Compliance Blog

Categories: UCC

Check Fraud and Impostors

We have discussed check fraud and concepts from the UCC here and here over the past couple of months. While the UCC does not contemplate every check fraud scenario that a credit union might encounter, the UCC provides a general framework that can be used to determine which party will bear the loss for the check fraud. There are even some special rules that we have discussed that can change the default rules regarding allocation of loss under certain circumstances. For example, section 3-406 of the model UCC explains that a loss that arises from a forgery or an alteration of a check can be allocated to those parties whose negligence contributes to the forgery or alteration. And section 4-406 of the UCC can act to shift the loss to your credit union's members when there is a forged or altered check if the members fail to exercise reasonable promptness in examining statements provided to them that might evidence any unauthorized payments.

Today I want to discuss another special circumstance. What happens when a member falls victim to a scam and unwittingly writes a check to a fictitious person. What if a member writes a check in the amount of $5,000 payable to a fictitious yet hairy individual who purports to be Chewy D. Wookie? The $5,000 is for the purpose of acquiring some Star Wars paraphernalia. But Chewy, being clever and not actually being Chewy D. Wookie but rather B.B. Eight, indorses the check in blank as Chewy and runs off to cash that check as quickly as possible. The credit union pays the check over a forged indorsement of a fake Chewy? Does the credit union bear the loss in this scenario or does the member bear the loss?

Section 3-404 of the model UCC deals with impostors and fictitious payees:

(a) If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

What this means is that in this hypothetical scenario, the credit union may be able to escape liability because the indorsement by any person in the name of the fictitious Chewy D. Wookie is an effective indorsement under the model UCC. The UCC suggests that the indorsement in the name of Chewy - Chewy not being a real person (i.e., a fictitious person) - appears to render the indorsement effective in favor of a person who, in good faith, pays the check or takes it for value or for collection. Therefore, the member bears the loss in this instance under the model UCC.

Because states can elect to deviate from the model UCC when implementing their versions of the UCC, credit unions may wish to consult with local counsel to see whether the relevant versions of the UCC that might apply to them are consistent with the model UCC or differ from the model UCC.

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About the Author

David Park, NCCO, Regulatory Compliance Counsel, NAFCU

David joined NAFCU in September 2018.  As part of the Regulatory Compliance Team, he provides daily compliance assistance to member credit unions on a variety of topics. 
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