Fraud and Forgery

Question 1

Who is liable for a fraudulent signature?

Answer 1

Only the person who signs the instrument fraudulently is liable, NOT the person’s name written

Question 2

What is the effect of an improper endorsement?

Answer 2

The possessor is NOT the holder, and the instrument is not properly payable to that person.

Question 3

Who may the proper payee recover from checks that were stolen and improperly negotiated?

Answer 3

He has a cause of action for conversion against EITHER the depository bank OR the payor bank, but can’t recover from both.

Question 4

What is the two step negligence test for forged instruments?

Answer 4

1. If maker/drawer’s failure of ordinary care substantially contributed to the forgery, they will be precluded from asserting the forgery claim against a good faith, for value purchaser. (ex. they leave a signed check lying around)
2. If the person asserting preclusion based on maker’s negligence ALSO failed to exercise ordinary care in paying for the item, the loss is distributed per each party’s negligence. (buyer accepts check signed in crayon).

Question 5

What are instances when forged endorsements are presumed valid and effective?

Answer 5

1. Paid to ficticious payees (usually embezzlement schemes, paid to fake suppliers)
2. Imposters-loss will be on person who failed to check ID
3. “Responsible employee”-employee charged with check processing duties fraudulently endorses employer’s instrument(embezzlement)
   Note: this will NOT apply to forged drawer signatures.

Question 6

What is the general rule for fraudulently altered or completed instruments?

Answer 6

Generally it discharges the maker/drawer

Question 7

When can an instrument fraudulently altered or completed from original terms be enforced?

Answer 7

1. Enforced according to original terms and

2. ONLY if acquired by someone in good faith, for value, and did not know of alteration.

Question 8

Parents give their child a check for $100 to go shopping, son changes it to $1000 and buys a stereo system from Sears. Can Sears enforce it? Can parents get their money back?

Answer 8

Yes, Sears can enforce it if taken in good faith and without negligence, but only enforce it for the original terms of $100. Parents will be able to redeem $900 from bank