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New Amsterdam Casualty Co. v. First Pennsylvania Banking and Trust Co.

decided as amended december 15 1971.: November 10, 1971.


Staley, Adams, and Rosenn, Circuit Judges.

Author: Adams


ADAMS, Circuit Judge.

The question here is whether an employee supplied to his employer the names of payees within the meaning of Section 3-405(1) (c) of the Uniform Commercial Code, Tit. 12A Pa.Stat.Ann. § 3-405(1) (c), intending the payees to have no interest in the proceeds of the checks. If Emanuel Wexler, an employee of E. W. Smith Co. [Smith], did so, his forged indorsements on the checks are effective as between Smith and The First Pennsylvania Banking and Trust Co. [Bank] which charged Smith's checking account with the sum of the checks.

Preliminarily, several points must be dealt with in the interest of clarity. The plaintiff in the action before us is Smith's insurer. After forged indorsements by its employee, Wexler, were discovered by Smith, New Amsterdam Casualty Co., pursuant to the employee dishonesty provisions of its fidelity bond, paid Smith's losses. All of Wexler's peculations relate to his employment at Smith and since Smith has assigned its rights to New Amsterdam, New Amsterdam will be referred to as Smith for the purposes of this opinion.

Jurisdiction in this case is based on diversity, 28 U.S.C. § 1332, thus, we are required to apply Pennsylvania law and, in effect, to sit as an appellate court of that state. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938). Because the Supreme Court of Pennsylvania has never passed on the precise point of law sub judice, this opinion expresses our view on the way that Court would decide the question if presented there. Cf. Guaranty Trust Co. v. York, 326 U.S. 99, 65 S. Ct. 1464, 89 L. Ed. 2079 (1945); Erie R. Co. v. Tompkins, supra.

The case came on for a jury trial September 16, 1970. At the close of the evidence, both the Bank and Smith moved for directed verdicts under Rule 50, Fed.R.Civ.P. The District Court granted the Bank's motion, denied Smith's motion, and entered judgment in the Bank's favor.*fn1

The essential facts adduced at the trial are not in dispute. Rather, the controversy centers on the legal conclusion to be drawn from the evidentiary premises.

Wexler, from 1959 until he was discharged on January 14, 1965, was employed by Smith as a registered representative. During a period lasting almost two years, Wexler improperly obtained some 47 checks made out to customers of Smith with a total value of $88,213.82, forged the customers' endorsements on the reverse side of the checks, cashed the checks at check cashing agencies and other banks and then converted the proceeds to his own use.*fn2

In order to comprehend Wexler's machinations, it is necessary to examine the normal course of customer relations at Smith, as evidenced by the record. For purposes of this opinion we may assume that Smith's customers all had either cash accounts or margin accounts. A customer having a cash account would effectuate a sale of his shares by first calling his registered representative in order to authorize the sale. The broker would then forward the sell order in writing to one of Smith's traders who completed the transaction on the appropriate exchange. The order form contained the name of the customer, the name and type of security to be sold, the number of shares and price, and the disposition of the funds.*fn3 Following the sale, a ticket was made up in the trading room containing essentially the same information as the broker's sell order. A confirmation was later prepared showing the proceeds of the transaction less deductions for commission and taxes. One copy of this confirmation was sent to the customer, and one to Smith's cashier's cage where a credit would be entered on the client's account, or, if indicated, a check prepared to the client's order on the fourth trading day following the sale. The check would, normally, be forwarded to the customer by mail.

Wexler turned this course of business into a money-making venture. Aware of the quantity and type of stock which his customers kept on account at Smith, Wexler would, without authorization from a customer, fill out a sell order with appropriate*fn4 and verifiable information. The following day, Wexler would stop by the desk where confirmations were typed out, and tell the secretary that since he, Wexler, was going to see the customer he would take the confirmation slip and give it to the customer personally. Wexler would not transmit the slip and the customer, of course, never received the confirmation. Then, on the fourth trading day following the sale, when he knew the check would be prepared pursuant to the course of events which he had initiated, Wexler would approach Smith's cashier with the same story he had given the person preparing confirmations, adding, however, that the customer had authorized Wexler's receipt of the check. After receiving the check, Wexler would forge on the reverse side of it the indorsement of the payee and either deposit the check in one of Wexler's accounts at banks other than First Pennsylvania, or cash the checks with one of the third-party defendant checkcashing agencies. In no case did the checks go directly from Wexler to the First Pennsylvania.

A slightly different method was employed by Wexler to extract money from the margin accounts of his clients. These accounts represent stock which had been placed with the brokerage house as collateral for a loan. The maximum permissible amount of the loan is a percentage, determined by the Federal Reserve Board, of the market value of the stock. It is possible for such accounts to have a "credit" in favor of the customer. For example, if the margin rate is 40%, and Mr. X places in a margin account 100 shares of General Motors with a present market value of $70 per share, he could qualify for a loan from Smith of $2,800 (.40 x 100 x $70). If at some time later the value of General Motors stock had risen to $100 per share, Mr. X would qualify for an additional loan of $1,200 (.40 x 100 x [$100-$70]). In such fashion, a "credit" could be generated. Following Smith's normal procedure, if Mr. X now desires a check for the $1,200, he either calls his representative at Smith who conveys the request to the cashier, or Mr. X may approach the cashier directly for the funds. In either case, the cashier, after verifying the existence of an equity, would prepare the check and hand it personally to Mr. X or mail it to him.

In order to accomplish the fraud with the margin accounts, Wexler first had to analyze his customers' accounts to determine if a credit existed, and if so, in what amount. He would then approach the cashier and request the specific amount of the credit available. Again, under the guise of authority to make personal delivery, Wexler would obtain the check, place an improper indorsement on the reverse side, cash it, and convert the funds to his personal use.

During the course of his misdeeds, Wexler was forced to overcome many stumbling blocks, all of which point to the nature and depth of the improper appropriations present here. Beginning in early 1964, the secretaries who typed the confirmations refused to give them directly to Wexler. He was then required to intercept them from Smith's outgoing mail. Because Smith sent monthly statements to margin-account customers, Wexler prepared false monthly statements at home and substituted them for the legitimate statements prepared by Smith. A number of Smith's customers began to question Wexler as to the validity of the statements. Some were assuaged when informed that the discrepancies were nothing more than bookkeeping errors. Other customers, ...

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