The basic rule
regarding liability on an instrument is expressed in Section 3-401: if a person
does not sign the instrument, he or she is not liable on the instrument. In addition to this basic rule, Section
3-401(a) also provides the first exception to the general rule by providing
that a party can be liable on an instrument by an agent’s signature. It was noted in our discussion of Section
3-402 that the principal in such a situation can be held liable on an
instrument even if not specifically named by the agent, assuming that the
authority did in fact exist. Another
exception to the general rule was discussed in connection with Section
3-406. In that situation, a person whose
negligence ‘substantially contributed’ to the forgery will be precluded from
asserting the forgery against a ‘person who, in good faith, pays the instrument
or takes it for value or for collection’.
Hence, liability can be established without the signature having been
made.
This
post will discuss a different scenario pertaining to signatures which is activated
by the imposter and fictitious payee rules of Section 3-404. Section 3-404(a) states as follows:
If an
impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the
instrument to the impostor, or to a person acting in concert with the impostor,
by impersonating the payee of the instrument or a person authorized to act for
the payee, an indorsement of the instrument by any person in
the name of the payee 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.
Section 3-406(a) envisions two situations:
Situation #
1:
1. An imposter;
2. An issuer who has been ‘induced by the imposter’—by the mails or
otherwise-- to issue the instrument to the imposter;
Situation # 2:
1. An imposter induces the issuer to issue the instrument to:
· A person acting in concert with the imposter who impersonates the payee
of the instrument; or
· A person acting in concert with the imposter who impersonates a person
authorized to act for the payee.
Examples of the
application are relatively simple and straightforward. In situation # 1, the imposter is simply
pretending to be someone he or she is not. The issuer has bought into the
scheme and issues an instrument to the imposter. In situation #2, the accomplice of the
imposter is pretending to be the intended payee or someone authorized to act
for the payee.
Section 3-406(a)
goes on to state that if an instrument so issued is subsequently indorsed ‘by
any person’ in the name of the payee to a person ‘who, in good faith, pays the
instrument or takes it for value or collection’, such indorsement is ‘effective
as that of the payee’. Assume for
example that Imposter induced Issuer to deliver a check for $25,000.00 to the
Imposter who claimed to be Fred Jones. The
Imposter’s signature as ‘Fred Jones’ is effective as that of Fred Jones as
regards a person who in good faith paid the instrument or took it for value or
for collection. As such, the drawer is
liable on his or her drawer’s contract, at least initially. [Exception to be
discussed below.]
The signature in the foregoing example is
‘effective’ even though Fred Jones does not exist. Similarly, if Imposter
induced Issuer to deliver a $25,000.00 check payable to Fred Jones to someone
pretending to be Fred Jones, or someone authorized to act for Fred Jones, a
subsequent indorsement in the name of Fred Jones is effective as that of Fred
Jones to a person who in good faith paid
the instrument or took it for value or collection.
Note that the
language states that the indorsement ‘by any person in the name of the payee is
effective as the indorsement of the payee in favor of someone who pays in good
faith or has taken the instrument for value or collection’. Therefore, if the Imposter or his colleague loses
the check and someone else picks it up and indorses ‘Fred Jones’ that too will
be considered an effective indorsement to someone who in good faith paid the
instrument or took it for value or collection.
The
policy of section 3-404(a) is simple: it was the drawer of the check that got
duped into issuing the check. Therefore,
the drawer will not be relieved of liability on the check to a person who in
good faith paid the instrument or took it for value or consideration. This is analogous to the rule discussed in
the last post, and consistent with the general policy of the Uniform Commercial
Code in placing responsibility on parties whose culpable conduct set the series
of transactions in motion.
Section
3-404(b) applies to cases dealing with not just fictitious payees, but also
instruments issued to existing payees that the issuer does not intend to have any
interest in the instrument. That section
also states certain rules with regard to such an instrument prior to any
special indorsement on the instrument:
(b) If (i) a person whose intent determines to whom an instrument is payable (Section 3-110(a) or (b)) does not intend the
person identified as payee to have any interest in the instrument, or (ii) the
person identified as payee of an instrument is a fictitious person, the
following rules apply until the instrument is negotiated by special indorsement:
(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.
It
is interesting to note that in such a situation, an indorsement in the name of
the payee ‘substantially similar’ to that of the payee will be effective and
further, if such an instrument is taken to a depository bank and deposited in
an account in a name ‘substantially similar’ to the payee, it will be treated
as an effective indorsement. The latter
is true even if the instrument has not been indorsed:
(c) Under
subsection (a) or (b), an indorsement is made in the name of a payee if (i)
it is made in a name substantially similar to that of the payee or (ii) the instrument, whether
or not indorsed, is deposited in a depositary bank to an account in a name
substantially similar to that of the payee.
As stated in Section 3-404(a), the
effectiveness of the Impostor’s indorsement is in favor of a ‘person who, in
good faith, pays the instrument or takes it for value or collection.’ As discussed in a previous post, good faith
under Article 3 means ‘honesty in fact and the observance of reasonable commercial standards of fair
dealing’ either via Section 3-103(a)(6) for those states that have not enacted
the amended definition of good faith or via 1-201(b)(20) for those that have.
The exception is New York who has neither enacted the amended definition of
good faith or the amendments to Article 3.
As was also discussed, the use of the words ‘reasonable
commercial standards of fair dealing’ are intended to focus on the fairness of
conduct, not the commercial reasonableness of conduct. The absence of commercial reasonableness in
conduct in the Imposter/Fictitious Payee situation has been addressed in
Section 3-404(d):
(d) With
respect to an instrument to which subsection (a) or (b)
applies, if a 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
payment of the instrument, 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.
Therefore, the broad
statement dealing with the effectiveness of the indorsement under Section
3-404(a) is limited not only by the good faith requirement, but also by a
requirement to exercise ordinary care in paying the instrument or taking it for
value or collection. Ordinary care was
discussed in detail in the previous post, but it clearly requires the
‘observance of reasonable commercial standards’ in addition to the commercial
fairness requirement of good faith.
No comments:
Post a Comment