Forge/Alter

Question 1

What is a critical factor to understand when dealing with a forgery?

Answer 1

Need to determine whose signature was forged because different rules apply depending on the identify/status of the person whose name is forged.

Question 2

Is the alleged marker of the instrument liable?

Answer 2

No - because their actual signature does not appear on the note.

Question 3

Can alleged maker’s conduct ratify a forgery or cause the alleged maker to be precluded from denying the forgery?

Answer 3

Yes

Question 4

Is a forger liable on an instrument?

Answer 4

Yes because their actual signature appears on the instrument.

Question 5

Is the liability of the forger affected by the fact that the former signed someone else’s name?

Answer 5

No - the forger is liable because their actual signature appears on the instrument.

Question 6

What is a drawer’s liability when their signature has been forged on a check?

Answer 6

They are not liable.

Drawee bank must recredit the alleged drawer’s account because the check was not properly payable.

This is the general rule unless the bank has a defense.

Question 7

True or False: As it relates to forged check, the bank is unable to pass on loss unless there is a breach of the presentment warranty.

Answer 7

True

Question 8

Is breach of presentment warranty generally at issue when a forgery as occured?

Answer 8

Generally not - generally not breaches because the parties had a right to enforce the forger’s obligation.

Question 9

Who is considered the real drawer of a forged check?

Answer 9

The forger - because they signed when the check in attempting to create the forgery.

Question 10

What is the general rule regarding the risk that a drawee takes regarding a forged check?

Answer 10

The drawee takes the risk that the drawer’s signature is unauthorized unless the presenter actually knew it was unauthorized.

Question 11

Does a party who ultimately presents the check to the bank for payment not knowing that it was forged have liability for violation of a presentment warranty.

Answer 11

No - unless they actually knew that the instrument was forged.

Question 12

What are the bank’s defenses to recrediting?

Answer 12

1) If drawer’s negligence substantially contributed to the forgery - drawer will then not be allowed to raise the forgery.
2) Violation of the Bank State Rule - Duty to inspect statement carefully

Question 13

What is an example of when a drawer’s own negligence may contribute to the forgery of a check?

Answer 13

If the individual leaves a stamp of their signature and their checkbook on top of their desk unsecured.

Question 14

What is the bank statement rule?

Answer 14

Customer (drawer) has a duty to inspect bank statements and canceled checks in a timely manner and report forgeries to the bank.

If the customer does not and the bank can prove a loss beyond original mistake payment, customer is precluded from raising the issue.

Question 15

When must a forged drawer’s signature be reported to the bank?

Answer 15

Within 1 year regardless of the bank’s or customer’s negligence.

Question 16

If party does contact bank within the required time period about a forged check, what is a defense that the bank can raise regarding the payment of the instrument?

Answer 16

The bank would have to prove that the delay (even though less than 1 year) in notifying the bank of the issue somehow prevented the bank from catching the forger and recovering the funds.

Question 17

What is the frequent offender rule?

Answer 17

If the same person is forging a series of checks, the drawer must report the forgeries within 30 days of when the statement was available.

If not - the bank will not recredit the account for subsequent forgeries by the same person.

Question 18

For repeated forgeries, what is the critical action that an innocent party must take?

Answer 18

Review their statements within 30 days and report it to the bank. Failure to do so results in all subsequent checks being barred from recovery and the first check can still be recovered on if within the 1 year window.

Question 19

What is the effect of a forgery on bearer paper?

Answer 19

None - because the indorsement is not necessary to negotiate bearer paper - possession is what gives the right.

Question 20

What is the effect of a forgery on order paper?

Answer 20

Forgery breaks the chain of title.

Check is not properly payable.

Drawer can demand that the drawee bank recredit the drawer’s account as the check was not properly payable.

Question 21

What is the imposter rule?

Answer 21

Issuer/maker/drawer will be estopped from denying the validity of the forged indorsement.

This occurs where the issuer/maker/drawer is deemed to have acted carelessly in issuing the check and thus is found to contribute to the forgery.

Question 22

What is an example of when an issue/maker/drawer contributed to a forgery?

Answer 22

When a check is paid and the drawer failed to determine the true identity of the payee or should have determined the nature of the person’s authority

This can extend to the claim that the drawer should have used better supervision in its operations.

Question 23

What is the rule regarding fraudulent indorsements by employees?

Answer 23

If an employer entrusts an employee with responsibility with respect to an instrument and the employee makes a fraudulent indorsement, it is effective. Payee is estopped from asserting the forgery.

Question 24

If the party is estopped from bringing a claim against the party that paid of the the check because the individual who forged the check had authority to act for them, from whom can they recover?

Answer 24

While they cannot recover from the bank, they can still recover from the employee.

Question 25

What is the drawee’s liability for paying on a forged check?

Answer 25

Payee can sue the payor bank as well as the depositary bank and other convertors for conversion;

OR

The drawer of a check can sue the payor/drawee bank since a check with a forged payees name is not properly payable.

Question 26

Does a drawee have an protection from double liability?

Answer 26

Yes - a successful conversion action against drawee by payee will eliminate a drawer’s not properly payable action.

Question 27

What are a bank’s defenses to liability for conversion or not properly payable check?

Answer 27

1) Imposter Rule: Defense to not properly payable action.
2) Fraudulent indorsement by employee - defense to a conversion action.
3) Drawer’s negligence - Defense to a not properly payable action
4) Failure to timely sue - drawer must sue within 3 years.

Question 28

To bring a claim against the drawee bank for not properly payable check, when must the drawer sue?

Answer 28

Within 3 years.

Question 29

What is the liability of a presenter if it turns out the check was not properly payable?

Answer 29

The drawee bank can sue the present and those prior to the presentor for breaching the presentment warranty - the forgery broke the chain of title so no one could become a holder.

Question 30

What are the options of presenter who loses to the payor for breach of presentment warranty of good title?

Answer 30

They can sue further up the chain for various transfer warranties of

1) entitled to enforce
2) signatures are authentic and authorized
3) no good defense

Question 31

What is the liability a bank has to the payor of an improperly paid check?

Answer 31

Liable for cashing a check that was not properly payable - liability to the payor.

Question 32

What is the liability of a bank has to the payee of an improperly paid check?

Answer 32

Liability for converting property.

Question 33

After the bank has paid either the payee or payor for the wrongful payment of a check, what option does it have?

Answer 33

It can bring a claim against party that presented the check to the bank for payment under the presentment warranty of entitled to enforce.

There was no right to enforce because the forgery prevented the party from being a holder.

Question 34

After paying to the pay out bank the amount of the wrongful payment made, what option does the depositing bank have?

Answer 34

They can bring a suit against the party that deposited the check with the bank under the transfer warrant of entitled to enforce, all signatures are authentic, and no good denses exists. The liability just keeps on passing down - generally the first party who trusted the forger loses.

Question 35

In a chain of liability which party usually loses?

Answer 35

The first party who trusted the forger.

Question 36

What is a situation where alteration comes up?

Answer 36

The obligor does not want to pay because the instrument was altered.

Question 37

What are the types of alterations?

Answer 37

1) Change in obligation: Any unauthorized change in an instrument that purports to modify the obligation of a party such as the amount, due date, name of payees, or interest rate.
2) Unauthorized completion - instrument is completed in an unauthorized manner which affects the party’s obligations.

Question 38

How does a change in obligation affect an HDC?

Answer 38

HDC is entitled to enforce the document for its original amount.

Question 39

True or False: Alteration is a real defense that works against the HDC.

Answer 39

True

Question 40

How does unauthorized completion of an instrument affect an HDC?

Answer 40

HDC may enforce the document as it was completed.

Question 41

True or False: Unauthorized completion of an instrument is a real defense that works against an HDC.

Answer 41

False - it is a personal defense and HDC may enforce the document as completed.

Question 42

What is the effect of an alteration fraudulently made by the holder of an instrument?

Answer 42

Results in the total discharge of the obligor. They don’t need to pay the original amount or the forged amount.

Question 43

What is the effect of an alteration NOT fraudulently made by the holder of an instrument?

Answer 43

The obligor is still liable under the original terms of the document.

Question 44

What is an example of an alteration that is not fraudulent made by the holder of an instrument?

Answer 44

An alteration made by a third party without the holder’s consent.

Question 45

What is the general rule regarding altered checks?

Answer 45

Such checks are not properly payable.

Question 46

If an altered check is cashed, what is the drawer’s option?

Answer 46

The drawer can recover against the bank because the check was not properly payable.

Question 47

What are the bank’s defenses to alteration?

Answer 47

1) Negligence - if the drawer’s negligence substantially contributes to the alteration, the drawer will be precluded from asserting the alteration.
2) Bank Statement Rule - The drawer must report alterations to the drawee bank within 1 year.

Question 48

What is an example of negligence leading to the alteration of a check?

Answer 48

Leaving a large gap in the text and number boxes of a check that gives a party an opportunity to easily forge the check.

Question 49

Under the Bank Statement Rule, when must a drawer report alterations to a bank?

Answer 49

Within 1 year

Question 50

Does the Bank Statement Rule for alteration apply even if the bank was obviously negligent?

Answer 50

Yes - if the claim is made after one year, the bank does not have to credit the drawer’s account because the forgery was not timely reported.

Question 51

If a bank has to pay the drawer money for a check not properly paid due an alteration, what options does it have?

Answer 51

It can sue up the chain bank for breach of the presentment warranty of no alteration.

The presenting bank can then sue up the chain for breach of the transfer warranty of no alteration.

Question 52

If drawer’s bank sues the presenting bank for a check that was not properly paid due to an alteration, what options does the presenting bank have?

Answer 52

The presenting bank can sue up the chain for breach of the transfer warranty of no alteration. The goal is to pass liability to the first alterer or the first party to get instrument from the alterer.

Question 53

In suing up the chain what is the ultimate goal?

Answer 53

To pass liability to the first alterer or the first party to get instrument from the alterer.