University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

194

Pages:

2
Author:

bratrochanter

Key Points on Exceptions to Liability in Negotiable Instruments: Negligence, Impostor Rule, and Fictitious Payee Rule 1. Negligence and Comparative Fault: o Under Article 3, if a party’s negligence facilitates alteration or forgery, they may be barred from claiming lack of authorization as a defense. Negligence in creating an easily altered instrument or failing to monitor transactions can lead to shared liability based on comparative fault. o Example: If a maker issues a check that can easily be altered and the bank fails to detect the alteration, both may share liability. 2. Impostor Rule: o The impostor rule holds the drawer responsible if they are deceived by an impostor who convinces them to issue a check payable to the impostor or an entity the impostor claims to represent. o Rationale: Since the drawer is best positioned to verify the payee's identity, liability is placed on them, allowing later innocent holders to claim the funds without penalty. 3. Fictitious Payee Rule: o This rule applies when a check is made payable to a nonexistent or unintended payee due to the actions of a dishonest employee. The check can be negotiated as if the endorsement were genuine, putting the liability on the employer who trusted the dishonest employee. o Example: An employee fabricates an invoice and makes a check payable to a legitimate vendor without intending to deliver it. By endorsing the check, they can deposit it fraudulently. 4. Fraudulent Endorsements by Employees: o Employers bear responsibility for fraudulent endorsements by employees entrusted with handling instruments. If an employee, authorized to handle company checks, endorses checks fraudulently, the employer is responsible rather than the bank that accepted the checks, unless the bank was also negligent. o Comparative fault principles can apply here, allowing the employer to recover some losses from the bank if the bank’s negligence contributed to the fraud. 5. Case Study: Victory Clothing Co., Inc. v. Wachovia Bank, N.A.: o Facts: Victory’s employee, Lunny, deposited checks intended for vendors into her personal account, violating Wachovia’s policy against accepting checks payable to businesses for deposit into personal accounts. o Outcome: The court held both Victory and Wachovia liable based on comparative negligence. Victory was found partly at fault for failing to supervise Lunny adequately, while Wachovia was negligent in disregarding its own policies. 6. Comparative Negligence in Double Forgery Cases: o In cases of “double forgery,” where both the drawer's and payee’s endorsements are forged, revised UCC provisions apply comparative fault. Liability is shared between banks and depositary institutions based on each party’s contribution to the loss. Summary of Liability Allocation: The revised UCC incorporates comparative fault, meaning liability is now more equitably distributed among involved parties based on their role in the loss. Employers bear initial responsibility for fraudulent actions by their employees, but can recoup some losses if financial institutions acted negligently.