forgery Flashcards
key question
It is essential when dealing with forgery to determine whose signature was forged because different rules apply based on the identity/status of the person whose name is forged.
B. FORGED MAKER’S SIGNATURE
note situation
- Alleged Maker Not Liable
Alleged maker is not liable because maker’s signature does not appear on the note. Alleged maker’s conduct may ratify the forgery or cause alleged maker to be
precluded from denying the forgery. - Forger Is Liable
Forger is liable on the note because forger’s signature appears thereon.
C. FORGED DRAWER’S SIGNATURE
draft situation
- Alleged Drawer __not_ liable
- Drawee bank must recredit alleged drawer’s account as check was __not properly payable __ unless drawee bank has a defense
- Bank unable to pass on loss unless breach of presentment warranty
Normally, no presentment warranties (entitled to enforce, no alteration, no knowledge of forged drawer’s signature) will be breached; parties had right to enforce the forger’s obligation.
Forger is the real drawer because forger signed when the forger forged the alleged drawer’s signature.
Drawee takes risk that drawer’s signature unauthorized unless presenter __knew__ it was unauthorized.
C. FORGED DRAWER’S SIGNATURE
4. Bank’s Defenses to Recrediting [defenses to the alleged drawer’s not properly payable action]
a. Drawer’s Negligence
If drawer’s negligence substantially contributes to the forgery of the drawer’s name, the drawer may not raise the forgery. (leave the signature stamp on desk)
b. Bank Statement Rule — Duty to Inspect Statement
(1) General Rule
Customer (drawer) has duty to inspect bank statement and canceled checks in timely manner and report forgeries to bank.
If customer does not and ***bank can prove a loss beyond original mistaken payment (e.g., not catch forger), customer precluded.
Warning: Forged drawer’s signatures must be reported to bank within __1 yr_ of when the statement was available regardless of bank’s or customer’s negligence.
(2) Repeat Offender Rule
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 the drawer does not do so, the bank will not recredit the account for the subsequent forgeries by the same person.
D. FORGED INDORSEMENTS
- Effect of forgery of payee’s name
- Effect of forgery of payee’s name
a. Bearer Paper
Since indorsement is not necessary to negotiate bearer paper, forgery of an indorsement is irrelevant
b. Order Paper
Forgery breaks chain of title and check is not properly payable. Accordingly, the drawer may demand that the drawee bank recredit the drawer’s account as the check was not properly payable.
D. FORGED INDORSEMENTS
- Situations Where a Party Is Precluded From Asserting Forgery of ***Payee’s Name
a. Impostor Rule — drawer/maker estopped to deny validity of forged indorsement
The issuer, maker or drawer, will be estopped from denying the validity of a forged indorsement.
These are situations where the maker or drawer is deemed to have acted negligently in issuing the check and thus to have contributed to the forgery.
examples:
forger pretends to be payee/ agents of payee, drawer should have determined the true identity of the payee/ true nature of Paul’s authority.
the corporate treasurer/ her secretary forges check payable to payee and pretends to be payee and cash. The corporation should have better supervised its treasurer.
b. Fraudulent Indorsements by Employees – Payee estopped
If an employer entrusts an employee (or independent contractor)* with responsibility with respect to an instrument* and the employee makes a fraudulent indorsement, the indorsement is effective. Payee is estopped to assert the forgery.
example:
bookkeeper will be liable if he is entrusted with responsibility with check, but not a janitor who steals the check
D. FORGED INDORSEMENTS
- Liability of Drawee (bank)
a. Conversion Liability to Payee
Payee can sue the payor bank (as well as the depositary bank and non-bank converters) for conversion, or
b. Not Properly Payable Liability to Drawer
The drawer of a check can sue the payor/drawee bank since a check with a forged payee’s name is not properly payable.
c. Drawee protected from double liability
A successful conversion action against drawee by payee will eliminate drawer’s not properly payable action.
d. Bank’s Defenses
(1) impostor Rule
(2) fraudulent Indorsement by Employee Entrusted With Check
(3) Drawer’s Negligence
(4) Failure to Timely Sue
Drawer must sue within 3 years.
If drawee bank pays, bank will then want to pass on liability —
- Liability of Presenter
- Liability of Transferor
- Liability of Presenter (depositary bank)
The drawee bank can then sue the presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce (the forged indorsement broke the chain of title so no one could become a holder). - Liability of Transferor
The presenter who loses to the drawee bank/payor for breach of presentment warranty of good title may sue entities further up the chain for breach of the various __transfer_ warranties of
(1) entitled to enforce,
(2) all signatures authentic or authorized, and
(3) no good defenses.
Example: Dan issues a check payable to Paul from Dan’s account at Octopus National Bank (ONB). Tom steals Paul’s check, expertly forges Paul’s name, and deposits the check in Tom’s account at Texas State Bank. Texas State Bank presents the check to ONB for payment and ONB pays the check. Shortly thereafter, both Dan and Paul discover what happened and notify ONB immediately.
drawee ONB is liable either (1) to drawer Dan for cashing a check which was _not properly payable_or (2) to payee Paul for converting Paul’s property.
After paying either Dan or Paul, ONB will bring a claim against presenter Texas State Bank for breaching the presentment warranty of entitled to enforce (Texas State Bank had no right to enforce the check because the forgery prevented it from being a holder). Texas State Bank may then bring a claim against transferor Tom for breaching the transfer warranties of entitled to enforce, all signatures authentic or authorized, and no good defenses.
E. ALTERATION
Obligor does not want to pay because the instrument was altered.
- Types
a. Change in Obligation
Any unauthorized change in an instrument that purports to modify the obligation of a party such as the amount, date, names of payees, or interest rate.
b. Unauthorized Completion
Instrument is completed in an unauthorized manner which affects the party’s obligation.
E. ALTERATION
2. Effect on HDC
a. Change in Obligation — Holder in Due Course May Enforce for Original Amount
but obligor has a real defense for the raised amount
b. Unauthorized Completion — Holder in Due Course May Enforce as Completed
Example: Mary signs a check but leaves the amount blank and hands it to Evans stating, “You may buy yourself a birthday present with this check but you may not spend more than $100.” Evans completes the check for $1,000 and transfers it to a bank which qualifies as a holder in due course. The bank may enforce the check against Mary for $1000
E. ALTERATION
3. Effect on Non-HDC
a. Fraudulently Made by Holder = __total __ Discharge of Obligor
Example: Martin signs a promissory note for $100 payable to Evans. Evans expertly alters the note so it reads $1,000 and then tries to collect the $1,000 from Martin. Martin has __no_ liability on the note and is not even obligated to pay the original $100.
b. Unauthorized Completion — Holder in Due Course May Enforce as Completed

Example: Martin signs a promissory note payable for $100 to Evans. Evans leaves the note in his desk. Unbeknownst to Evans, the cable TV installer finds the note, expertly alters the note so it reads $1,000, and returns the note to the desk. Martin is still liable for $100, the original terms of the note.
E. ALTERATION
4. Not Properly Payable
a. General Rule
An altered check is not properly payable.
bank has to recredit
Example: Dave issues a check for $100 to Paula. Paula expertly alters the check so it reads $1,000 and cashes the check. Dave may recover against his bank because this check was not properly payable.

b. Bank’s Defenses
(1) Negligence
If the drawer’s negligence substantially contributes to the alteration, the drawer will be precluded from asserting the alteration.
Example: Dan draws a check for $10 payable to Arthur. The number “10” and the word “ten” are typewritten in the appropriate spaces on the check. A large blank space is left after the number and the word. Arthur uses a typewriter with the same font style and size to add the word “thousand” after the word “ten” and the figures “,000” after the number “10.” If the drawee pays the check, Dan may not be able to recover in a not properly payable action because his negligence in leaving blank spaces substantially contributed to Arthur’s ability to make the alteration.
(2) Bank Statement Rule
The drawer must report alterations to the drawee within __1 yr_.
E. ALTERATION
5. Breach of Transfer and Presentment Warranties of No Alteration

Example: Dave issues a check for $100 to Paula. Paula expertly alters the check so it reads $1,000 and cashes the check. Dave timely reports the alteration after receiving his bank statement and the drawee bank recredits Dave’s account because this check was not properly payable.
Dave’s bank may now sue up the chain of banks for breach of the presentment warranty of no alteration and the presenting bank may sue up the chain for breach of the transfer warranty of no alteration.
