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Summary of Rights and LiabilitiesForgery of Promissory Notes

1. Makers signature forged

RuleThe Maker is NOT LIABLE TO ANY HOLDER.

Reason The maker, whose signature is forged, is not a party to the transaction.

Exception He may be made liable if the doctrine of estoppel finds application.

Caveat If the note is negotiated nevertheless by subsequent endorsement and delivery,the endorsers may be held liable on their statutory warranties.

2. Endorsers signature forged Note payable to order

Rule Endorser whose signature is forged and all prior parties, including the makerare NOT LIABLE TO ANY HOLDER.

Reason The signature of the endorser and the delivery of the note are necessary totransfer title to the note. Since an endorsers signature is forged, the transfer oftitle to a subsequent endorsee is inoperative.

3. Endorsers signature forged Note payable to bearer

Rule Endorser whose endorsement is forged and all prior parties including the makerARE LIABLE TO A HOLDER IN DUE COURSE, provided the note ismechanically complete before the forgery.

Reason The endorsement is not necessary to transfer title. The only defense available toresist the claim is want of delivery of a mechanically complete instrument underSection 16.

Exception Section 16 is a defense available only against a holder who is not a holder in duecourse, because a valid and intentional delivery of the note is presumed by lawas regards a holder in due course.

Qualification If the note is incomplete, Section 14 would apply, in which case the possessor of

the note must complete the instrument strictly in accordance with the authoritygiven and within a reasonable time. But if upon completion the note isnegotiated to a holder in due course, the note is valid and effectual for allpurposes in his hands and he may enforce the note as if it was strictly filled up inaccordance with the authority given, and within a reasonable period of time.

If the note is incomplete and undelivered, then Section 15 will apply and it willnot be valid in the hands of any holder unless completed and negotiated withauthority.

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Summary of Rights and LiabilitiesForgery in Bills of Exchange

A (Drawer) B (Payee)

X (Drawee Bank) C (Collecting Bank)

Y (forger)

A draws a check in favor of B against his account with X. Y steals the check, forges Bs endorsement, anddeposits the check in his account with C. Y later withdrew the proceeds of the check.

1. Forgery of Payees Signature(a)Drawer vs. DraweeRule X (Drawee Bank) suffers the loss and must reimburse the account of A

(Drawer).

Reason A (Drawer) instructed X (Drawee Bank) to pay B and no one else. If B is notpaid, X (Drawee Bank) did not obey the instruction

(b) Drawee vs. Collecting Bank

Rule X (Drawee Bank) may recover from C (Collecting Bank) because C had noauthority to pay the proceeds of the check to Y (forger).

Reason C has the legal duty to ascertain that the payees endorsement is genuine.

(c) Drawer vs. Collecting Bank

Rule A (Drawer) has no cause of action against C (Collecting Bank).

Reasons There is no privity of contract between drawer and collecting bank. The duly toobserve due care is owed by the collecting bank to the payee.

(d) Payee vs. Drawer

Rule B (Payee) may recover from A (Drawer).

Reason The claim of B against A remains unpaid.

(e) Payee vs. Recipient of Payment

Rule B (Payee) may recover from Y (forger).

Reason Y, the forger and thief, is not entitled to the proceeds of the check. At best, Yholds the proceeds of the check in trust for B.

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(f) Payee vs. Collecting Bank

Rule B (Payee) may recover from the C (Collecting Bank).

Reason Cs collection of the proceeds of the check is unlawful, and C therefore holds thefunds in trust for the payee. A forged endorsement is totally inoperative. Cs

collection of the proceeds of the check amounts to a conversion i.e., theunauthorized assumption and exercise of rights of ownership over goods andchattels belonging to another.

(g) Payee vs. Drawee

Rule B (Payee) has no cause of action against X (Drawee Bank) unless the check hasbeen certified (or accepted) by the latter.

Reason There is no privity of contract between the payee and the drawee.

(h) Collecting Bank vs. Forger

Rule C (Collecting Bank) has a cause of action against Y (forger) for the recovery of

the proceeds of the check.Reason C was prejudiced by the withdrawal of funds by Y, which amount must be

reimbursed by C to either the Payee or the Drawee.

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2. Forgery of Drawers Signature

Bill has been accepted

A (Drawer) B (Payee)

X (Drawee Bank) C (Endorsee)(Accepted)

As signature was forged. On presentment by C, X refuses to pay on the ground that As signature isforged.

Rule ReasonX (Drawee/Acceptor must pay the check. By accepting the check, an acceptor undertakes

to pay the instrument in accordance with thetenor of his acceptance. [Section 62]

A (Drawer) is not liable for the value of thecheck.

A forged signature is totally inoperative.[Section 23]

Bill not accepted

A (Drawer) B (Payee/forger)

X (Drawee Bank) C

D (Holder)

On presentment, X paid the proceeds of the check to D.

Rule ReasonX (Drawee Bank) cannot recover the proceedsof the check from D if D is a holder in duecourse.

X should have detected the forgery of Assignature because A is its client.

C (endorser) is liable to D, if X dishonored thecheck

An endorser is liable under his warranties inSection 66.

A (Drawer) generally enjoys protection againstforgery. However, he must not be guilty ofnegligence; i.e., the forgery must not have beencaused by his own negligence. Also, he mustdiscover the forgery within a reasonable periodof time

A forged signature is wholly inoperative.

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Summary of Warranties and Defenses Barred

Maker(Section 60)

Warranty Defenses Barred

Existence of the payee That the payee is a fictitious person, natural orjuridical;

Payees capacity to endorse That the payee is a minor or an insane personor otherwise incapacitated; That in the case of acorporate payee, the transaction is ultra vires.

Drawer(Section 61)

Warranty Defenses BarredExistence of the payee That the payee is a fictitious person, natural or

juridicalPayees capacity to endorse the bill That the payee is a minor or an insane person

or otherwise incapacitated; That in the case of acorporate payee, the transaction is ultra vires.

Acceptor(Section 62)

Warranties Defenses BarredDrawers existence Drawer is a fictitious or non-existent person,

whether natural or juridicalDrawers genuine signature Forgery of Drawers signatureDrawers capacity and authority to draw theinstrument

Incapacity of the Drawer; or ultra vires act of acorporate drawer; Drawers lack of authority todraw instrument e.g. want of consideration, oramount drawn is in excess of drawers funds[Liberty Trust Co. v Haggerty, 113 Atl 596]

Payees existence Payee is a fictitious or non-existent person,whether natural or juridical

Payees capacity to endorse Payees incapacity to endorse the instrument

Qualified Indorser and Persons Negotiating by Delivery(Section 65)

Warranties Defenses BarredInstrument is genuine and in all respects whatit purports to be

Forgery, material alteration

He has good title to the instrument That he has no title to the instrument becausehe stole it or he procured it through fraudAll prior parties have capacity to contract That maker is a minor, insane or otherwise

incapacitated; in case of a corporation, that thetransaction is ultra vires

No knowledge of fact that would impair thevalidity of the instrument or would render itvalueless

If the insolvency of the maker at the time ofnegotiation is known to the endorser, he would

be liable for a breach of this warranty

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General Indorser(Section 66)

Warranties Defenses BarredThe instrument is genuine and in all respects

what it purports to beForgery, material alteration

He has good title to the instrument That he has no title to the instrument becausehe stole it or he procured it through fraud

All prior parties have capacity to contract That the maker is a minor, insane or otherwiseincapacitated; in case of a corporation, that thetransaction is ultra vires

That the instrument is, at the time of hisendorsement is valid and subsisting

Illegality of the note because of illegalconsideration

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Tabular Summary of Undertakings, Warranties and Defenses Barred

Section Party Warranties/Undertakings Defenses Barred60 Maker Unconditional and principal

obligation to pay according to tenorof instrument

Existence of payee and his capacityto endorse note Payee is fictitious; payee isincapacitated; transaction isultra vires as to a corporation

61 Drawer If bill is dishonored andproceedings for dishonor taken, he

will pay the bill to holder orendorser who may be compelled topay it; obligation to pay issecondary and conditionalExistence of payee and his capacityto endorse the bill

Payee is fictitious; payee isincapacitated; transaction isultra vires as to a corporation

On presentment, the bill will beaccepted, paid, or both

62 Acceptor Pay the bill according to the tenorof his acceptance; obligation isprincipalExistence of drawer Drawee is fictitiousDrawers capacity and authority todraw the bill

Drawee is incapacitated;drawee has no authority todraw the bill; transaction isultra vires as to a corporation;

want of consideration

Drawers signature genuine Forgery

Existence of payee and his capacityto endorse

Payee is fictitious; payee isincapacitated; transaction isultra vires as to a corporation

64 IrregularEndorser

Same as an endorser Same as an endorser

65 Qualifiedendorser/by

delivery

Instrument is genuine, and in allrespects what it purports to be

Forgery; material alteration

He has good title Fraud; theft of instrumentCapacity of all prior parties Incapacity of any prior party;

transaction is ultra vires as to acorporation

No knowledge of fact that rendersinstrument worthless or invalid

Theft of instrument; want ofconsideration

Warranties extend to immediatetransferees; no guaranty of

payment if qualified endorsementexcept if person principally liable isinsolvent and qualified endorserconceals it; secondary liability is

based on breach of any of the 4warranties

66 Generalendorser

If instrument is dishonored, andproceedings for dishonor are taken,he will pay holder or any endorser

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who pays it; obligation is secondaryInstrument is genuine and in allrespects what it purports to be

Forgery; material alteration

He has good title to it. Fraud; theft of instrument

Capacity of all prior parties Incapacity of any prior party;transaction is ultra vires as to a

corporationAt time of endorsement,instrument is valid and subsisting

Forgery; material alteration;instrument is discharged bypayment in due course

Warranties extend to all holders indue course

Tabular Summary of Beneficiaries of Warranties

By Delivery Warranties extend to immediate transferee only.

Qualified Endorsement Warranties extend to all subsequent parties deriving title throughthe qualified endorsement, whether or not such subsequent party isa holder in due course. No undertaking to pay the instrumentexcept if dishonor results in a breach of any of the 4 warranties.

General Endorsement Warranties extend to all holders in due course as well as to thetransferee of a holder in due course. The secondary obligation topay is not limited to a dishonor resulting from a breach of the

warranties.