LIES, IMPOSTORS AND FORGERY AKIN BUT NOT EQUAL IN COMMERCIAL LAW

June 2, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

In a case where an attorney allegedly lied to a hospital about whether a settlement was authorized and forged his client's signature on a $200,000 settlement check, the Illinois Appellate Court had to choose between two conflicting lines of authority on whether the "impostor defense" applies when someone uses a forged document (such as a notarized settlement agreement, with the forged signature of a client) to obtain a negotiable instrument.

Reversing summary judgment for a bank that accepted a check with a forged endorsement, the Appellate Court remanded with important new guidelines for deciding when the impostor defense applies. Advocate Health and Hospitals Corp. v. Bank One, N.A., 2004 WL 834727 (1st Dist., April 19).

Here are some highlights of Justice Margaret Stanton McBride's opinion (with various omissions not noted in the quoted text):

"Under the impostor defense, an endorsement in the name of the payee is 'effective' if an impostor 'by use of the mails or otherwise' has induced the drawer to issue the check to the impostor in the name of the payee. 810 ILCS 5/3-404(a). Title to the check passes as though the forged endorsement is genuine, and liability on the check lies with the drawer, rather than a depositary bank, such as American National in this instance, or a payor or drawee bank, such as First National in this instance, as long as there is no lack of good faith by the banks involved.

"The rationale for the impostor defense is that, 'The drawer is in the best position to avoid the fraud and thus should take the loss.' 810 ILCS Ann. 5/3-404, comment 3, at 211 (Smith Hurd 1993). Furthermore, 'because the drawer ... has increased the chance of forgery by dealing with a person who intends to commit a forgery, and has even permitted the forger to chose the name that he will forge, the drawer's ... culpability is deemed to outweigh that of subsequent purchasers.' 4 Hawkland, Uniform Commercial Code Series, section 3-405 (2002) (section 3-405 has been renumbered as section 3-404).

"Aside from the impostor defense, due to the client's forged signature on the check, the bank that accepted it, American National, would be liable for warranting to the subsequent bank, First National, that 'all signatures on the item are authentic and authorized.' 810 ILCS 5/4-207(a)(2)."

"Thus, the questions are what type of conduct constitutes an imposture and whether the bank proved an imposture induced the hospital to issue the $200,000 check at issue.

"The current, revised version of UCC Article 3, which is the article pertaining to negotiable instruments (810 ILCS 5/3-101 et seq.), does not include a definition of the term 'impostor,' and the prior, or original version of Article 3 included only a brief official comment, indicating, ' "Impostor" refers to impersonation, and does not extend to a false representation that the party is the authorized agent of the payee. The maker or drawer who takes the precaution of making the instrument payable to the principal is entitled to have his endorsement.' Ill.Ann.Stat., ch. 26, par 3-405(1)(a), Uniform Commercial Code, comment 2 (Smith-Hurd 1963).

"Because the old official comment made it clear that the impostor defense 'does not extend to a false representation that the party is the authorized agent of the payee,' courts have consistently indicated that misrepresentation of a person's authority as an agent is not enough to trigger the impostor defense.

"When a person honestly identifies himself or herself, but falsely purports to be an agent of another, the person is simply misrepresenting his or her status, rather than misrepresenting his or her identity. An impersonation, or misrepresentation of identity, is always required before the impostor rule can be invoked, whether the impostor pretends to be the principal or his agent.

"This principle is illustrated by Title Insurance Company [of Minnesota v. Comerica Bank-California, 27 Cal.App.4th 800, 806, 32 Cal.Rptr.2d 735, 739 (1994)], in which a bank customer's son obtained home equity loans in her name by falsely representing that he was authorized to act on her behalf. The son arranged for checks to be issued totaling about $167,000, without assuming his mother's identity or forging her signature on the loan documents. He always correctly identified himself as her son. Although his conduct was fraudulent, it was not an impersonation of his mother, and thus was not enough to invoke the impostor defense.

"Similarly, here, we find the mere fact that the dishonest attorney orally misrepresented his authority to settle his client's pending medical malpractice suit against the hospital was not enough to trigger the impostor defense. The question is whether the attorney's additional conduct of using the forged covenant not to sue amounted to an assumption of his client's identity.

"Courts have disagreed over whether an impersonation occurs when, as in this case, a forged document is tendered in order to obtain a negotiable instrument. See ... S. Dow, 'The Impostor Rule and the Nature of Forgery Under the Revised Uniform Commercial Code: A Doctrinal Analysis and Some Suggestions for the Drafting Committee,' 49 Am. Bus. L.J. 25 (2001). The disagreement has resulted in two lines of authority.

"The bank relies upon the minority line of cases, which have applied the impostor defense when a forged document has been used to obtain a negotiable instrument. The leading opinion is Minster State Bank v. BayBank Middlesex, 414 Mass. 831, 611 N.E.2d 200 (1993), in which the court construed a promissory note bearing a husband's signature and his wife's forged signature as the husband's 'implicit' impersonation of his spouse. The court was of the opinion that although the husband had not impersonated his wife 'in the literal "in person" ' sense, he had held himself out as her, in writing, inducing the bank to issue a loan check."

"We are not persuaded by Minster's reasoning. We regard an impostor as '[o]ne who pretends to be someone else to deceive others' (Black's Law Dictionary 760 (7th ed. 1999)), or 'a person who practices deception under an assumed character, identity or name' (Random House Webster's Unabridged Dictionary 962 (1998)), rather than someone who correctly identifies themselves but suggests through forged documents or signatures that another person is involved in their financial or business transaction.

"A dissenting justice in Minster considered it crucial that the husband had never represented that he was anyone other than himself. The dissent pointed out that if the husband had forged the wife's signature and returned the promissory note to the bank without a cover letter or with a cover letter purportedly from her, then clearly an imposture 'by use of the mails or otherwise' (810 ILCS 5/3- 404(a)) as stated in the UCC would have occurred.

"Impersonation would have occurred in those circumstances because the mailing would have falsely represented that the wife, not the husband, was the correspondent. However, the facts showed that the husband had only lied about his wife's participation in the loan transaction and never expressly or implicitly told anyone that he was her.

"The dissent believed the court had too lightly dismissed the 'sound logic' of the other developing line of authority which would have construed the husband's conduct as a misrepresentation coupled with a forged document.

"Prominent cases in that line include East Gadsden Bank v. First City National Bank of Gadsden, 50 Ala. App. 576, 281 So.2d 431 (1973), and Broward Bank v. Commercial Bank of Hollywood, 547 So.2d 687 (Fla.App. 1989).

"The hospital urges us to consider their reasoning. Like Minster, both of these cases involved a misrepresentation of intent and forged signatures on the documents required to obtain checks, yet the impostor defense was rejected. In East Gadsden, a loan applicant caused his bank to issue a check by misrepresenting that he was purchasing a car and forging the signature of a car dealership's officer on a purchase order in order to substantiate his intent to purchase the vehicle.

"In a breach of warranty suit involving the bank that issued the check and the bank that accepted it, the court concluded that the loan applicant had merely misrepresented to the issuing bank that he was purchasing an automobile and strengthened his misrepresentation with the forged purchase order. The imposture required for imposition of the impostor rule had never occurred.
"In the more recent Broward Bank case, the plaintiff bank argued that if forgery were enough to trigger the impostor rule, the rule would be known as the forgery rule. The court rejected the impostor defense after a husband forged his wife's signature on loan documents and the resulting loan checks, emphasizing that no one at the issuing bank had contact with a person identifying herself as the wife. It also indicated that if the impostor rule were construed to the contrary, then 'virtually every forgery would also constitute an "impersonation." '

"The East Gadsden-Broward Bank line includes a case we consider the most factually similar to the present dispute, Clients' Security Fund v. Allstate Insurance Co., 219 N.J.Super. 325, 530 A.2d 357 (1987). In that New Jersey case, an attorney tendered forged client releases in order to obtain settlement checks. The checks were made payable to the attorney and his clients, but the attorney forged the clients' endorsements, deposited the funds into his own account at another bank, and then kept the proceeds.

"The New Jersey court was satisfied that under these facts, the impostor defense was not applicable. It emphasized that the attorney never pretended to be anyone other than himself. He always represented the true fact that he was the claimants' attorney, and never claimed to be the clients themselves. In the court's opinion, rather than impersonating someone, the attorney misrepresented that his clients intended to settle, and then strengthened his misrepresentation with a forged document.

"The court also indicated that if it deemed the attorney to be an impersonator, it would effectively negate the UCC's general rule that a forged endorsement is ineffective to pass title. 'Virtually every forger would be an "impersonator." Every forged instrument would thus be rendered effective, thereby immunizing the depositary bank from liability.'

"We are persuaded that this line of cases is the proper interpretation of the UCC impostor defense. We point out, however, that although we consider Clients' Security to be the most analogous, none of the previous cases appears to have involved a forged signature that was notarized."

The documents that the hospital relied on in the Illinois case "do not establish the impostor defense was applicable. They do not prove that anyone assumed the client's identity, nor do they prove that the assumption of identity is what induced the hospital to issue the settlement check. The statements clearly indicate that the attorney misrepresented his authority to settle, yet misrepresentation of authority is not an imposture and has never been enough to trigger the defense. The statements also clearly establish that the client's signature was notarized, yet they do not indicate that an actual assumption of the client's identity was necessary to gain the notary's endorsement.

"These statements leave open several possible ways of obtaining the notarization, and not all of them involve an imposture. As examples, it could be inferred from the facts presented that the dishonest attorney forged both the client's signature and the notary's endorsement, that the notary knowingly endorsed the client's signature despite his absence, or that the dishonest attorney or his confederate appeared before the notary as the client in order to gain the notary's participation.

"All of these possibilities exist under the limited facts presented; however, only the last one qualifies as an imposture. We are not finding that the latter scenario is the only way in which the imposture defense could be established in this case. We do not know what actually occurred and what discovery might reveal about the circumstances leading up to the issuance of the settlement check.

"We use these examples to demonstrate that a question of fact exists as to whether an imposture, or assumption of identity, consistent with East Gadsden and Broward Bank occurred, and that the moving party failed to meet its burden of proving imposture as a matter of law."

"We also point out that the documents clearly disclose that the attorney tendered the covenant not to sue bearing the client's forged signature and that the hospital tendered its check, but they do not establish that the notarized document in particular is what induced the hospital to issue the check.

"Even assuming that an actual imposture was required to gain the notary's endorsement, a question of fact remains as to whether that imposture induced issuance of the check. Construing the documents in the light most favorable to the non-moving party leads to the conclusion that the bank failed to prove as a matter of law that an imposture had occurred and that the imposture is what induced issuance of the check."

"At this point in time, material questions of fact remain as to what transpired before the $200,000 settlement check was issued. It cannot be said that there is no set of facts which would entitle the hospital to recover against the bank. Accordingly, the bank was not entitled to judgment as a matter of law and the dismissal of the bank's complaint was erroneous.

"The judgment of the Circuit Court is reversed, and this cause is remanded for further proceedings consistent with this opinion."

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