State Security Check Cashing, Inc. v. American General Financial Services
972 A.2d 882, 409 Md. 81 (2009)
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Rule of Law:
Under Maryland's Commercial Law Article § 3-404, the 'imposter rule' places the loss from check fraud on the drawer who issued the check to the imposter, as the drawer was in the best position to prevent the fraud. A party who subsequently cashes the check does not fail to exercise 'good faith' or 'ordinary care' when it relies on the same fraudulent identification and documents that the drawer found sufficient to issue the check.
Facts:
- On June 20, 2007, an imposter posing as Ronald E. Wilder telephoned American General Financial Services, Inc. ('American General') to apply for a loan.
- After running a credit check on the real Wilder and receiving faxed tax returns from the imposter, American General approved an $18,000 loan on June 22, 2007.
- The imposter appeared in person at American General's office, presented a fraudulent driver's license with his photo and Wilder's information, signed loan documents, and received an $18,000 check payable to 'Ronald E. Wilder'.
- Later that day, the imposter presented the check, the fraudulent driver's license, and the loan documents to State Security Check Cashing, Inc. ('State Security').
- An employee at State Security reviewed the documents, compared the check to others from American General, received approval from a compliance officer, and cashed the check for the imposter, charging a fee.
- On June 25, 2007, the real Ronald E. Wilder notified American General of the identity theft.
- Upon learning of the fraud, American General placed a 'stop payment' order on the check before State Security could present it for payment to the bank.
Procedural Posture:
- State Security Check Cashing, Inc. filed a civil claim against American General Financial Services, Inc. in the District Court of Maryland, sitting in Baltimore County.
- After a bench trial, the District Court entered judgment in favor of American General, finding State Security had not exercised ordinary care.
- State Security, as appellant, appealed to the Circuit Court for Baltimore County.
- The Circuit Court, acting as an intermediate appellate court, affirmed the judgment of the District Court.
- State Security, as petitioner, filed a petition for a writ of certiorari with the Court of Appeals of Maryland, the state's highest court, which was granted.
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Issue:
Does a check cashing business fail to exercise 'good faith' and 'ordinary care' under Maryland's Commercial Law Article when it cashes a large loan check for an imposter after relying on the same fraudulent identification and loan documents that the check's issuer had relied upon?
Opinions:
Majority - Harrell, Judge
No. A check cashing business does not fail to exercise 'good faith' and 'ordinary care' under these circumstances, and therefore the drawer of the check bears the loss. The default 'imposter rule' under § 3-404 places the loss on the drawer, who is in the best position to prevent the fraud. To be a holder in due course, a party must take an instrument in 'good faith,' which means 'honesty in fact and the observance of reasonable commercial standards of fair dealing.' State Security acted in good faith because it relied on the same identification and loan documents that American General itself had deemed sufficient; holding State Security to a higher standard would be anomalous. Furthermore, to shift the loss, the drawer must show the paying party failed to exercise 'ordinary care,' meaning it violated 'reasonable commercial standards' prevailing in its business and area. American General failed to present any evidence that State Security's procedures were commercially unreasonable. In contrast, American General had a better opportunity to detect the fraud, such as by contacting the personal references the imposter provided.
Analysis:
This decision reinforces the UCC's 'imposter rule' principle that the party best positioned to prevent fraud—the drawer who deals directly with the imposter—should bear the resulting loss. The court clarified that the standards of 'good faith' and 'ordinary care' do not impose a higher duty of diligence on a check cashing business than on the financial institution that issued the check. This precedent makes it more difficult for a drawer duped by an imposter to shift the loss downstream to a subsequent holder who acted in a commercially reasonable manner, thereby protecting the negotiability of instruments in commerce.
