The Guardian Life Insurance Company of America v. Weisman

96-1141 (U.S. D. Ct. D. N.J. 1998) (Unpublished)
  • Opinion Date: March 6, 1998

UCC; CHECKS; FORGERY—Even though a depository bank is relieved of liability for cashing checks forged by a company’s faithless employee using a fictitious payee scheme, this limited exception to the general rule is not available when the bank cashes a check with an illegible endorsement signature.

An agent for several life insurance companies submitted false requests for payment in the names of policyholders and annuity contract holders. Checks were issued by the insurance companies without knowledge of the falsity of the requests, and cashed by the agent after forging (often illegibly) the name of the payee. Once discovered, the drawee banks sought recovery from the bank where the agent deposited the checks. The issue was whether the depository bank (Midlantic) was liable to the other banks for improper payment.

The general rule is that a drawee bank may not debit the drawer’s account when payment is based on a forged check, because the check was not properly payable. Section 3-405 (1)(c) of New Jersey’s Uniform Commercial Code creates a limited exception to this general rule when a faithless employee uses a fictitious payee scheme to defraud his employer. In such a case, the drawee banks are shielded from liability on the theory that the loss should be taken by the drawer/employer because, “it is in the best position to prevent it and ... has as good a chance as the banks to distribute the risk to all of society through the use of insurance.” Perini Corp. v. First National Bank of Habersham County, 553 F.2d 398, 404 (5th Cir. 1977). However this exception is inapplicable when the endorsement on the check is illegible, because depository banks may only accept checks for deposit where the name on the endorsement is substantially identical to that of the named payee. If the endorsement is not substantially identical, the depository bank has improperly cashed the checks and is liable for payment. In its summary judgment motion, Midlantic argued that the “faithless employee/fictitious payee” rule barred recovery by the drawee banks from Midlantic. The drawee banks claimed the rule did not apply because Midlantic failed to exercise ordinary care and good faith in accepting those checks with illegible endorsements. The Court refused to grant summary judgment to Midlantic with regard to the checks deposited with illegible endorsements, but granted it with regard to the checks where the endorsement was legible, finding that they were properly cashed by Midlantic.