                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


10-26-1995

Univ Premium v York Bank
Precedential or Non-Precedential:

Docket 94-2047




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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT
                          ____________

                          Nos. 94-2047/2048
                             ____________

           UNIVERSAL PREMIUM ACCEPTANCE CORPORATION,
                                       Appellant
                               v.
                 THE YORK BANK & TRUST COMPANY,
                                        Appellee
                          ____________

          APPEAL FROM THE UNITED STATES DISTRICT COURT
            FOR THE EASTERN DISTRICT OF PENNSYLVANIA
           (D.C. Civ. Nos. 94-cv-02138, 94-cv-05735)
                          ____________

                      Argued June 29, 1995

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

                    Filed October 26, l995
                           ____________

Jane C. Silver, Esquire (ARGUED)
Richard P. McElroy, Esquire
BLANK, ROME, COMISKY & McCAULEY
1200 Four Penn Center Plaza
Philadelphia, PA 19103

Attorneys for Appellant

Ronald P. Schiller, Esquire (ARGUED)
Piper & Marbury
Two Logan Square, Suite 3400
18th & Arch Streets
Philadelphia, PA 19103


___________________________________

* The Honorable William D. Hutchinson participated in the oral
argument and decision in this case, but died before he could join
or concur in this Opinion.




                                 1
C. Lamar Garren, Esquire
Piper & Marbury
Charles Center South
36 South Charles Street
Baltimore, Maryland 21201

Attorneys for Appellee


                            ____________

                     OPINION OF THE COURT
                            ____________



WEIS, Circuit Judge.
          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 indorsements 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 non-negotiable. Moreover,

we hold that the indorsements 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



                                 2
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."




                                 3
          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 indorsement 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 indorsement 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.




                                 4
          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. § 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 indorsement 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

negligence claim should not have been resolved in York's favor.

                               I.

          One of the requirements for negotiability under 13 Pa.

Cons. Stat. Ann. § 3104(a)(3) is that an instrument must be




                               5
"payable to order or to bearer."1    How the parties regard or

characterize the instrument is immaterial.    "The negotiability of

an instrument cannot be established by waiver. . . . [W]here the

statute requires certain elements, it is not for private persons

to dispense with or waive them."    5A Ronald A. Anderson, Uniform

Commercial Code § 3-104:13 (3d ed. 1994).    See also Anderson

§ 3-112:1 (official code comment).    The drafts here did not meet

the terms of § 3104.

           In some circumstances instruments that are not payable

"to order" or "to bearer" may nevertheless be within the scope of

Article 3 of the Code except that there can be no holder in due

course of such an item.   13 Pa. Cons. Stat. Ann. § 3805 provides

that Article 3 "applies to any instrument whose terms do not

preclude transfer and which is otherwise negotiable within this

division but which is not payable to order or to bearer

. . . ."

           The commentary to section 3805 cites as a typical

example an item that reads "Pay John Doe" without the words "to

the order of."   See, e.g., Key Bank of Southeastern New York,

N.A. v. Strober Bros., Inc., 523 N.Y.S.2d 855 (N.Y. App. Div.

1988).   Such instruments have been termed "technically non-

negotiable" because they meet all requirements as to form except




1
 Because the incidents in this case took place before the
effective date of the revised edition of the Uniform Commercial
Code presently in effect in Pennsylvania, the older version,
rather than the current one, is applicable here. See Menichini
v. Grant, 995 F.2d 1224, 1229 n.5 (3d Cir. 1993).


                                6
they are not payable to order or bearer.2    See Henry J. Bailey &

Richard B. Hagedorn, Brady on Bank Checks ¶ 2.17 (7th ed. 1992).

            The language on the drafts, "PAY AND DEPOSIT ONLY TO

THE CREDIT OF:   Great American Insurance Company," goes beyond a

mere technicality.    Not only did these drafts lack "to the order

of," they contained specific instructions -- "deposit only to the

credit of."    Implicit in such language is a warning of non-

negotiability.   See C.R. v. The Travelers, 626 A.2d 588 (Pa.

Super. Ct. 1993) (presuming that proper restriction on face of

draft would have prevented negotiation).

            The drafts demonstrate that they were not meant to be

freely transferable, but were to be "deposited" and "only" to the

credit of the insurance company.     "Deposited" implies that the

instruments were to have a limited use and a short transactional

life.   "Only" can be understood to modify "deposited" or the

payee, but in either instance, the language is quite restrictive.

The terms on the face of the items were meant to preclude

transfer.   See Resorts Int'l Hotel, Inc. v. Salomone, 429 A.2d

1078 (N.J. Super. Ct. App. Div. 1981) (counter checks); Central
Bank v. Kaipern Santa Clara Fed. Credit Union, 191 Cal. App. 3d

186 (Cal. Ct. App. 1987) (money orders).     We hold, therefore,


2
 Section 3805 was deleted from the 1990 revision of the Code and
a check payable "To John Doe" without the word "order" is now
treated as a negotiable instrument and the holder in due course
provisions do apply. See 13 Pa. Cons. Stat. Ann. § 3104 & cmt. 2
(Supp. 1995) (effective July 9, 1993). The revision to the Code
intends that these instruments, which look like and are intended
to be checks, should be treated as such. We note that the drafts
here are not checks and that the broad language of section 3805
has been deleted in the 1990 revision.

                                 7
that the drafts were not "otherwise negotiable" within the scope

of section 3805.

                               II.

          As an alternative method of finding negotiability, York

argues that even if not originally negotiable, the indorsements

in blank by "Great American" converted the drafts into "bearer,"

negotiable, instruments.   We reject that premise.

          13 Pa. Cons. Stat. Ann. § 3204(b) provides that a blank

indorsement on a negotiable instrument transforms it into a

bearer instrument, but that section has no application to a non-

negotiable item.   An item which is non-negotiable in its

inception remains so.   Mere indorsement of such a draft does not

change its character.   As one court remarked, to sanction any

other result would enable an indorser to change the rights and

liabilities of the prior parties in a most material fashion.

Wettlaufer v. Baxter, 125 S.W. 741 (Ky. 1910).    See also Foley v.

Hardy, 253 Pac. 238 (Kan. 1927).

          These cases are pre-U.C.C., but have retained their

authoritative status.   See Partney v. Reed, 889 S.W.2d 896 (Mo.

Ct. App. 1994) (negotiability determined from four corners of

instrument at time it was issued without reference to extrinsic

facts).



          One commentator has remarked:

          "In order to understand the UCC definitions

          in the area of negotiable instruments, you

          must first know the law of negotiable

                                8
          instruments.   In other words, the Code is not

          a code that tells a student or a banker or a

          lawyer what the law is.       It is rather a

          compilation of notes that may serve to remind

          you of law you had better know before you

          read the UCC."

David Mellinkoff, The Language of the Uniform Commercial Code, 77

Yale L. J. 185, 192-93 (1967).    For views on negotiability as

expressed in later treatises, see Anderson § 3-202:56 at 503 ("An

indorsement has no effect upon negotiability, without regard to

the nature or terminology of the indorsement"); Brady on Bank

Checks § 2.1 ("Negotiability must be determined solely by what is

written on the face of the instrument").

          We conclude, therefore, that the drafts did not become

bearer or negotiable instruments by virtue of the forged blank

indorsements of the Great American Insurance Company.

                                 III.

          The general rule is a bank that pays on a forged

indorsement is liable to the drawer.       However, 13 Pa. Cons. Stat.

Ann. § 3405(a) (the fictitious payee exception) provides that an

indorsement by any person in the name of the designated payee is

effective if the drawer intends the payee to have no interest in

the instrument.   That provision is intended to protect banks that

cash instruments with such forged indorsements and is based on

the assumption that as between the bank and the drawer, the

latter is in a better position to prevent the loss.



                                  9
          We have held that section 3405 should be interpreted

broadly enough to carry out its purpose.   New Amsterdam Casualty

Co. v. First Pennsylvania Banking & Trust Co., 451 F.2d 892 (3d

Cir. 1971).   But, in McAdam v. Dean Witter Reynolds, Inc., 896

F.2d 750, 762 (3d Cir. 1990), we recognized that because this

provision "is a banker's exception which dramatically departs

from the general UCC rule and narrows the liability of a bank,

courts should be cautious in expanding the section's scope beyond

its explicit rationale."   Commentators have also characterized

section 3405 as a banker's provision that should be strictly

construed so as not to give more protection than is stated.     See

James J. White & Robert S. Summers, Uniform Commercial Code § 16-

8 (2d ed. 1980).

          13 Pa. Cons. Stat. Ann. § 3405 is not applicable here

because it speaks only to negotiable instruments.   Although

Article 3 of the Uniform Commercial Code is sometimes applied by

analogy to non-negotiable instruments, in that situation as well,

the same cautious approach to section 3405 should be used.

          The scenario here is quite different from a scheme in

which a faithless employee obtains a company check payable to a

non-existent person and then cashes it.    In such situations there

is some merit in relieving the bank from liability and leaving

the employer to bear the loss.   However, the direction on the

drafts here to "pay and deposit only to the credit of Great

American" was explicit.

          The action of York Bank in permitting the deposit of

the drafts in the Small Businessman's Service Corporation account

                                 10
instead of Great American's account created quite a different

situation than cashing the check of a fictitious payee.      The face

of the drafts raised a red flag and was enough to put York on

notice that something was amiss in the Talbot group's dealings

with it.    We are not persuaded that the fictitious payee

exception should be carried over to the non-negotiable

instruments in this case.

                                  IV.

             Our conclusions that the drafts are non-negotiable and

that the fictitious payee exemption is not applicable undermine

the basic premises upon which the district court based its

decision.     Consequently, the case must be remanded to the

district court for further proceedings during which the parties

may develop their contentions consistent with appropriate legal

principles.     We expect that on remand some of the confusion that

developed because of the alternative and, at some points,

inconsistent theories advanced by the parties may be dispelled.

The district court is entitled to a more focused presentation of

the issues than that which occurred.

             Our holding that these drafts were not negotiable means

that some of the parties' arguments to this Court and the

district court have become irrelevant.     We need not discuss them

further, but in the interests of simplification, we will dispose

of several issues summarily so that they need not be considered

on remand:

             (1)   The mere fact that Universal entrusted Talbot with

the forms is not a proper basis for imputation of agency between


                                   11
him and Universal.    The premium financing agreement specifically

disclaims such a relationship and there is no evidence of

apparent authority in this record.

           (2)   Universal is incorrect in characterizing the

direction "pay and deposit only" on the face of the drafts as an

"indorsement."

           (3)   The parties' discussion about ratification of the

forged indorsements is not pertinent at this point.    Pennsylvania

does not permit ratification of a forgery on a non-negotiable

item.   See Funds for Business Growth, Inc. v. Woodland Marble &

Tile Co., 278 A.2d 922, 925 (Pa. 1971).

                                  V.

           The test for negotiability of drafts and checks is the

same, and therefore, to this point there has been no need to

discuss the differences between the two types of instruments.

On remand, however, the distinctions may be important in

resolving the issues remaining.    A brief discussion on the nature

of drafts therefore may be helpful.

           The parties have correctly designated the items in

question as drafts, but at times have treated them as checks.       A

check may be described in general terms as an order to a bank by

a person having an account there to pay on demand a specified

amount of money to a designated payee.    Although all checks are

drafts, not all drafts are checks.     Drafts may take other forms

as well.   For example, if the order to pay is directed to a third

party other than a bank or to a bank where the drawer does not

have an account, the item is a draft, but not a check.

                                  12
            Drafts are sometimes used in sales transactions when

the seller initiates the payment process rather than having the

buyer issue a check.    In what is to some extent a reversal of

roles, the seller, as drawer, writes a draft on the buyer as

drawee.    Often the draft will provide that it is "payable

through" a specified bank in which the buyer has an account.

            That bank then pays the seller.

            Drafts can also be used to implement a three-party

transaction involving a buyer, seller and financing entity.      As

an illustration, a buyer of an automobile signs a draft drawn on

a finance company but payable to an automobile dealer through a

specified bank.    The dealer deposits the draft in its own bank,

which sends it to the finance company's bank.    After it approves

the transaction, the finance company directs its bank to pay the

draft to the automobile dealer.    Thereafter, the buyer makes

periodic payments to the finance company.

            In other instances, the arrangements between the buyer-

drawee and his bank may provide that the bank is to receive bills

of lading or other documentation as a pre-condition to honoring

the drafts.    These are called "documentary drafts."

            Casualty insurance companies frequently use drafts for

the payment of claims.    Adjusters sign the drafts payable through

a named bank and deliver them to the claimant.   Copies of the

draft and executed releases are sent to the home office, which

can review those documents before authorizing its bank to pay the

draft.    This procedure gives the home office some control over

the payment of claims.    It also enables an insurance company to


                                  13
place funds with the bank only when needed to honor drafts,

rather than having the money remain idle in a checking account.

           Another use of drafts is the withdrawal of funds from

savings banks.    That practice is described in Pennsylvania

Banker's Assoc. v. Secretary of Banking, 392 A.2d 1319 (Pa.

1978).   For a general discussion of various types of drafts, see

Barkley Clark & Barbara Clark, The Law of Bank Deposits,

Collections and Credit Cards ¶¶ 1.05, 13.01 (Rev. ed. 1995);

Brady on Bank Checks ¶ 1.13 (7th ed. 1992); Daniel E. Murray,

Drafts "Payable Through" Banks, 77 Com. L.J. 389 (1972).       Steven

B. Dow, Determining Bank Status in Article Four Check

Collections, 49 U. Pitt. L. Rev. 43 (1987).

          Universal uses drafts as a means of providing financing

for policyholders to pay premiums due their insurance carriers.

The arrangements are made through the insurance agents who sell

the policies.    The customary procedure is for the insurance

agent, acting on behalf of the policyholder, to sign the draft

form supplied by Universal, fill in the amount desired and insert

the name of the insurance company issuing the policy.    A copy of

the draft, together with a Premium Finance Agreement executed by

the policy holder, is sent to Universal.

          The original draft is delivered directly to the

insurance company, which deposits it in its bank.    The original

draft is then transmitted to Universal's bank, Landmark.       On

receipt, Landmark advises Universal, which is then required to

instruct the bank within twenty-four or forty-eight hours whether

to pay the draft.    In that interim, Universal calls the insurance

                                 14
company to verify that a policy had been issued and that the

financing transaction is apparently in good order.

          With this understanding of the business practices

followed in this case, we note briefly the various claims

asserted by Universal.     Preliminarily, we point out that Talbot,

as agent for the policyholder, was the drawer of the drafts.

Universal was the drawee, not the "maker" as it was labeled by

York employees.   Great American was the payee.   Landmark's status

will be discussed infra.

                                 VI.

          In addition to, or in the alternative to Article 3,

Universal based its claims on Article 4 of the Commercial Code,

governing bank deposits and collections.     Article 4's scope is

not limited to negotiable instruments, but includes "items" that

are defined as "any instrument for the payment of money even

though it is not negotiable but does not include money."       13 Pa.

Cons. Stat. Ann. § 4104.    The drafts here come within that

definition.

          Universal relies on 13 Pa. Cons. Stat. Ann. § 4207(a),

which provides for warranties that are applicable upon payment or

acceptance of an item.     That section provides in pertinent part

that "[e]ach . . . collecting bank who obtains payment or

acceptance of an item and each prior . . . collecting bank

warrants to the payor bank or other payor who in good faith pays

or accepts the item that:     (1) he has good title to the item or

is authorized to obtain payment or acceptance on behalf of one

who has a good title."     See Continental Bank & Trust Co. v.


                                  15
Peoples Nat'l Bank & Trust Co. of Norristown, 274 A.2d 549 (Pa.

Super. Ct. 1970) (per curiam) (Hoffman, J., concurring)

(explaining operation of section 4207).

          The liabilities for breach of warranty by banks in the

collection process is affected by their status.     As we view the

record before us, York Bank is the depository bank because it was

"the first bank to which an item is transferred for collection."

13 Pa. Cons.   Stat. Ann. § 4105.    It probably is also a

collecting bank.

          Landmark may be a collecting bank.     13 Pa. Cons. Stat.

Ann. § 3120 provides that "[a]n instrument which states that it

is `payable through' a bank or the like designates that bank as a

collecting bank to make presentment but does not of itself

authorize the bank to pay the instrument."     See also 13 Pa. Cons.

Stat. Ann. § 4105 cmt. 3.   ("Items are sometimes drawn or

accepted `payable through' a particular bank. . . .     [T]he

`payable through' bank will be a collecting (and often a

presenting) bank; it is not a `payor bank.'"

          York, however, contends that Landmark was a payor bank,

and as such had more responsibilities than a collecting bank.       It

appears that determination of Landmark's status will be a

significant factor in the resolution of Universal's claims under

Article 4 and may require further development on remand.

          Landmark's name, appearing as it does in the lower

right-hand corner of the draft, creates an ambiguity.    Although

that location usually identifies a party as the drawer or maker,

see Mitchultka v. Grapin, 340 A.2d 576 (Pa. Super. Ct. 1975), it

                                16
is clear enough that Landmark was not intended to be such.      It

may be that the uncertainty as to Landmark's status came about

because the draft form was prepared by Universal and not the

bank.

          From our review of the record, including a scrutiny of

the face of the items, we conclude that they are, to a

substantial degree, akin to "payable through" drafts.     Although

on their face the drafts do not contain the words "payable

through," that lack is not determinative here for two reasons.

First, the drafts are not negotiable and, thus, not within the

term "instrument" as used in section 3120.3   Second, at this

juncture, the evidence on the practice followed in issuing and

paying the drafts corresponds to the "payable through" procedure.

          The determination of whether a draft is of the "payable

through" variety can be important in determining whether a bank

that honors the item is a "payor" or a "collecting" bank.

Although some courts have concluded that "payable through" status

is determined by examining the face of the draft, they have

nonetheless considered evidence on the function that the bank

actually performed.   See Berman v. United States Nat'l Bank, 249

N.W.2d 187 (Nebr. 1976); Engine Parts, Inc. v. Citizens Bank of

Clovis, 582 P.2d 809 (N.M. 1978).    The net result is that

extrinsic evidence has been used to determine whether a

relationship similar to a "payable through" arrangement existed

3
 Article 3 is not always consistent in its use of the word
"instrument". See Mellinkoff, 77 Yale L.J. at 194-95. It
appears, however, that section 3120 uses the term to mean only
negotiable items.


                                17
in fixing a bank's liability.   See Branch Banking & Trust Co. v.

Bank of Washington, 120 S.E.2d 830 (N. C. 1961); Phelan v.

University Nat'l Bank, 229 N.E.2d 374 (Ill. App. Ct. 1967);

Wilhelm Foods, Inc. v. National Bank, 382 F. Supp. 605 (S.D.N.Y.

1974) (distinguished by Horney v. Covington Cty. Bank, 716 F.2d

335 (5th Cir. 1983)).

          The argument against the use of extrinsic evidence

rests on its possible adverse impact on negotiability.    Whatever

may be the merits of restricting review to the face of the drafts

to determine the status of the affected parties, that limitation

has less weight here because the items are not negotiable.    See

Dow, 49 U. Pitt. L. Rev. at 63, 66-81.   Moreover, there is some

significance to the fact that before a draft would be honored by

Landmark, it had to be accepted by Universal.

          On remand, therefore, in determining the status of the

parties to the drafts under Article 4, the district court will

not be restricted to the face of the items.   Instead, it will be

free to consider whatever further evidence it deems necessary.

                                VII.

          In addition to its breach of warranty count, Universal

insists that York is liable in conversion.    We note that this

claim must be resolved on remand and observe that D & G Equipment
Co. v. First Nat'l Bank of Greencastle, 764 F.2d 950 (3d Cir.

1985), discussed a claim for conversion of checks.    We commented

that under 13 Pa. Cons. Stat. Ann. § 3419, an instrument is

converted when it is paid on a forged indorsement.



                                18
          However, it appears that common law conversion in

Pennsylvania may be somewhat broader in scope.   Id. at 957 n.4.

In Cenna v. United States, 402 F.2d 168, 170 (3d Cir. 1968), we

said that under Pennsylvania law, conversion is the "deprivation

of another's right of property, or use or possession of a

chattel, or other interference therewith, without the owner's

consent and without legal justification."

                               VIII.

          Finally, Universal seeks a recovery based on

negligence.   As York points out, when 13 Pa. Cons. Stat. Ann.

§ 3405 applies, some courts have held that the drafters of Code

intended to displace common law negligence actions.   See Law of

Bank Deposits ¶ 8.04[8][c]; Brady on Bank Checks, § 31.17

(collecting cases).

          In the absence of a holding by an appellate court, we

may assume, without deciding, that Pennsylvania would adopt that

viewpoint.4   However, since we have concluded that section 3405

does not apply here, Universal is free to establish, if it can,

a case of negligence against York.

          In that connection, York's action in depositing drafts

made payable to one company in the account of another should be

subject to scrutiny.   See, e.g., Commonwealth Fed. Savings & Loan
v. First National Bank of New Jersey, 513 F. Supp. 296, 304 (E.D.


4
 In the 1990 revision, the fictitious payee provision formerly in
§ 3405 was renumbered as § 3404 and provided for imposition of
comparative negligence liability. "In short, this is one area
where the drafters of the 1990 UCC completely reversed a rule of
the 1962 U.C.C." Brady on Bank Checks ¶ 31.18 at 31-46.

                                19
Pa. 1979) ("established banking practice mandates that any check

payable to a designated business entity can be accepted for

deposit only into the account of such named payee").   Further

development of this claim must await the remand.

          Accordingly, the judgment of the district court will be

reversed and the case will be remanded for further proceedings

consistent with this Opinion.




                                20
