Legal Definitions - impostor rule

The impostor rule is a principle in commercial law that addresses situations where a person issues a negotiable instrument, such as a check, to someone who is impersonating another individual or entity. Under this rule, if the impostor then endorses the instrument using the name of the person or entity they are pretending to be, that endorsement is legally considered valid, not a forgery. The law places the responsibility for the loss on the person who originally issued the instrument to the impostor, viewing them as negligent for being deceived. Consequently, the issuer remains liable for payment to any subsequent party who accepts the instrument in good faith. This rule aims to protect innocent third parties who later accept the instrument from the impostor, shifting the financial burden to the party who was in the best position to prevent the fraud.

• Example 1: The Fictitious Vendor Representative

  Imagine a small manufacturing company, "Precision Parts Co.," that regularly purchases raw materials from "Industrial Supplies Inc." An individual, Ms. Evans, contacts Precision Parts, claiming to be a new account manager for Industrial Supplies Inc. She provides a new bank account number and a revised mailing address for all future payments. Precision Parts, without independently verifying Ms. Evans's identity or the change in banking details, issues a check for a large order, payable to "Industrial Supplies Inc.," and mails it to the new address provided by Ms. Evans. Ms. Evans receives the check, endorses it with "Industrial Supplies Inc.'s" name, and deposits it into her personal account.

  In this scenario, the impostor rule would hold Precision Parts Co. responsible for the funds. By issuing the check to Ms. Evans, who was impersonating a legitimate representative of Industrial Supplies Inc., Precision Parts enabled the fraud. Ms. Evans's endorsement, even though unauthorized by the real Industrial Supplies Inc., is treated as valid under the rule. Precision Parts Co. would be liable for the payment, and the bank that accepted the check from Ms. Evans would not bear the loss, as they processed an instrument that was effectively endorsed by the party to whom it was issued by the drawer.

• Example 2: The Fake Charity Fundraiser

  Suppose Mr. Thompson, a generous donor, wishes to contribute to a well-known environmental conservation group, "Green Earth Alliance." He receives an unsolicited email from someone claiming to be a senior fundraiser for Green Earth Alliance, requesting a donation check be sent to a specific private mailbox address for an urgent campaign. Mr. Thompson, moved by the appeal but without verifying the email's authenticity or the mailing address, writes a check for a significant amount payable to "Green Earth Alliance" and mails it to the address provided. The scammer retrieves the check, endorses it with "Green Earth Alliance's" name, and deposits it into a personal bank account.

  Under the impostor rule, Mr. Thompson would be responsible for the loss. He issued the check to an individual who successfully impersonated a representative of Green Earth Alliance. The scammer's endorsement, even if a forgery in a general sense, is considered effective because Mr. Thompson was deceived into issuing the instrument to the impostor. The rule protects the bank that processed the check, placing the liability on Mr. Thompson for failing to confirm the identity of the recipient before issuing the negotiable instrument.

• Example 3: The Deceptive Property Manager

  A landlord, Ms. Rodriguez, owns several rental properties. She receives a letter from someone claiming to be a new property manager for one of her buildings, Mr. Johnson, stating that he has been authorized by the tenants to collect rent on her behalf due to a temporary issue with her usual payment system. The letter includes a convincing but fake authorization document and requests rent checks be made payable to "Ms. Rodriguez" but sent to a new P.O. Box. A tenant, Mr. Lee, unaware of the deception, writes his monthly rent check payable to "Ms. Rodriguez" and mails it to the P.O. Box. Mr. Johnson retrieves the check, endorses it with "Ms. Rodriguez's" name, and cashes it.

  In this situation, the impostor rule would apply to Mr. Lee's payment. Even though Mr. Johnson forged Ms. Rodriguez's signature, the law treats his endorsement as effective because Mr. Lee, the drawer, issued the check to the impostor (Mr. Johnson, who pretended to be an authorized agent). Mr. Lee is considered negligent for being deceived by Mr. Johnson's impersonation. Therefore, Mr. Lee's bank would honor the check, and Mr. Lee would be considered to have made a valid payment, even though the funds did not reach the actual Ms. Rodriguez. The loss falls on Mr. Lee, who was tricked by the impostor, rather than on the bank that accepted the check.