First Division
April 19, 2004

The issues on appeal are whether the imposter defense contained in section 3-404(a) of theIllinois version of the Uniform Commercial Code, Negotiable Instruments (810 ILCS 5/3-404(a)(West 2000)) ("UCC") may be properly asserted in a section 2-615 motion to dismiss a complaintfor failure to state a claim (735 ILCS 5/2-615 (West 2000)) and whether the defense is factuallyapplicable to the present dispute.

As detailed in this court's earlier opinion, Blutcher v. EHS Trinity Hospital, 321 Ill. App.3d 131, 746 N.E.2d 863 (2001), one of the defendants in that action, a hospital, issued a$200,000 check in settlement of a patient's medical malpractice claim, after the patient's attorneyfalsely represented that he was authorized to settle the claim and tendered a notarized covenantnot to sue bearing his client's forged signature. Blutcher, 321 Ill. App. 3d 131, 746 N.E.2d 863. The client only learned of the settlement a year later, when he questioned why the hospital was nolonger named as a defendant in an amended version of the complaint. Blutcher, 321 Ill. App. 3dat 134, 746 N.E.2d at 866. The circuit court granted the client's subsequent petition to vacatethe falsified settlement agreement, vacate the order dismissing the hospital as a defendant, andreinstate the medical malpractice claim as to the hospital, and was affirmed on appeal. Blutcher,321 Ill. App. 3d 131, 746 N.E.2d 863.

The present suit is the hospital's attempt to recoup the $200,000 debited to its checkingaccount by its bank, defendant First National Bank of Chicago, n/k/a Bank One, N.A. (FirstNational). The hospital alleged in a second amended complaint that the attorney forged hisclient's endorsement on the check, endorsed the check himself, deposited it into an account theattorney maintained with nonparty American National Bank of Chicago (American National), andkept the proceeds. The hospital claimed that First National's payment of the check bearing theclient's forged endorsement was a breach of section 4-401 of the UCC (810 ILCS 5/4-401 (West2000)). Section 4-401 indicates a bank may charge an item against a customer's account only ifthe item is "properly payable," and the official comment to that section indicates an item bearing aforged endorsement is not considered properly payable. 810 ILCS 5/4-401 (West 2000). Thehospital gave no indication in its second amended complaint as to why it had issued the check tothe attorney.

Those circumstances, however, were disclosed to the trial judge by First National, after itobtained a copy of a legal memorandum which the hospital had filed in the Blutcher proceedingsin an effort to enforce the forged settlement agreement. First National relied on the factsdisclosed in the hospital's Blutcher memorandum, in a successful section 2-615 motion to dismissthe hospital's UCC claim with prejudice (735 ILCS 6/2-615 (West 2000)). First National'sargument was that since the forged covenant not to sue had induced the hospital to issue thecheck to the dishonest attorney, the UCC's imposter defense precluded the hospital from shiftingits $200,000 loss to First National. Under the imposter defense, an endorsement in the name ofthe payee is "effective" if an imposter "by use of the mails or otherwise" has induced the drawer toissue the check to the imposter in the name of the payee. 810 ILCS 5/3-404(a) (West 2000). Title to the check passes as though the forged endorsement is genuine, and liability on the checklies with the drawer, rather than a depositary bank, such as American National in this instance, ora payor or drawee bank, such as First National in this instance, as long as there is no lack of goodfaith by the banks involved. See generally First National Bank of Chicago v. MidAmericaFederal Savings Bank, 303 Ill. App. 3d 176, 707 N.E.2d 673 (1999). The rationale for theimposter defense is that "[t]he drawer is in the best position to avoid the fraud and thus shouldtake 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 intendsto commit a forgery, and has even permitted the forger to chose the name that he will forge, thedrawer's *** culpability is deemed to outweigh that of subsequent purchasers." 4 Hawkland,Uniform Commercial Code Series