Opinion ID: 2211447
Heading Depth: 2
Heading Rank: 2

Heading: Background Of the Intended Payee Defense

Text: Recognizing that not all improper payments cause a loss which should be actionable, the Indiana legislature and courts have established several statutory and equitable defenses for a bank which pays a check over the forged endorsement of a payee. Under Ind. Code Ann. § 26-1-3-404 (West Supp. 1992), for example, an otherwise invalid endorsement may become operative as the named person's signature if that person ratifies the signature or is precluded by estoppel from denying it. See also id. (Indiana Comment) (West 1980). The fictitious payee defense, codified at Ind. Code Ann. § 26-1-3-405 (West 1980), similarly allows a drawee bank to escape from its liability for improperly paying a check bearing the forged endorsement of a payee. Under that defense, an endorsement by any person in the name of a named payee is deemed effective if an imposter has induced the drawer to issue the check to him in the name of the payee. Id. Apart from the statutory defenses to liability expressly provided by the U.C.C., certain equitable defenses exist to reduce or eliminate a drawee bank's liability for payment of a check bearing the forged endorsement of a payee. See generally Ind. Code Ann. § 26-1-1-103 (West Supp. 1992) (Unless displaced by the particular provisions of [the Indiana Commercial Code], the principles of law and equity ... shall supplement the provisions of [the Commercial Code].). Separate from, but closely associated with, the intended payee defense is the defense of mitigation of damages for a drawee or collecting bank defending a conversion action brought pursuant to Ind. Code Ann. § 26-1-3-419 (West Supp. 1992) by a payee whose endorsement was forged or missing. The mitigation of damages defense reduces the bank's liability to the extent the proceeds of the check were received by the payee and applied to the specific debt to which the payee intended they apply. Yeager & Sullivan, 162 Ind. App. at 25, 317 N.E.2d at 798. The mitigation of damages defense is aimed at preventing unjust enrichment, and it exists to prevent a payee from recovering on a forged endorsement to the extent the payee did not suffer damages in the transaction. A defendant seeking the benefit of the defense must show that the check proceeds were applied as the payee intended because otherwise the defense would have the effect of allowing the tortfeasor to dictate to the true owner how his property is to be used. Id. at 26, 317 N.E.2d at 799. The intended payee defense is similarly aimed at preventing a drawer from being unjustly enriched by recovering for an improperly paid check when the proceeds of the check in fact were received by the payee intended by the drawer and the drawer suffered no damages caused by the improper payment. The Appellate Court of Indiana applied this defense as long ago as 1937, Shank v. Peoples State Bank, 104 Ind. App. at 458-59, 7 N.E.2d at 52, and some say it has attained universal recognition, Commercial Credit Corp. v. Empire Trust Co., 260 F.2d 132, 134 (8th Cir.1958). The defense is based on the view that the drawer should not be permitted to recover from the drawee bank where he has suffered no loss from the improper payment of a check. Tonelli v. Chase Manhattan Bank, 41 N.Y.2d 667, 394 N.Y.S.2d 858, 860-61, 363 N.E.2d 564, 567 (1977). The intended payee defense is based on the fundamental equitable principle that a defendant should obtain relief from liability when no damage has resulted from his wrongdoing. See Shank, 104 Ind. App. at 458, 7 N.E.2d at 52. In addition to the policy against unjust enrichment, the intended payee defense is also grounded on the tort notion of causation. The intended payee defense is available to a bank which has paid a check over the forged endorsement of a payee when the bank's improper payment is not a cause of the drawer's injury flowing from the transaction. This causation aspect envisions occasions in which the drawer is damaged in a forged check transaction but the forgery in no way precipitated or caused the damage. See, e.g., Modern Equip. Corp. v. Northern Trust Co., 284 Ill. App. 586, 1 N.E.2d 105 (1936). In Modern Equipment, the endorsement of a payee on several one-party checks was forged by the payee's wife. Id. 1 N.E.2d at 106. Because the wife deposited the proceeds into the husband and wife's joint bank account, the court determined that the intended payee actually received the funds. Id. at 108. The court held that the drawer could not recover on the forged check because any damages the drawer suffered in respect to the check transactions had no relation to and were not caused by the forgeries. Id. No act of the drawer in relation to the checks contributed to the loss suffered by the drawer in its transaction with the payee. Id. In the context of jointly payable checks, the intended payee defense also commonly applies when the co-payee whose endorsement was forged was never intended to have an interest in the proceeds of the check. See, e.g., Commercial Credit, 260 F.2d 132; Gordon v. State St. Bank & Trust Co., 361 Mass. 258, 280 N.E.2d 152 (1972); Union Finance Co. v. National Bank, 463 S.W.2d 70 (Mo. Ct. App. 1970). In Gordon, the drawer wrote a jointly payable check to a husband and wife as a loan from the drawer to the husband. 280 N.E.2d at 153. Although the husband received the funds as intended, the wife's signature was forged on the check and the accompanying note. Id. at 154. Shortly after the loan was funded, the husband died and the wife claimed she never authorized her husband to sign the note for her. Id. The drawer-lender in Gordon arguably was damaged in the amount of the unpaid portion of his loan, but the court nevertheless held that the intended payee defense relieved the drawee bank from any liability on the forgery. The court reasoned that the forgery did not cause the drawer's harm: The drawer is not harmed if the drawee bank's action with respect to a check carries out (or does not interfere with the accomplishment of) the drawer's purpose with respect to that check. Id. The defense imposed no injustice in relieving the drawee bank from liability because there has been precisely the expected benefit, as a consequence of the initial negotiation of the check, to the person intended to take the whole interest. Id. Rather, any damage caused to the drawer was caused by the forged signature on the note. Id. at 154 n. 1; see also Commercial Credit, 260 F.2d at 134 (applying the defense under the same facts as Gordon, court held it is inescapable that the forged endorsement was not the proximate cause of plaintiff's loss); Union Finance, 463 S.W.2d at 72 (under the same facts, concluding any loss to drawer caused not by forged endorsement but by forged signature on promissory note).