Getty Petroleum Corp. v. American Express Travel Related Services Co.Getty Petroleum Corp. v. American Express Travel Related Services Co.
OPINION OF THE COURT
Ordinarily, the drawer of a check is not liable on a forged indorsement. An exception to this principle is found in Uniform Commercial Code § 3-405 (1) (b) — the "fictitious payee” rule — which allocates the loss to the drawer if "a person signing as or on behalf of a * * * drawer intends the payee to have no interest in the instrument.” In this сase of statutory interpretation, we are asked whether the fictitious payee rule, typically applied to protect banks, can also extend to nonbank depositaries when they accept a check over a forged indorsement. We answer that question in the affirmative. We further conclude that the depositary here did not by reason of its own negligence forfeit the benefit of the fictitious payee rule because its conduct did not rise to the level of commercial bad faith, and we therefore dismiss the drawer’s complaint.
Facts
Respondent Getty Petroleum Corporation distributes gаsoline through dealer-owned stations. Customers who purchase gasoline at a Getty station can pay by cash or credit card. When a customer uses a credit card, Getty processes the transaction, receives payment from the credit card company and then issues computer-generated checks payable to dealers to reimburse them for their credit card sales. Many of the checks, however, are not intended for negotiation and are never delivered to the payees. Instead, Getty uses these checks for bookkeeping purposes, voiding them and then crediting thе check amount toward the dealer’s future purchases of gasoline.
A supervisor in Getty’s credit processing department, Lorna Lewis, was given sole responsibility for voiding the checks. From April 1991 to October 1992, Lewis stole over 130 of the checks, forged the indorsements of the payees by hand or rubber stamp, and then submitted the checks to appellant American Express Travel Related Services Company, Inc. and other credit card companies in payment of her own credit card debt. The credit card companies, in turn, credited Lewis’s accounts
After uncovering Lewis’s theft, Getty commenced an action against the credit card companies which had accepted the checks. As against American Express, Getty sought to recover the face amount of 31 checks, and following a nonjury trial Supreme Court found American Express liable to Getty in the amount of $58,841.60. Supreme Court agreed with American Express that UCC 3-405 is applicable to nonbank transferees and that, because the stolen checks were drawn by Getty with the intent to be voided, and not delivered to the individual dealers, the checks fell within the scope of the statute. Nevertheless, the court concluded that in light of American Express’s remittance procedures "calculated to make forged, fraudulent and stolen checks acceptable for рrocessing” and its acceptance of stolen checks on which Lewis’s name did not appear, American Express had acted with gross negligence as a matter of law and thus, could not avail itself of the protection of UCC 3-405.
The Appellate Division affirmed, but on different grounds. Contrary to Supreme Court, the Appellate Division held that UCC 3-405 "is widely acknowledged to be a 'bankers provision’, and should not protect non-bank depositaries such as American Express” (
We now reverse and dismiss Getty’s complaint.
Discussion
The provisions of article 3 of the Uniform Commercial Code relating to check fraud have as their purpose ensuring the ready negotiability of commercial paper and advancing the important policy of assigning loss based upon the relative responsibility of the parties
(see, Hartford Acc. & Indem. Co. v American Express Co.,
Article 3, however, shifts the risk of loss to the drawer in situations where the drawer is the party best able to prevent the loss
(see, e.g.,
UCC 3-405, 3-406, 4-406;
see also,
McDonnell,
op. cit.,
73 Geo LJ, at 1407). In particular, UCC 3-405 (1) (b)— the fictitious payee rule — provides that "[a]n indorsement by any person in the name of a named payee is effective if * * * a person signing as or on behalf of a maker or drawer intends the payee to have no interest in the instrument.” The fоrged indorsement, in other words, is treated as if it were the actual indorsement of the stated payee, and payment by a transferee in the transactional chain is proper
(see, Merrill Lynch, Pierce, Fenner & Smith v Chemical Bank,
The situation presented here is precisely that contemрlated by UCC 3-405 (1) (b). Getty drew more than 4,000 checks to the order of payees with no intention that they would be delivered or negotiated. Rather, it was Getty’s intention to void the checks and use them to create a paper trail of gasoline credits. Of these, over 130 were misappropriated by Lewis, who then forgеd the indorsement of the dealers. In short, the drawer (Getty) made checks payable to a payee (a dealer), intending the payee to have no interest in the instruments, thus rendering the forged indorsement by Lewis on the checks "effective” (UCC 3-405 [1] [b]; see, UCC 3-405, Comments 1, 3; see also, 2 Anderson, Uniform Commercial Code § 3-405:4, at 932 [2d ed]).
As the record demonstrates, Getty was in the best position to prevent the losses by its bookkeeping practices, by supervising
Getty attempts to sidestep responsibility by advancing two arguments: first, that the fictitious payee rule applies only when the transferee of the forged instrument is a bank and second, that American Express’s own conduct amounted to gross negligence which strips it of the protection of the rule. We reject both contentions.
Rule Not Limited To Banks
Nothing in UCC 3-405 limits the protection of the fictitious payee rule to banks. Comment 4 to UCC 3-405 indicates that the rule was intended to protect all holders of negotiable instruments: "The principle followed [in UCC 3-405] is that the loss should fall upon the employer as a risk of his business enterprise rather than upon the subsequent holder or drawee.” Equally significant is that the Code itself , does not distinguish between bank and nonbank holders. The Code defines a "holder” as "a person who is in possession of * * * an instrument * * * indorsed * * * in blank” (UCC 1-201 [20]). Here, American Express was a "holder” because it was the recipient of instruments indorsed in blank by Lewis (UCC 3-202 [1]).
Moreover, the limitation Getty urges upon the Court undermines the objective of the Code to shift the risk of loss to the party best able to prevent loss under circumstances presented by this case — namely, the drawer-employer. As we noted in
Prudential-Bache:
" 'the employer is normally in a better position to prevent such forgeries by reasonable care in the selection or supervision of his employees, or, if he is not, is at least in a better position to cover the lоss by fidelity insurance; and that the cost of such insurance is properly an expense of his business rather than of the business of the holder or •drawee’ ” (
In rejecting Getty’s argument, we also bear in mind that, had the Legislature intended to limit UCC 3-405 to banks, it
In support of its argument, Getty relies on this Court’s statement in
Prudential-Bache
that UCC 3-405 is " 'a banker’s provision intended to narrow the liability of banks’ ” (
Getty, however, overstates the import of the description "bankers provision,” which simply recognizes the reality that UCC 3-405 is most often asserted by drawee banks because they are usually the party sued by the drawer for paying over a forged indorsement
(see, e.g., Merrill Lynch, Pierce, Fenner & Smith v Chemical Bank,
Getty’s remaining "policy” arguments are similarly unpersuasive. First, application of UCC 3-405 to nonbanks such as
In sum, we are satisfied that the fictitious payee rule should extend to nonbank depositaries that accept checks over forged indorsements.
No Evidence of Commercial Bad Faith
That conclusion does not end the analysis. Getty claims that even if the fictitious payee rule applies, American Express should be denied the benefit of the rule because of its own gross negligence.
As an initial matter, Getty misstates the exception to UCC 3-405. UCC 3-405 does not require that a transferee demonstrate due care in order to enjoy its protection, unlike other risk-shifting provisions which permit a drawer to defeat a transferee’s defenses by demonstrating the transferee’s failure to observe "reasonable commercial standards” (UCC 3-406) or to use "ordinary care” (UCC 4-406 [3]). Thus, while a drawer can defeat a defense to forgery by showing that the transferee acted negligently under these two sections of the Code, there is no similar qualifying language incorporated in UCC 3-405. In short, UCC 3-405 does not invite courts to balance the relative culpability of the parties
(see, Prudential-Bache Sec. v Citibank,
As we noted in
Prudential-Bache,
while "the Legislaturе might have opted for a statutory standard that apportioned liability according to each party’s actual fault in a particular transaction — as it did elsewhere in the Code — it. chose instead in UCC 3-405 (1) (c), as a policy matter, to allocate the loss to the drawer-employer because it perceived that party was in a better position to prevent such loss from occurring in the first instance”
(id.,
at 273;
see, Merrill Lynch, Pierce, Fenner & Smith v Chemical Bank,
Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious circumstances which might have well induced a prudent banker to investigate and other permutations of negligence are not relevant considerations under section 3-405
(see, Prudential-Bache Sec. v Citibank,
Getty therefore had the heavy burden of demonstrating that American Express’s conduct amounted to dishonesty or complicity in Lewis’s plans. Both Supreme Court and the Appellate Division found that American Express accepted 31 checks on behalf of Lewis even though neither her name nor the name of American Express appeared on these checks. Those courts also determined that American Express routinely processed stale checks, checks payable to neither American Express nor the customer, checks where neither American Express nor the
Getty’s remaining contentions are without merit.
Accordingly, the order of the Appellate Division should be reversed, with costs, and the complaint dismissed.
Judges Titone, Bellacosa, Smith, Levine, Ciparick and Wesley concur.
Order reversed, etc.