be paid "to plaintiffs, Louis and Charlotte Manfredi, as parents and natural guardians of Michelle Manfredi, a minor, to be deposited in a Mutual Fund Growth Account through Common Sense Trust." Trial Court Opinion filed 3/19/96 p. 3. A check dated October 14, 1988, and payable "to the order of Louis and Charlotte Manfredi, as parents and natural guardians of Michelle Manfredi, a minor," was distributed to appellant's parents. After receiving the check, Louis endorsed the check, and, on October 20, 1988, he deposited it into his and Charlotte's joint checking account with Dauphin Deposit. Charlotte did not endorse the check. Dauphin Deposit never received a copy of the lower court's September 26, 1988, order, and was never given any verbal limitations regarding the check at issue. After the check was deposited, Louis periodically wrote checks on the account for his own use.
In July, 1992, after appellant reached the age of majority, she realized that her father had used all of the settlement funds, except for $800, for his own purposes. As a result, she filed a Petition for Accounting. Following a hearing on the matter, the lower court entered a judgment in favor of appellant and against Louis for $48,464.80.
On January 27, 1995, appellant filed a complaint seeking to recover damages from Dauphin Deposit on the theory of conversion under the UCC and violation of Section 6372 of the UFA. *fn3 She argued that the bank improperly deposited the settlement check since it contained a forged and unauthorized endorsement, and that the bank violated its burden of inquiry when Louis made the deposit. Dauphin Deposit argued that appellant had no right of action for conversion and that it had a good faith defense under the UFA. The parties cross-filed motions for summary judgment. The lower court determined that there was no entitled to judgment as a matter of law. This appeal followed.
Appellant's first argument is that the bank is liable for conversion because it permitted her father, Louis, to deposit the settlement check in her parents' joint checking account without the endorsement of both parents. *fn4 Her argument is rooted in the language of 13 Pa.C.S.A. §§ 3116(2) and 3419(a)(3). *fn5
Section 3116 provides the following:
§ 3116. Instruments payable to two or more persons
An instrument payable to the order of two or more persons:
(1) if in the alternative is payable to any one of them and may be negotiated, discharged or enforced by any of them who has possession of it; or
(2) if not in the alternative is payable to all of them and may be negotiated, discharged or enforced only by all of them.
13 Pa.C.S.A. § 3116. The Comment to Section 3116(2) explains that there is a distinction between an instrument payable to "A or B" and one payable to "A and B." The second is payable only to A and B together and both must endorse it in order to negotiate the instrument. Here, the settlement check was payable "to the order of Louis and Charlotte Manfredi, as parents and natural guardians of Michelle Manfredi, a minor." Clearly, under Section 3116(2), Louis was not permitted to deposit the check without both his and Charlotte's endorsement or consent.
Section 3419 provides, in relevant part, that:
§ 3419. Conversion of Instrument; innocent representative
(a) Acts constituting conversion. An instrument is converted when:
(3) it is paid on a forged instrument.
13 Pa.C.S.A. § 3419. *fn6
Appellant avers that Louis' endorsement was forged, and, therefore, Dauphin Deposit is liable to her for conversion. Case law establishes that where a check is paid or cashed on an unauthorized or forged endorsement, the bank is liable for conversion. Jones v. Van Norman, 513 Pa. 572, 522 A.2d 503 (1987). Here, the endorsement was Louis' actual signature and he was authorized to endorse the check. However, case law also establishes that where there is evidence that the bank had knowledge of a limiting instruction regarding the endorser's authority, the bank may be liable for conversion. Jones, (supra) . Appellant argues that because the check was payable to Louis and Charlotte the bank was aware that Louis' authority was limited, and, therefore, Dauphin Deposit converted the settlement check by depositing it on the endorsement of Louis only. Neither statute nor case law is dispositive of whether a "forged instrument" includes an instrument which is payable to two persons and the two persons are not alternative payees, i.e., a check payable to A and B, and only one payee endorses the check which is accepted by a bank. *fn7 However, assuming arguendo that a depository bank is liable for conversion if it deposits such an instrument, we cannot find that a person in appellant's position is permitted to sue the bank for conversion.
It is clear that appellant was not a holder of the settlement check. *fn8 The check was made payable to Louis and Charlotte, in their capacity as appellant's natural parents and guardians. Appellant's endorsement was not required to have the check deposited. Also, she could not have presented the check for payment. Simply put, the settlement check was not her property. Stone v. Webster Engineering Corp. v. First National Bank & Trust Co., 345 Mass. 1, 184 N.E.2d 358 (Mass. 1962) (drawer of an instrument cannot sue for conversion because he was not a "holder"). *fn9 Accordingly, we cannot find that appellant has a cause of action for conversion against Dauphin Deposit. *fn10
Appellant's next argument is that Dauphin Deposit is liable under Section 6372 of the UFA and that the UFA's good faith defense under Section 6361 does not shield the bank from liability. We agree.
Section 6372 provides, in relevant part, that:
If any negotiable instrument, payable or indorsed to a fiduciary as such, is indorsed by the fiduciary,...the indorsee is not bound to inquire whether the fiduciary is committing a breach of his obligation as a fiduciary in indorsing the instrument...and is not chargeable with notice that the fiduciary is committing a breach of his obligation as a fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith....
7 P.S. § 6372.
Here, there is no dispute that Louis was a fiduciary within the meaning of the UFA, *fn11 or that the check was endorsed solely by Louis. However, there is no evidence, nor indeed any contention, that Dauphin Deposit had actual knowledge that Louis was committing a breach of his obligation as a fiduciary when he endorsed the check and deposited it into his and Charlotte's joint checking account. The only question, therefore, is whether there were facts known to Dauphin Deposit that its action in the matter amounted to bad faith. "A thing is done in 'bad faith,' within the meaning of the act, only when it is done dishonestly and not merely negligently." Davis v. Pennsylvania Co. For Insurances on Lives, Etc., 337 Pa. 456, 12 A.2d 66, 68 (1940). Section 6361 shields banks from liability when they act honestly in fiduciary relationships, that is, when they act in "good faith." *fn12 Robinson Protective Alarm Co. v. Bolger & Picker, 512 Pa. 116, 516 A.2d 299 (1986).
In this case, the check specifically called to the bank's attention the fiduciary nature of the depositor and the fact that both Charlotte's and Louis' endorsement was required to enforce the check. However, the bank permitted the check to be deposited solely upon Louis' signature without inquiry as to Charlotte's consent. "The UFA does not permit a bank to ignore an irregularity where it is of a nature to place one on notice of improper conduct by the fiduciary. In such a case, the good faith test would not be met." Robinson Protective Alarm Co., 516 A.2d at 303. We find that the failure to secure both Charlotte's and Louis' endorsement on the check, and the bank's failure to inquire as to the absence of Charlotte's endorsement, where it was clear that both endorsements were necessary, was conduct that would raise such a suspicion. Moreover, we note that Section 6361 "relieves banks of liability only when the fiduciary has the power to endorse." Levy, 487 A.2d at 861. The "power to endorse" in this case required both Charlotte's and Louis' signature. Also, Charlotte and Louis, together, were the payee. "If a check is made payable to the order of a person named therein, the absolute duty of a bank honoring the check is to pay only to that payee or according to his order, and no amount of care to avoid error will protect it from liability if it pays to a wrong person." Land Title Bank & Trust Co. v. Cheltenham National Bank, 362 Pa. 300, 66 A.2d 768, 770 (1949).
The Uniform Fiduciaries Act was designed to facilitate banking transactions by relieving the depository of the responsibility of seeing that an authorized fiduciary uses entrusted funds for proper purposes. The Act accomplishes this objective by shielding a depository from liability where it applies funds consistently with the [required] endorsement on a negotiable instrument in reliance upon a fiduciary's authority to so endorse the instrument, without further inquiry into the fiduciary's actual authority to so apply the entrusted funds.
Lehigh Presbytery v. Merchants Bancorp, Inc., 410 Pa. Super. 557, 600 A.2d 593, 595 (1991) (citation omitted). The UFA is, therefore, in harmony with the clear mandate of the UCC that where an instrument is payable to two or more persons, not in the alternative, both parties must endorse it in order to negotiate the instrument. 13 Pa.C.S.A. § 3116(2). The UFA was not designed to relieve a depository from liability where, as here, the bank followed the instructions of a fiduciary which conflicted with the clear mandate of the UCC. See Lehigh Presbytery, (supra) (where depository bank credited checks to account of depositor's employee despite a rubber-stamp restrictive endorsement, UFA did not relieve bank of liability).
We have reviewed the cases cited by Dauphin Deposit where the bank was relieved of liability by the UFA. See Robinson Protective Alarm Co., (supra) ; Davis, (supra) ; Downey v. Duquesne City Bank, 146 Pa. Super. 289, 22 A.2d 124 (1941). In these cases, the banks were relieved of liability by the UFA because the banks relied upon the authority of the fiduciaries when they applied funds consistently with the named payees' endorsements on the instruments. *fn13 Such was not the case here. Accordingly, we find that Dauphin Deposit was not shielded from liability under the UFA.
For all of the foregoing reasons, we find that the lower court erred in entering summary judgment in favor of Dauphin Deposit and that summary judgment should have been entered in favor of appellant. Accordingly, we remand this case and direct the lower court to enter summary judgment in favor of appellant. Reversed; remanded; jurisdiction relinquished.