Padded Payroll Rule Law and Legal Definition
Padded payroll rule is a principle of commercial law that an indorsement by any person in the name of a named payee is effective if an agent or employee of the maker or drawer has supplied the maker with the name of the payee intending the latter to have no such interest. Padded payroll rule is also known as fictitious-payee rule
The following is an example of a state statute (Texas) on the rule:
In Texas, the padded payroll rule is codified at Tex. Bus. & Com. Code § 3.404 It reads as follows:
Tex. Bus. & Com. Code § 3.404. Impostors; Fictitious Payees
(a) If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
(b) If (i) a person whose intent determines to whom an instrument is payable (Section 3.110(a) or (b)) does not intend the person identified as payee to have any interest in the instrument, or (ii) the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement:
(1) Any person in possession of the instrument is its holder.
(2) An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
(c) Under Subsection (a) or (b), an indorsement is made in the name of a payee if:
(1) it is made in a name substantially similar to that of the payee; or
(2) the instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to that of the payee.
(d) With respect to an instrument to which Subsection (a) or (b) applies, if a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.