Check fraud and impostors
We have discussed check fraud and concepts from the UCC here and here over the past couple of months. While the UCC does not contemplate every check fraud scenario that a credit union might encounter, the UCC provides a general framework that can be used to determine which party will bear the loss for the check fraud. There are even some special rules that we have discussed that can change the default rules regarding allocation of loss under certain circumstances. For example, section 3-406 of the model UCC explains that a loss that arises from a forgery or an alteration of a check can be allocated to those parties whose negligence contributes to the forgery or alteration. And section 4-406 of the UCC can act to shift the loss to your credit union’s members when there is a forged or altered check if the members fail to exercise reasonable promptness in examining statements provided to them that might evidence any unauthorized payments.
Today I want to discuss another special circumstance. What happens when a member falls victim to a scam and unwittingly writes a check to a fictitious person. What if a member writes a check in the amount of $5,000 payable to a fictitious yet hairy individual who purports to be Chewy D. Wookie? The $5,000 is for the purpose of acquiring some Star Wars paraphernalia. But Chewy, being clever and not actually being Chewy D. Wookie but rather B.B. Eight, indorses the check in blank as Chewy and runs off to cash that check as quickly as possible. The credit union pays the check over a forged indorsement of a fake Chewy? Does the credit union bear the loss in this scenario or does the member bear the loss?
Section 3-404 of the model UCC deals with impostors and 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 indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
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