Summary of Rights and Liabilities

Forgery of Promissory Notes

1. Maker’s signature forged

Rule The 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. Endorser’s signature forged – Note payable to order

Rule Endorser whose signature is forged and all prior parties, including the maker
are NOT LIABLE TO ANY HOLDER.
Reason The signature of the endorser and the delivery of the note are necessary to
transfer title to the note. Since an endorser’s signature is forged, the transfer of
title to a subsequent endorsee is inoperative.

3. Endorser’s signature forged – Note payable to bearer

Rule Endorser whose endorsement is forged and all prior parties including the maker
ARE LIABLE TO A HOLDER IN DUE COURSE, provided the note is
mechanically complete before the forgery.
Reason The endorsement is not necessary to transfer title. The only defense available to
resist the claim is want of delivery of a mechanically complete instrument under
Section 16.
Exception Section 16 is a defense available only against a holder who is not a holder in due
course, because a valid and intentional delivery of the note is presumed by law
as 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 authority
given and within a reasonable time. But if upon completion the note is
negotiated to a holder in due course, the note is valid and effectual for all
purposes in his hands and he may enforce the note as if it was strictly filled up in
accordance 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 will
not be valid in the hands of any holder unless completed and negotiated with
authority.
 Summary of Rights and Liabilities
Forgery in Bills of Exchange

A (Drawer) B (Payee)

X (Drawee Bank) C (Collecting Bank)

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

1. Forgery of Payee’s Signature

(a) Drawer vs. Drawee

Rule 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 not
paid, 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 no
authority to pay the proceeds of the check to Y (forger).
Reason C has the legal duty to ascertain that the payee’s 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 to
observe 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, Y
holds the proceeds of the check in trust for B.
(f) Payee vs. Collecting Bank

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

Reason C’s collection of the proceeds of the check is unlawful, and C therefore holds the
funds in trust for the payee. A forged endorsement is totally inoperative. C’s
collection of the proceeds of the check amounts to a conversion – i.e., the
unauthorized assumption and exercise of rights of ownership over goods and
chattels belonging to another.

(g) Payee vs. Drawee

Rule B (Payee) has no cause of action against X (Drawee Bank) unless the check has
been 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.
2. Forgery of Drawer’s Signature

Bill has been accepted

A (Drawer) B (Payee)

X (Drawee Bank) C (Endorsee)

(Accepted)

A’s signature was forged. On presentment by C, X refuses to pay on the ground that A’s signature is
forged.

Rule Reason
X (Drawee/Acceptor must pay the check. By accepting the check, an acceptor undertakes
to pay the instrument in accordance with the
tenor of his acceptance. [Section 62]
A (Drawer) is not liable for the value of the A forged signature is totally inoperative.
check. [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 Reason
X (Drawee Bank) cannot recover the proceeds X should have detected the forgery of A’s
of the check from D if D is a holder in due signature because A is its client.
course.
C (endorser) is liable to D, if X dishonored the An endorser is liable under his warranties in
check Section 66.
A (Drawer) generally enjoys protection against A forged signature is wholly inoperative.
forgery. However, he must not be guilty of
negligence; i.e., the forgery must not have been
caused by his own negligence. Also, he must
discover the forgery within a reasonable period
of time
 Summary of Warranties and Defenses Barred

Maker
(Section 60)

Warranty Defenses Barred

Existence of the payee That the payee is a fictitious person, natural or
juridical;
Payee’s capacity to endorse That the payee is a minor or an insane person
or otherwise incapacitated; That in the case of a
corporate payee, the transaction is ultra vires.

Drawer
(Section 61)

Warranty Defenses Barred

Existence of the payee
Payee’s capacity to endorse the bill
That the payee is a fictitious person, natural or
juridical
That the payee is a minor or an insane person
or otherwise incapacitated; That in the case of a
corporate payee, the transaction is ultra vires.

Acceptor
(Section 62)

Warranties Defenses Barred

Drawer’s existence Drawer is a fictitious or non-existent person,
whether natural or juridical
Drawer’s genuine signature Forgery of Drawer’s signature
Drawer’s capacity and authority to draw the Incapacity of the Drawer; or ultra vires act of a
instrument corporate drawer; Drawer’s lack of authority to
draw instrument e.g. want of consideration, or
amount drawn is in excess of drawer’s funds
[Liberty Trust Co. v Haggerty, 113 Atl 596]
Payee’s existence Payee is a fictitious or non-existent person,
whether natural or juridical
Payee’s capacity to endorse Payee’s incapacity to endorse the instrument

Qualified Indorser and Persons Negotiating by Delivery

(Section 65)

Warranties Defenses Barred

Instrument is genuine and in all respects what
it purports to be
He has good title to the instrument
All prior parties have capacity to contract
No knowledge of fact that would impair the
validity of the instrument or would render it
valueless
Forgery, material alteration
That he has no title to the instrument because
he stole it or he procured it through fraud
That maker is a minor, insane or otherwise
incapacitated; in case of a corporation, that the
transaction is ultra vires
If the insolvency of the maker at the time of
negotiation is known to the endorser, he would
be liable for a breach of this warranty
 General Indorser
(Section 66)

Warranties Defenses Barred

The instrument is genuine and in all respects
what it purports to be
He has good title to the instrument
All prior parties have capacity to contract
That the instrument is, at the time of his
endorsement is valid and subsisting
Forgery, material alteration
That he has no title to the instrument because
he stole it or he procured it through fraud
That the maker is a minor, insane or otherwise
incapacitated; in case of a corporation, that the
transaction is ultra vires
Illegality of the note because of illegal
consideration
 Tabular Summary of Undertakings, Warranties and Defenses Barred

Section Party Warranties/Undertakings Defenses Barred

60 Maker Unconditional and principal
obligation to pay according to tenor
of instrument
Existence of payee and his capacity Payee is fictitious; payee is
to endorse note incapacitated; transaction is
ultra vires as to a corporation
61 Drawer If bill is dishonored and
proceedings for dishonor taken, he
will pay the bill to holder or
endorser who may be compelled to
pay it; obligation to pay is
secondary and conditional
Existence of payee and his capacity Payee is fictitious; payee is
to endorse the bill incapacitated; transaction is
ultra vires as to a corporation
On presentment, the bill will be
accepted, paid, or both
62 Acceptor Pay the bill according to the tenor
of his acceptance; obligation is
principal
Existence of drawer Drawee is fictitious
Drawer’s capacity and authority to Drawee is incapacitated;
draw the bill drawee has no authority to
draw the bill; transaction is
ultra vires as to a corporation;
want of consideration
Drawer’s signature genuine Forgery
Existence of payee and his capacity Payee is fictitious; payee is
to endorse incapacitated; transaction is
ultra vires as to a corporation
64 Irregular Same as an endorser Same as an endorser
Endorser
65 Qualified Instrument is genuine, and in all Forgery; material alteration
endorser/by respects what it purports to be
delivery
He has good title Fraud; theft of instrument
Capacity of all prior parties Incapacity of any prior party;
transaction is ultra vires as to a
corporation
No knowledge of fact that renders Theft of instrument; want of
instrument worthless or invalid consideration
Warranties extend to immediate
transferees; no guaranty of
payment if qualified endorsement
except if person principally liable is
insolvent and qualified endorser
conceals it; secondary liability is
based on breach of any of the 4
warranties
66 General If instrument is dishonored, and
endorser proceedings for dishonor are taken,
 he will pay holder or any endorser
who pays it; obligation is secondary
Instrument is genuine and in all
respects what it purports to be
He has good title to it.
Capacity of all prior parties
At time of endorsement,
instrument is valid and subsisting
Warranties extend to all holders in
due course
Forgery; material alteration
Fraud; theft of instrument
Incapacity of any prior party;
transaction is ultra vires as to a
corporation
Forgery; material alteration;
instrument is discharged by
payment in due 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 through
the qualified endorsement, whether or not such subsequent party is
a holder in due course. No undertaking to pay the instrument
except 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 the
transferee of a holder in due course. The secondary obligation to
pay is not limited to a dishonor resulting from a breach of the
warranties.