Printable Format84-3-405. Employer's responsibility for fraudulent endorsement by employee. (a) In this section:
(1) "Employee" includes an independent contractor and employee of an independent contractor retained by the employer.
(2) "Fraudulent endorsement" means (A) in the case of an instrument payable to the employer, a forged endorsement purporting to be that of the employer, or (B) in the case of an instrument with respect to which the employer is the issuer, a forged endorsement purporting to be that of the person identified as payee.
(3) "Responsibility" with respect to instruments means authority (A) to sign or endorse instruments on behalf of the employer, (B) to process instruments received by the employer for bookkeeping purposes, for deposit to an account or for other disposition, (C) to prepare or process instruments for issue in the name of the employer, (D) to supply information determining the names or addresses of payees of instruments to be issued in the name of the employer, (E) to control the disposition of instruments to be issued in the name of the employer, or (F) to act otherwise with respect to instruments in a responsible capacity. "Responsibility" does not include authority that merely allows an employee to have access to instruments or blank or incomplete instrument forms that are being stored or transported or are part of incoming or outgoing mail, or similar access.
(b) For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent endorsement of the instrument, the endorsement is effective as the endorsement of the person to whom the instrument is payable if it is made in the name of that person. If the 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 the fraud, 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.
(c) Under subsection (b), an endorsement is made in the name of the person to whom an instrument is payable if (1) it is made in a name substantially similar to the name of that person or (2) the instrument, whether or not endorsed, is deposited in a depository bank to an account in a name substantially similar to the name of that person.
History: L. 1991, ch. 296, § 42; 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(1)(c), but has substantially broadened an employer's responsibility for the misdeeds of its employees or independent contractors by increasing the number of cases in which an unauthorized indorsement will be effective. In many cases the indorsement may be effective under the sections dealing with actual or imputed negligence, 84-3-404, 84-3-405 and 84-3-406. Historical case and statutory references can be obtained from the 1965 and 1983 bound volume 7 of the Kansas Statutes Annotated.
Subsection (a). The definition of "employee" is broad, and includes employees of independent contractors. As a result, an employer may require bonding, additional safeguards and additional auditing provisions for independent contractors. "Fraudulent endorsement" includes endorsements of both incoming and outgoing instruments. "Responsibility" is broadly defined to include virtually all authorized contact with crediting incoming instruments or preparing any aspect of outgoing instruments. It does not include mere access to instruments or mail, or physical handling.
Subsection (b). This subsection makes the indorsement of a responsible employee, or of one acting in concert with a responsible employee, effective. A person paying the instrument, or taking it for value, must use due care and is liable for its comparative negligence for any loss caused by the failure to use due care. This language is similar to that in 84-3-404(d), and the standards should be the same.
It should be noted that 84-3-405 applies only to fraudulent indorsements, and not to other fraudulent signatures, such as issuing fraudulent checks and notes.
Later takers do not need to show negligence on the part of the employer under this provision. It should be noted, however, that the section does not explicitly require any connection between the unauthorized indorsement and the employee's responsibilities, an issue that Official Comment 3, Case # 6 does not mention. It seems dubious that the employer would be liable if the wrongdoing is totally unrelated to the responsibilities of the employee, such as a treasurer robbing a messenger on the way to the bank to deposit checks. If the treasurer or an accomplice indorses the checks, it would be problematical to validate the indorsement and hold the employer liable. Logically, it would appear that there must be some nexus between the fraudulent indorsement and the employee's position or the policy would make the employer liable for all fraudulent employee indorsements.
Subsection (c). As with 84-3-404(c), the indorsement or the account need be only substantially similar to the person named on the instrument.
Revisor's Note:
Former section 84-3-405 was repealed by L. 1991, ch. 296, § 111 and the number reassigned to the current text.