FORGERY AND

ALTERATION
 FORGERY
• The counterfeit making OR
• Fraudulent alteration of any writing, with
INTENT TO DEFRAUD
 2 General Types of Forgeries

• Counterfeiting of signature – Sec. 23

• Material alteration – Sec. 124
 Sec. 23. Forged signature; effect of.

When a signature is forged or made without the authority of

the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of
authority.
 EFFECT OF FORGERY IN GENERAL

• That the signature forged or made without authority is wholly inoperative

• That no right to retain the instrument, or to give discharge thereof, or to enforce
payment thereof against any party thereto, can be acquired through or under
such a signature forged or made without authority
• That nevertheless, as against a party precluded from setting up the
forgery or want of authority, the signature forged or made without
authority is operative, and rights to retain the instrument, to give
discharge therefore, or to enforce payment thereof, can be acquired
through or under the signature forged or made without authority
 Parties barred from setting
up the defense of forgery
• Indorsers
• Persons negotiating by delivery
• Acceptors
• Persons in estoppel
• Persons guilty of negligence
 Why are indorsers precluded?
• Whether qualified or general, they
warrant that the instrument indorsed
by them is genuine in all respect and
what it purports to be
 Basis - Sec. 66. Liability of general
indorser.
Every indorser who indorses without qualification, warrants to all subsequent holders
in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or
both, as the case may be, according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who may be compelled to pay it.
• GENERAL INDORSER subsequent to
the forgery warrants among other things
that the instrument is genuine, and that it
is valid and subsisting at the time of his
indorsement
• Remember: By merely affixing your
signature, you become a general indorser
 Why are persons negotiating by
delivery precluded?
• Also warrant the instrument negotiated by
them is genuine in all respects what it
purports to be
• Basis: Sec. 65
 Why are acceptors precluded?

Sec. 132. Acceptance; how made, by and so forth. - The

acceptance of a bill is the signification by the drawee of
his assent to the order of the drawer. The acceptance
must be in writing and signed by the drawee. It must
not express that the drawee will perform his promise by
any other means than the payment of money.
Sec. 62. Liability of acceptor. - The acceptor, by
accepting the instrument, engages that he will pay it
according to the tenor of his acceptance and admits:

(a) The existence of the drawer, the genuineness of his

signature, and his capacity and authority to draw the
instrument; and

(b) The existence of the payee and his then capacity to

indorse.
Why are persons in estoppel
precluded?
Whenever a party has, by his own declaration, act or
omission, intentionally and deliberately led another to
believe that his or another’s signature in the instrument
is genuine, and to act upon such belief, he cannot in any
litigation arising out of such declaration, act or
omission, be permitted to set up the forgery of such
signature/s.
 Negligence
•The omission may consist in
negligence in the delivery of
the instrument
 Extent of the effect of
forgery
• Section 23 does not purport to declare the
instrument totally void nor the genuine
signatures thereon inoperative. It is only the
forged or unauthorized signature that is
declared to be inoperative.
 CUT-OFF PRINCIPLE
• It does NOT render the instrument void. The
signature is wholly inoperative, and no right to
retain the instrument, or to give a discharge
thereof, or to enforce payment thereof against
any party to it, is acquired through or under
such signature.
 Forgery of
Promissory Notes
Forgery of Maker’s Signature
• GR: Maker cannot be held liable by any
holder, as he is not a party to the instrument
as his forged signature is inoperative and no
right to retain, enforce or discharge the note,
may be acquired against him.
Forgery of Indorser’s Signature
on a Note Payable to Order
• The party whose indorsement is
forged and parties prior to him
including the maker cannot be held
liable by any holder
Forgery of Indorser’s Signature
on a Note Payable to Bearer
• The party whose indorsement is forged and
parties prior to him including the maker, may
be held liable by a holder in due course
provided that the note was mechanically
complete before the forgery.
Forgery of bills of
exchange
Forgery of Bearer Instrument
• The same as the rule in forged indorsements of a
promissory note
• The 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.
 Drawee’s Liability to the Drawer
• If the drawee pays a forged bearer instrument, he is not
liable for breach of contract with drawer, because the
instruction was for him to pay to the bearer;
• If the drawee dishonors, a holder in due course can sue
the drawer, the forger/indorser, due to their warranties
in Section 65 and the drawee bank.
 Forgery of an Order Instrument
• Remember the Rule in Section 23
• GR: Drawer is not liable for the value of the
check

Drawer’s Signature is Forged
• Drawer – Drawee – Forger
or the Holder (PNB v.
National City Bank of NY
Case)
Indorser’s Signature is
Forged
• Drawer – Drawee –
Collecting Bank – Forger
Drawer’s Signature is
Forged
 Right of a Drawer to be
Reimbursed by the Drawee
Bank when his/her Signature
is Forged
(Thus, it is the Drawee Bank which
must bear the loss)
 Illustrated in the cases of:
• PNB v. Quimpo
• Casa Montessori v. BPI
• Samsung Construction v. FEBTC
 PNB v. Quimpo

• Friend took the check from the car of his friend and forged
his signature. Encashed the same check and thus, it was
debited to his friend’s account. The owner of the check said
that the amount be returned to him by the drawee bank
(PNB) as his signature was a forgery.
• PNB – they should not reimburse because the proximate
cause for the loss was drawer’s negligence
 Reason why Drawee Bank (PNB) is held
liable?
• The prime duty of a bank is to ascertain the
genuineness of the signature of the drawer or the
depositor on the check being encashed. Obviously,
petitioner was negligent in encashing said forged check
without carefully examining the signature which shows
marked variation from the genuine signature of private
respondent.
 Casa Montessori v. BPI

• A bank is bound to know the signatures of its

customers; and if it pays a forged check, it
must be considered as making the payment
out of its own funds, and cannot ordinarily
charge the amount so paid to the account of
the depositor whose name was forged.
• For allowing payment on the checks to a wrongful and
fictitious payee, BPI -- the drawee bank -- becomes liable to
its depositor-drawer. Since the encashing bank is one of its
branches,BPI can easily go after it and hold it liable for
reimbursement. It may not debit the drawers account and is
not entitled to indemnification from the drawer.
 Samsung Construction v. FEBTC
• The general rule is to the effect that a forged
signature is wholly inoperative, and payment
made through or under such signature is
ineffectual or does not discharge the
instrument. If payment is made, the drawee
cannot charge it to the drawers account.
• The traditional justification for the result is that the drawee
is in a superior position to detect a forgery because he has
the makers signature and is expected to know and
compare it. The rule has a healthy cautionary effect on
banks by encouraging care in the comparison of the
signatures against those on the signature cards they have
on file.
 When a person deposits money in a general account in a bank, against
which he has the privilege of drawing checks in the ordinary course of
business, the relationship between the bank and the depositor is that
of debtor and creditor. So far as the legal relationship between the two
is concerned, the situation is the same as though the bank had borrowed
money from the depositor, agreeing to repay it on demand, or had bought
goods from the depositor, agreeing to pay for them on demand. The
bank owes the depositor money in the same sense that any debtor
owes money to his creditor. Added to this, in the case of bank and
depositor, there is, of course, the bank's obligation to pay checks drawn
by the depositor in proper form and presented in due course. When the
bank receives the deposit, it impliedly agrees to pay only upon the
depositor's order. When the bank pays a check, on which the
depositors signature is a forgery, it has failed to comply with its
contract in this respect. Therefore, the bank is held liable.
• The fact that the forgery is a clever one is immaterial. The
forged signature may so closely resemble the genuine as to
defy detection by the depositor himself. And yet, if a bank
pays the check, it is paying out its own money and not the
depositors.
• A bank is bound to know its depositors signature.
 Q: Will the diligence of the drawee bank
be sufficient for it not to bear the loss?

NO! Take note of the cases illustrating the immateriality

of the drawee bank’s diligence when the drawer is not
precluded from setting up the defense of forgery.
 “However, the degree of diligence exercised by the bank would be
irrelevant if the drawer is not precluded from setting up the defense
of forgery under Section 23 by his own negligence. The rule of equity
enunciated in PNB v. National City Bank of New York, as relied
upon by the Court of Appeals, deserves careful examination.
”
- Samsung Construction v. FEBTC
 Rule of Equity
• The issue of detecting the forgery
becomes relevant only if there is a need to
weigh the comparative negligence
between the bank and the party whose
signature was forged.
 PNB v. National City Bank of New York
(Rule of Equity)
• Comparative negligence was also applied
• BUT TAKE NOTE - In determining the relative rights of a
drawee who, under a mistake of fact, has paid, and a holder
who has received such payment, upon a check to which the
name of the drawer has been forged, it is only fair to consider
the question of diligence or negligence of the parties in
respect thereto.
“ When the drawer is precluded from setting
up the defense of forgery, then the drawer
can not recover from the drawee bank
In accordance with Section 23
”
Exception to the General Rule
 Illustrated in the following case:
• Ilusorio v. CA - accorded his secretary
unusual degree of trust and unrestricted
access to his credit cards, passbooks, check
books, bank statements, including custody and
possession of cancelled checks and
reconciliation of accounts
 Take note also of the cases when
negligence of the Drawer was not proven
• Samsung Construction v. FEBTC - It was not borne out on record that
Samsung was negligent. JONG testified that the checks were kept in a
safety deposit box. FEBTC did not however present a contrary version.
• PNB v. Quimpo - The act of plaintiff in leaving his checkbook in the
car while he went out for a short while can not be considered negligence
sufficient to excuse the defendant bank from its own
negligence. Defendant had trust in his classmate and friend. He had no reason
to suspect that the latter would breach that trust .
Q: Can the drawee bank recover
from the holder if the drawer's
signature is forged?
Yes.
 RULE
• If a drawee bank pays a forged check which was
previously accepted or certified by the said bank it cannot
recover from a holder who did not participate in the
forgery and did not have actual notice thereof;
• In the case of the payment of a forged check, even
without former acceptance, the drawee can not recover
from a holder in due course not chargeable with any act
of negligence or disregard of duty;
 PNB v. National City Bank of
New York
• Bank is bound to know the signature of drawer
and thus, could not recover money paid upon a
forgery of the drawer's name. Drawee was
negligent not to know the forgery and it must
bear the consequence of its negligence. (OLD
CONCEPT)
 PNB v. National City Bank of
New York
• In this case however, the question of
diligence or negligence of the parties
was looked into
 PNB v. National City Bank of
New York
• If it appears that the one to whom payment was made was
not an innocent sufferer, but was guilty of negligence
in not doing something, which plain duty
demanded, and which, if it had been done,
would have avoided entailing loss on any one, he
is not entitled to retain the moneys paid through a mistake on
the part of the drawee bank.
 To entitle the HOLDER of a forged check
to retain the money obtained thereon
There must be a showing that the duty to ascertain
the genuineness of the signature rested entirely upon
the drawee, and that the constructive negligence of
such drawee in failing to detect the forgery was not
affected by any disregard of duty on the part of the
holder, or by failure of any precaution which, from
his implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to believe
he had taken.
 Badges of Negligence of the
Holder
• The Motor Service Co., Inc., accepted the two
checks from unknown persons.
• Check is indorsed by a subagent of the agent of
the payee, International Auto Repair Shop. The
Motor Service Co., Inc., made no inquiry
whatsoever as to the extent of the authority of
these unknown persons.
• It was a crossed check.
Indorser's Signature is
Forged
 Who will be liable? Drawer or
drawee?
• Rule: Drawee bank suffers the loss and must
reimburse the account of the drawer
• Reason: Drawer instructed the drawee bank to pay
the payee and no one else. If payee is not paid,
then drawee bank did not obey the instruction.
 Illustrated in the cases of:
• Great Eastern Life Insurance v. HSBC -
GEL Insurance can therefore recover from
HSBC (Drawee) because it did not authorize
payment to another person except only to
the order of MELICOR
 Illustrated in the cases of:
• Associated Bank v. CA - The bank on which a check is
drawn, known as the drawee bank, is under strict liability
to pay the check to the order of the payee. The drawer's
instructions are reflected on the face and by the terms of
the check. Payment under a forged indorsement is not to
the drawer's order. When the drawee bank pays a person
other than the payee, it does not comply with the terms of
the check and violates its duty to charge its customer's (the
drawer) account only for properly payable items.
 Since the drawee bank did not pay a holder or
“ other person entitled to receive payment, it has no
right to reimbursement from the drawer. The
general rule then is that the drawee bank may
not debit the drawer's account and is not
entitled to indemnification from the drawer. ”
The risk of loss must perforce fall on the
drawee bank.
- Associated Bank v. CA
Exception to the General Rule - If the drawer is
precluded from setting up the defense of forgery

• Associated Bank v. CA - If the drawee bank

can prove a failure by the customer/drawer to
exercise ordinary care that substantially
contributed to the making of the forged
signature, the drawer is precluded from
asserting the forgery
The Province of Tarlac permitted Fausto Pangilinan to collect the
checks when the latter, having already retired from government service,
was no longer connected with the hospital. xxxxx After nearly three
years, the Treasurer's office was still releasing the checks to the retired
cashier. In addition, some of the aid allotment checks were released to
Pangilinan and the others to Elizabeth Juco, the new cashier. The fact
that there were now two persons collecting the checks for the hospital is
an unmistakable sign of an irregularity which should have alerted
employees in the Treasurer's office of the fraud being committed.
There is also evidence indicating that the provincial employees were
aware of Pangilinan's retirement and consequent dissociation from the
hospital.
Exception to the General Rule - If the drawer is
precluded from setting up the defense of forgery
• Gempesaw v. CA - An exception to this rule is
where the drawer is guilty of such negligence which
causes the bank to honor such a check or checks.
(Manipulation of a trusted employee/bookkeeper
(Galang) of 8 years); Take note that in this case,
comparative negligence/diligence was also applied
 Drawee to recover from
collecting bank
• Rule: Drawee bank may recover from Collecting
Bank because Collecting Bank had no authority to
pay the proceeds of the check of the forger
• Reason: Collecting bank has the duty to ascertain
the payee’s endorsement is genuine
 Illustrated in the cases of:
• San Carlos Milling v. BPI - It had a right to rely upon the
endorsement of the Bank of the Philippine Islands when it gave the
latter bank credit for its own cashier’s check.
• Reiterated that: "A bank is bound to know the signatures of its customers;
and if it pays a forged check, it must be considered as making the payment out
of its own funds, and cannot ordinarily charge the amount so paid to the account
of the depositor whose name was forged."
 Associated Bank v. CA - In cases involving checks with
forged indorsements xxxxx the chain of liability does not
end with the drawee bank. The drawee bank may not debit
the account of the drawer but may generally pass liability back
through the collection chain to the party who took from the
forger and, of course, to the forger himself, if available. In
other words, the drawee bank canseek reimbursement or a
return of the amount it paid from the presentor bank or
person. Theoretically, the latter can demand reimbursement
from the person who indorsed the check to it and so on. The
loss falls on the party who took the check from the forger, or
on the forger himself.
If the forgery is that of the payee's or
holder's indorsement, the collecting
bank is held liable, without prejudice
to the latter proceeding against the
forger.
 Reasons why can collect from
the Collecting Bank
• Since a forged indorsement is inoperative, the
collecting bank had no right to be paid by the
drawee bank. The former must necessarily
return the money paid by the latter because it
was paid wrongfully.
 Reasons why can collect from
the Collecting Bank
• More importantly, by reason of the statutory warranty of a
general indorser in section 66 of the Negotiable Instruments Law,
a collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior
indorsements, including the forged indorsement. It warrants
that the instrument is genuine, and that it is valid and subsisting at
the time of his indorsement. Because the indorsement is a forgery,
the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank.
 Reasons why can collect from
the Collecting Bank
• The drawee bank is not similarly situated as the
collecting bank because the former makes no
warranty as to the genuineness. of any indorsement.
The drawee bank's duty is but to verify the
genuineness of the drawer's signature and not of
the indorsement because the drawer is its client.
 Reasons why can collect from
the Collecting Bank
• Moreover, the collecting bank is made liable
because it is privy to the depositor who negotiated
the check. The bank knows him, his address and
history because he is a client. It has taken a risk on
his deposit. The bank is also in a better position to
detect forgery, fraud or irregularity in the
indorsement.
 In this case however, the Court stated that
liability of the CB to DB - determine
comparative negligence/diligence
• A delay in informing the collecting bank
(Associated Bank) of the forgery, which deprives it
of the opportunity to go after the forger, signifies
negligence on the part of the drawee bank (PNB)
and will preclude it from claiming reimbursement.
(BUT NO SUCH NEGLIGENCE EXISTS HERE.)
 Isn't it a Circuitous Liability?
• The drawer, Province of Tarlac, is a clientor
customer of the PNB, not of Associated
Bank. There is no privity of contract between
the drawer and the collecting bank.
• Allied Banking v. Lim Sio Wan - The warranty that the
instrument is genuine and in all respects what it purports to be
covers all the defects in the instrument affecting the validity
thereof, including a forged indorsement. Thus, the last indorser
(METROBANK) will be liable for the amount indicated in
the negotiable instrument even if a previous indorsement was
forged. We held in a line of cases that a collecting bank which
indorses a check bearing a forged indorsement and presents it to
the drawee bank guarantees all prior indorsements, including
the forged indorsement itself, and ultimately should be held
liable therefor.
• Allied Banking v. Lim Sio Wan - However, this
general rule is subject to exceptions. One such
exception is when the issuance of the check itself
was attended with negligence. Thus, in the cases
cited above where the collecting bank is generally
held liable, in two of the cases where the checks were
negligently issued, this Court held the institution
issuing the check just as liable as or more liable than
the collecting bank.
• Associated Bank v. CA(1992) - the law imposes a
duty of diligence on the collecting bank to scrutinize
checks deposited with it, for the purpose of
determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking,
holds itself out to the public as the expert on this
field, and the law thus holds it to a high standard of
conduct.
• Associated Bank v. CA(1992) - WHY IS THE
COLLECTING BANK LIABLE?
(1) Deliberate and positive act in stamping warranties
(2) Failure to exercise duty of diligence - it did not
verify the indorser's authority (CROSSED CHECK)
Q: Can the Collecting Bank
charge the liability from the
Depositor's Account?
 JAI ALAI V. BPI
• Yes, can collect from JAI ALAI because the
nature of the relationship created here is one of
agency, that is, the bank was to collect from the
drawees of the checks the corresponding
proceeds. No debtor-creditor relationship created
here, because it is a forgery.
 JAI ALAI V. BPI
• Jai Alai is negligent. It could not have escaped the
attention of the petitioner that the payee of all the checks
was a corporation — the Inter-Island Gas Service, Inc.
Yet, the petitioner cashed these checks to a mere
individual who was admittedly a habitue at its jai-alai
games without making any inquiry as to his authority to
exchange checks belonging to the payee-corporation.
 JAI ALAI V. BPI
• Also, Jai Alai is an indorser also.
• Considering that the petitioner indorsed the said checks
when it deposited them with the respondent, the
petitioner as an indorser guaranteed the genuineness of all
prior indorsements thereon. The respondent which relied
upon the petitioner's warranty should not be held liable
for the resulting loss.
 TAKE NOTE - JAI ALAI v.
METROBANK CASE
• Metrobank Case - Cannot recover
from the indorser
• Jai Alai (check) and Metrobank
(treasury warrant)
 Drawee vs. Collecting Bank
(Exception)
• Trader’s Royal Case – not proven
that it passed really to the CB; no
indorsements of CB; no records that
it passed in the clearing house
ALTERATION
 Sec. 124. Alteration of
instrument; effect of.
Where a negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as against
a party who has himself made, authorized, or assented to the
alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the
hands of a holder in due course not a party to the alteration, he
may enforce payment thereof according to its original tenor.
 Sec. 125. What constitutes a material
alteration.
Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration.
 MATERIAL ALTERATION

• any change in the details of the instrument that

results in a change in the effect of such instrument
• Remember that both forgery and alteration are
CHANGES made to an instrument.
• If the signature is altered, it is no longer alteration.
FORGERY ALTERATION
As to effect, the forged signature The instrument does not become wholly
becomes wholly inoperative inoperative.

A holder in due course may still enforce

the instrument according to its original
tenor, provided that he was not a party to
the alteration.

The instrument is avoided except against

the party who has himself made,
authorized or assented to the alteration
and subsequent indorsers.
 EFFECTS OF MATERIAL
ALTERATION
General Rule: Where a negotiable instrument is materially altered, it is avoided in
the hands of one who is not a holder in due course as against any prior party who
has not assented to the alteration.
Exceptions:
The instrument is not avoided as against:
1) a party who has made the alteration;
2) a party who authorizes or assented to the alteration; and
3) subsequent indorsers - he warrants, among other things, that the instrument is
in all what it purports to be and that it was valid and subsisting at the time of his
indorsement
 But, if in the hands of a HDC

• He may enforce payment thereof according to its

original tenor.
• A holder in due course can enforce the instrument
according to its original tenor regardless of whether
the alteration was innocent or fraudulent because
the law does not make any distinction
 TAKE NOTE
• Banco Atlantico v. Auditor General - Philippine Embassy
in Madrid, as drawer of the three (3) checks in question,
cannot be held liable. It is apparent that the said three (3)
checks were fraudulently altered by Virginia Boncan as to
their amounts and, therefore, wholly inoperative. No right of
payment thereof against any party thereto could have been
acquired by the petitioner. (TN: As to HDC contention of
Banco)
 WHO WILL BEAR THE LOSS?
Drawer or drawee?
• General rule denies the drawee bank’s right to charge
against the drawer’s account the amount of an altered
check.
• However, the drawer’s negligence, before or after
alteration, may estop him from setting up such
alteration as against an innocent drawee bank who has
paid the check.
 Sample of drawer's negligence:

Thus, where the drawer of a check who in filling it

out negligently leaves spaces, making it possible for
another to alter the amount by inserting words and
figures therein, the drawer cannot complain should
the bank pay and charge the amount as altered against
his account. It was his negligence which proximately
caused its payment. (Foutch vs. Alexandria Bank)
 Sample of drawer's negligence:

Where the negligence of the drawer consists in failing to discover

alterations previously made, the rule is similar to that applicable to
a forged check. Thus, in a series of alterations of several checks, if
the drawer could have discovered the alterations by a comparison
between his cancelled checks and his check stubs, or by a diligent
observation of his record, and could thus have prevented the
drawee bank from subsequently cashing other altered checks, the
latter can charge the subsequent checks against the negligent
drawer’s account. (Critten vs. Chemical National Bank)