Notes on Negotiable Instruments Law.

What is the shortcut rule, or the truncation of right of recourse in forged checks?

The shortcut rule hold that, the payee whose signature was forged, can go
directly against the collecting bank, regardless of whether or not the check was actually
delivered to the payee.

Suppose that Mario issued a check drawn against his checking account with BDO,
the drawee bank, to Pablo.

James stole the check and forged Pablos signature as endorser. He made it appear
that the check was duly endorsed to him. James then deposited the check to his
account with RCBC, the collecting bank.

Determine the respective rights of recourse of the parties.

Pablo as the payee, whose endorsement was forged by James, who lost the note to
James, through theft, may proceed against RCBC, the collecting bank, for the recovery of
the amount.

RCBC became liable, as a general endorser, when it endorsed the check the
drawee bank, BDO, thereby warranting that the check was genuine, and in all respects,
what it purports to be.

RCBC, the collecting bank, may only recover against James, the forger and the
depositor. There is no privity of contract between the maker, and the collecting bank.
The collecting bank may hold the depositor liable, because the depositor is its client.

Mario as the maker, may proceed against the drawee bank, BDO, and not the
collecting bank, because there is not privity of contract between the maker, and the
collecting bank.

What is the rationale behind the shortcut rule?

The collecting bank is ultimately liable. The collecting bank is liable to the payee,
and must bear the loss, because it is its legal duty to ascertain that, the payees
endorsement was genuine, before cashing the check.
 The general rule is that, a bank or corporation who has obtained possession of a
check, upon an unauthorized or forged endorsement of the payees signature, and who
collects the amount of the check from the drawee, is liable for the proceeds thereof, to
the payee, or other owner, notwithstanding that the amount has been paid to the
person, from whom the check was obtained.

The theory behind the rule is that, the possession of the check is wrongful/ when
the money has been collected, the collecting bank can be held liable, because it is
deemed to have held the money, for the rightful owner, in order for the latter to recover
them.

The position of the bank, taking the check on the forged or unauthorized
endorsement, is the same as if it had taken it and collected the amount, without
endorsement at all, and the act of the bank, amounts to conversion of the checks.

The rationale is to expedite, the right of recourse of the payee, to reach by a

desirable shortcut, the person who ought to be allowed to recover, directly from the
collecting bank, regardless of whether the check was delivered to the payee or not.

The rule is not readily applicable to a case, when the signature that is forged,
belongs to the drawer, or to other subsequent endorsers.

If the drawers signatures was forged, the drawer may not be held liable, for the
amount on the instrument, although he may certainly be held liable for the underlying
contract.

If the endorsers signature was forged, the cut-off rule operates to bar recovery,
from the parties prior to the forged endorsement. A subsequent holder, may not there,
enforce payment against the drawee, the drawer, or the payee, because the parties prior
to the forgery, may set it up as a defense except when they are precluded from
claiming that.

Where the facts of any problem, do not present a case where the payees
signature is forged, the application of this rule is not advisable.