Legal Definitions - fictitious-payee rule

The fictitious-payee rule is a principle in commercial law that states that if a person issues a check or other commercial paper to a payee who has no actual interest in the instrument, a forgery of the payee's name will still be effective in passing good title to later transferees. This is also known as the padded-payroll rule.

For example, if a company issues a check to a fake employee, and that check is later stolen and the fake employee's name is forged, the person who receives the check from the thief may still have a legal claim to the funds.

This rule is important because it allows for the transfer of commercial paper even if there has been a forgery, which can help prevent fraud and ensure the smooth functioning of commercial transactions.