Teri Zemencik was an employee at IGS Industries for 22 years until her termination due to embezzling funds. At the time of her termination, Zemencik was the payroll supervisor in IGS’s accounting department and had embezzled a total of \($497,143.17\) from IGS. Zemencik would manipulate the accounting system to page 659 create checks payable to generic and ambiguous names such as “Credit Account,” “DCS,” and “Services.” These checks payable to vague names were used by Zemencik to pay her personal debts, including \($360,915.32\) paid to Discover Financial Services, Inc.
On March 8, 2017, IGS filed a complaint against Discover, asserting that Discover failed to exercise ordinary care under the Pennsylvania Uniform Commercial Code. In the complaint, IGS alleged that no one from Discover had verfied Zemencik was authorized to pay her personal credit card accounts with checks drawn from IGS’s business accounts, which led to IGS being defrauded.
CHIEF MAGISTRATE JUDGE KELLY IGS brings claims against Discover at Count I of the Complaint for failing to exercise ordinary care under Sections 3404, 3405 and 3406 of the UCC. Discover asks that all three claims be dismissed as none of these provisions apply to the facts of this case. The Court agrees.
13 Pa. C. S. § 3404 (d). Subsection 3404(b),… which is presently at issue, provides:

(b) Fictitious payee.—If a person whose intent determines to whom an instrument is payable (section 3110

(a) …) does not intend the person identified as payee to have any interest in the instrument or the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement:
(1) Any person in possession of the instrument is its holder.
(2) An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
IGS acknowledges that subsection (b)(1) is inapplicable here, but contends that Discover may be held liable under subsection (b)(2). Section 3404(b)(2), however, “covers cases in which an instrument is payable to a fictitious or nonexisting person and to cases in which the payee is a real person but the drawer or maker does not intend the payee to have any interest in the instrument,” neither of which is at issue in this case. Discover is clearly not a fictitious or nonexisting entity and the maker of the instruments at issue here — Zemencik — clearly intended Discover to have an interest in the instruments.
IGS nevertheless argues that it has stated a claim under Section 3404(b)(2) because some of the checks at issue were made to fictitious persons, including “BC,” “CCC,” “OS.” In response, Discover argues that Section 3110(a), which is incorporated into Section 3404(b), dictates that it is the intent of the issuer that determines to whom a check is payable, even if the payee is misidentified, and that because Zemencik intended for the checks to be payable to Discover, Section 3404

(b) does not apply. Indeed, Section 3110

(a) provides that:

(a) Intent of issuer.—The person to whom an instrument is initially payable is determined by the intent of the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument. The instrument is payable to the person intended by the signer even if that person is identified in the instrument by a name or other identification that is not that of the intended person.
Thus, under Section 3110(a), even if the payee is misidentified, the instrument is payable to the person intended by the issuer and the intended payee may endorse the check using either the “misdescribed” name or the payee’s correct name. Because it is clear in this case that Zemencik intended for the checks to be payable to Discover, the fact that Zemencik identified the payee as something other than “Discover” is of no moment. Section 3404(b)(2) therefore is inapplicable to the circumstances of this case and that claim is properly dismissed.
The liability provision of Section 3405 provides that:

(b) Rights and liabilities.—For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
Section 3405 therefore applies where an employee makes a fraudulent indorsement of an instrument. Fraudulent indorsement is defined as covering the following situations:
(1) In the case of an instrument payable to the employer, a forged indorsement purporting to be that of the employer.
(2) In the case of an instrument with respect to which the employer is the issuer, a forged indorsement purporting to be that of the person identified as payee.
IGS concedes that subsection (a)(1) is inapplicable here but contends that subsection (a)(2) is somehow implicated because “the checks were made payable to identified payees including ‘Financial Corp.’, ‘DFS Inc.’, and others, but were indorsed by Discover purporting to be the identified payee.” It is unclear to the Court, however, how an indorsement by Discover falls under subsection (a)(2) which applies to fraudulent indorsements made by an employee. IGS has not alleged that Zemencik fraudulently indorsed the checks at issue and thus Section 3405, which after all is entitled “Employer’s responsibility for fraudulent indorsement by employee,” does not apply. As such, IGS’s claim brought pursuant to Section 3405 at Count I is properly dismissed as well.
Section 3406, which is entitled “Negligence contributing to forged signature or alteration of instrument,” is equally inapplicable. It provides:

(a) Failure to exercise ordinary care.—A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.

(b) Allocation of loss.—Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.
Thus, as IGS acknowledges, Section 3406 adopts a concept of comparative negligence and provides for the allocation of loss where an instrument has been altered and/or signature has been forged and the loss stemming from the alteration and/or forgery can be attributed to the failure to exercise ordinary care by both the drawer and the drawee of the instrument. Although it can be inferred from the allegations in the Complaint that IGS itself failed to exercise ordinary care in its supervision of Zemencik, it has not alleged any facts regarding a forged signature or the alteration of an issued instrument. Section 3406 therefore does not apply. IGS therefore has failed to state a claim under Section 3404, 3405 or 3406 of the UCC and Count I should be dismissed in its entirety.
Motion to dismiss is granted.
CRITICAL THINKING:
If IGS in its complaint presented evidence that Zemencik had manipulated the accounting system to create unauthorized checks to pay her debts, would that change the judge’s ruling concerning the claims under Section 3406? Why or why not?
ETHICAL DECISION MAKING:
What stakeholders do you think lawmakers had in mind when it drafted Section 3110

(a) of the UCC regarding the issuer’s intent to whom the instrument is paid?
Why do you think those stakeholders were protected?