"The Impostor Rule"
by G. Bradley Hargrave, Esq.
Nearly every state has adopted the 1990 revision of Articles 3 and 4 of the Uniform Commercial Code ("UCC"), the law of negotiable instruments. Checks are a type of negotiable instrument. While the general import of these two Articles is known, at least subconsciously, to virtually anyone with a checking account, certain sections can give rise to some surprising results.
One such section is known commonly as the "impostor rule." UCC Section 3-404 provides that one who impersonates a payee (i.e. the person to whom a check is made), or misrepresents himself as one authorized to act on behalf of a payee, and induces a check writer to issue him a check, may thereafter endorse the item in a name identical to, or substantially similar to, the payee noted on the check. In the event that the check writer's bank pays the item to the impostor, the check writer is left generally with no recourse against the bank. In other words, the check writer suffers the loss and is left in the unenviable position of having to track down the impostor in order to recover the misappropriated funds.
Although one might think that the bank is the entity better able to bear the loss, the check writer may, in fact, be entitled to some relief. If he can establish that the bank failed to exercise ordinary care in paying or taking the check, and that this failure substantially contributed to the loss, the check writer may recover from the bank to the extent such failure contributed to the loss. In essence, the bank would be obligated to pay that percentage of the loss which was due to its negligence in paying or accepting the check.
