Summary of Rights and Liabilities Forgery of Promissory Notes 1.

Makers signature forged

Rule Reason Exception Caveat

The Maker is NOT LIABLE TO ANY HOLDER. The maker, whose signature is forged, is not a party to the transaction. He may be made liable if the doctrine of estoppel finds application. 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 Reason Endorser whose signature is forged and all prior parties, including the maker are NOT LIABLE TO ANY HOLDER. The signature of the endorser and the delivery of the note are necessary to transfer title to the note. Since an endorsers signature is forged, the transfer of title to a subsequent endorsee is inoperative.

3. Endorsers signature forged Note payable to bearer

Rule Reason Exception Qualification

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. 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. 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. 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)

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

1. Forgery of Payees Signature

(a) Drawer vs. Drawee

Rule Reason

X (Drawee Bank) suffers the loss and must reimburse the account of A (Drawer). 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 Reason

X (Drawee Bank) may recover from C (Collecting Bank) because C had no authority to pay the proceeds of the check to Y (forger). C has the legal duty to ascertain that the payees endorsement is genuine.

(c) Drawer vs. Collecting Bank

Rule Reasons

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

B (Payee) may recover from A (Drawer). The claim of B against A remains unpaid.

(e) Payee vs. Recipient of Payment

Rule Reason

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

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

B (Payee) has no cause of action against X (Drawee Bank) unless the check has been certified (or accepted) by the latter. There is no privity of contract between the payee and the drawee.

(h) Collecting Bank vs. Forger

Rule Reason

C (Collecting Bank) has a cause of action against Y (forger) for the recovery of the proceeds of the check. 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 Drawers Signature Bill has been accepted

A (Drawer)

B (Payee)

X (Drawee Bank) (Accepted)

C (Endorsee)

As signature was forged. On presentment by C, X refuses to pay on the ground that As signature is forged. Rule X (Drawee/Acceptor must pay the check. A (Drawer) is not liable for the value of the check. Bill not accepted Reason By accepting the check, an acceptor undertakes to pay the instrument in accordance with the tenor of his acceptance. [Section 62] A forged signature is totally inoperative. [Section 23]

A (Drawer)

B (Payee/forger)

X (Drawee Bank)

D (Holder)
On presentment, X paid the proceeds of the check to D. Rule X (Drawee Bank) cannot recover the proceeds of the check from D if D is a holder in due course. C (endorser) is liable to D, if X dishonored the check A (Drawer) generally enjoys protection against 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 Reason X should have detected the forgery of As signature because A is its client. An endorser is liable under his warranties in Section 66. A forged signature is wholly inoperative.

Summary of Warranties and Defenses Barred Maker (Section 60)

Warranty Existence of the payee Payees capacity to endorse Defenses Barred 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.

Drawer (Section 61)

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

Payees existence Payees capacity to endorse

Qualified Indorser and Persons Negotiating by Delivery (Section 65)

Warranties 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 Defenses Barred 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 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 Defenses Barred 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 60 Party Maker Warranties/Undertakings Unconditional and principal obligation to pay according to tenor of instrument Existence of payee and his capacity to endorse note 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 to endorse the bill On presentment, the bill will be accepted, paid, or both Pay the bill according to the tenor of his acceptance; obligation is principal Existence of drawer Drawers capacity and authority to draw the bill Defenses Barred

Payee is fictitious; payee is incapacitated; transaction is ultra vires as to a corporation

61

Drawer

Payee is fictitious; payee is incapacitated; transaction is ultra vires as to a corporation

62

Acceptor

Drawers signature genuine Existence of payee and his capacity to endorse 64 65 Irregular Endorser Qualified endorser/by delivery Same as an endorser Instrument is genuine, and in all respects what it purports to be He has good title Capacity of all prior parties No knowledge of fact that renders instrument worthless or invalid 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 If instrument is dishonored, and proceedings for dishonor are taken, he will pay holder or any endorser

Drawee is fictitious Drawee is incapacitated; drawee has no authority to draw the bill; transaction is ultra vires as to a corporation; want of consideration Forgery Payee is fictitious; payee is incapacitated; transaction is ultra vires as to a corporation Same as an endorser Forgery; material alteration Fraud; theft of instrument Incapacity of any prior party; transaction is ultra vires as to a corporation Theft of instrument; want of consideration

66

General 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 Qualified Endorsement Warranties extend to immediate transferee only. 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. 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.

General Endorsement