Fictitious payee rule is a principle of commercial law that if a drawer or maker issues commercial paper to a payee whom the drawer or maker does not actually intend to have any interest in the instrument, an ensuing forgery of the payee's name will be effective to pass good title to later transferees. Ordinarily, the drawer of a check is not liable on a forged indorsement. The "fictitious payee" rule is an exception to this principle, as it allocates the loss to the drawer if a person signing as or on behalf of a drawer intends the payee to have no interest in the instrument. The policy behind the fictitious payee rule is that it seeks to ensure that, "the loss should be placed on the drawer of the check, rather than on the drawee or the depositary bank that took the check for collection" because the drawer is in the best position to avoid the fraud that usually sets in motion such fictitious payee scenarios.
This is also known as padded-payroll rule.
The following is an example of a state statute (New York) on the rule:
In New York, the fictitious-payee rule is codified at NY CLS UCC § 3-405. It reads as follows:
§ 3-405. Imposters; Signature in Name of Payee
(1) An indorsement by any person in the name of a named payee is effective if
(a) an imposter by use of the mails or otherwise has induced the maker or drawer to issue the instrument to him or his confederate in the name of the payee; or
(b) a person signing as or on behalf of a maker or drawer intends the payee to have no interest in the instrument; or
(c) an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest.
(2) Nothing in this section shall affect the criminal or civil liability of the person so indorsing.