Category Archives: false checks

How Does The Imposter Rule Apply in Cases Involving Conversion in Connection With the Cashing of False Checks?

Who should be to blame when a person wrongfully and seamlessly misappropriates the assets of another?  The Supreme Court in New York County, New York recently addressed this question in  Tripp & Co., Inc. v. Bank of New York, 911 N.Y.S.2d 696 (N.Y. County 2010).

That case involved Tripp & Co., Inc. (“Tripp”), a brokerage firm that retained the clearing services of non-party Pershing, LLC (“Pershing”) to hold the assets of Tripp’s customers in an account.  At Tripp’s request, Pershing issued checks payable to Tripp’s customers through Pershing’s account maintained by The Bank of America (Delaware) Inc., n/k/a BNY Mellon Trust of Delaware, N.A. (“BNY”).  Tripp’s former employee, Michael Axel (“Axel”) misappropriated over $600,000.00 through a series of fraudulent checks.  Axel accomplished this by requesting the checks from Pershing and then forging the payee’s name, replacing the true recipients name with his own. Id. at 1.  Axel would then deposit or cash the checks into his personal account at Citibank.  Id.  Citibank accepted the checks and made payments on them, while BNY accepted and cleared the checks.  Tripp was ultimately forced out of business in trying to address the issue and reimburse patrons.  Id.  Consequently, Tripp filed an action alleging amongst other things conversion against both defendants, BNY and Citibank.  Id.  Both defendants moved to dismiss the complaint. Id.

While the Court acknowledged that the general rule pertaining to conversion imposes the risk of loss upon the drawee bank for improper payment over a forged endorsement, UCC §3-419, the Court noted that UCC §3-405(1)(C), commonly known as “the imposter rule,” states that “any endorsement 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.” UCC §3-405(1)(c).  Additionally, the official comments to UCC §3-405(1)(c) state that the loss should fall on the employer as a risk of his business enterprise because the employer is usually in the best position to prevent the forgery by reasonable care in the regulation of his employees.  See Official Comment, UCC §3-405(1)(c)(2009).

The Court found that Axel was an agent of the drawer, Pershing, and so the imposter rule applied.  Id. at 3.  Further, the Court stated that Pershing acted as Tripp’s agent in performing the services it was hired to perform.  Pershing had drew up checks at Axel’s request for over four years and thus established a course of dealing in which Axel routinely supplied the payee information to Pershing so that Pershing could draw the checks.  Id.  The Court reasoned that as an agent of Pershing, Axel supplied the names of the payees with no intention of Pershing having an interest, such that the imposter rule applied and the endorsements are legally effective.  Id.

Further, the Court rationed that Tripp was in a position to prevent the conversion since it could have done a better job of monitoring Axel.  In addition, “the imposter rule” imposes no duty of care and makes the endorsements effective despite the commercial reasonableness of the defendants.  Id. at 4.  Banks cannot, however, use §3-405(1)(c)  to shield its own bad faith, but Tripp did not allege that the defendants acted in commercial bad faith. Id.  Since the imposter rule applied, Tripp’s conversion claims against BNY and Citibank were precluded and dismissed from the complaint.  Id. at 5.

Ultimately, §3-405(1)(c)  takes the responsibility off of banks for improper payment over a forged endorsement and shifts the risk of loss to the drawer of the checks.

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