Guardian Life Ins. Co. of America v. Chemical Bank, 94 N.Y.2d 420 (2000)
Under UCC 3-405(1)(c), the fictitious payee rule applies when an agent of the drawer supplies the name of the payee intending the latter to have no interest in the instrument, shifting the loss from a forged endorsement to the drawer.
Summary
Guardian Life sued Chemical Bank to recover funds from checks fraudulently obtained by an insurance broker, Rutberg, who forged policyholders’ endorsements. Rutberg, acting for Baer Insurance Agency, requested checks from Guardian for policy loans/dividends, which he then intercepted and cashed after forging the endorsements. The court addressed whether the general rule placing the risk of loss on the drawee bank for forged endorsements applied, or whether the fictitious payee exception shifted the risk to Guardian. The Court of Appeals held that Rutberg acted as Guardian’s agent for the purpose of UCC 3-405(1)(c), thus the fictitious payee rule applied, and Guardian bore the loss because it was in a better position to prevent the fraud.
Facts
Jerome Rutberg, an insurance broker for Baer Insurance Agency, defrauded Guardian Life for ten years by requesting checks for policy loans/dividend withdrawals in the names of Guardian policyholders without their consent. Guardian issued the checks and sent them directly to Rutberg, who forged the payees’ endorsements and cashed them. Baer Agency was a “general agent” of Guardian. Guardian did not verify the requests or notify the policyholders before issuing the checks to Rutberg.
Procedural History
Guardian sued Chemical Bank to recover the value of fraudulent checks cashed between June 5, 1986, and July 9, 1989. The Supreme Court granted Chemical Bank’s motion for summary judgment, holding Rutberg was Guardian’s agent. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.
Issue(s)
Whether, under UCC 3-405(1)(c), Rutberg acted as an agent of Guardian when he supplied the names of payees (policyholders) to Guardian, intending that the payees have no interest in the checks, thus triggering the fictitious payee rule and shifting the loss from the forged endorsements to Guardian.
Holding
Yes, because Rutberg was entrusted by Guardian with the responsibility of processing requests for policy loans and dividend withdrawals, making him Guardian’s agent for the purpose of UCC 3-405(1)(c); therefore, the fictitious payee rule applies, and Guardian bears the loss.
Court’s Reasoning
The court reasoned that UCC 3-405(1)(c) assigns the risk of loss to the drawer when an agent supplies the payee name intending the payee to have no interest, reflecting a policy of placing the risk on the party best able to prevent the loss. While Rutberg was not a formal employee of Guardian, agency principles apply. Agency can be established by conduct and does not require a formal agreement. Pennsylvania law, where Rutberg cashed the checks, holds that an insurance broker can act as an insurer’s agent when authorized to perform specific tasks. The court emphasized that Rutberg, with Guardian’s consent, performed all steps to process policy loan requests except the check issuance. The court noted that Guardian could have prevented the fraud through better verification and supervision. The court stated, “Since the undisputed facts establish that Rutberg was ‘an agent * * * of the * * * drawer [who] supplied [it] with the name of the payee intending the latter to have no such interest’ when he effected these insurance policy loan and dividend withdrawal transactions, his indorsements were effective under UCC 3-405 (1) (c) despite their having been forged.”