Printable Format84-3-404. Impostors; fictitious payees. (a) If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument or a person authorized to act for the payee, an endorsement of the instrument by any person in the name of the payee is effective as the endorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
(b) If (1) a person whose intent determines to whom an instrument is payable (K.S.A. 84-3-110(a) or (b)) does not intend the person identified as payee to have any interest in the instrument, or (2) the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special endorsement:
(A) Any person in possession of the instrument is its holder.
(B) An endorsement by any person in the name of the payee stated in the instrument is effective as the endorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
(c) Under subsection (a) or (b), an endorsement is made in the name of a payee if (1) it is made in a name substantially similar to that of the payee or (2) the instrument, whether or not endorsed, is deposited in a depository bank to an account in a name substantially similar to that of the payee.
(d) With respect to an instrument to which subsection (a) or (b) applies, if a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
History: L. 1991, ch. 296, § 41; February 1, 1992.
KANSAS COMMENT, 1996
This section is identical to the 1995 Official Text except that the lower case roman numerals have been replaced by capital letters. This section is derived from the former 84-3-405(a) and (b). It broadens the situations in which an indorsement will be effective. Historical case and statutory references can be obtained from the 1965 and 1983 bound volume 7 of the Kansas Statutes Annotated.
This section codifies the "impostor" and "fictitious payee" rules, throwing the loss for forged indorsements on the issuer who was duped into issuing an instrument to the wrong person. These rules are a codification of variations of the general negligence provisions of 84-3-406. The section is closely related to the next two sections. If the section is successfully invoked, the loss arising from a forged indorsement is shifted away from later "holders" and on to the issuer. Note that the "impostor" rule has been expanded to cover situations where a misrepresentation of agency is involved and the instrument is made payable to the real principal. The "fictitious payee" rule has been broadened to include indorsements which are substantially similar.
Subsection (a). The rule stated in this subsection validates the indorsement where the issuer intended the instrument to go to that impostor him or herself, or as agent of the named payee, or a confederate. The key words in the statute are "to issue the instrument to the impostor, or to a person acting in concert with the impostor." The controlling factor is whether the issurer intended the person receiving the instrument to receive it. The subsection can only be invoked by a good faith payor or transferee for value.
Subsection (b). This subsection deals with fictitious payees and the padded payroll. It applies if the person who controls and determines to whom instruments are payable either does not intend the named payee to have an interest in the instrument or if the intended payee does not exist ("is a fictitious person"). In those cases all persons possessing the instrument so payable are holders and any indorsement in the name of the payee to a good faith payor or transferee for value is valid. The subsection validates instruments issued by a dishonest treasurer or payroll manager. This shifts the burden to the employer or principal to institute a system for double checking and auditing the actions of the employees or agents.
Subsection (c). This provision validates indorsements (or deposits for collection) substantially in the name of the payee.
Subsection (d). The payor or transferee for value must exercise ordinary care or be liable for the comparative loss caused by the the lack of care. This should encourage settlement of many disputes which were previously litigated since prior law, dealing with a concept of contributory negligence, created a winner take all system.
Although the section may not appear to protect remote good faith payors or transferees for value, the literal language of the section would protect them whether they took the instrument from the wrongdoer or through an intermediary. For example, if the impostor indorsed and transferred the instrument without consideration to a donee, and the donee negotiated it to a good faith payor, the payor should prevail by relying on the impostor's validated indorsement to the donee.
Revisor's Note:
Former section 84-3-404 was repealed by L. 1991, ch. 296, § 111 and the number reassigned to the current text.
CASE ANNOTATIONS
1. Whether allegations employees knew of forgeries and retroactively adopted signatures stated claim for ratification examined. Deere and Co. v. Zahm, 837 F. Supp. 346, 353 (1993).
2. Depository bank cannot invoke imposter defense to avoid liability where attorney forged client's endorsement on settlement drafts. King v. White, 265 Kan. 627, 629, 631, 633, 636, 640, 962 P.2d 475 (1998).