Getty Petroleum Corp. v. American Express Travel Related Services Co., 90 N.Y.2d 322 (1997)
The “fictitious payee” rule of UCC 3-405(1)(b), which generally protects banks from liability for forged endorsements when the drawer intends the payee to have no interest in the instrument, also extends to non-bank depositaries unless they acted with commercial bad faith.
Summary
Getty Petroleum brought suit against American Express to recover funds from checks stolen and fraudulently endorsed by a Getty employee. The employee, responsible for voiding checks intended for internal bookkeeping, instead forged endorsements and used the checks to pay her American Express bill. The New York Court of Appeals addressed whether the fictitious payee rule applied to American Express, a non-bank depositary, and whether American Express’s alleged negligence precluded its use of the rule. The court held that the fictitious payee rule protects non-bank depositaries absent commercial bad faith, and found no evidence American Express acted in bad faith, reversing the Appellate Division decision.
Facts
Getty Petroleum used computer-generated checks to reimburse dealers for credit card sales, often voiding these checks for bookkeeping purposes without delivering them to the payees. Lorna Lewis, a Getty supervisor, was solely responsible for voiding these checks. Between April 1991 and October 1992, Lewis stole over 130 checks, forged the endorsements, and used them to pay her American Express bill. American Express credited Lewis’s account and forwarded the checks through banking channels. Chemical Bank, Getty’s bank, honored the checks.
Procedural History
Getty sued American Express to recover the face amount of 31 checks. The Supreme Court found American Express liable, holding that UCC 3-405 applied to non-bank transferees but that American Express was grossly negligent and could not avail itself of the protection of the statute. The Appellate Division affirmed, holding that UCC 3-405 is a “bankers provision” and should not protect non-bank depositaries like American Express, and that American Express exhibited “wilful blindness constituting gross negligence.” The New York Court of Appeals reversed.
Issue(s)
1. Whether the fictitious payee rule of UCC 3-405(1)(b) applies to non-bank depositaries such as American Express?
2. Whether American Express’s conduct precluded it from benefiting from the fictitious payee rule due to negligence or bad faith?
Holding
1. Yes, because nothing in UCC 3-405 limits the protection of the fictitious payee rule to banks, and the purpose of the UCC is to shift the risk of loss to the party best able to prevent the loss.
2. No, because UCC 3-405 requires a showing of commercial bad faith, not mere negligence, and there was no evidence American Express acted dishonestly or participated in the fraudulent scheme.
Court’s Reasoning
The Court reasoned that Article 3 of the UCC aims to ensure the negotiability of commercial paper and allocates loss based on the parties’ relative responsibility. Generally, the drawee bank bears the loss for forged instruments because it is best positioned to detect the forgery. However, UCC 3-405 shifts the risk to the drawer when the drawer is in the best position to prevent the loss. Here, Getty created checks payable to payees with no intention of delivering them, making Lewis’s forged endorsements