Shearson Lehman Brothers, Inc. vs. Wasatch Bank
In March 1987, Erb personally accepted from Matthews a check drawn by Utah Softcopy and payable to the order of “APB Investments.” The amount of the check was $460,150.23. At that time, there was no ABP Investment account opened at Shearson, although the Wordperfect principals maintained accounts elsewhere in that name. Notwithstanding the absence of an account in the name of the payee, Erb accepted the check for deposit at Shearson. Matthews suggested that a substitute check be correctly drawn and submitted for deposit from Shearson. Erb responded by assuring Matthews that he would personally guarantee that the check was credited to the appropriate account. However, rather than depositing the check into on of the authorized Wordperfect accounts, Erb opened a new account at Shearson in the name of ABP investments. Erb apparently forged the signature of Bruce Bastian on the new account documents. No evidence in the record suggests that Bastian or any other Wordperfect or Utah Softcopy representative authorized or subsequently ratified the creation of the new account. Erb listed as the address of records for the ABP Investment account a post office box number in Orem, Utah, which was unknown to Wordperfect and its principals and was different from the record address for the other there Wordperfect accounts. Erb would obtain the check and indorse them in the name of ABP Investments. He took the check to Wasatch Bank for deposit into his personal account for which Wasatch accepted the deposit. Shearson brought suit against Wasatch. Wasatch move for summary of judgment, claiming under the “fictitious payee” rule that is was not liable.
The issue is whether or not Wasatch would be liable for cashing the forged check. My answer is yes they should. The court must grant Wasatch’s motion for summary judgment if, based upon the pleadings, affidavits, depositions and other evidence heretofore presented, thee is no genuine issue as to any material fact and moving party is entitled to judgment as a matter of law.
This case was first trialed in the District Court in Utah.
The “fictitious payee” defense as articulated in section 3-405(1)(c) of the Uniform Commercial Code operates under the facts of the present case to shield the collecting bank, Wasatch, from liability resulting from Erb’s misconduct while in Shearson’s employ. Erb deliberately induced the issuance of checks by Shearson. The payee named on those checks was never intended by Erb to take an interest in the checks. In such circumstances the mandate of the Code is clear — the drawer shall bear the loss resulting from the misdeeds of its employee. Wasatch’s conduct in the relevant transactions raises serious questions about whether the bank discharged its duty to act in a commercially reasonable manner. Nevertheless, no fact has been alleged which would support the inference that Wasatch acted in bad faith so as to preclude the operation of the fictitious payee defense. Moreover, the defense is viable against Shearson whether Shearson stands in the position of the drawer of the checks or the payee. Finally, the defense is an absolute defense to both the statutory and common law causes of action alleged in the complaint. The court need not address the other grounds for Wasatch’s motion and summary judgment is hereby GRANTED in favor of Wasatch and all counts of Shearson’s complaint are hereby dismissed with prejudice.