Section 23 Negotiable Instruments Law.docx

8/12/2019 Section 23 Negotiable Instruments Law.docx

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Section 23- Forged Signature; effect of

Forgery, in general - the counterfeit making or fraudulent alteration ofany writing, and may consist in

1. the signing of anothers name with intent to defraud; or 2. the alteration of an instrument in the name, amount,

description of the person and the like, with intent to defraud

Forgery in Section 23 of the NIL - applies only to forged signatures orsignatures made without authority of the person whose authority ofthe person whose signature it purports to be.

Forms of forgery:

1. Fraud in factum or fraud in esse contractus - there is nointention to issue an instrument; amounts to forgery and i s areal defense (available against a holder in due course)

Example: B obtains the signature of A by telling Athat it is only for autograph purposes. Then Bwrites above the signature a negotiableinstrument.

Fraud in inducement - there is an intention to issue aninstrument; does not amount to forgery and is only apersonal defense.

Example: A sells to B what he represents to B as adiamond ring, which in fact is only glass. B issuesto A a check. The check is not a forgery. The fraudhere is in inducing B to issue the check.

2. Duress amounting to forgery - ordinarily, duress is apersonal defense but where it amount to forg ery, it is a realdefense.

Example: A takes Bs hand and forces him to signhis name.

3. Fraudulent impersonation - whether or not it amounts toforgery depends on the intention of the maker/ drawer

Double intent in fraudulent impersonation:

1 st intention - the maker/ drawer intends to makethe instrument payable to the person before himor to the person writing at the other end of theline, in case the negotiation is by correspondence.The maker/ drawer bears the loss.

2nd

intention- the maker/ drawer intends to makethe instrument payable to the person whom hebelieves the stranger to be.

General Rule: The 1 st intention is controlling; the maker/drawer bears the loss.

Exception: Where the name of the payee was already knownto the maker or drawer, or was more particularly identifiedin some manner, the 2 nd intention is controlling.

Example: X represents himself to be Juan Cruz, when in facthe is not. By this misrepresentation, X obtains from Y a note

payable to the order of Juan Cr uz. Then X indorses the note,signing Juan Cruz.

Q: Is there forgery?A: It depends on the intention of Y

If Y intends that the proceeds of the note will go toX, the person dealing with him, named at the timeJuan Cruz, then Xs signature of the name of JuanCruz is not a forgery. Here, X is the intendedpayee. Following the general rule, the intention ofthe maker/ drawer is to make the note payable tothe person before him, thus there is not forgery

but the signature of an assumed name.

If Y intends that the proceeds of the note will go tothe real Juan Cruz and not to X, but to whom Yissued the note on the belief that X was Juan Cruz,Xs signature of Juan Cruz would be a forgery.

Here, Juan Cruz, not X, is the intended payee. Theintention of the maker/ drawer is to make the notepayable to the person whom he believes thestranger to be.

Reason for the Rule (maker/drawer bears the loss):

1. Theory of actual intent - the drawee, in paying paper,the holder, in taking it upon the i ndorsement of the

impostor in the name of which the payee wasdescribed, carries out the intention that the drawerentertained at the time of the delivery of the paper tothe impostor.

2. Theory of estoppel - as between two innocent personsthe one whose act was the cause of the loss shouldbear the consequences thus it was the drawers duty touse diligence to ascertain the identity of the party withwhom he dealt.

Rule qualified where impostor represent himself to be the agent ofthe payee

The loss falls on the drawee or the purchaserrather than the drawer where the impostor uponwhose indorsement the paper was purchased orpaid, represented himself to be the agent of thepayee, and not the payee himself.

The doctrine of actual intent does not applybecause the drawer did not regard the individualto whom he delivered the check as the payee butmerely as the agent of the payee.

Admission of genuineness and due execution

When an action or defense is f ounded upon a writteninstrument, such as negotiable instrument, copied in orattached to the corresponding pleading, the genuiness anddue execution of the instrument shall be deemed admittedunless specifically denied under oath by the adverse party.


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Meaning of genuineness and due execution

The party whose signature the instrument bears admits

1. That he signed it or that it was signed by another for himand with his authority;

2. That at the time it was signed, it was in words and figures asexactly set out in the pleading of the party relying upon it;

3. That any formal requisites required by law, such as swearingand acknowledgment, or revenue stamp which it requires,are waived by him.

Defense cut off by admission of genuineness, etc. (defenses whichare inconsistent with the admission of genuineness, etc)

1. Forgery2. Signature was unauthorized3. That the party charged signed the instrument in some other

capacity than that alleged

Defenses not cut off (defenses which are not inconsistent with theadmission of genuineness, etc)

1. Payment2. Statute of limitations3. Illegality or want of consideration4. Fraud5. Mistake6. Compromise7. Estoppels8. Coercion9. Imbecility10. Etc.

Effects of forgery:

1. That the signature forged or made without authority iswholly inoperative;

2. That no right to retain the instrument, or to give dischargetherefor, or to enforce payment thereof against any partythereto, can be acquired through or under such signatureforged or made without authority; and

3. That, nevertheless, as against a party precluded from settingup the forgery or want of authority the signature forged ormade without authority is operative, and rights to retain theinstrument, to give discharge therefor, or to enforcepayment thereof, can be acquired through or under thesignature forged or made without authority.

Example: B makes a note, making it appear that A is the makerthereof, by forging the signature of A. B makes himself the payee.Thereafter, he indorses the note to C, a holder in due course.

Q: Can C enforce the note against A?

A: No, because As signature is ino perative and it did make A party tothe instrument nor bind him therein. As against A, C acquired no rightto retain, discharge or enforce payment on the note.

Q: But suppose that C showed A the instrument before buying it and Atells C to go ahead and but it as it is alright. Can C enforce the noteagainst A?

A: Yes, As signature is operative and C acquired the right to retain,discharge and enforce payment on the note. By his declaration, A is

precluded from setting up the forgery of his signature.

Extent of the effect of forgery:

1. Only the signature forged or made without authority isinoperative but neither the instrument itself nor the genuinesignatures are rendered inoperative.

Example: A makes a note payable to the order ofB. Y obtains the note fraudulently and indorses thenote to C, by forging Bs signature. Suppose that Cindorses the note to D. D can recover from Cwhose signature is genuine and thereforeoperative. C is bound as an indorser of the noteand has a right of recourse against the forger (Y).

2. The instrument can be enforced by holders to whose titleover the instrument the forged signature is not necessarysuch as an indorsement of an instrument payable to bearer.

Example: A makes a note payable to B or bearer. Xobtains the note fraudulently and indorses thesame to C by forging Bs signature. Can C hold Aliable? Yes, because instruments payable to bearercan be negotiated by mere delivery. The forgedindorsement is not necessary to the title of C.

3. The instrument can be enforced against those who areprecluded from setting up the defense of forgery, even

against those whose signatures are forged.

Persons precluded from setting up the defense of forgery

1. Those who warrant or admit the genuineness of thesignature in question

a. Indorsers- whether qualified or general, warrant thatthe instrument indorsed by them is genuine in allrespects what it purports to be. They c annot interposethat signatures prior to them are forged.

Example: A, maker. B, payee. X fr audulentlyobtains possession of the note and indorses thesame to C, forging Bs signature. C indorses thenote to D, D to E and E to F, the present holder. Fcan enforce the note against C, D and E, who beingindorsers, cannot interpose the defense that Bssignature is forged.

b. Persons negotiating delivery - also warrant that theinstrument negotiated by them is genuine in allrespects what it purports to be.

c. Acceptors - a drawee, by accepting the bill, admits thegenuineness of the signature of the drawer.

Example: A, draw er. B, payee. X, drawee. But Assignature is really a forgery made by Y. Onpresentment for acceptance, X accepts the bill. Bthen negotiates the bill to C, C to D, D to E and E tF, present holder. When F demands payment fromX, the latter cannot refuse to pay on the ground


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that As signature is forged. By accepting the bill, Xadmitted the genuineness of the drawerssignature and is therefore, precluded from settingup the defense of forgery.

2. Those who, by their acts, silence or negligence, are stoppedfrom setting up the defense of forgery

Estoppels may arise from

1. A declaration2. An act3. Omission or negligence

Estoppel by omission or negligence

1. Unreasonable delay in giving notice of the forgery

Requisites:1. The delay must be unreasonable2. That the one who ought to be apprised of the forgerymust have been prejudiced

Example: Y, agent of B, comes into possession of a check with Bas payee and indorses and cashes the same. B, however, delays incomplaining to the collecting bank of the forgery for three years.B is barred by his delay in complaining the forgery, which amountto ratification of the agents unauthorized acts.

Reasonably prompt notice of forgery - depends upon thecircumstances of the case and the situation of the parties withreference to the remedies against any party is a proper elementto enter into the estimate of the reasonableness of the notice.

2. Negligence in delivery

Example: A has accounts with two persons named B, one in

Oklahoma and the other in Texas. A closed its accounts with theTexas B. Subsequently, A sold securities for the Oklahoma B anddrew a check against X in favor of Oklahoma B but the check was,by mistake, mailed to the Texas B who indorsed it to C who inturn, cashed the same at Y Bank. The Oklahoma B then assignedwhatever claims he had on the check to A. Can A, the drawer,

recover from Y bank? No. A was stopped by its negligence in thedelivery of the check to dispute the f orgery, if it existed.

Cases of forgery in general

1. Forgery of promissory notesa. Forgery of an indorsement in the noteb. Forgery of the makers signature

2. Forgery of bills of exchangea. Forgery of an indorsement on the billb. Forgery of the drawers signature

aa. with acceptance by the draweebb. without acceptance by the draw


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Qualifications to the rules on rights of parties in forgery ofinstruments

1. Rules precluding the setting up of the defense of forgery bywarranty

2. Estoppel as in the case of negligence

Indorsers and parties negotiating subsequent to the forgery

Precluded from setting up the defense of forgery as they

may be held liable under warranties and liabilities stated inSection 65 and 66

Example:

1. As signature is forged as maker. B payee. Heindorses to C, C to D, D to E and E to F. F can holdB, C, D and E liable because as indorsers, theywarrant that the note is genuine and in all respectswhat it purports to be. If they are generalindorsers, they also warrant that the note is validand subsisting.

2. A, drawer, B payee, X drawee. Y steals the bill and

forges Bs signature and indorses the bill to C. C toD. D to E. E to F. F can hold C, D and E liable.

Negligence in forgery of indorsements in bill

GR: Drawee bears the loss

1. The duty of verifying the genuineness of the indorsementsrests on the drawee.

EXC:Drawer, payee or indorser may bear the loss

Drawers negligence in forgery of his own signature

1. The drawer himself must not be negligent or guilty aswould estop him from asserting the forged character of theindorsement as against the drawee, and that if he wasnegligent or guilty of such conduct, the loss must fall on him.

2. The drawers negligence must be the proximate cause ofthe payment by the drawee upon the forged indorsement.Thus, there must be on the part of the drawer

1. Negligence by delivery2. Unreasonable delay in the giving of notice

3. Drawers duty does not extend to the examination andverification of the genuineness of the indorsements on thechecks or to the discovery of forgeries therein because adepositor is not required and may not be expected to knowthe signature of the payee and of the various indorsers

4. A drawer is under the duty towards the drawee toexamine the returned vouchers and notify the draweewithin reasonable time of any mistakes or inaccuracies in theamounts of the check or forgeries of the depositorssignature.

Example: If A, whose signature is forged as thedrawer, fails to examine statements of accounts orchecks returned by the drawee bank X, A would beconsidered negligent and may be barred from

recovery of the amount paid if the drawee hasalready charged his account.

Payee s negligence in forgery of drawers signature

The payee in a check or draft may be supposed to haveknowledge of the circumstances under which it is drawn andgenerally, of the person drawing it, and is in a bettersituation to judge the genuiness of the paper than areindorsees.

Doctrine of comparative negligence - constructivenegligence of the drawee bank is overcome by the activenegligence of the paying bank in not using the ordinaryprecautions used by banks in determining the identity of theperson presenting the check the genuineness of such check

Example: Y forges the signature of A, making Aappear as drawer in a check. X, drawee bank. Bbank is the payee. B bank pays for the check to Y,

who is a stranger to B, without requiring proof asto identity or making inquiries in regards to Y.Then B collects from X, drawee bank. In this case,can recover from B bank which has been negligent

Indorsers negligence (holder receiving payment)

If it appears that one to whom payment was made was notan innocent sufferer but guilty of negligence in not doingsomething which plain duty demanded and which if it hadbeen done, would not have entailed loss on anyone, he isnot entitled to retain the moneys pad through a mistake onthe part of the drawee bank.

Purchaser of check or bill

1. If drawee is merely constructively negligent, he may recoverfrom the recipient who must actually be negligent providedthat the drawee has promptly notified the recipient of theforgery

2. If drawee is actively negligent, then his active negligence willoffset the active negligence of the recipient and in such acase, the drawee cannot recover from the recipient what he

has paid

Example: As signature is forged by strangers in two checks. B ispayee. The strangers negotiated the checks to C for tirepurchases, pretending to be agents of B. C did not make anyinquiries whatsoever. One check was crossed generally. Thecheck with a prior number to the other was issued on a laterdate. A is a good customer of C which receives checks from Aevery month in payment of account. C indorsed the checks to Dbank for deposit and was cr edited with the amount. Thereafter,the checks were credited at the c learing house and X, drawee,credited D bank with the amount. When X bank found that Assignature was forged, it demanded payment from C. Held: C was

negligent and had no right to retain the proceeds of the check. Xcan recover from it what is has paid.

Forgery of both drawers and payees signature

1. The indorser is liable on his warranty to all to whom itruns if the indorsement of the payee is forged


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Reason: The indorser guarantees the genuinenessof prior indorsements

2. The drawees right to recover depends on the presenceor absence of negligence on the part of one who negotiatedthe paper and the presence or absence of his ownnegligence

Reason: The drawee is held not to be a holder indue course and therefore is not entitled to thebenefit of the indorsers warranty. The result isthat, the situation is the same as though the paperbore no idorsement, but was payable to bearer.

Other rules change of position

When negligence of the recipient has been established, theright of the drawee to r ecover depends upon the existenceof negligence in his part. The negligent recipient is stillentitled to receive prompt notice of the forgery from thedrawee.

Penal liabilities incurred from forgery of signature

1. Falsification of private document element of damage orintent to cause damage is not necessary; forger need notimitate genuine signature

2. Swindling/ estafa through posr-dating of checks failure ofthe drawer to deposit the amount necessary to c over hischeck within 3 dyas from notice from the bank/payee/holderthat said check has been dishonored for insufficiency offunds shall be prima facie evidence of deceit constitutingfalse pretence or fraudulent act.

3. Estafa by falsification of signature- where because of theforgers representation, the offended party is induced toissue the check in exchange for the value of the merchandisewhich he purchased

Encashment of check by impostor

1. Money paid through check to an impostor still belongs tothe legal owner or possessor thereof. Its delivery throughestafa does not transmit ownership of the amount to the

impostor who could not even acquire ownership throughacquisitive prescription.

2. The person who identifies an impostor to whom theamount of a check is paid is co-principal by directparticipation in the commission of the crime if he hasknowledge of the case.

Commercial documents- documents or instruments which are used bymerchants or businessmen to promote or fac ilitate trade or credit.

Section 23 Negotiable Instruments Law.docx

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