On appeal from the Superior Court of New Jersey, Law Division, Mercer County.
King, Havey and Muir, Jr. The opinion of the court was delivered by Havey, J.A.D.
[219 NJSuper Page 327] Defendant First Fidelity Bank, N.A. (First Fidelity) appeals from a summary judgment dismissing its cross-claim against Allstate Insurance Company (Allstate). The appeal involves application of the so-called "impostor rule", under § 3-405 of
the Uniform Commercial Code as enacted in New Jersey at N.J.S.A. 12A:3-405. The "impostor rule" makes an indorsement in the name of the payee effective if an impostor induces the maker or drawer to issue the instrument to him in the name of the payee. N.J.S.A. 12A:3-405(1)(a). Consequently, title to the instrument passes as though there had been no forgery, and liability on the instrument is transferred from the collector-depository bank to the maker-drawer of the instrument. Judge Levy, the motion judge, held that the rule does not apply to an attorney who forges the signature of his clients to settlement drafts, since the attorney has not "impersonated" the clients. We agree and affirm.
This litigation commenced by the filing of a complaint by the Clients' Security Fund of the Bar of New Jersey (Fund) against First Fidelity, Allstate, and Midlantic National Bank (Midlantic), Allstate's paying bank.*fn1 The Fund alleged that Samuel K. Yucht, a New Jersey attorney, diverted the proceeds of settlement drafts issued by Allstate and made payable to Yucht's clients in settlement of personal injury actions in which Yucht acted as attorney. In each case Yucht delivered forged releases to Allstate. Allstate in turn issued settlement drafts made payable to the client and Yucht as attorney. The Fund alleged that Yucht forged his clients' indorsements on each draft, added his own indorsement and deposited the checks into his trust account maintained at First Fidelity. Yucht thereafter withdrew the proceeds for his own use.
Upon discovering their losses, Yucht's clients filed claims with the Fund. The Fund paid the claims and thereupon filed
the present law suit, against First Fidelity, Allstate and Midlantic, alleging conversion and breach of implied warranty that the signatures on the drafts were genuine. First Fidelity cross-claimed against Allstate, asserting that the "impostor rule", N.J.S.A. 12A:3-405, rendered the forged instruments effective so as to preclude First Fidelity's liability as the depository bank.
First Fidelity thereupon settled all claims with the Fund, preserving its cross-claim against Allstate. On cross-motions for summary judgment, Judge Levy found that Yucht had not impersonated his clients in the manner contemplated by the "impostor rule" in that Yucht never assumed his clients' identities, but simply forged their signatures to the settlement drafts. The judge concluded that the rule was therefore inapplicable and dismissed First Fidelity's cross-claim.
The general rule under the Code is that any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it. N.J.S.A. 12A:3-404. An unauthorized signature includes a forgery. N.J.S.A. 12A:1-210. A forged indorsement is normally ineffective to pass title or to negotiate the instrument on which it appears. Brighton, Inc. v. Colonial First Nat'l Bank, 176 N.J. Super. 101, 112 (App.Div.1980), aff'd 86 N.J. 259 (1981). Payment of a check bearing a forged indorsement constitutes conversion under N.J.S.A. 12A:3-419(1)(c), and on a conversion theory, a payee may seek recovery against the drawee. Ibid; see also White & Summers, Uniform Commercial Code (2 ed. 1984) § 15-4 at 586-589. While generally a depository bank handling a forged check may claim immunity against the payee under N.J.S.A. 12A:3-419(3), that immunity may be lost where the depository bank acted in bad faith or failed to adhere to reasonable commercial standards. See Knesz v. Central Jersey Bank and Trust Co. of Freehold, 97 N.J. 1, 21-22 (1984). Also, a depository bank passing a check bearing a forged indorsement to a drawee bank may ultimately
be held liable for a breach of implied warranty that it had good "title". See N.J.S.A. 12A:4-207(1); see also White & Summers, § 15-4 at 589-594.
N.J.S.A. 12A:3-405, the so-called "impostor rule", is an exception to the general rule that a forged instrument is ineffective to pass title. It ...