Before the court is Defendant’s Motion for Summary Judgment. The core issue presented by the motion is whether and to what extent a collecting or depository bank will be liable to the drawer or the unintended payee of a check when the drawer’s faithless employee induces the drawer to issue checks, fraudulently indorses them in the name of the specified payee, and absconds with the funds. Because under the undisputed facts of the case, the ‘‘fictitious payee’’ defense as codified by section 3–405 [Revised §§3–404, 3–405] of the Uniform Commercial Code affords the defendant an absolute defense to all claims, summary judgment for the defendant is hereby granted.

   The present litigation between plaintiff Shearson Lehman Brothers, Inc., (‘‘Shearson’’) and defendant Wasatch Bank (‘‘Wasatch’’) arises out of the activities of a former employee of Shearson, Stanley A. Erb (‘‘Erb’’). Erb began working as a financial consultant or broker at Shearson’s Provo, Utah, branch office in 1984. By 1987, because of the volume of his sales, Erb had been given the cognomen of vice president. In 1987, Erb was contacted by McKay Matthews, the controller for the Orem, Utah, based WordPerfect Chapter 27 Transfer 519 Corporation, and its sister corporation, Utah Softcopy. On Matthews’ request, Erb coordinated the establishment of three separate investment accounts at Shearson. The accounts were for the benefit of WordPerfect and Utah Softcopy as corporations and one account was established for the personal benefit of the WordPerfect principals, Allen C. Ashton, Bruce W. Bastian, and Willard E. Peterson. Thereafter, Erb assumed the responsibility for managing all three of the Word Perfect accounts at Shearson.

   In March 1987, Erb personally accepted from Matthews a check drawn by Utah Softcopy and payable to the order of ‘‘ABP Investments.’’ The amount of the check was $460,150.23. At that time, there was no ABP Investment account opened at Shearson, although the WordPerfect principals maintained accounts elsewhere in that name. Notwithstanding the absence of an account in the name of the payee, Erb accepted the check for deposit at Shearson. Matthews suggested that a substitute check be correctly drawn and submitted for deposit at Shearson. Erb responded by assuring Matthews that he would personally guarantee that the check was credited to the appropriate account. However, rather than depositing the check into one of the authorized WordPerfect accounts, Erb opened a new account at Shearson in the name of ‘‘ABP Investments.’’ Erb apparently forged the signature of Bruce Bastian on the new account documents. No evidence in the record suggests that Bastian or any other WordPerfect or Utah Softcopy representative authorized or subsequently ratified the creation of the new account. Erb listed as the address of record for the ABP Investment account a post office box number in Orem, Utah, which was unknown to WordPerfect and its principals and was different from the record address for the other three WordPerfect accounts.

   Over the course of the next eleven months, Erb induced Shearson to draft checks on the ABP Investment account, payable to ABP Investments. Erb manipulated Shearson’s procedure for making payments to clients by submitting to the Shearson cashier falsified payment request forms. Checks were drawn by Shearson in the requested amounts and were mailed to the Orem post office box. Erb then obtained the checks from the post office box, indorsed them in the name of ABP Investments, and took them to Wasatch for deposit into his personal account. In the course of his scheme, Erb fraudulently procured and negotiated approximately thirty-seven checks, totaling $504,295.30.

   Wasatch accepted for deposit and subsequently allowed Erb to withdraw from his personal account all of the funds representing the thirty-seven checks Erb fraudulently procured from Shearson. Copies of those checks reveal that each was drawn payable to the order of ABP Investments and each was indorsed, in handwriting, in the name of ABP Investments and without Erb’s personal indorsement or any other indication of Erb’s authority to act on behalf of the payee. No ABP Investment account was maintained at Wasatch and therefore no signature card or other evidence on the premises of the bank could have been used to verify Erb’s authority to deposit checks payable to ABP Investments. * * *

   Erb’s activities with respect to the ABP Investments account were not discovered until early 1989, by which time Erb had terminated his employment at Shearson. Lori Rogerson, the operations manager at the Provo Shearson office, testified that she had always been aware of the existence of the ABP Investment account, that she understood the initials ‘‘ABP’’ to represent the names of the WordPerfect principals, but that she also assumed the account was legitimately opened and managed by Erb. At a meeting with WordPerfect representatives in early 1989, Rogerson peripherally mentioned the ABP Investment account whereupon a WordPerfect representative informed her that neither WordPerfect nor its principals maintained such an account at Shearson. After this disclosure, Shearson requested an audit of the accounts managed by Erb and discovered the extent of his mishandling of the ABP Investment account as well as other unrelated mismanagement.

   In June 1989, Shearson, WordPerfect and the WordPerfect principals entered a settlement agreement whereby all claims against Shearson arising out of Erb’s mishandling of the WordPerfect and related accounts were settled for $1,208,903. Under the agreement, Shearson acquired by assignment or was subrogated to all legal rights of WordPerfect, Ashton, Bastian and Peterson. Shearson subsequently initiated the present suit against Wasatch. Shearson’s complaint alleges the following causes of action: (1) common law negligence, specifically, that the deposits were suspicious, Wasatch knew Erb was employed by the drawer of the checks he deposited into his personal account, and Wasatch made no reasonable attempt to determine the authenticity of endorsements; (2) breach of warranty of good title and implied covenant of good faith and fair dealing in that Wasatch failed to follow reasonable commercial banking practices; * * *.

   Wasatch subsequently moved for summary judgment and asserts as the basis for that motion the following arguments: (1) the ‘‘fictitious payee defense,’’ UCC §3–405(1)(c) [Revised §3–405], bars all of Shearson’s claims; * * *.

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Discussion 

Whether Shearson’s Claims Are Barred by the ‘‘Fictitious Payee’’ Defense of UCC 3–405(1)(c) [Revised §3–405]Wasatch acknowledges that, ‘‘[a]s a general rule, ‘forged indorsements are ineffective to pass title or to authorize a drawee to pay.’’’ [Citations.] Consequently, when a collecting bank makes payment over a forged indorsement, it is generally liable for the amount paid. [Citations.]

   Under this general rule, Wasatch clearly would be liable as the party that accepted checks over forged indorsements. Wasatch attempts to avoid such liability, however, by invoking what is known as the ‘‘fictitious payee’’ defense. The defense is an exception to the general rule that a party accepting or paying an instrument over a forged indorsement ultimately will be liable for the loss and is set forth in section 3–405 [Revised §3–405] of the Uniform Commercial Code:

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   The policy underlying section 3–405 [Revised §3–405] is thus to place the risk of loss of forgery on the party in the best position to avoid or insure against such loss. [Citations.]

  As indicated by the language of section 3–405(1)(c) [Revised §3–405], if the defense applies to the facts of a given transaction, the result is to render the forged signature effective to transfer good title as if no forgery had occurred. [Citations.] * * *

   For the defense to apply, an employee or agent of the drawer must ‘‘supply’’ the name of the payee to the drawer, and the faithless employee must intend that the payee have no interest in the instrument. [UCC] §3–405(1)(c) [Revised §3–405]. Although the defense commonly has been referred to as the ‘‘fictitious payee’’ defense, the payee named on the check need not be a fictitious person or entity. ‘‘It is immaterial whether a person with the name of the payee actually exists or whether the name is in fact a wholly fictitious name.’’ [Citations.] Moreover, courts applying the defense have liberally construed the term ‘‘supply.’’ ‘‘An employee ‘supplies’ the name of the payee if he ‘starts the wheels of normal business procedure in motion to produce a check for a nonauthorized transaction.’’’ [Citations.] * * *

   Thus Wasatch argues that the fictitious payee defense of section 3–405(1)(c) [Revised §3–405] applies to the undisputed facts of the present case. Erb, an employee of the drawer of the check, ‘‘supplied’’ the name of the payee within the meaning of the statute and obviously intended that the named payee have no interest in the checks. He then procured the checks and fraudulently indorsed them for deposit into his account at Wasatch. Wasatch accordingly argues that the effect of Erb’s actions was to validate the forged indorsements and to allow good title to pass to Wasatch thereby extinguishing Wasatch’s liability for the transaction.

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Conclusion

The ‘‘fictitious payee’’ defense as articulated in section 3– 405(1)(c) [Revised §3–405] of the Uniform Commercial Code operates under the facts of the present case to shield the collecting bank, Wasatch, from liability resulting from Erb’s misconduct while in Shearson’s employ. Erb deliberately induced the issuance of checks by Shearson. The payee named on those checks was never intended by Erb to take an interest in the checks. In such circumstances the mandate of the Code is clear—the drawer shall bear the loss resulting from the misdeeds of its employee. Wasatch’s conduct in the relevant transactions raises serious questions about whether the bank discharged its duty to act in a commercially reasonable manner. Nevertheless, no fact has been alleged which would support the inference that Wasatch acted in bad faith so as to preclude the operation of the fictitious payee defense. [S]ummary judgment is hereby GRANTED in favor of Wasatch and all counts of Shearson’s complaint are hereby dismissed with prejudice.