Unauthorized Indorsements. First National Bank collected debts owed to Rock Island Bedding Co and Berry Industries, Inc, and in turn paid those two firms the amounts collected by remitting checks to them drawn on First National Bank. On several

Question

occasions, Johns, an employee of First National, asked the bank's accounting department to prepare cashier's checks payable to Rock Island Bedding Co and to Berry Industries, Inc The requests did not appear to be irregular, because the bank had been making regular payments to the two firms. Johns, however, forged the payees' indorsements on eighteen of the checks so issued and deposited them into an account at First City Bank of Dallas. Johns fraudulently obtained $903,300 in this way. First City indorsed the checks "P.I.G." (prior indorsements guaranteed) and presented them to First National for payment. First National paid the checks and later recovered from its insurer, Fidelity & Casualty Co Fidelity sought recovery from First City, claiming that Johns's forged indorsements did not authorize First City to pay the checks and that First City should bear the loss. Do you agree? Why or why not?

Answer 1

Unauthorized indorsements
(This case was decided under the unrevised Article 3, but the result would likely by the same under the revised Article 3.) Ordinarily, First City would be liable to the payor bank (First National) because First City had accepted the checks in spite of the fact that their indorsements were not genuine or authorized [UCC 3-404(1) in the unrevised Article 3; UCC 3-403(a) in the revised Article 3]. UCC 3-405(1)(c) in the unrevised Article 3 [UCC 3-404(b)(2) in the revised Article 3] provides an exception to this general rule, however. That section provides that an indorsement by any person in the name of a named payee is effective if "an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest." This is known as the fictitious payee rule. In this case, Johns intended that the payee have no interest in the checks, and thus UCC 3-405(1)(c) under the unrevised Article 3, or UCC 3-404(b)(2) under the revised Article 3, applies. The purpose of this UCC provision is to allocate the loss, among innocent parties, to the person closest to the individual causing the loss and who presumably is in the best position to prevent the loss. In this case, because First National was Johns's employer and in the best position to prevent the loss, it was held liable.