Also known as: fraudulent indorsements · fraudulently indorse · fraudulently indorsed · fraudulent endorsement · fraudulent endorsements
Written by attorneys · grounded in primary & secondary sources — see below
A forged indorsement on a negotiable instrument payable to an employer that purports to be the employer's own indorsement or a forged indorsement on an instrument issued by an employer that purports to be that of the named payee. The definition applies when an employee entrusted with responsibility over the instrument or a person acting with the employee forges the signature. For good-faith payers or takers the forged indorsement counts as genuine so that the loss allocation rules of the statute determine ultimate liability.
Select any source to read its text and confirm it supports the definition.
Fairview Manufacturing gives accounts-payable clerk Felix Franco authority to enter supplier data into its check-writing system. Franco changes a supplier address to his own, causing the system to issue a check payable to the supplier. He forges the supplier's indorsement and deposits the check into his personal account at a local bank that pays in good faith.
BFH issues checks payable to itself that its controller is authorized to handle. The controller forges BFH's indorsement and deposits the checks into a personal account. The depositary bank accepts the deposits without verifying the indorsements or comparing signatures, allowing the controller to withdraw the funds before BFH discovers the loss.
An indorsement is fraudulent when an employee entrusted with responsibility forges the signature of the employer on an instrument payable to the employer or forges the signature of the named payee on an instrument issued by the employer. The definition focuses on the forged character of the signature and the employment relationship rather than on whether the employee had general authority over instruments.
Supporting sources
The indorsement is effective as the indorsement of the person to whom the instrument is payable when the payer or taker acts in good faith. This effectiveness shifts loss allocation questions to the ordinary-care comparison between the employer and the bank rather than treating the instrument as unindorsed.
Supporting sources
The statute requires that the employee be entrusted with responsibility with respect to the particular instrument involved in the transaction. General responsibility for instruments in the abstract is insufficient to trigger the rule.
Supporting sources
If the bank fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to the loss, the person bearing the loss may recover from the bank to the extent the bank's negligence contributed to the loss. The comparative fault rule applies after the indorsement is deemed effective.
Supporting sources