NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

KINDS OF DEFENSES 1. Real defenses (Absolute defenses) Those which attach to the instrument itself and generally disclose an absence of one of the essential elements of a contract or where the admitted contract is void for all purposes for reasons of public policy o Available against all holders, even HDC 2. Personal Defenses (Equitable Defenses) Those wherein a true contract appears, but for some reason, such as fraud, the defendant is excused from the obligation to perform o Can be raised only against non-HDC KINDS OF CLAIMS OF OWNERSHIP (EQUITIES) 1. Legal title May recover even from HDC 2. Equitable title May not recover from HDC, only from nonHDC REAL DEFENSE AND PERSONAL DEFENSE DISTINGUISHED REAL DEFENSES PERSONAL DEFENSES NATURE Those that attach to the NI Those which are available only itself and are available against against a person not HDC or a all holders, whether or not HDC, subsequent holder who stands but only by parties entitled to in privity with him raise them STATUS OF CONTRACT Void Voidable AVAILABILITY AGAINST HDC Available against HDC Not available against HDC DEFENSES Key: PAID-WIFI-MUD-FEM Key: CUBIC: RAIN-WIFI-MICU 1. PRESCRIPTION 1. Non-delivery of COMPLETE 2. Material ALTERATION (Sec instrument (Sec 16) 124) 2. ULTRA VIRES acts of 3. ILLEGALITY If declared corporations where the void for any purpose corporation has the power 4. DURESS amounting to to issue negotiable paper forgery but the issuance was not 5. WANT of authority of agent authorized for the particular 6. NON-DELIVERY of purpose for which it was Incomplete Instrument (Sec issued 15) 3. Negotiation in BREACH of 7. FORGERY (Sec 23) 8. INSANITY Where the insane person has a guardian 9. MINORITY available only to the minor 10. ULTRA VIRES act of corporation 11. DISCHARGE in Insolvency 12. Fraud in FACTUM or Esse Contractus Fraud in execution 13. Execution of NI between public ENEMIES 14. MARRIAGE in the case of a wife NOTE: An Instrument subject to real defense cannot be enforced against the person to whom the defense is available but it can be enforced against those whom such defense is not available such as under Sec 23 faith (Sec 55) 4. INSERTION of wrong date in an instrument (Sec 13) 5. CONDITIONAL delivery of complete instrument 6. Filling up blank beyond REASONABLE time (Sec 14) 7. ABSENCE or failure of consideration whether partial or total (Sec 28) 8. ILLEGAL consideration (Sec 55) 9. Filling up blank NOT within authority (Sec 14) 10. WANT of authority agent where he has apparent authority 11. Fraud in INDUCEMENT 12. Acquisition by FORCE, duress or fear (Sec 55) 13. INTOXICATION 14. MISTAKE 15. INSANITY Where there is no notice of insanity in the part of the one contracting with the insane person 16. Negotiation under CIRCUMSTANCES that amount to fraud (Sec 55) 17. Acquisition of the instrument by UNLAWFUL means (Sec 55)

A.

INCAPACITY Under Sec 22 NIL, If a minor indorses a

NI, although he cannot be held liable on his contract of indorsement, the title to the instrument passes to his indorsee Real defense EFFECT: Subsequent holder, if HDC, can recover from the maker free from the defenses of minority and other personal defenses

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

EXAMPLE: A makes a note payable to B (minor). B indorses the note to C, who in turn, indorses it to D. Upon maturity, D sues A (maker). o A cannot raise the defense of minority of B because: (1) Sec 22 provides that indorsement of NI by a minor passes the property therein; and (2) under Sec 60, the maker warrants the capacity of the payee to indorse o If A is insolvent, D cannot sue B because as to B, minority is a real defense o Is C liable to D? Yes, under Sec 66, a general indorser warrants the capacity of all prior parties NOTE: Minority is a real defense available only to the minor and is not a personal defense which by availed of by the parties other than such minor Same rules apply in case the indorser is a corporation with no capacity to indorse under its charter; insane or demented persons, and deaf-mutes who do know how to write HELD: Voidable. Under Sec 22, The statement that the infant passes property therein entails that the contract of indorsement is not void and that his indorsee has the right to enforce payment from all parties prior to the infant indorser. The incapacity of the minor cannot be availed of by the prior parties. It was not intended to provide that the indorsee should become the owner of the instrument by title indefeasible as against the infant, or to make the act of indorsement an irrevocable one. The law would not want to deprive the infant of the right to reinvest in himself the title to the instrument against a holder who had knowledge of the indorsers infancy. The common-law rule is that the purchaser and indorsee of such a note is not a bona-fide holder as against an infant indorser, and that the latter may disaffirm and recover the note from the possession of the former, who takes with constructive notice of the incapacity. This means that the infant could disaffirm and recover B.

MURRAY V. THOMPSON 136 Tenn. 118, 188 S.W. 378, LRA, 1817B 1172 (1916)
Subject: CHECK Maker: Brick Co Payee: Murray Subsequent indorsements: Murrays father sold NI to Thompson FACTS: Murray received a note from a brick company in satisfaction to his claim for damages worth $1,750 because of personal injuries. It was payable on June 1, 1915 because he was still a minor. On October 16, 1914, W.A. Murray, his father, with the consent of the minor, sold the note to Thompson. He indorsed the name of his son without apprising Thompson that he himself was not the payee. The proceeds were deposited to the account of Murray. It was invested in a saloon business and was lost. There was no actual fraud on the part of Murray in the transaction with Thompson. ISSUE: What is the status of the indorsement of a NI by a minor?

ILLEGALITY As general rule, illegality is a personal

defense not available against HDC. Under Sec 55, illegal consideration is mere personal defense, available only against non-HDC Although a NI may have been issued or negotiated for an illegal consideration, only the parties involved in the illegality and subsequent parties who are not HDC can be adversely affected HDC can still recover HOWEVER, NI, if declared void for any/all purposes, the defense of illegality becomes a real defense

RODRIGUEZ V. MARTINEZ 5 PHIL 67 (1906)

Subject: PN dated October 17, 1902 for P4,000 Maker: Martinez Payee: Montalvo Indorsee: Rodriguez FACTS: Montalvo, for value received, sold and transferred the said PN to Rodriguez before maturity. Rodriguez received the same WITHOUT notice of any conditions existing against the note.
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Rodriguez, before having the note, went to Martinez and asked him in respect thereto, and was informed by him that the note was good and that he would pay the same at a discount; and that the note was delivered by Martinez to Montalvo in payment of the gambling debt which Martinez owed Montalvo. This note was presented to the court as evidence of that debt without the stamp required by law, and no stamp had ever been attached thereto. After the trial Rodriguez offered to put the necessary stamp on the note, and tendered such stamp. ISSUE: WON Martinez is liable to pay Rodriguez on the PN HELD: Yes. SC did not discuss whether the game at which this debt was incurred is a prohibited game or not. In view of the fact that the judgment of the court below contains no finding as to the name or nature of the game, SC applied Art 1277 NCC: the consideration of the contract must be presumed to be lawful and valid until the contrary is proved; and without considering as we have said these questions which we do not think necessary to discuss for the purposes of this decision, yet there are other grounds upon which this case can be decided. From the facts set out in the judgment of the court below, Rodriguez acquired the ownership of the note in question by virtue of its indorsement, he having paid the value thereof to its former holder. He did so without being aware of the fact that the note had an unlawful origin, since he was not given notice of any conditions existing against the note. Furthermore, he accepted it in good faith, believing the note was valid and absolutely good, and that defendant Martinez would not repudiate it for the reason that Martinez, had assured him before the purchase of the note that the same was good and that he would it at a discount. Without such assurance from Martinez we can hardly believe that Rodriguez would have bought the note. It is thus inferred from the fact that he, Rodriguez, inquired from the defendant about the nature of the note before accepting its indorsement. These facts sufficiently show that Rodriguez bought the note upon the statement of Martinez that the same had no legal defect and that he was thereby induced to buy the same by the personal act of Martinez. In view of this, Martinez cannot be relieved from the obligation of paying Rodriguez the amount of the note alleged to have been executed for an unlawful consideration. If such unlawful consideration did in fact exist, Martinez deliberately and maliciously concealed it from Rodriguez. Therefore, to hold otherwise would be equivalent to permitting Martinez to go against his own acts to the prejudice of Rodriguez. Such a holding would be contrary to the most rudimentary principles of justice and law. Par. 1, Sec 333 of Code of Civil Procedure, applicable to this case, provides as follows: "Whenever a party has, by his own declaration, act, or omission intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsity it." C.

FORGERY Under Sec 23, forgery is a real defense. A

person whose signature to an instrument was forged was never a party and never consented to the contract which gave rise to such instrument; as such, he cannot be held liable thereon by anyone, not even HDC TWO situations contemplated under Sec 23: a. Want of authority of agent Where the signature on the instrument is affixed by one who purports to be an agent but who does not have the authority to bind the alleged principal b. Where the signature is affixed by one who does not claim to act as an agent and who has no authority to bind the apparent signer EFFECTS: a. Signature (not the instrument itself) is inoperative and no one can gain title to the instrument through it b. NO right to retain the instrument, or to give discharge therefore, or to enforce payment thereof EXCEPTION: Where the party against whom it is sought to enforce a right is precluded from setting up the forgery or want of authority 1. Person who WARRANT or admit the genuineness of the signature in question a. Indorsers Indorsers can be held liable because of their breach of warranty that the instrument is genuine and in all respect what it purports to be (Sec 66) b. Persons negotiating by mere delivery; and
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

c. Acceptors 2. Those who by their acts, silence, or negligence are ESTOPPED from setting up the defense of forgery These include acts or omission that amount to ratification, express or implied o But a person precluded from raising the defense of forgery may still recover damages under NCC on torts o If the instrument is payable to bearer, the forgery of the indorsement is immaterial since it is negotiable by mere delivery In case of forgery of an indorsement of an instrument payable to order, it is not only the person whose signature was forged who would not be liable but also the parties prior to such person. Payment under a forged instrument is not the drawers order. Where an instrument is originally payable to bearer, the effects of a forged indorsement is different. The holder of such instrument who did not know of the forgery can still enforce it against the drawer or maker because he can cancel the forged indorsement as not being necessary to his title (Sec 48). REASON: Payable to bearer instruments are negotiated by mere delivery Should there be an indorsement subsequent to the forged one, the holder, should he be unable to recover from the maker, may have a right against the subsequent indorser on the latters warranty that the instrument is genuine and valid at the time of his indorsement NOTE: The burden of proving the genuineness of a signature is on the person basing his claim thereon. by Flynn and indorsed by defendant. When Balene & Max requested the defendant to be present at the transfer and questioned him about the notes, he attended and examined them and said, Everything is all right. The notes were then accepted on account of the purchase price of the property, and the one in suit subsequently passed by indorsement, for a valuable consideration, to the plaintiff. Defendant at the trial denied his signature as indorser, insisting that it was a forgery. ISSUE: WON Gluckman is estopped from alleging forgery HELD: Yes. It is true that silence and acquiescence alone does not estop a defendant in a suit upon an alleged forged instrument from proving the forgery, where the plaintiff had not been prejudiced or damaged thereby. But where the holder of a note has been willfully misled as to the genuineness of an indorsement thereon by one who purports to be the indorser and sustains damage or is prejudiced thereby, the alleged indorser will be stopped from denying the validity of the signature.

STRADER V. HALEY 216 Minn. 315, 12 N.W. (2d) 608 (1943)

Subject: Checks Drawer: Strader Forger: Haley FACTS: Haley and his wife lived with plaintiff Strader. Between July 11, 1936 and June 14, 1941, 69 checks were negotiated by Haley. Strader claimed that Haley forged her name as drawer for 2 checks and as indorser in a total of 57 checks. Checks varied amounts. Park Recreation Parlor, Luz, Easlinger, Liberty State Bank were those who cashed the checks. Plaintiff claimed she never made such indorsements or signed as drawer. Plaintiff brought separate actions against Haley, parties who were alleged to have cashed checks for Haley and Liberty State Bank. Defense claimed that the checks were indorsed by plaintiff herself, that she delivered them to Haley with instructions to cash them, to purchase supplies, and return the change to her. TC said that there was no finding that plaintiff authorized Haley to sign her name on any check. TC also said that plaintiff received
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GLUCKMAN V. DARLING 85 N.J.L. 457, 89 Atl. 1016 (1914)

Subject: Promissory note Maker: Charles Flynn Payee: Balene & Max Indorsee: H.L. Darling Holder for Value: Isaac Gluckman FACTS: Balene & Max were about to sell to Charles Flynn some real estate and were to take in part payment therefore notes made

NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

from Haley all the proceeds of the checks with knowledge that such proceeds came from the checks. TC found that plaintiff had ratified Haleys actions and conduct in cashing the checks. ISSUE: WON Plaintiff is liable for Haleys acts by ratification HELD: Yes. The Court held that the word precluded in Sec 23 NIL includes ratification (in this case, receiving proceeds of the checks). NIL is based largely on the English Bills of Exchange Act. The
English law contains a proviso that nothing in this section shall affect the ratification of an unauthorized signature not amounting to a forgery. This proviso was not included in the NIL but a footnote was added that a forged signature may be ratified. The dropping of such proviso did not indicate any intention of changing the meaning adopted from the English law. Established rule was that an unauthorized signature not amounting to forgery could be so ratified. SC concluded that the framers of the NIL intended that under the act, the same as under the prior law, a party may be precluded by ratification. *case had a discussion on WON precluded was equivalent to estoppel as some authors conclude. However the Court said that although precluded denotes the consequence of an estoppel, it is not equivalent and its meaning should not be so limited because 1) it is not the intention of the framers; 2) it is opposed to the prior law which NIL adopted. By a forgery is meant an unauthorized signature on an instrument or a material alteration thereof in violation of a criminal statute. Rule is that an unauthorized signature on a note, check or other instrument under circumstances not constituting the crime of forgery may be ratified. CAB: There was no forgery committed as an essential element, the intent to fraud, was not proven. Where the principal accepts and retains the benefits of an unauthorized act of an agent with full knowledge of all the facts, he thereby ratifies the act. In the instant case, the evidence sustains the finding that plaintiff received the proceeds of the checks in cash and with full knowledge of all the facts. This was proven by: proceeds of the check were definitely identified and traced; corroboration of Haleys wife; the fact that Strader did not complain to her attorneys that she did not receive any checks, which was her usual routine. The Court concluded that plaintiff ratified all the unauthorized signatures in these cases; that by reason of such ratification she is precluded from setting up the fact that her signatures were unauthorized in the actions against Haley.

SAN CARLOS MILLING CO V. BPI & CHINA BANKING CORP 59 PHIL59 (1933)
Subject: Check Drawer: San Carlos Milling Co Drawee: BPI Collecting Bank: China Bank FACTS: San Carlos Milling is organized under Hawaiian law and is authorized to engage business in the Philippines. The business in the Philippines was handled by Alfred Cooper, its agent (under GPA) with authority of substitution. The principal employee in the Manila office is Joseph Wilson who also has a GPA but without substitution. Before Cooper left in 1926, he gave a GPA to Newland Baldwin and at the same time revoked Wilsons GPA relative to dealing with BPI, a bank where plaintiff has an account. After a year, Wilson, conspiring with Alfredo Dolores, a messengerclerk in Plaintiffs Manila office, sent a cablegram to the company in Hawaii requesting a telegraphic transfer of $100K to China Banking Corp. (CBC), where plaintiff also has an account. After receipt of the money, CBC sent an exchange contract to plaintiff offering P201K (current rate). On this contract was forged the name of Baldwin. It also contained a request for a certified check from CBC upon receipt of the money. A managers check on CBC for P201K payable to plaintiff was receipted for by Dolores. W/c check was deposited to BPI by the following indorsement: For deposit only with BPI, to credit account of (plaintiff). By (Sgd.) NEWLAND BALDWIN For Agent This endorsement was spurious. BPI credited plaintiffs account for P201K and passed the cashiers check through the clearing house, where it was paid by CBC. The same day, BPI received a letter, purporting to be signed by Baldwin, directing that P200K in bills of various denominations be packed for shipment and delivery the next day. The next day, Dolores witnessed the counting and packing of the money then he gave a check, purporting to be signed by Baldwin, for P200K. He
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was also charged P1 for the service wherein he also came up w/ another check for P1, again purporting to be signed by Baldwin. (This practice of withdrawing money for shipment was frequent for plaintiff but never so large an amount and under the sole supervision of Dolores.) Dolores then delivered the money, in plaintiffs office, to Wilson where he received his P10K share. Shortly thereafter, the crime was discovered, and upon BPI refusing to credit plaintiff with the amount of the 2 forged checks (P200K+P1), plaintiff sued BPI and CBC ISSUES: 1. WON China Bank is liable 2. WON BPI is liable HELD: FIRST ISSUE: No. A bank that cashes a check must know to whom it pays. In connection with the cahiers check, this duty was therefore upon BPI, and CBC was not bound to inspect and verify all endorsements of the check, even if some of them were also depositors in that bank. It had a right to rely upon BPIs endorsement when it gave the latter bank credit for its own cahiers check SECOND ISSUE: Yes. It is an elementary principle both of banking and the NIL that a drawee 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. The bank paid out its money because it relied upon the genuineness of the purported signatures of Baldwin. These, they never questioned at the time its employees should have used care. In fact, even today the bank represents that it has a belief that they are genuine signatures. The signatures to the checks being forged, under Sec 23, NIL, they are not a charge against plaintiff nor are the checks of any value to the defendant. The proximate cause of the loss is BPIs negligence.

PNB V. QUIMPO G.R. No. L-53194 (1988)

FACTS: Francisco S. Gozon II, a depositor of the Caloocan Branch of PNB, went to the bank accompanied by his friend Ernesto Santos whom he left in the car while he transacted business in the bank. Santos took a check from Gozons checkbook, filled it up for the amount of P5T, forged the signature of Gozon, and encashed it in the bank on the same day. Upon receipt of the statement of account from the bank, Gozon asked that the amount of P5T be returned to his account as his signature on the check was forged but the bank refused. Santos was apprehended by the police and he admitted that he stole the check of Gozon. Gozon filed the complaint for recovery of the amount of P5T against the bank in the CFI Rizal. ISSUES:
1. 2. WON PNB was negligent in encashing the forged check without carefully examining the signature therein WON Gozon is precluded from setting up the defense of forgery or want of authority (since it is his own negligent act of leaving the checkbook in Santos hands that is the proximate cause of the loss)

HELD: FIRST ISSUE: Yes. The drawee 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 change the amount so paid to the account of the depositor whose name was forged. This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the presumed negligence of the drawee in failing to meet its obligation to know the signature of its correspondent. If the paper comes to the drawee in the regular course of business, and he, having the opportunity ascertaining its character, pronounces it to be valid and pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the commercial law places upon him, and the result of his negligence must rest upon him. SECOND ISSUE: No. The act of Gozon 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

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negligence. Gozon could not have been expected to know that Santos would remove a check from his checkbook. Defendant had trust in his classmate and friend. He had no reason to suspect that the latter would breach that trust. Unfortunately for Price, both these bills were actually fakes. They were done by a certain Lee who was later hanged for the crime of forgery. Wanting to recover the amount he paid, Price sued Neal. It was proven that Neal acted innocently and bona fide, without any suspicion of the forgeries and that he paid the whole value of those bills. But the jury found a verdict for Price. ISSUE: WON Price may recover from Neal the money he paid on the two bills HELD: No. Price cannot recover the money paid from Neal because the latter received it upon a bill of exchange indorsed to him for a fair and valuable consideration, which he had bona fide paid, without the least privity or suspicion of any forgery. It was incumbent upon Price (drawee) to be satisfied that the bill drawn upon him was the drawers hand, before ha accepted or paid it. It was not Neals duty to do so. Notice was given upon Price of a bill drawn upon him; and he sends his servant to pay and take it up. The other bill he actually accepts. CAB: It was a considerable time after payment before Price found they were forged and the forger was already to be hanged. He made no objection at the time he paid them. Whatever neglect there was, it was on his side. Neal had no reason to doubt the second bill after Price, without any scruple or hesitation, paid the first. Neal also paid the whole value bona fide. It is a misfortune which happened without Neals fault or neglect. NOTE: Under Price v. Neal, a drawee who paid on an accepted bill as well as a non-accepted bill, each of which bore a forged signature of the drawer, cannot recover the money paid out on either bill.

ACCEPTANCE AND PAYMENT UNDER MISTAKE

1. Price v. Neal Doctrine When the drawers signature is forged on a bill or check and the drawee did not detect the forgery thereon, the drawee cannot charge the amount thereof to the drawers account o RATIO: The drawee is bound the know the signature of the drawer by reason of its business relations with the drawer. o Forgery as a defense is not available to the acceptor under Sec 62 NIL o Sec 62 covers bills paid without prior acceptance and bills accepted since one who pays a bill necessarily accepts it. (No distinction between acceptance and payment)

PRICE V. NEAL 3 Burr. 1354 (1762)

Subject: Bill for 40 Drawer: Benjamin Sutton Drawee: John Price Payee: Rogers Ruding Holder: Watson & Son FACTS: A bill for 40 was purportedly drawn by Sutton (drawer) against Price (drawee) in favor of Ruding (payee). It appeared from the bill that it was indorsed to Anthony Topham, then Hammon and Laroche and finally, for a valuable consideration, to Watson and Son whose representative, Edward Neal, received it. Neal gave notice to Price. On the day it was due, Price sent his servant to Neal to pay the 40 and take up the bill. A second bill for 40 was again purportedly drawn by Sutton (drawer) against Price (drawee) in favor of Ruding (payee). It appeared from this bill that it was indorsed by Ruding to Watson and Son. This second bill was accepted by Price upon presentment by writing on it: Accepted John Price. The bill being accepted, it was indorsed by Neal for a valuable consideration and left at Prices bankers for payment. It was paid upon Prices order.

FIRST NATL BANK OF PORTLAND V. US NATL BANK OF PORTLAND 100 Ore. 264, 196 Pac 547, 14 ALR 470 (1921)
Subject: 18 forged checks Drawer: Willamette Iron & Steel Works Drawee: First National Bank of Portland Payee: Rose and Shea Indorsees: various merchants to US National Bank of Portland FACTS: Rose and Shea conspired to obtain 18 blank checks bearing the lithographed signature of Ball, president of Steel
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Works, and forged therein the signature of Insley, secretarytreasurer. The checks were negotiated by the two to various merchants, all of whom deposited the checks in their accounts in the United States National Bank. Defendant bank collected from drawee/plaintiff bank. Forgery was discovered and drawee was immediately notified. Plaintiff bank wants to recover from defendant bank on the theory that (1) the latter was negligent in not detecting the forgery (apparently, drawer also had a checking account in defendant bank, so they should have been aware of the required signatures), and (2) even if not negligent, the indorsement of the checks and presentment for payment, followed by actual payment, oblige the defendant to refund. ISSUE: WON defendant bank is liable to plaintiff bank HELD: No. GENERAL RULE: Where a holder for value in due course presents to the drawee a bill of exchange to which the name of the drawer has been forged, and the drawee pays the instrument, the holder and drawee alike ignorant that the signature of the ostensibly drawer was forged, and it is subsequently discovered that the signature of the drawer was forged, the drawee cannot recover payment made to the holder. EXCEPTIONS: This defense is not available to a holder who (1) is guilty of bad faith, or (2) has been negligent. CAB: There was nothing upon the face of any of the checks to excite suspicion, and it is not claimed that any of the 18 merchants knew or had any reason to suspect the checks were forgeries. The fact that the defendant had in its files the genuine signature of a drawer might be, if there are other circumstances tending to show negligence, considered in determining whether the defendant was negligent; but it cannot be said that the failure to compare the signatures was, as a matter of law, negligence on the part of the defendant. Drawer: Pangasinan Transport Co Drawee: PNB Payee: International Auto Repair Shop Holder/Recipient: Motor Service Co FACTS: An unknown person negotiated with Motor Service Co the checks in payment for tires purchased from Motor Svc, purporting to have been issued by Pangasinan Transport Co. against PNB and in favor of Intl Auto Repair Shop. Said checks were indorsed by unknown person at the back, Motor Svc believing that the signatures of Klar (Manager and Treasurer of Pangasinan Transport) were genuine. Checks were indorsed for deposit by Motor Svc at the National City Bank of New York and Motor Svc was credited w/ the amounts. Checks were cleared and PNB credited the National City Bank of New York for the amounts, believing that the signatures of the drawer were genuine, that the payee is an existing entity and the indorsements are regular. PNB found out that the purported signatures of Klar were forged. It demanded from Motor Svc the reimbursement of amounts for w/c it credited the National City Bank and for w/c the National City Bank credited Motor Svc. Motor Servic refused to reimburse. Pangasinan Transport refused to have proceeds deducted from their deposit. ISSUE: WON PNB has a right to recover from National City Bank of New York HELD: Yes.
Acceptance is unnecessary in so far as bills of exchange payable on demand are concerned (e.g., checks). A check being payable immediately and on demand, bank can fulfill its duty to depositor only by paying the amount demanded. The holder has no right to demand from bank anything but payment, and the bank cannot do anything but pay. There is however, nothing w/c prohibits presentation of checks for acceptance before they are paid. Where a check is certified by the bank on w/c it is drawn, certification is equivalent to an acceptance. The bank accepts if it chooses. The purpose of certification is to import strength to the paper by obtaining acknowledgment from the certifying bank that the drawer has sufficient funds. In this case, there was payment but no acceptance nor certification.

PNB V. NATL CITY BANK OF NEW YORK & MOTOR SERVICE CO 63 PHIL 711 (1936)
Subject: Checks

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To entitle the holder of forged check to retain the money obtained, he must be able to show that the whole responsibility of determining validity of the signature was upon drawee. The drawee of a check who is deceived by forgery of drawers signature may recover payment, unless his mistake has placed an innocent holder of paper in a worse position than he could have been in if the discovery of the forgery had been made on presentation. CAB: Motor Services, in purchasing the papers from unknown person without making inquiry, acted negligently and contributed to the PNBs constructive negligence in failing to detect the forgery. NOTE: In such cases, the doctrine of contributory negligence is applied. Art 2179 NCC provides: When the plaintiffs own negligence was the

Subsequently, on January 31, 1962, upon demand from GSIS, PNB re-credited the amount since the signatures on the check were forged. Thereupon, PNB sought to refund the said amount from PCIB but the latter refused. ISSUES: 1. WON PCIB is liable to PNB by virtue of the formers guaranty on the back of the check 2. WON PNB may recover from PCIB HELD: FIRST ISSUE: No. PCIB guaranteed that all prior indorsements, not the authenticity of the signatures of the officers of GSIS because GSIS is not an indorser of the check, but is drawer. It could have been availed of by a subsequent indorsee, or HDC, subsequent to PCIB, but PNB is neither. Upon payment by PNB, as drawee, the check ceased to be a negotiable instrument and became a mere voucher or proof of payment. SECOND ISSUE: No. Assuming PCIB had been negligent, it is still undeniable that PNB had been guilty of a greater degree of negligence, since it had a previous and formal notice from GSIS that the check had been lost and a stop payment order had been made. PNB, then, is the proximate cause and must therefore bear the corresponding loss. CAB: The fact that PNB retained the check and did not return it to PCIB after it had cleared, implies that PNB considered the check good and would honor it. As a matter of fact, PNB honored the check and paid its amount to PCIB. It was only then that PCIB allowed Lim to draw said amount from his account. ACCEPTANCE AND PAYMENT Acceptance and payment within the purview of NIL are essentially two different things. Acceptance is a promise to perform an act, whereas payment is the actual performance thereof. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer, which in case of checks, is the payment on demand, of a given sum of money. On the other hand, payment implies not only an assent to said order and recognition of the drawees obligation to pay, but also a compliance with such obligation.

immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendants lack of due care, the plaintiff may recover damages but the courts shall mitigate the damages to be awarded.

PNB V. COURT OF APPEALS 25 SCRA 693 (1968)

Subject: Check Drawer: GSIS Drawee: PNB Payee: Mariano Pulido Collecting Bank: PCIB Holder/Recipient: Augusto Lim FACTS: A check was purportedly drawn by GSIS against PNB in favor of Mariano Pulido. It appears the payee, Mariano Pulido, indorsed the check to Manuel Go, who in turn indorsed it to Augusto Lim. When the check was deposited at PCIB, PCIB stamped the check All prior indorsements and/or lack of indorsements guaranteed. 2 months prior to its deposit (November 13, 1961), GSIS notified PNB that said check had been lost and requested to stop payment. On January 15, 1962, Augusto Lim deposited in his PCIB account a GSIS check for P57,415 drawn against PNB. The check cleared the following day, however PNB did not return the said check; instead, it retained it and paid its amount to PCIB and debited the amount against GSISs account.

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REPUBLIC V. EQUITABLE BANKING CORP AND BPI 10 SCRA 8 (1964)
FACTS: Jacinto Carranza asked the Corporacion de los Padres Dominicos to cash 24 treasury warrants from which encashment his wife expected to earn a sort of commission. The Corporacion accommodated Carranzas request since the latter was a trusted former employee but subject to certain conditions: a) that the warrants be deposited with BPI; b) that the actual payment of the value of the warrants would be made only after the same had been duly accepted and cleared by the Treasurer and the proceeds thereof duly credited to the BPI account of the Corporacion. Said conditions were met and deposited with BPI who accepted the warrants subject to collection only and with each of them (warrants) bearing the indorsement of the respective payee and that of the Corporacion. BPI presented the warrants for payment to the drawee (the Government) through the Clearing Office and upon clearing, was paid by the Treasurer. BPI then credited the proceeds to the Corporacions account, which was then withdrawn by the Corporacion. The Treasurer returned 3 of the warrants to the Central Bank on the ground that those were forged and then demanded that the value of said warrants be charged against BPIs account with the Clearing Office and credited back to the demand deposit of the Treasury. Eventually, all warrants were returned by the Treasury to the Central Bank for the same reason and with the same demand. Central Bank then referred the matter to BPI for appropriate action but the latter opposed the return of the warrants or to have their value charged against its account and requested, instead, to the CB to return said warrants to the Treasurer. [Equitable Case]: 4 warrants were deposited with Equitable by its depositors Robert Wong, Lu Chiu Kau and Chung Ching. Equitable cleared said warrants through the Clearing Office and then collected the corresponding amounts from the Treasurer, and thereafter, credited those to the accounts of the depositors. The Treasurer notified Equitable that said warrants were defective and demanded reimbursement of said amounts, which the latter refused. ISSUE: WON said banks are liable HELD: No. The Treasury was negligent in this case since there was a 24 hour clearing rule, wherein items that should be returned for whatever reason should be done so within 24 hours. This it failed to do in these two cases. (Note: there is no mention of the NIL here because the 28 warrants were not negotiable; Campos posed the question that had the said warrants been negotiable, would the Courts ruling be different?) Negligence in clearing: The Auditor of the Treasury, whose signature was forged, exceeded his authority to approve since each of the warrants involved were for over 5k pesos. The irregularity of the warrants was apparent on the face thereof from the Treasurys viewpoint yet the banks were not informed of any of the irregularity in them until after said warrants were cleared and honored. Only then did the Treasury give notice of the forgeries. As was stated, all 28 warrants were cleared and paid by the Treasury, this, then, induced the banks to credit the amounts to the respective depositors. TF, the loss of amounts was imputable to the acts and omissions of the Treasury so the banks should not and cannot be penalized. Treasury should bear the loss, citing PNB v Natl City Bank of NY, Where a loss, which must be borne by one of two parties alike, innocent of forgery, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded. Generally, where a drawee bank otherwise would have a right of recovery against a collecting or indorsing bank for its payment of a forged check, its action will be barred if it is guilty of an unreasonable delay in discovering the forgery and in giving notice thereof.

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

2. Extension of Price v. Neal Doctrine a. Overdraft Overdraft occurs when a check is issued for an amount more than what the drawer has in deposit with the drawee bank. In this case, the drawee, who pays the holder of the bill despite the knowledge of the drawers insufficient funds, cannot recover from the holder what he paid under mistake. HOWEVER, such holder must have been a bona fide purchaser of the bill, otherwise the drawee may recover from him On the other hand, the drawee may claim against the drawer
check by another teller of the First National, for a symbol authorizing payment. Acting on this mistaken assumption he prepared a cashiers check dated September24, payable to order of the United States National in the amount of the Kelleck check, had the same duly signed by an assistant cashier of the drawee and delivered the same to the messenger from the United States National. The United States National credited the First Nationals cashiers check to the account of the Nobles. The First Nationals cashiers check was marked paid through the clearing house at 8:45 a.m., September25, to the United States National though the courts finds that the cashiers check was received by the First National on September24 and marked paid on that date though the clearing house transaction took place on the next morning. September25, the First National Bank discovered its mistake and before 12 oclock the First National retendered the Kelleck check as a dishonored item but the United States National refused to receive it and to return the proceeds of the cashiers check. The First National Bank brought an action of assumpsit for money had and received against Lilian Noble and John Noble and the United States National Bank to recover the amount of the cashiers check, i.e., $10, 573.50. The US National Bank filed its bill of interpleader and tendered the money into court. The plaintiff recovered judgment in the trial court against the Nobles. The court concluded that the asserted right of plaintiff to restitution must be considered exactly as if the Kelleck check and had been paid over the counter in cash.

FIRST NATL BANK OF PORTLAND V. NOBLE (1946) 179 Ore. 26, 168 P. (2d) 354 (1946)
Subject: check drawn as a refund of the payment made by John and Lilian
Noble for the property purchased and subsequently reconveyed to T.D. Lee through the drawer

Drawer: Kelleck, a broker Drawee: First National Bank of Portland Payee: Lilian Noble Subsequent indorsements: Noble indorsed the check in blank and
deposited it in the United States National Bank of Portland. The deposit, on the same day, was entered as credits in the Nobles savings account and checking account.

ISSUE: WON the trial court erred in discharging the US National from
liability

FACTS: The US National Bank, on September21, placed its clearing house

indorsement, as of September22, on the check. The check reached the drawee, the First National Bank of Portland on September22. The account of the drawer, Kelleck, then had but $200 to his credit. On discovery of this fact a teller in the First National Bank placed a small symbol on the check which indicated that the check was to be rejected for want of sufficient funds. The check was then returned through the clearing house to the forwarding bank, the US National, at 11 am, September23, with the advice that it was being dishonored for insufficient funds in the drawers account. The credit to the US National Bank was canceled by the First National. The US National, by letter dated September23, informed Mrs. Noble of the dishonor of the Kelleck check and that it had been charged back to the Nobles account. September 24, shortly before 3pm, US National Bank by messenger presented the check over the counter of the First National. The teller in the First National, to whom the check was presented the second time, mistook the rejection symbol which on September 22, had been placed on the

HELD: No. -Rule 33 of the Restatement on Restitution must control the

decision of this case. It is as follows: The payee is entitled to retain the money which he has received as a bona fide purchaser. The typical cases are those where an employee of a bank pays the holder of a check in the mistaken belief that the drawer has sufficient funds on deposit to meet it or in forgetfulness of the fact that the drawer has directed that payment should not be made. The forgery cases are said to rest, in part at least, upon the maxim that where the equities are equal the legal title must prevail. That maxim appears applicable where a drawee bank pays a check so skillfully forged as to defy detection. The holder and the drawee are equally without fault, and the holder has the money. The position of the defendants in the case at bar is in this respect stronger than that of the one who has received payment of a forged check. Here the equities are not equal. The representative of the plaintiff was clearly negligent. He acted in reliance on a symbol which he had never before
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seen the meaning of which he had no reason to know. A moments inquiry would have informed him fully concerning the meaning of the symbol and the state of Kellecks account. But no inquiry was made. The defendants Noble are not chargeable with any neglect or inequitable conduct. Neither they nor their collecting agent knew or were entitled to know the state of the Kelleck account, and the fact that the Kelleck check was NSF on Sept22 did not render it unconscionable to present it again on September 24, Freeport Bank of Freeport.

check, is a finality, and the bank can't recover from the payee of the check the amount so paid. The reasons for this rule are: 1. There is no privity between the payee and the bank; 2. The bank always has the means of knowing the state of the depositor's account by an examination of its books, and therefore the payment is not a mistake within the meaning of the general rule which permits the recovery of money paid under a mistake of fact; and 3. To permit the bank to repudiate the payment would destroy the certainty that must pertain to commercial transactions and give way to uncertainty, delay and annoyance. It is a rule that a person receiving stolen money innocently in due course of business, in payment of a pre-existing debt, is a holder for value as against the former owner. b. Stop Payment Order A stop payment order is one issued by the drawer of a check countermanding his first order to the drawee bank to pay the check i.e., the drawer is ordering the drawee bank not to pay the check issued by him. The drawee bank is bound to follow the stop order provided it is received prior to its certification or payment of the check RATIO: Payment was voluntary on the part of the drawee bank which, because of the stop order, was under no legal obligation to pay and its negligence is paying precludes it from reclaiming the amount from a bona fide holder EXCEPTION: Drawee bank may claim from drawer if such payment discharged a legitimate debt of the drawer If stop order comes after the bank has certified or accepted the check, the bank is under legal duty to pay the holder and will not be liable to the drawer for doing so Certification and acceptance are akin to assignment of credit i.e., funds are segregated to be given to the payee

LIBERTY TRUST CO V. HAGGERTY 92 N.J. Eq. 609, 113 Atl. 596 (1921)
FACTS: Haggerty, a swindler, had a checking account with Liberty Trust Co. He induced a bookkeeper of the bank to manipulate the bank's books to make it appear that he had credit in the bank so that the checks he drew on the bank would be honored. They were successful for about 5 months, when a bank official accidentally discovered the falsification. Haggerty and bookkeeper succeeded in obtaining overdrafts of about $53k of the bank's funds. Haggerty was arrested. He was also declared bankrupt and a trusty was appointed. His total realized assets was $9500 and the claims filed with the trustee totaled more than $150k. Mayhew was one of the claimants. He loaned Haggerty some money with 20-40% interest. Haggerty paid him with checks drawn on Liberty. The bank paid a total of $19k to Mayhew during the time the books were being magicked. Mayhew was not aware of the fact that Haggerty's account was being falsified. Liberty wants to recover the money it paid to Mayhew. ISSUE: WON Liberty can recover what it paid Mayhew HELD: No. Mayhew was a bona fide holder for value. As such, he did not have a right to exact payment from Liberty because there was no contract between them. Liberty, on the other hand, had the right to determine whether to pay him. When the bank decided to pay, it was bound to know the state of its account with Haggerty. Having exercised its option to pay or not to pay by honoring the checks, Liberty can't recover the money back from the payee. This is under the general rule that payment of a check by a bank upon which it is drawn, under the mistaken belief that the maker of the check has sufficient funds to his credit to pay the

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

3. Effect of Negligence of Depositor The drawee bank is not liable if the proximate cause of the wrongful payment is the negligence of the drawer o If the negligence of the depositor should delay the discovery of the forgeries and this negligence is should deprive the bank to recover from the forger, the depositor will have to bear the burden of the loss and cannot demand a re-credit from the bank o RATIO: It is the duty of the depositor to carefully examine the banks statement, his cancelled checks and check stubs within a reasonable time, and to report any errors without unreasonable delay 4. Effect of Payment under Forged Indorsements A drawee can recover the amount paid by him on a forged indorsement since he makes no warranty as to the genuineness of any indorsement o When the drawee learns about the forgery, the drawee has the duty to notify the holder whom he has paid as soon as possible. If he fails to act promptly, he may lose his right to recover against the holder if his negligent delay operates to the latters prejudice o If the draw fails to recover from an insolvent holder, he cannot recover from the drawer o Payable to bearer instruments: The drawee bank may debit the drawers account in spite of the forged indorsement because such indorsement may be disregarded as being unnecessary to the holders title EXCEPT: If drawees negligence prejudices the holder o Where both drawee and collecting banks are guilty of negligence, the degree of negligence of each will be weighed in considering the amount of loss each should bear (contributory negligence) FACTS: Great Eastern, an insurance company, drew a check for 2k on HSBC payable to the order of Melicor. Maasim fraudulently obtained possession of said check and forged Melicor's signature, as an endorser. He then endorsed and presented it to PNB where the amount was placed to his credit. After paying Maasim, PNB endorsed the check to HSBC. HSBC paid PNB and then charged the check to the account of Great Eastern. HSBC, as expected in the ordinary course of business, sent Great Eastern a bank statement which showed that the check was charged to its account. Great Eastern did not object. 4 months later, Great Eastern found out that Melicor never got paid. Great Eastern then made a demand on HSBC that Great Eastern should be given credit for the forged check but HSBC refused. Great Eastern sued HSBC to recover the 2k (so it could pay Melicor). HSBC, on the other hand, prays that should judgment be rendered against it, it should have like judgment against PNB. ISSUE: WON Great Eastern can recover HELD: Yes. This is not a case where the plaintiff's own signature was forged to one of its checks. In such a case, the plaintiff would have known the forgery and would therefore have the duty to promptly notify the bank. Failure to do so would release the bank. Here, the forgery was that of payees signature, Melicor. Therefore, when Great Eastern, the drawer, received its bank statement, it had the right to assume that Melicor had personally endorsed the check because otherwise, HSBC would not have paid it. HSBC had no legal right to pay it out to anyone except Great Eastern or its order. Great Eastern ordered HSBC to pay the 2k to Melicor but the money was paid to Maasim. HSBC has no defense to this action. PNB cashed the check upon a forged signature. PNB had no license or authority to pay the money to Maasim. It was its legal duty to know that Melicor's endorsement was genuine before cashing the check. Its remedy is against Maasim. Great Eastern can recover
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GREAT EASTERN LIFE INS CO V. HSBC 43 PHIL 678 (1922)

Subject: Check for P2000 Drawer: Great Eastern Life Ins Drawee: HSBC Payee: Melicor Collecting Bank: PNB

NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

from HSBC. HSBC can recover from PNB. As for PNB, it should go after Maasim. On October 8, 1959, Jai-Alai Corp drew against its current account with BPI a check for P135,000 payable to the order of the Mariano Olondriz y Cia in payment of certain shares of stock. The check was dishonored by BPI as its records showed that the current account of the petitioner, after netting out the value of the checks P8,030.58 with the forged indorsements, had a balance of only P128,257.65. ISSUE: WON BPI had the right to debit the petitioner's current account in the amount corresponding to the total value of the checks with the forged indorsements HELD: Yes. When the petitioner deposited the checks with the respondent, the nature of the relationship created at that stage was one of agency--the bank was to collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the proceeds of the checks when it debited the petitioner's account, so that following the rule in Gullas vs. Philippine National Bank, it might be argued that the relationship between the parties had become that of creditor and debtor as to preclude the respondent from using the petitioner's funds to make payments not authorized by the latter. BPI, as a collecting bank which indorsed the checks to the draweebanks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo and by the appellate court, the indorsements on the checks had been forged In legal contemplation, therefore, the payments made by the drawee-banks to the BPI, on account of the said checks, were ineffective; and, such being the case, the relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks not having been properly and legitimately converted into cash. Having received the checks merely for collection and deposit, BPI cannot he expected to know or ascertain the genuineness of all prior indorsements on the said checks. Indeed, Jai-Alai, having indorsed the checks to BPI in accordance with the rules and practices of commercial banks, is deemed to have given the warranty prescribed in Section 66 of the Negotiable Instruments

JAI-ALAI CORP V. BPI 66 SCRA 29 (1975)

Subject: 10 Checks amounting to P8,030.58 Drawer: Delta Engineering Service Drawee: Pacific Banking Corp Payee: Inter-Island Gas Service or order Collecting Bank: BPI Holder/Recipient: Jai-Alai Corp FACTS: 10 checks with a total face value of P8,030.58 were deposited by Jai-Alai Corporation in its current account with BPI. All the checks (all payable to Inter-Island Gas or order) were acquired by the Jai-Alai Corporation from one Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular bettor at jaialai games Upon deposit to BPI, the checks were temporarily credited to JaiAlai Corporation's account with the condition that any cred it allowed...is provisional only, until such time as the proceeds thereof, in current funds or solvent credits, shall have been actually received by the Bank, and the latter reserves to itself the right to charge back the item to the account of its depositor, at any time before that event, regardless of whether or not the item itself can be returned... After Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to inter-bank clearing, Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers, as well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. Inter-Island Gas advised Jai-Alai Corp, BPI, the drawers and the drawee-banks of the said checks about the forgeries. Drawers of the checks demanded reimbursement to their respective accounts from the drawee-banks. Drawee-banks demanded from BPI, as collecting bank, the return of the amounts they had paid on account thereof. BPI, for its part, debited Jai-Alai Corp's current account

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

Law that every single one of those checks "is genuine and in all respects what it purports to be." Also, Jai-Alai was grossly negligent in accepting the checks in question from Ramirez. It could not have escaped its attention that the payee of all the checks was a corporation he Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere individual who was admittedly a habitual gambler at jai-alai games without making any inquiry as to his authority to exchange checks belonging to the payee-corporation. It must be noted further that three of the checks in question are crossed checks, which may only be deposited, but not cashed; yet, the petitioner negligently accepted them for cash. Under Sec 67 NIL, "Where a person places his indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and in all respects what it purports to be." 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. forgery. Upon plaintiffs objections, the circuit judge overruled the defendants offer to prove the ff: (1) That the defendants received the draft from the Bank of New York to collect, as agents for the latter, and that as such they received the money and paid it over to their principals, before notice of the forgery; (2) That a uniform custom of the banks of this state is to receive and collect drafts in the manner this was done, without disclosing their agency. ISSUE: WON the defendants were bound to return the money received HELD: Yes. Though the defendants were innocent of any intended wrong, they had obtained money of the plaintiffs on an instrument to which they had no title, and were therefore bound to refund; though notice of the forgery was not given till more than two months after they had received the money, they already received it and transmitted it to their principal. Where a bank collects a draft without disclosing to the drawee that it is merely collecting as agent, and it is afterwards discovered that the indorsement was a forgery, it is liable as principal in an action, by the drawee. Where a draft had been fraudulently indorsed with the name of an agent, who is also payee, and put in circulation, bona fide, by the principal of the pretended agent, without disclosing an agency, the indorsee of the principal, discovering the forgery two months after might recover the money advanced to the principal. If one accepts a draft in the hands of a bona fide holder, he will not be allowed afterward to dispute the genuineness of the drawer's signature, though he may that of the endorsers; and payment operates, in this respect, the same as an acceptance. To a note or bill payable to order, none but the payee can assert any title without the indorsement of such payee; not even a bona fide holder.

CANAL BANK V. BANK OF ALBANY 1 Hill 287 (1841)

FACTS: This is a case to recover money paid on a draft. The ground on which the plaintiffs sought to recover back the money was that the endorsement purporting to be that of Bentley was a forgery, which fact was proved by Bentley and others on the trial. The draft was drawn on the plaintiffs (Canal Bank) by the Montgomery County Bank, payable to the order of E. Bentley. It purported to have been endorsed successively by Bentley, then by one Budd, afterward by the Bank of New-York, and lastly by the defendants (Bank of Albany), to whom the plaintiffs paid it. Two months after payment, plaintiffs asked the defendants to have the money refunded, notifying them at the same time of the

REPUBLIC BANK V. EBRADA 65 SCRA 860 (1975)

Subject: Forged Check
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Drawer: Bureau of Treasury Drawee: Republic Bank Payee: Martin Lorenzo, who was already dead 11 years prior to the execution of the check Indorsee: Ramon Lorenzo, Delia Dominguez Holder/Recipient: Mauricia Ebrada FACTS: Treasury issued check in favor of Martin Lorenzo. The check was subsequently indorsed to Ebrada for encashment, and so after, she delivered the proceeds to Dominguez, and Dominguez delivered the latter to a certain Justinia Tinio. When Treasury found out that the check was forged, they demanded RB to refund the check proceeds. RB demanded refund from Ebrada. TC ruled for RB. ISSUE: WON Ebrada, the last indorser, was liable to pay the check on its face although she did not benefit from it HELD: Ebrada liable to RB, RB liable to Treasury. Where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was duly indorsed by the original payee, and where the Bank pays the amount of the check to a third person, who has forged the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against the person to whom it paid the money. EFFECT OF FORGED INSTRUMENT: Where the signature on a negotiable instrument if forged, the negotiation of the check is without force or effect (from Sec 23 of NIL). It is only the negotiation based on the forged or unauthorized signature which is inoperative (Beam vs. Farrel). DRAWEES RECOVERY WHEN HE PAID BASED ON A FORGED INSTRUMENT: The drawee of a check can recover from the holder the money paid to him on a forged instrument. It is not supposed to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are genuine, warranty not extending only to holders in due course. One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty and the drawee who has paid the forged check, without actual negligence on his part, may recover the money paid from such negligent purchasers. In such cases the recovery is permitted because although the drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty, the forgery would in all probability, have been detected and the fraud defeated. CAB: Since Ebrada was the last indorser of the check, she was supposed to have warranted that she has good title to said check. She was duty-bound to ascertain whether the check in question was genuine before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss and the plaintiff Bank may recover from her the money she received for the check. As reasoned out above, had she performed the duty of ascertaining the genuineness of the check, in all probability the forgery would have been detected and the fraud defeated. As regards RB, the plaintiff Bank should suffer the loss when it paid the amount of the check in question to defendant-appellant, but it has the remedy to recover from the latter the amount it paid to her. As regards the argument that Ebrada did not benefit from the check, although the defendant-appellant to whom the plaintiff Bank paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the check, she has warranted that she has good title to it even if in fact she did not have it because the payee of the check was already dead 11 years before the check was issued. The fact that immediately after receiving the cash proceeds of the check in question in the amount of P1,246.08 from the plaintiff Bank, defendant-appellant immediately turned over said amount to Adelaida Dominguez who in turn handed the amount to Justina Tinio on the same date would not exempt her from liability because by doing so, she acted as an accommodation party in the check for which she is also liable under Sec 29 NIL.

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BDO V. EQUITABLE BANKING CORP 157 SCRA 188 (1988)
Subject: 6 Checks Drawer: Equitable Banking Corp, Visa Card Dept Drawee: Equitable Bank Payee: Various Visa cardholders Collecting Bank: BDO Holder/Recipient: Aida Trencio FACTS: Sometime in 1983, EBC thru its Visa Card Department, drew 6 crossed Manager's checks amounting to P45,982.23 and payable to certain member establishments of Visa Card. Subsequently, the checks were deposited with the BDO to the credit of its depositor, a certain Aida Trencio. Following normal procedures, and after stamping at the back of the checks the usual endorsements: 'All prior and/or lack of endorsement guaranteed', BDO sent the checks for clearing through the PCHC. Accordingly, EBC paid the checks; its clearing account was debited for the value of the checks and defendant's clearing account was credited for the same amount. Thereafter, EBC discovered that the endorsements appearing at the back of the checks and purporting to be that of the payees were forged and/or unauthorized or otherwise belong to persons other than the payees. EBC presented the checks directly to BDO for the purpose of claiming reimbursement from the latter. However, BDO refused to accept such direct presentation and to reimburse the EBC for the value of the Checks. ISSUE: WON BDO was negligent and thus responsible for any undue payment HELD: Yes. In presenting the Checks for clearing and for payment, BDO made an express guarantee on the validity of 'all prior endorsements'. Thus, stamped at the bank of the checks are the defendant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, EDC would not have paid on the checks. As the warranty has proven to be false and inaccurate, the BDO is liable for any damage arising out of the falsity of its representation. The principle of estoppel effectively prevents BDO from denying liability for any damages sustained by EBC which, relying upon an action or declaration of the BDO, paid on the checks. The same principle of estoppel effectively prevents the BDO from denying the existence of the checks. Whether the checks have been issued for valuable considerations or not is of no serious moment to this case. These checks have been made the subject of contracts of endorsement wherein BDO made expressed warranties to induce payment by the drawer of the Checks; and the defendant cannot now refuse liability for breach of warranty as a consequence of such forged endorsements. BDO has falsely warranted in favor of EBC the validity of all endorsements and the genuineness of the checks in all respects what they purport to be. CAB: The collecting bank has privity with the depositor who is the principal culprit in this case. BDO knows the depositor; her address and her history, Depositor is BDO's client. It has taken a risk on its depositor when it allowed her to collect on the crossedchecks. Having accepted the crossed checks from persons other than the payees, BDO is guilty of negligence; the risk of wrongful payment has to be assumed by BDO.

BPI V. CA AND CHINA BANKING CORP 216 SCRA 51 (1992)

Subject: 2 Checks for the pre-termination of a money market placement Drawer/Drawee: BPI Payee: Eligia Fernando impersonated by Susan Lopez Collecting Bank: China Banking Corp FACTS: Lopez impersonated Fernando, preterminated the latters money market placement evidenced by a promissory note (P2,462,243.19) from and through BPI, who issued her 2 checks. She later opened an account at CBC and endorsed the checks there; CBC stamped them with guaranty of prior endorsements and/or lack of endorsement; BPI cleared them. Lopez withdrew nearly the whole amount. The real Fernando came on the maturity date of the placement for rollover and claimed forgery of endorsements.
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

ISSUE: WON in the event that the payees signature is forged, BPI may claim reimbursement from CBC HELD: No. Under Sec 23, the general rule is that forged signatures are wholly inoperative and payments through such are ineffectual; the exception is where the party relying on the forgery is precluded from setting up the forgery or want of authority. The court recognizes negligence of the party invoking forgery as an exception; hence general rule does not apply here. BPI claims the clearing guaranty makes CBC wholly liable for forged checks. Records show both BPI (not calling Fernando to confirm pretermination; not verifying Fernandos signatures; not asking for the promissory note upon pickup of checks) and CBC (opening account for Lopez with only Fernandos tax account number as ID, not questioning Lopez huge deposit and withdrawals) were negligent in the selection/supervision of their employees and thus both liable. the checks to the payees named therein were left to the bookkeeper. In the course of her business operations covering a period of two years, petitioner issued, following her usual practice stated above, a total of 82 checks in favor of several suppliers. It appears that instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. It was established that the signatures of the payees as first indorsers were forged. The record fails to show the identity of the party who made the forged signatures. The checks were then indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as earlier noted. The second indorsements were all genuine signatures of the alleged holders. It was only after the lapse of more than 2 years that petitioner found out about the fraudulent manipulations of her bookkeeper (payees did not receive nor see the subject checks). Because of this, the petitioner demanded from the drawee Bank to credit her account with the money value of the 82 checks for having been wrongfully charged against her account. The Bank refused. ISSUES 1. WON the CA erred in ruling that the negligence of the drawer is the proximate cause of the resulting injury to the drawee bank 2. WON the drawer is precluded from setting up the forgery or want of authority as a defense WON the respondent drawee Bank should not have honored the checks because they were crossed checks. 3. WON banking rules prohibit the drawee bank from having checks with more than one indorsement. 4. WON the drawee Bank may be held liable for damages under any law aside from NIL HELD: FIRST ISSUE: No. The petitioners negligence was the proximate
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GEMPESAW V. COURT OF APPEALS AND PBCOM 218 SCRA 682 (1993)

Subject: 82 Checks Drawer: Natividad Gempesaw Drawee: PBCOM Payee: Various suppliers/merchants FACTS: Petitioner Natividad Gempesaw owns and operates 4 grocery stores in Caloocan City. Petitioner maintains a checking account with the Caloocan City Branch of the respondent drawee Bank (PBCOM). To facilitate payment of debts to her suppliers, petitioner draws checks against her checking account with PBC as drawee. Her customary practice of issuing checks in payment of her suppliers was as follows: The checks were prepared and filled up as to all material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than 8 years. After the bookkeeper prepared the checks, the completed checks were submitted to the petitioner for her signature, together with the corresponding invoice receipts which indicate the correct obligations due and payable to her suppliers. Petitioner signed each and every check without bothering to verify the accuracy of the checks against the corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper. The issuance and delivery of

NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

cause of her loss. Gempesaw failed to examine her records with reasonable diligence whether before she signed the checks or after receiving her bank statements. Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled checks, check book stubs, and had she compared the sums written as amounts payable in the 82 checks with the pertinent sales invoices, she would have easily discovered that in some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed these discrepancies, she should not have signed those checks, and should have conducted an inquiry as to the reason for the irregular entries. Likewise, had petitioner been more vigilant in going over her current account by taking careful note of the daily reports made by respondent drawee Bank on her issued checks, or at least made random scrutiny of her cancelled checks returned by respondent drawee Bank at the close of each month, she could have easily discovered the fraud being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee Bank. The respondent drawee Bank then could have taken immediate steps to prevent further commission of such fraud. SECOND ISSUE: Yes. As a general rule, forgery is a defense. However, the plaintiff falls under the exception. GENERAL RULE: Sec 23 provides that forgery is a real or absolute defense by the party whose signature is forged. A party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. This section covers both the forged signature of the maker of a promissory note/drawer of a check and forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check. EXCEPTION: Where the drawer is guilty of such negligence which causes the bank to honor such a check or checks. Where the indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer and the payee oftentimes have business relations of long standing. The continued occurrence of business transactions of the same nature provides the opportunity for the agent/employee to commit the fraud after having developed familiarity with the signatures of the parties. CAB: the agent was the one who perpetrated the series of forgeries. Had the petitioner been more prudent under the circumstances, she could have discovered the fraud earlier. THIRD ISSUE: The banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation thereof (Sec 36, NIL). In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the instrument, so that any subsequent party may be forewarned that it ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee where the form of the indorsement does not authorize him to do so. Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or check. FOURTH ISSUE: Yes, under Art 1170 NCC. There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form part of any
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

contract it enters into with any of its depositors. When it violated its internal rules that second endorsements are not to be accepted without the approval of its branch managers and it did accept the same upon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence. the absence of sufficient security in the printing of the checks coupled with the very closed similarities between the genuine signatures and the alleged forgeries, the 23 checks in question could have been presented to the petitioners signatories without their knowing that they were bogus checks. Petitioner failed to provide the needed security measures. Another factor which facilitated the fraudulent encashment of the 23 disputed checks was the failure of the petitioner to reconcile the bank statements with its own records. Thus, even if the 23 checks in question are considered forgeries, considering the petitioners gross negligence, it is barred from setting up the defense of forgery under Sec 23 NIL. Drawee-bank PNB cannot be faulted for not having detected the fraudulent encashment of the checks because the printing of the petitioners personalized checks were not done under the supervision and control of the bank. There is no evidence on record indicating that because of this private printing, the petitioner furnished the respondent bank with samples of checks, pens, and inks or took other precautionary measures with PNB to safeguard its interests. Under the circumstances, the petitioner was in a better position to detect and prevent the fraudulent encashment of its checks.

MWSS V. COURT OF APPEALS AND PNB 143 SCRA 29 (1936)

Subject: 23 Checks Drawer: MWSS Drawee: PNB Payees: Various individuals Collecting Banks: PCIB and PBC FACTS: By special arrangement with PNB, MWSS used personalized checks in drawing from its account. MWSS issued personalized checks against its account with PNB in favor of different payees. During the same month, a second batch of 23 checks were issued bearing the same numbers as those in the first batch. Both batches were paid and cleared by PNB and debited against the account of MWSS. At the time of their presentation to PNB, these checks bear the standard indorsement, All prior indorsement and/or lack of indorsement guaranteed. Upon investigation by NBI, it appeared that the payees for the 2 nd batch of checks were all fictitious persons. As such, MWSS demanded PNB to re-credit the amounts paid on the 23 checks but PNB refused. ISSUE: WON the drawee bank is liable to MWSS HELD: No. First of all, there is no express and categorical finding that the 23 questioned checks were indeed signed by persons other than the authorized MWSS signatories. Forgery cannot be presumed. It must be established by clear, positive and convincing evidence. This was not done in the present case. Furthermore, the petitioner was using its own personalized checks, instead of the official PNB commercial blank checks. Considering

RAMON ILUSURIO V. COURT OF APPEALS 393 SCRA 89 (2002)

Subject: 17 Checks Drawer: Ramon Ilusorio Drawee: Manila Banking Corp FACTS: Ilusorio was a prominent business and head of various corporations. At the time he had an account with Manila Bank. As he was running about 20 corporations, he entrusted his secretary, Katherine Eugenio, to handle his credit cards and his checkbook with blank checks. It was also Eugenio who verified and reconciled the statements of said checking account. Between September 1980 and January 1981, Eugenio was able to encash and deposit to her personal account 17 checks drawn against Ilusorios account with Manila Bank. Petitioner did not bother to check his statement of account until a business partner
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

informed him that he saw Eugenio used his credit card. A criminal action was subsequently filed against Eugenio. Ilusorio requested Manila Bank to restore to his account the value of the checks which were wrongfully encashed but Manila Bank refused. ISSUE: WON Manila Bank is liable to Ilusorio HELD: No. It was Ilusorios failure to examine his bank statements which was the proximate cause of his own damage. To be entitled to damages, petitioner has the burden of proving negligence on the part of the bank for failure to detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner to establish the fact of forgery, i.e., by submitting his specimen signatures and comparing them with those on the questioned checks. Curiously though, petitioner failed to submit additional specimen signatures as requested by NBI from which to draw a conclusive finding regarding forgery. Moreover, it was shown that the Manila Banks employees exercised due diligence before encashing the checks. CAB: The bank was not shown to be remiss in its duty of sending monthly bank statements to petitioner so that any error or discrepancy in the entries therein could be brought to the banks attention at the earliest opportunity. But, petitioner failed to examine these bank statements not because he was prevented by some cause in not doing so, but because he did not pay sufficient attention to the matter. Had he done so, he could have been alerted to any anomaly committed against him. In other words, petitioner had sufficient opportunity to prevent or detect any misappropriation by his secretary had he only reviewed the status of his accounts based on the bank statements sent to him regularly. It is a rule that when a signature is forged or made without the authority of the person whose signature it purports to be, the check is wholly inoperative. No right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party, can be acquired through or under such signature. However, the rule does provide for an exception, namely: "unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority." In the instant case, it is the exception that applies. In our view, petitioner is precluded from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to his secretary his credit cards and checkbook including the verification of his statements of account.

TOLMAN V. AMERICAL NATL BANK 48 Atl. 480, 52 L.R.A 877 (1901)

FACTS: Tolman sues to recover money paid out by the defendant on his account, upon his check, under a forged indorsement. Potter, representing himself as Haskell, went to the plaintiff to get a loan of money, giving the residence and occupation of Haskell as his own. The plaintiff made an inquiry on Haskell and founding that the residence and occupation correct thereby agreed to nake the loan. Potter, under the name of Haskell, gave the note to the plaintiff, and the plaintiff gave him a check on the defendant payable to the order of Haskell, delivering it to Potter, supposing him to be Haskell. Potter indorsed Haskell's name on the back of the check, and gave it to AB Homes, who collected it from the bank. When the note given to the plaintiff became due, fraud was discovered. He thereupon notified the ank, and demanded the return of the amount paid on the check to the credit of his account. ISSUE: WON the bank is liable for the payment which it made on the check: HELD: Yes. When a bank receives money to be checked out by a depositor, it is to be paid only as the depositor shall order. The bank assumes this duty in receiving the deposit. If the bank pays money out on a forged signature, the depositor being free from balme or negligence, it must bear the loss. CAB: The money was intended to Haaskell, because his was the only name suggested. He had been looked up and found to be responsible. It is a perversion of words to say that it was intended for Potter simply because he had fraudulently impersonated Haskell, and led the plaintiff to believe the he was Haskell. The plaintiff did not intend Potter to have the money. When Potter

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fraudulently indorsed Haskell's name on the check, it was a typical case of forgery. When a signature is forged or made out 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 discharge therefor, or to enforce payment thereof, against a party thereto, can be acquired through or under such signature, unless a party against whom it is sought to enforce such right is precluded from setting up forgery or want of authority. guaranteeing the previous indorsements. Corn Exchagne Bank, relying upon the guaranty by the trust company, paid each of the checks to the trust company through its collecting agents. Based on the averments that, the indorsements purporting to be those of Charles Niemann were forgeries; that the trust company collected the proceeds of the checks without actual knowledge of the character of the business of R.M. Miner; that Corn Exchange Natl Bank had constructive notice of the business of the firm; and that the said checks were not given in due course of the business. Snyder wants to recover from the bank the amounts drawn from its account. ISSUE: WON Snyder may recover from defendant bank HELD: No. The bank said that Neimann was not a real, bona fide payee, but was in legal contemplation, a fictitious personand such fact was known to Greenfield when he drew the checks, in his capacity as Snyders attorney/agent. Neimann may have been an existing person, but nevertheless, he was a fictitious name within the meaning of the act of assembly as Greenfield only intended to use this name and never intended for him to receive the checks or have any right to them. -A check is payable to bearer when it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable (Sec 9 NIL). The intent of the drawer in inserting the name of the payee is the sole test of whether the payee is a fictitious person. In such case, there could be no recovery. When the checks were delivered to R.M. Miner, they were shown as payable to bearer and nothing therefore need be said in the contention of Snyder as to the liability of the trust company to the bank upon the guaranty of the indorsements on the checks. The checks drawn by Greenfield are made as if drawn by Snyder himself. And when Snyder lodged with Greenfield with this power, it is as if he said to the bank that any check drawn by Greenfield should be paid by it as if it was made and issued by him. The court said that if this is not enough to protect the bank from liability for mis-payments from his account, it is not easy to conceive what else would be.

SNYDER V. CORN EXCHANGE NATIONAL BANK 221 Pa. 599, 70 Atl. 876 (1908)
Subject: 4 Checks Drawer: George Snyder Drawee: Corn Exchange Bank Payee: Charles Niemann or order Holder/Recipient: RM Miner Collecting Bank: Real Estate Title Insurance & Trust Company of Philadelphia FACTS: George Snyder is a broker, trading and doing business under the name of Harrison, Snyder & Son. He is a depositor at the Corn Exchange National Bank. He had in his employ a clerk named Edwin Greenfield, an attorney, who was authorized to draw checks in his name against his deposit in the said bank. Greenfield drew 4 checks payable to the order of Charles Niemann with a total amount of $ 18, 387.50. These checks were paid by the bank and charged to the account of Snyder. The checks were said to have been indorsed by Neimann, but these indorsements were forgeries and were never authorized by him or Snyder. They were said to have been indorsed in blank to R.M. Miner & Co., a co-partnership purporting to carry on a stock and grain brokerage business but is actually conducting a gambling establishment popularly known as a bucket shop. The 4 checks were deposited by R.M. Miner to Real Estate Title Insurance & Trust Company of Philadelphia. The trust company then indorsed 3 of the 4 checks to guarantee previous indorsements to certain banks in Philadelphia for collection. The 4th check was also indorsed by the trust company but without

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

5. Effect of Negligence of Drawee in Informing Recipient of Forgery Prompt notice of discovery of forgery was not a condition precedent to suit. If it shown that the drawee on learning of the forgery did not give prompt notice of it and that damages resulted, recovery by the drawee is barred. The drawee should be allowed to shift that loss to the drawee only upon clear showing that the drawees delay in notifying him of the forgery caused him damage. No such damage has been shown by Clearfield. 6. Effect of Negligence of Drawer in case of Forged Indorsements on Checks The drawer, as soon as he discovers the forged indorsement, should promptly notify the drawee bank. Otherwise, if the drawers negligent delay is the proximate cause of any subsequent loss to the bank, the drawee bank may recover from the drawer

CLEARFIELD TRUST CO V. UNITED STATES 318 US, 363, 63 S. S. Ct. 573 (1943)
Subject: Check for $24.20 Drawer: US Treasurer Drawee: Federal Reserve Bank of Philadelphia Payee: Clair Barner Indorsers: JC Penney to Clearfield Trust FACTS: A check was drawn on the Treasurer of the US through the Federal Reserve Bank of Philadelphia to the order of Clair Barner in the amount of $24.20. It was dated at Harrisburg, Pennsylvania and was drawn for the services rendered by Barner to the Works Progress Administration. The check was placed at the mail addressed to Barner but he did not receive the check. Some unknown person obtained it and presented it to JC Penney Co. store representing that he was the payee and endorsed the check in the name of Barner and transferred it to JC Penney Co. in exchange for cash and merchandise. JC Penney Co. endorsed the check to Clearfiled Trust Co. which accepted it as an agent and endorsed it as follows: Pay to the order of Federal Reserve Bank, Prior endorsements guaranteed. Clearfield collected check from the US and paid the full amount to JC Penney. Neither Clearfield nor JC Penney +had any knowledge or suspicion of forgery. ISSUE: WON US is barred from recovery HELD: No. He who presents a check for payment warrants that he has title to it and the right to receive payment. If he has acquired the check through forged endorsement, the warranty is breached at the time the check is cashed. The drawees right to recover accrues when the payment is made. There is no other barrier to the maintenance of cause of action. The theory of the drawees responsibility where the drawers signature is forged is inapplicable here. The drawee, whether it be the US or another, is not chargeable with the knowledge of the signature of the payee.

DETROIT PISTON RING CO V. WAYNE COUNTY & HOME SAVIS BANK 252 Mich. 163, 233 N.W. 185 (1930)
Subject: Checks for payroll Drawer: Detroit Piston Ring Drawee: Wayne County & Home Savings Bank Payee: Supposed employees of Detroit Piston FACTS: Helen Culbert was a trusted payroll clerk of Detroit Piston. She prepared the biweekly payroll and the checks corresponding therewith. She would then have these signed by the officer of the Company who would sign the same without question. Unbeknown to the Company, Culbert was also preparing checks to the order of non-existing persons or former employees which she subsequently indorsed in the names of the payees and negotiate them to other banks or stores. The drawee bank would then pay the same and debit Detroit for the corresponding amount. The cancelled checks were then returned to the company on the first of each month. the bookkeeper would then compare the balance on the bank statement with Detroits own book. She would then sign a receipt containing the stipulation if no error is reported in ten days the account will be considered correct. Because of the increased cost due to the activities of Culbert, the Company employed auditors to ascertain the reason for said
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

increased costs. However, the auditors (it should have employed Ricky if they really wanted to get to the bottom of the problem) failed to discover the cause. As it turned out, the fraud could have been easily discovered if someone just compared the payroll sheet with the time cards punched by employees in the time clock. The company finally discovered the defalcation amounting to $28,066.66. The Company sued Wayne County & Home Savings alleging negligence in paying the questioned checks and claiming reimbursement of the above amount plus interests thereon. ISSUE: WON Detroit was negligent in the issuance of the checks and thus estopped from asserting claims against the Bank HELD: Yes. The estoppel of the depositor, on the ground of negligence, to recover for an unauthorized payment, is based on the failure of the depositor to act as a prudent businessman in issuing his checks. CAB: At the beginning of the period during which the fraudulent checks were issued, the only negligence on the part of the Company consisted in the failure of its officers to make a thorough check of the payroll. Each time the checks were issued, the officers signing them would compare the checks with the payroll, but at no time was a complete investigation made, i.e., a comparison of the checks with the time cards, nor was an audit of the payroll ever made. It is perfectly clear that a complete investigation would have disclosed the fraud at once. D. instrument, but it is a REAL defense when relied on to deny liability according to the altered terms Intent is immaterial in the alteration

What constitutes MATERIAL alteration (Sec 125)

(a) (b) (c) (d) (e) (f) Date Sum payable or interest Time or place of payment Number or relations of parties Medium or currency of payment Any other change or addition which alters the effect of NI

NOTE: Spoilaton, material alteration by a stranger, does not affect the NI, provided the original meaning can be ascertained

MONTINOLA V. PNB 88 PHIL 178 (1951)

FACTS: Ramos is disbursing officer of USAFFE. As such, he went to the Province of Lanao to procure a cash advance in the amount of P800K for the use of USAFFE. Encarnacion, Provincial Treasurer of Lanao did not have that amount in cash. So, he gave Ramos P300K in emergency notes and a check for P500K. Ramos went to the office of Laya, the Provincial Treasurer of Misamis Oriental and ex officio agent of PNB branch in Misamis Oriental, to encash the check for P500K which he had received from Encarnacion. Ramos worked under him as assistant agent in the bank branch and Ramos got the job as disbursing officer from the recommendation of Laya. Note that the currency being used in Misamis Oriental and Lanao which had not yet been occupied by the Japanese invading forces, was the emergency currency. Laya did not have enough cash to cover the check so he gave Ramos P400K in emergency notes and a check for P100,000 drawn on PNB. According to Laya, he had previously deposited P500,000 emergency notes in PNB Cebu and he expected to have the check issued by him cashed in Cebu against said deposit. Ramos had no opportunity to cash the check because in the evening of the same day the check was issued to him, the Japanese forces entered the capital of Misamis Oriental, and the USAFFE forces surrendered. Ramos was made a

MATERIAL ALTERATION Since it changes the

contract of the parties, a material alteration avoids the instrument (Effect: No longer a NI) and discharges all parties, unless they authorized or consented to the alteration EXCEPT: As to subsequent indorser because by indorsing the NI, he warrants that the instrument is in all respects what it purports to be and that it was valid and subsisting at the time of his indorsement (Sec 65-66 NIL) HDC may enforce the altered NI according to its ORIGINAL tenor Material Alteration is a PERSONAL defense when used to deny liability according to the original tenor of the

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

prisoner of war until 1943. In 1945, Ramos allegedly indorsed this check (P100K) to Montinola. However, Montinola alleges that in 1944, Ramos, needing money to buy foodstuffs and medicine, offered to sell him the check. Montinola, with his agents and Ramos, went to see President Carmona of PNB Manila to check the genuineness of said check; after examining it President Carmona told him that it was negotiable but that he should not let the Japanese catch him with it because possession of the same would indicate that he was still waiting for the return of the Americans to the Philippines. He and Ramos finally agreed to the sale of the check for P850,000 Japanese military notes, payable in installments; that of this amount, P450,000 was paid to Ramos in Japanese military notes in five installments, and the balance of P400,000 was paid in kind. Upon payment of the full price, Ramos duly indorsed the check which now appears on the back of the document: "The words, 'pay to the order of ' -in rubber stamp and in violet color are placed about one inch from the top. This is followed by the words 'Enrique P. Montinola' in typewriting which is approximately 5/8 of an inch below the stamped words 'pay to the order of'. Below 'Enrique P. Montinola', in typewriting are the words and figures also in typewriting, '517 Isabel Street' and about 1/8 of an inch therefrom, the edges of the check appear to have been burned, but there are words stamped apparently in rubber stamp which, according to Montinola, are a facsimile of the signature of Ramos. There is a signature which apparently reads 'M. V. Ramos' also in green ink but made in handwriting." M. V. Ramos is handprinted in green ink, under the signature. According to Montinola, he asked Ramos to handprint it because Ramos' signature was not clear. Ramos in his turn told the court that the agreement between himself and Montinola regarding the transfer of the check was that he was selling only P30,000 of the check and for this reason, at the back of the document he wrote in longhand the following: "Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine National Bank to the credit of M. V. Ramos." Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him P90,000 in Japanese military notes but that Montinola gave him only two checks of P20,000 and P25,000, leaving a balance unpaid of P45,000. In this he was corroborated by Atty. Ramos Jr. The indorsement or writing described by M. V. Ramos which had been written by him at the back of the check does not now appear at the back of said check. What appears thereon is the indorsement testified to by Montinola and described by the trial court as reproduced above. When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in lieu thereof he filed a supposed photostatic copy. However, at the trial, he presented the check itself and had its face marked and the back thereof. But the check is badly mutilated, blotted, torn and partly burned, and its condition can best be appreciated by seeing it. In explanation of the mutilation of the check Montinola told the court that several months after indorsing and delivering the check to him, Ramos demanded the return of the check to him, threatening Montinola with bodily harm, even death by himself or his guerrilla forces if he did not return said check, and that in order to justify the nondelivery of the document and to discourage Ramos from getting it back, he (Montinola) had to resort to the mutilation of the document. Laya stated that he issued the check only his capacity as Provincial Treasurer, and that the words in parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear on the check when he issued the same. The words 'Agent, Phil. National Bank' which now appear on the check were not typewritten below his signature when he signed the said check and delivered the same to Ramos. According to Laya, when he issued checks in his capacity as agent of PNB Misamis Oriental the said check must be countersigned by the cashier of the said agency -not by the provincial auditor. Montinola on the other hand said that when he received the check it already bore the words 'Agent, Phil. National Bank' below the signature of Laya and the printed words 'Provincial Treasurer'. ISSUE: WON there was valid negotiation (P30,000 only indorsed) HELD: No. Montinolas complaint cannot prosper because

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

1) Check long overdue by about 2 1/2 years. It may therefore be considered even then, a stale check. 2) The insertion of the words "Agent, Phil. National Bank" which converts the bank from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration of the instrument without the consent of the parties liable thereon, and so discharges the instrument. (Sec 124 NIL). 3) The check was not legally negotiated within the meaning of the Negotiable Instruments Law. Section 32 of the same law provides that "the indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable does not operate as a negotiation of the instrument." Montinola may therefore not be regarded as an indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him by Ramos, in which case, as such assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis Oriental and against Ramos. 4) He should have known that a check for such a large amount of P100K could not have been issued to Ramos in his private capacity but rather in his capacity as disbursing officer of the USAFFE, and that at the time that Ramos sold a part of the check to him, Ramos was no longer connected with the USAFFE but already a civilian who needed the money only for himself and his family. 5) Ramos had he retained the check may not now collect its value because it had been issued to him as disbursing officer. As observed by the trial court, the check was issued to M. V. Ramos not as a person but M. V. Ramos as the disbursing officer of the USAFFE. Therefore, he had no right to indorse it personally to plaintiff. It was negotiated in breach of trust, hence he transferred nothing to the plaintiff. 6) It is absolutely necessary for the court to examine the original in order to see the actual alterations supposedly made thereon, and that should this Court grant the prayer contained in the bank's brief that the check be later referred to the city fiscal for appropriate action, said check may no longer be available if the appellant is allowed to withdraw said document.

BANK OF COMMERCE OF SULPHUR V. WEBSTER 70 Okla. 73, 172 942 (1918)

Subject: A note of guaranty executed by Webster & Molacek as guarantors, guaranteeing to the Bank of Commerce of Sulphur the payment of 2 notes issued by Crafton Maker: 2 notes by Crafton; Note of guaranty by Webster & Molacek Payee: Security State Bank Indorsee: Bank of Commerce of Sulphur FACTS: The note of guarantee was executed when the notes (to be guaranteed) were transferred from Security State Bank to Bank of Commerce. When Bank of Commerce sued for the fulfillment against the guarantors, the guarantors interposed the defense that they were relieved of liability since the note issued by Crafton had been materially altered. The alteration consists of having the wife of maker Crafton (Lizzie Crafton) sign the note at the instance of the Bank of Commerce after execution and delivery of the guaranty. (note: it seems that in effect, Lizzie became a co-maker to the note) Trial court held that the signing of Lizzie at the instance of the Bank of Commerce, without knowledge and consent of the guarantors, was an alteration that defeated the guaranty. ISSUE: WON the signing of the notes by Lizzie Crafton after the execution and delivery of the contract of guaranty, without the consent and knowledge of the guarantors, released and discharged the guarantors from the contract of guaranty HELD: Yes. the adding of an additional party to a negotiable instrument subsequent to its execution and delivery discharges the original parties when such change is made without their knowledge or consent. The reason why the addition of a name to a note as a joint maker, after its issuance, materially alters it, is because it changes the number of parties and their relative rights, the rate of contribution, and the character and description of the instrument. A guarantor is exonerated, except as far as he may be indemnified by the principal, if by any act of the creditor, without the consent of the guarantor, the original obligation of the principal is altered in any respect, or the remedies or rights of the
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

creditor against the principal in respect thereto, in any way impaired or suspended. CAB: The addition of the name of Lizzie to the note, payment of which the guarantors guaranteed, changed the identity of the said note and its effect and operation, and such alteration being made without the consent and knowledge of the guarantors, the guarantors are discharged from their liability on the guaranty. 1. Effect of Negligence of Drawer of Checks GENERAL RULE: Drawee cannot charge against the drawers account on altered checks/NI o EXCEPT: If drawers negligence is the proximate cause o Where the negligence of the drawer consists in failing to discover alterations previously made, the rule is similar to that of a forged check HELD: No. The bank is not liable because it was the plaintiff 's negligence which approximately caused the loss and the bank is not guilty of any negligence that contributed to the loss. There is a distinction between bank checks and negotiable instruments of the note and bill class. One who purchases a note, or like negotiable instrument, is under no manner of compulsion and acts purely at his option or election, under which circumstance, it is not inappropriate to apply, by analogy the caveat emptor rule; whereas, the Bank is under a direct and peculiarly delicate obligation, which requires prompt discharge, usually with little opportunity for investigation to pay the check of its depositor ,upon presentation, or subject itself to the risk f damages. Furthermore the depositor on the other hand, owes to his bank the duty to exercise care in drawing checks in order to avoid possible loss. CAB: The drawer of this check authorized the payee to fill out the check, not only in pencil, which made the added words and figures raising the check particularly easy to insert and well high impossible to detect, there being no such variation as frequently appears when different ink is used, but the payee having been authorized to fill out the check in his handwriting, with the words and figures placed as herein before shown, no possibility of detection of the check having been thus raised was left open to the Bank. NOTE: This case made a distinction between 2 kinds of alteration: (1) alteration by insertion of figure, words to the NI; and (2) alteration by erasure. In the former, the drawer is liable for negligence while in the latter the drawee is liable for failing to detect the erasure paying the check despite the presence of an erasure.

FOUTCH V. ALEXANDRIA BANK & TRUST CO 177 Tenn. 348, 149 S.W. (2d) 74 (1941)
Subject: Check for $18 altered to $418 Drawer: W.L. Foutch Drawee: Alexandria Bank & Trust Co Payee: B.W. Foutch FACTS: W.L. Foutch purchased a cow from B.W. Foutch for $18 for which he gave a check to B.W. Foutch, payable to his order. This check was wholly written by the payee (because it was W.L.'s practice to have the checks filled out by the parties to whim the check was made). In the check, there was a space between the dollar sign and the amount in numbers and the amount in words was written midway of the line provided for it and in the lower left corner for cow and when presented it already bore $418, four hundred eighteen dollars and for cow and note. All the figures and writings in the check were in the same writing except for the signature when it was presented to the bank.The bank paid to B.W. Foutch the sum $418 called for by the check, and charged it to the account of the drawer. ISSUE: WON the the bank is liable for the overdraft (or should W.L. Foutch bear the loss)

SAVINGS BANK OF RICHMOND V. NATL BANK OF GOLDSBORO 3 F. 2d 790, 39 A.L.R. 1374 (1925)
Subject: Check for $6 altered to appear $8,470 Drawer: AC Norwood, President of National Bank of Goldsboro Drawee: First National Bank of New York Payee: Order of NL Massie Holder/Recipient: Savings Bank of Richmond
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

FACTS: A.C. Norwood (DRAWER), President of the National Bank of Goldsboro issued a certain draft dated March 29, 1918 for the sum of $6, drawn against the FIRST NATIONAL BANK OF NEW YORK (the DRAWEE) payable to the order of N.L. Massie. The said draft was thereafter unlawfully and without the knowledge or consent of A.C. Norwood or the Goldsboro Bank, fraudulently forged and altered in material respects. The date was changed from March 29, 1918 to June 21, 1918, and the amount thereof from $6 to $8,470. Massie sold the altered draft to the SAVINGS BANK OF RICHMOND, with whom he had been transacting with for two years. Trusting Massies moral and financial strength, the SAVINGS BANK OF RICHMOND purchased the draft for $8,470 giving him in exchange a cashiers check for the same amount. When the Savings Bank attempted to collect it, only then did it find out that the draft was forged. Savings Bank insists that the National Bank of Goldsboro (THE DRAWER) should be liable on the theory that it was negligent or amiss in its duty to ensure that the draft is safe from every reasonable chance of alteration. Ordinary paper was used and that there was no protectograph or other safety device to prevent alteration. Daniel, a commentator on the negotiable instruments law is cited as authority for the liability of the drawer of a bill or the maker of a note who by careless execution of the instrument left room for any alteration, insertion or erasure, which would prejudice the bona fide holders rights. The Goldsboro Bank counters that with a completed draft, losses arising from its subsequent alteration and forgery do not fall upon it but rather upon those who have chosen to accept the same as changed. Assuming that the argument of Savings Bank to be valid, it will not be liable because it is not the proximate cause of the loss. ISSUES: 1. WON Savings Bank can recover from point of view of tort or negligence. 2. WON Bank can recover from the draft as a contract btwn the parties. 3. WON Savings instrument Bank can recover from the negotiable

HELD: FIRST ISSUE: No. The issuing of the note could in no sense be considered as proximate cause of the loss. Where a negotiable note was delivered in completed form, the possibility that it might be altered by the willful fraud or forgery of another was too remote to afford basis of an action either in tort or in contract. SECOND ISSUE: The note in its forged and altered state is not a contract of the maker of the instrument. Thus, a suit based on contract can neither prosper. THIRD ISSUE: Yes. But only as to the original face value of the draft. Section 3106 of the Negotiable Instruments Law of North Carolina provides: Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided except as against the party who has himself made, authorized or assented to the alteration and subsequent indorsers. But when the 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 the original tenor. NOTE: HIDC enjoys status as such only to the extent of the original amount as written by drawer or maker in a proper case. Impliedly, it seems to say that the HIDC albeit protected by the law still has some duty to conduct reasonable inquiry especially when transactions involve huge sums of money. Certainly 8,000 dollars is a huge amount in the 1920s.

CRITTEN V. CHEMICAL NATIONAL BANK 171 N.Y. 219, 63 N.E. 969, 57 L.R.A. 529 (1902)
FACTS: Plaintiff kept a large and active account with the defendant. The Plaintiffs employed a clerk named Davis. It was the duty of Davis to fill up the checks which it might be necessary for the plaintiffs to give in the course of business, top make corresponding entries in the stubs of the check book, and present the checks so prepared to Mr. Critten, one of the plaintiffs, for signature, together with the bills in payment of which they were drawn. After signing a check Critten would place it and the bill in
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

an envelope addressed to the proper party, seal the envelope and put it in the mailing drawer. In 24 separate instances, Davis abstracted one of the envelopes from the mailing drawer, opened it, obliterated by acids the name of the payee and the account specified in the checks, then made the check payable to cash and raised its amount, in the majority of cases, by the sum of $100. he would draw the money on the checks so altered from the defendant bank, pay the bill for which the check was drawn in cash, and appropriate the excess. On one occasion David did not collect the altered check from the defendant, but deposited it to his own credit in another bank. When a check was presented to Critten for signature the number of dollars for which it was drawn would be cut in the check by a punching instrument. When Davis altered a check he would punch a new figure in front of those already appearing in the check. This work has been entrusted to another person in Davis absence, hence the forgeries were discovered and Davis was arrested and punished. Hence this action to recover the amount of these forged checks, over and above the sums for which they were originally drawn. ISSUES: 1. WON plaintiff is guilty of negligence 2. WON by negligence in its discharge or by the failure to discover and notify the bank, the depositor (plaintiff) is estopped from asserting that they are forgeries 3. WON defendant bank can claim relief from plaintiffs negligence HELD: FIRST ISSUE: Yes. A comparison of the returned checks with the stubs in the checkbooks would have exposed the alterations made in the checks. Of course the knowledge of the forgeries that Davis possessed from the fact that he himself was the forger, was in no respect to be attributed to the plaintiffs. It is well-settled that the depositor owes his bank the duty of a reasonable verification of the returned checks. If the depositor has by his negligence in failing to detect forgeries in his checks and give notice thereof caused loss to his bank, either by enabling the forger to repeat his fraud or by depriving the bank of an opportunity to obtain restitution, he should be responsible for the damage caused by his default but beyond this his liability should not extend. SECOND ISSUE: While the Court hold that this duty rests upon the depositor, it does not accept the doctrine asserted in some of the cases that, by negligence in its discharge or by the failure to discover and notify the bank, the depositor either adopts the checks as genuine and ratifies their payment or estops himself from asserting that they are forgeries. In the present case, a check altered by Davis from the sum of $22 to $622 was paid by the defendant to the Colonial Bank in which Davis had deposited it. Against the bank the defendant has ample recourse. If it were to be held that the plaintiffs are estopped from denying the genuineness of that check as against the defendant, the latter could have no claim against the Colonial Bank, nor is it clear that the plaintiffs would have any direct right of action against that Bank. The Colonial bank took the check solely on the responsibility of Davis. To it the plaintiffs owed no duty. A rule which might operate to relieve the bank from the liability it assumed when it collected an altered check, merely because the plaintiffs failed in their duty, not ti it, but to a third party should not be upheld. Nor would it operate justly in a case in which the bank had paid a single forgery unless by the depositors default and delay the bank had lost its opportunity to secure restitution. THIRD ISSUE: No. The Bank was also guilty of negligence in paying the check. The sixth in sequence of these forgeries was a check with the name of the payee erased and cash written in the place thereof. The teller of the defendant who paid the check and was a witness on its behalf testified that the check showed on its face that the word cash had been written in the place for the payees name over an erasure; that it was in such mutilated condition when it was presented to him that, before paying it he required Davis to indorse upon the check a receipt for its amount. Had Davis been required to obtain the indorsement or guaranty of the plaintiffs as to its correctness, the forgeries of Davis would have been exposed, and their repetition would not have occurred. The action brought by plaintiffs was brought on contract, not on tort for the allegation of negligence on the part of the defendant is used only to defeat its claim for relief on account of the plaintiffs negligence.

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2. Effect of Drawees Payment or Acceptance of Altered Check If a drawee bank cashed a check on which the amount has altered, the drawee bank may recover from the Recipient-HDC on the ground that the amount was paid under mistake and under Sec 124, an HDC can recover only according to the original amount of the NI. o Under Sec 62 NIL, assent to the order of the drawer means assent to the actual not apparent order of the drawer o Sec 124 provides that an altered NI is avoided except as against a party who made or consented to the alteration o Drawee bank is liable because it is in a better position to shoulder the loss and it can insure itself against such loss repayment of the amount immediately when it discovered the alterations. Natl City Bank refused to repay the same. Before the discovery of the alteration, both banks believed the check to be genuine. ISSUE: WON Marine Natl Bank is entitled to repayment HELD: Yes. An acceptor of a bill of exchange by acceptance only admits the genuineness of the signature of the drawer, and does not admit the genuineness of the indorsements...or any other part of the bill, is elementary and sustained by an unbroken current of authority. The reason is that when the bill is presented for acceptance the acceptor looks to the handwriting of the drawer with which he is presumed to be acquainted. But the acceptor cannot be presumed to have any such knowledge of the other facts upon which the rights of the holder may depend. The doctrine is applied to cases of bills altered in the body, by the raising of the amount for which they were drawn, and also to those in which the name of the payee has been feloniously changed. The drawee is presumed to be acquainted with the drawers signature, but to require the drawee to know the handwriting of the residue of the bill is unreasonable. It would, in most cases, be requiring impossibility. Such a rule would be not only arbitrary and rigorous, but unjust.

MARINE NATIONAL BANK V. NATIONAL CITY BANK 59 N.Y. 67 (1874)

Subject: Check for $25 but was altered later Drawer: Lunt Brothers Drawee: Marine National Bank Payee: To the order of Henry Smith Indorsee/Recipient: Derippe Collecting Bank: National City Bank FACTS: Lunt Brothers who were merchants in NY gave a stranger the $25-check in exchange for the same amount. The next day, a person called upon Derippe & Co (gold brokers in NY) stating that he wished to buy some gold for Lunt Brothers, and asked $3334 gold in currency. A memo, giving the amount as $4079.96 was delivered to him. The person then altered the $25-check by erasing the date, payee, and amount, and inserting Dec.2,1969, payee Derippe & Co, amount $4079.96, sent the check to Marine for certification, and upon presentation it was duly certified, and thereupon, Derippe without notice, and being ignorant of the alteration and relying upon the certification, gave to the person the sum of $3334 American gold, receiving in payment the certified check. Derippe indorsed the check and deposited it in National City Bank. Marine Bank paid the check to Natl City Bank, but requested

WELLS FARGO BANK V. BANK OF ITALY 214 Cal. 156, 4 P. 2d 781 (1931)
Subject: A check drawn which was altered (the payees name was substituted: Drawer: McCormick Steamship Co Drawee: Wells Fargo Bank Payee: Albert Meyer & Co Collecting Bank: Bank of Italy Holder/Recipient: Popkin FACTS: Behling, an employee of steamship co., purchased clothes from a store owned by a certain Popkin, and offered the check in question as payment. (It is not known how Behling got hold of the check). The 2 then went to drawee bank to have the check cashed. After presentment, the drawee bank certified the check but suggested that Popkin, being a depositor of defendant bank,
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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

should cash it there instead. So defendant bank, after the check was presented to it, paid the amount thereof and transmitted it to drawee bank, which in turn paid the amount of the check to defendant bank. Drawer did not discover the alteration until the original payee made an inquiry several months after the check had been paid. Drawer notified drawee. Drawee then notified defendants (Bank of Italy and Popkin) demanding repayment of the amount of the check. Drawee filed action to recover the sum. The alteration was made with such skill that it could not be detected. The person responsible for the alteration is unknown. ISSUE: WON Wells Fargo may recover the amount it has paid on the check HELD: No. Under Sec 62, the acceptor, by accepting the instrument, engages to pay according to the tenor of his acceptance. It makes for the usefulness and currency of negotiable paper to construe the words according to the tenor of his acceptance as referring to the instrument as it was at the time it came into the hands of the acceptor for acceptance, for he accepts no other instrument other than the one presented to himthe altered form-and it alone he engages to pay. The presentation of a check to a drawee for payment is not a negotiation. It involves no warranties as the drawee is not a holder in due course. A drawee who has paid the instrument is not a transferee of title as the last holders indorsement does not transfer the check but converts it into a voucher. Banking institutions can readily protect themselves against liability on altered instruments either by qualifying their acceptance or certification or by relying on forgery insurance and special paper, which will make alterations obvious. and was able to erase the name of HSBC as payee and instead typed his name. Four days before, Changco had opened a current account with PBTC, where he deposited the altered check. The check was presented by PBTC for clearing, with the following indorsement: "For clearance, clearing office. All prior endorsements and/or lack of endorsements guaranteed. Peoples Bank and Trust Company." The check was duly cleared by HSBC, and PBTC credited Changco with the amount of the check. Changco began to withdraw from the account then subsequently closed it. On Apr 12, 1965 it was returned to PLDT, and the alteration in the name of the payee was discovered. On that same date, PBTC was notified of the alteration, and HSBC requested PBTC to refund to it the sum of P14,608.05. PBTC refused. HSBC relies on the indorsement (above), arguing that since such an indorsement carries with it a concomitant guarantee of genuineness, PBTC is liable to HSBC for alteration. PBTC relies on the "24 hour" regulation of the Central Bank that requires after a clearing, that all cleared items must be returned not later than 3:00 PM of the following business day. Since HSBC advised PBTC 27 days after clearing, PBTC claims that it is now too late to do so. ISSUE: WON the Central Bank regulation should be applied, and would thus preclude or allow recovery by HSBC from PBTC HELD: Yes. The 24-hour clearing house rule issued by the Central Bank was applied in Republic v. Equitable Banking Corporation. The rule is embodied in sec 4(c) of Circular No. 9 of the Central Bank and reads thus: "Items which should be returned for any reason whatsoever shall be returned directly to the bank, institution or entity from which the item was received All items cleared at 11:00 o'clock a.m. shall be returned not later than 2:00 o'clock p.m. on the same day and all items cleared at 3:00 o'clock p.m. shall be returned not later than 8:30 a.m. of the following business day, except for items cleared on Saturday which may be returned not later than 8:30 of the following day." The circular is clear and comprehensive; the facts of the present case fall within it.
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HSBC V. PEOPLES BANK & TRUST CO 35 SCRA 140 (1970)

FACTS: On March 8, 1965, PLDT drew a check on HSBC in favor of the same bank in the sum of P14,608.05. PLDT sent this check to HSBC by mail. Florentino Changco somehow got hold of the check,

NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

Moreover, as mentioned in a case cited by HSBC, "It is a settled rule that a person who presents for payment checks such as are here involved guarantees the genuineness of the check, and the drawee bank need concern itself with nothing but the genuineness of the signature, and the state of the account with it of the drawee." If at all, then, whatever remedy HSBC has would lie not against PBTC but as against the party responsible for changing the name of the payee. Its failure to call the attention of PBTC as to such alteration until after the lapse of 27 days would, in the light of the above Central Bank circular, negate whatever right it might have had against defendant Bank. NOTE: As per Campos, this case illustrates the fact that the SC comes to the same conclusion, but on an etirely different basis, as the minority view regarding the effect of drawees payment or acceptance of altered check. April 19, 1966 -SMC notified FNCB of the material alternation in the check about a month after FNCB had paid Republic Bank. FNCB recredited P9,240 to SMCs account. May 19, 1966 FNCB wrote Republic about the alteration. But at that time, Delgado had already withdrawn the said amount from his Republic Bank account. FCNB demanded that Republic Bank refund the amount of P9,240 on the basis of the latters endorsement and guaranty. Republic refused, saying that 1) there was delay in giving notice of the alteration, 2) it was SMCs fault in drawing the heck in such a way as to allow the alteration and 3) that FNCB, as drawee, was absolved of any liability to SMC thus FNCB had no right to recourse against Republic Bank. ISSUE: WON Republic Bank, as clearing bank, is protected from liability by the 24-hour clearing house rule (in CB Circular 9) HELD: Yes. When an endorsement is forged, the collecting bank or last indorser bears the loss. However the unqualified endorsement of the collecting bank on the check should be read together with the 24-hour regulation on clearing house operation. When the drawee bank fails to return a forged or altered heck to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from liability. Jurisprudential rulings on the matter: HSBC vs. Peoples Bank: A check was drawn by PLDT on HSBC payable to the same bank. It was mailed to the payee but landed in the hands of Changco who erased the payees name and replaced it with his own name. He then deposited the check in Peoples Bank with the indorsement: For clearance, clearing office. This was cleared by the drawee bank HSBC. Changco withdrew the money and when the alteration was discovered, HSBC sought to recover the amount from Peoples Bank. HSBC advised Peoples Bank of the alteration 27 days after clearing. The Court ruled that the said indorsement must be read with the 24hour regulation. Metrobank vs. FNCB: A check for P50 was drawn by Cunanan and Co. on its account at FNCB and payable to Manila Polo Club was changed to P50,000. It was deposited by Sales in his account in Metrobank. The check was cleared by FNCB which paid P50,000 to
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REPUBLIC BANK V. CA AND FIRST NATL CITY BANK G.R. NO 42725 (1991)
Subject: Check for $240 which was later altered to $9,240 Drawer: San Miguel Corp Drawee: First National City Bank (FNCB) Payee: J. Roberto Delgado Clearing Bank: Republic Bank FACTS: SMC drew a divided check worth P240 in favor of Delgado, one of its stockholders. After the check had been delivered, the check was altered by increasing the amount on its face from P240 to P9,240. This was done fraudulently and without the authority of SMC as drawer. The check was indorsed and deposited on March 14, 1996 by Delgado in his account with Republic Bank. Republic accepted the check without ascertaining its genuineness and regularity. It endorsed the check to FNCB with a stamp on the back of the check, stating: all prior and/or lack of indorsement guaranteed. March 15, 1966: FNCB, believing that the check was genuine and relying on the guaranty and endorsement of the petitioner bank, paid the amount on the face of the check.

NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

Metrobank. The alteration was discovered 9 days later so FNCB sought to recover from Metrobank. The Court upheld the validity of the 24-hour clearing house regulation. The check was not returned to Metrobank in accordance with the given period but was cleared by FNCB. Failure of FNCB to call attention to the alteration of the check negates whatever right it may have had against Metrobank. Every bank that issues checks for the use of its customers should know whether the drawers signature is genuine. It should be able to detect alterations, erasures and other intercalations on the check. It should possess appropriate detecting devices. Unless the alteration is attributable to the fault or negligence of the drawer, the remedy of the drawee bank that negligently clears a forged/altered check for payment is against the party responsible for the forgery/alteration. E. (2) Fraud in inducement (personal defense) The person who signs the same as NI but was induced by fraud

CIT CORP V. PANAC 149 P. (2d) 901 (1944)

Subject: 2 Promissory notes Maker: Panac Payee: Home Improvement Co Holder: CIT Corp
FACTS: Plaintiff CLT brought this action to recover from the defendants (Panacs-maker) the amount of 2 promissory notes, negotiable in form, executed in favor of Home Improvement Company (payee) in payment of certain repairs and renovations to be performed by the payee upon two dwelling houses owned by the defendants. The notes were indorsed by the payee to the plaintiff which claims to be holder in due course. Defendants denied that the plaintiff was such a holder and as a separate defense, pleaded fraud on the part of the payee in the procurement of the notes by its agent, William Hart. The defendants were alleged to be illiterate. Hart was introduced to the defendants by a Krajer, for whom Home Improvement Company had done repair work similar to that proposed to be done by defendants. Hart prepared a document which purported to embody the understanding arrived at on the work to be performed and the cost. He asked defendants to sign it. Both demurred, Mrs. Panac stating that she did not read it and wished to see an attorney. Hart assured her that it was not necessary, that the contract has to be signed at once to get the work started. In doing so, he read the items of work entered in his note book, stating that they were in agreement and urged again the defendants to sign. They still objected but their scruples were overcome by Harts assurance that all the work shall be done to their satisfaction and that it was necessary to start at once. Martin thereupon affixed his signature to the contract. Hart then presented to them another paper, divided into 3 parts by perforated lines, one part being an application for credit, the second a form of promissory note and the third a declaration that the work for which the credit was required had been satisfactorily completed. The defendants placed their signatures at the point indicated by Hart upon his assurance that it was part of the contract for the work to be done and without having Hart read it to them. The second note was executed under the same circumstances. The defendants testified that they understood from Hart that the work was to be paid for in monthly installments, but had not contemplated giving notes. The work was never completed notwithstanding vigorous efforts
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FRAUD Under Sec 55, fraud renders a partys title

defective which is a personal defense and cannot be used against HDC Where the fraud is practice on the maker or signer of NI in which he is tricked into signing a paper which he does not know to be a NI, he cannot be liable to any holder, even HDC. This is called fraud in factum or fraud in the execution real defense Where the signer knows the paper he is signing is NI but is deceived as to its value or terms, the fraud is fraud in inducement personal defense and not available against HDC Where the signer does not know the nature of the paper he is signing but he could have known using ordinary care personal defense

Types of Fraud (1) Fraud in factum (real defense) The person who signs the instrument lacks knowledge of the character or essential terms of the instrument. But the defense is not available if the party had reasonable opportunity to obtain such knowledge o An essential element is that the maker or indorser must have exercise ordinary diligence and in no manner contributed negligently to the imposition

NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

made by the plaintiff and the defendants to induce Home Improvement Company to do so, with the consequence that when the first installment became due on the notes the defendants refused to pay. The trial court found that CLT is a holder in due course however, it also held that fraud was perpetuated against the defendants hence, plaintiff takes nothing by its action.

PETERS, DISSENTING: The type of fraud here involved has been referred to as fraud in esse contractus, fraud in the factum, fraud in the inception or fraud in execution, to distinguish it from fraud in the inducement which is a mere personal defense. At common law the cases were practically unanimous that fraud in the execution was a real defense. The overwhelming weight of authority is to the effect that the adoption of the NIL in no way changed the common law rule, and that both before and after the adoption of that uniform statute, fraud in the execution was and remained, a real defense. The applicable rules under the NIL is stated as: Although there are some decisions to the contrary, the weight of authority holds that if a person intending to sign an instrument of an entirely different character places his signature to a negotiable instrument not being due to laches or negligence on the part of the signor, the latter is not liable on the instrument, although it has passed into the hands of a bona fide holder for value. Sec. 57 of NIL, Sec. 3138 of the Civil Coe, provides that the holder in dues course free from any defect of title of prior parties, and free from defenses available prior parties among themselves. When a party, without negligence, signs a document by reason of fraud of another and honestly and reasonably believes it to be something else other than a negotiable instrument, the document, when executed is not merely voidable it is void. Fraud of this type is not a mere defense nor a mere defect of title such as referred to in Sec. 57. It is a factor which renders the instrument non-existent as a binding obligation.

ISSUES:
2. 3.

4.

WON plaintiff is a holder in due course. WON defendants are free from negligence. WON the defendants can plead the defense of fraud against the plaintiff

HELD: FIRST ISSUE: Yes. Defendants do not contend that the plaintiff is a holder in due course. No evidence was introduced that C.L.T. had actual knowledge of a defect in the instruments or any fact that would justify a finding that the plaintiffs acceptance of the instruments amounted to bad faith on their part. SECOND ISSUE: Yes. The trial court determined that, notwithstanding the possession of some knowledge of the English language on the part of the defendants, their neglect to call upon others present to read to them the documents, and their failure to insist on their request for time to seek independent legal advice, they are free from negligence. A reading of the record alone might well disapprove this finding, but, bearing in mind that the trial court had an opportunity to view the witnesses, note their demeanor, the Court refrained from stating as a matter of law that there is insufficient evidence to uphold it. THIRD ISSUE: No. In Wisconsin, Minnesota and Illinois, NIL or other legislation expressly makes fraud in factum a real defense. However, the Uniform Code Act does not. It is possible, then, that such conduct is fraud within Sec 55 and causes merely a defect in title, which is a personal defense. Under the old common law view fraud in Sec 55 would be limite d to fraud in inducement, which is a personal defense, while fraud in factum is a real defense, being analogous to forgery under Sec 23. To follow the Wisconsin law would mean amending the Civil Code Sec 3136.

CLT CORPORATION V. PANAC 25 Cal. (d) 547, 154 P. (2d) 710, 160 A.L.R. 1285 (1944)
Subject: 2 Promissory notes in payment of certain repairs and renovations to be performed by payee upon 2 houses owned by makers Maker: Spouses Panac, illiterate; unable to read or write in English Payee: Home Improvement Co Indorsee: CIT Corp (HDC)

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FACTS: Makers were defrauded by payee in the procurement of the notes. William Hart, agent of the payee, gained their trust and confidence and secured their signatures to the notes by false representations which induced them to believe that they were signing a contract to repair the houses and nothing else. They were ignorant of the fact that they were signing notes, and were not negligent in signing the same. ISSUE: WON the defense put up by the makers is a real defense, good even against indorsee as a holder in due course HELD: A negotiable instrument which is void (as when there is in fact no contract or there is fraud in the execution) is not enforceable by a holder in due course in the absence of negligence on the part of the maker. A person who cannot read is not always negligent in not calling on a third person to read the instrument to him. The question as to his negligence is one for the jury (that is, the courts) to decide. Circumstances showing that makers were not negligent: Spouses Panac were illiterate Hart employed high pressure method Only contract for repair was read, not the notes Hart insisted an immediate execution Hart brushed aside Mrs. Panacs suggestion that legal advice be obtained Witnesses to the signing were all friends of Hart. Even Krajer, whom makers personally knew could not have objected to such fraud since he was promised commission. In fact, it was his apparent acquiescence in the transaction that served to silent any apprehensions of the makers. F. G.

NON-DELIVERY OF COMPLETE INSTRUMENT

Non-delivery of a complete instrument is only a PERSONAL defense (See Sec 16 NIL on Delivery) RATIO: Delivery is a prerequisite for liability; even if the instrument is complete but if undelivered, there is no contract However, if the NI is no longer in the possession of the person who signed it, there is a disputable presumption of delivery o If holder is HDC, there is a conclusive presumption of delivery o This applies even if NI is payable to bearer Every contract on a NI is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto

COHN V. CITY OF TAUNTON 303 Mass. 182, 21 N.E. (2d) 281 (1939)
FACTS: An action filed by Cohn et al., innocent purchasers for value without notice, to prosecute to recover the face amount of overdue coupons on certain bonds of the defendant city payable to bearer which have been stolen from the vault of the city treasurer. After the bearer bonds had been delivered to the City Tre asurer as agent in order to have them registered, the Treasurer had completed the issue of fully registered bonds of like amount, but had not destroyed or cancelled the bearer bonds nor placed any notation upon them and had kept them in his vault. Cohn and company held them, but the City Treasurer refused to pay on the ground that the amount covered by the bonds had been paid already. ISSUE: WON Cohn is HDC and thus entitled to the amount HELD: Yes. An instrument that has once been issued, returned, discharged, and stolen would seem to stand no differently in the hands of a holder in due course than an instrument that has been prepared, signed and stolen before being issued. The validity of municipal obligations is not affected, in the hands of innocent holders for value, by facts which concern merely the
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DURESS Duress is merely a personal defense which

cannot be used to defeat the rights of HDC However, where the duress is so serious as to result to a lack of contractual intent, it can be used as a real defense E.g., the signer acted not in accordance with his own will, but in accordance with the will of another because of his well-founded fear of an imminent and serious injury

NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

manner of their passing from their maker into currency, and which do not concern the mode of, or the authority for their creation. It would be unfortunate in many respects if bonds of municipalities passing by delivery in the market should be treated differently in this regard from the negotiable paper of other corporations and individuals. It is true that the incurring of liability by municipalities is often strictly regulated by statue, and we need not now go far as to say that such statutes could never affect the position of an innocent holder.
The oral agreement between the parties testified to by Dotterweich was that the note would be held in Smiths safe until the loan was procured, otherwise the note would be returned & the insurance policy would be null & void. The loan was never made, therefore there is a failure of the condition which determines the existence of any contract between the parties. In the case of Jamestown Business College Assoc. v. Allen, upon which Smith relies to support his contentions, the promissory note was rendered effective by an unconditional delivery. The agreement of the payee to release the maker and cancel the note upon the happening of a future contingency was a condition subsequent which brought the case within the general rule that a contract reduced to writing, and complete in its terms, cannot be contradicted by oral testimony. The oral testimony therein was in direct contradiction of the written contract, as to the existence or validity of which there was no controversy, while in the case at bar the oral testimony tends to show that the writing purporting to be a contract is no contract at all. On the effect of oral testimony on contracts which are wholly or partly reduced to writing When the oral testimony goes to the question whether there is a written contract or not, it is always competent; but when the effect of the oral testimony is to establish the existence of the written contract which it is designed to contradict or change, then the spoken word must yield to the written compact. On the rule in Benton v Martin, 52 NY 570 Instruments not under seal may be delivered upon conditions the observance of which is essential to their validity. The annexing of such conditions to the delivery is not an oral contradiction of the written obligation as between the parties to it or others having notice.

SMITH V. DOTTERWEICH 200 N.Y. 299, 93 N.E. 985, 33 L.R.A. (N.S.) 892 (1911)
Subject: Promissory note for $3,740 payable in 6 months Maker: Dotterweich Payee: Smith FACTS: Dotterweich executed and delivered to Smith (PAYEE-plaintiff) a
promissory note for $3,740 payable in 6 months. When the note became due, it was renewed by 4 notes payable 6 months from that date. The renewal notes were not paid at maturity, & Smith brought action for payment. Smith introduced evidence to show that the original note was given in payment of premiums on 2 life insurance policies to the defendant by the John Hancock Life Insurance Company through Smith, as its general agent. Dotterweich denied that the notes were given for value received and that Smith was the lawful holder & owner thereof, alleging an oral agreement under which neither the notes nor the insurance policies were to become valid & enforceable obligations unless Smith secured for Dotterweich a certain loan of money. The trial court granted Smiths motion to direct a verdict, to which Dotterweich excepted and moved to submit to the jury the question whether there was a condition that the original note & the insurance policies should be returned in case Smith did not procure a loan of $70,000 for Dotterweich within a year. The motion was denied, and Dotterweich took an exception. ISSUE: WON the oral agreement between the parties meant that the notes were never valid, in which case there was no delivery

H.

NON-DELIVERY OF INCOMPLETE INSTRUMENT

Under Sec 15, an instrument which is not only undelivered but also incomplete, is a REAL defense, which not even HDC can recover RATIO: There is no valid contract The conclusive presumption of delivery under Sec 16 does not apply o If NI is complete, Sec 16 applies Test: If an instrument contains all the requisites for making it negotiable, it should be considered complete even if there may be blanks as to non-essentials However, as against a drawee bank, the drawer is estopped to rely on Sec 15 if his negligent custody of the checks after partial execution, contributed to its loss

HELD: No. There was delivery but the notes became invalid because of the failure of the condition.

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

Two Steps in the Execution of NI (1) The act of writing the instrument completely and in accordance with Sec 1; and (2) The delivery of the instrument with the intention of giving effect thereto NOTE: If completed and negotiated without authority, not a valid contract against a person who has signed before delivery of the contract even in the hands of HDC but subsequent indorsers are liable. This is a real defense which belongs to the drawer (or parties prior to the delivery of NI to the payee) against any holder REASON: Where an INCOMPLETE and UNDELIVERED instrument is in the hands of HDC, there is a prima facie presumption of delivery which the maker may rebut by proof of non-delivery amounts due them as shown by such account of sales. Hoard was not entrusted with a key to the defendants office although he did have access to a key kept in a desk in the office in order to unlock the padlock on the inside of the gate across the counter between defendants office and the hall. On or about Feb 24, 1939, after the close of the defendants office, Hoard gained access thereto by unlocking the gate across the counter and climbed over the counter into defendants office and then opened the safe in defendants office by using the combination which he knew, and w/o defendants knowledge, took certain instruments printed for use as checks, blank as to amount, date and payee, which had been signed by defendants office manager authorized to sign checks, and, in one of which instruments Hoard w/o defendants knowledge or express consent, inserted the date, amount and payee. Then Hoard placed his name upon the back of the instrument and delivered the same to plaintiff for value of $102.85. ISSUE: WON the lost check was completed therefore giving Pavilis title to the instrument HELD: No. The check in controversy was an incomplete instrument when stolen and cannot be enforced in the absence of conduct on the part of the drawer creating estoppel. It is urged that defendant is chargeable with negligence and is estopped to deny liability. The cases cited are those in which the party sought to be charged upon a negotiable instrument has entrusted an instrument signed in blank to an agent or some other person who has wrongfully completed and negotiated the instrument; an agency or trust was created by means of which the fraud was committed and the fact that there was no authority for completing the instrument was otherwise wrongfully dealt with was no defense. In Linick v AJ Nutting Co: blank check signed by plaintiff was stolen by Rycoff and Silbermann, who filled the amount and a fictitious name as payee and presented it to drawee bank. They endorsed the name of the payee and transferred the check to defendant for value who collected the amount of the check from the bank. Court held that the check was an incomplete instrument

PAVILIS V. FARMERS UNION LIVESTOCK COMM. 68 S.D. 96, 298 N.W. 732
FACTS: Plaintiff Pavilis filed the action to recover upon an instrument alleged to be a check transferred to plaintiff for value by one C. Hoard who was named as payee therein. Defendant Farmers Union Livestock Commission argues that: (a) plaintiff was not HIDC, and (b) the instrument signed in blank by defendant and having been stolen from his possession prior to delivery had no legal inception or existence as a check. Lower court ruled in favor of plaintiff. Defendant appealed. It was practice of defendants office manager, who was authorized to sign checks, to sign a block of instruments, printed to be used as check at the beginning of the business day and deliver the same to the bookkeeper whose regularly duty was to complete the instruments as checks and deliver the same to customers during the business day. It was also the practice of such office manager to procure the return of such signed instruments not delivered at the close of business day for the purpose of safekeeping and for the purpose of checking or auditing the same. Around February 1939, one C. Hoard was employed by defendant as a bookkeeper and clerk. Hoard was expressly authorized by defendant in the presence of such other bookkeeper to complete and deliver checks only during business hours and only for

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NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

and that negligent custody of the check was not borne out by the facts. Court concludes: If as a result of negligence such instrument comes into the hands of a holder in due course, the latter may recover, yet we cannot say under the facts and circumstances of the instant case that defendant was negligent. The loss did not result from completion and negotiation of the check by one entrusted with its possession, and we are not concerned with a breach of duty as between a depositor and drawee. It does not appear that defendant had reason to mistrust its employee and to anticipate the wrongful taking by him of a check signed in blank, the subsequent completion and negotiation. The drawer owes the duty to use due care in the execution of checks, but it does not follow as a legal conclusion that signers of checks in blank assume the risk of liability in all cases where such instruments are wrongfully taken, completed and negotiated. To hold that a person is negligent in having in his possession a check signed in blank would require something more than the exercise of ordinary care. estoppel. To hold otherwise would require the bank to communicate with the drawer as each check was presented, in order to find out if the delivery was intended. This is too much to be expected; and to place the burden of loss or its chance to the depository if it does not interview the maker, is neither fair nor compatible with public interest. Such would affect the very nature of checks which is convenience.

LINICK V. AJ NUTTING & CO 125 N.Y.S. 93, 140 App. Div 265 (1910)
FACTS: Plaintiff Linick signed his name to a blank check. Thereafter Rycoff and Silberman stole the check, filled in the name of FA Mann as payee and $147.87 as the amount thereof, and presented it to the State Bank, where plaintiff kept his account, and procured it to be certified. Thereafter they indorsed said check with the name of FA Mann and passed it to defendant A.J Nutting and Co. for value, who collected the amount from said bank. Plaintiff, having taken up said check from the bank, now sues defendant as for money had and received for the amount of the check. ISSUE: WON defendant obtained any title to the check which as against the plaintiff, was a valid obligation for $147.87. HELD: No. In the case of a commercial paper, when by voluntary act a party instructs another with such paper with a blank thereon designed to be filled up with a stipulated amount, such party is liable to a bona fide holder, of the instrument. As to the basis of (plaintiffs) liability, some say that it rest s upon an implied authority conferred by the maker upon the person to whom it was delivered to fill in the blanks, and others upon estoppel by reason of negligence. Not upon implied authority: for such doctrine grows out of principal-agent relationship, and theres no such relation between a thief and his victims. The rule that the bona fide holder of an incomplete instrument, negotiable but for some lack capable of being supplied, has implied authority to supply the omission, and to hold the maker thereon, only applies when the latter has by his own act, or the act of another, authorized, confided in or invested with apparent authority by him, put the instrument in circulation as a negotiable paper.
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WEINER V. PENNSYLVANIA CO 160 Pa. Super. 320, 51 A. 2d 385 (1947)

Subject: Check Maker: Weiner Payee: Blank FACTS: Weiner signed her name to a blank check. The check was stolen. The thief placed the amount $250, the date, and a fictitious name as the payee. The bank paid the check to the fictitious payee who properly indorsed it. Weiner sued the bank to recover the amount taken saying that the bank was negligent as it failed to identify the person paid ISSUE: WON the bank is liable HELD: No. Weiner is liable for the loss. Weiner signed the check in blank thus putting it in the power of an unauthorized person to fill it in and present it for payment. The depositors act made the loss possible and caused it, and enabled the thief to commit the fraud. Weiners act was a bar and an

NEGOTIABLE INSTRUMENTS LAW Chapter 4: Defenses & Equities

Not upon negligence: since the paper was stolen and the persons guilty of the crime have been convicted. Plaintiff then cannot be charged with negligence giving rise to an estoppel, unless a man is guilty of negligence in writing his name upon a piece of paper which by some possibility may afterwards be stolen from him, which paper comes into the hands of a third person who is an entire stranger to the transaction, with words written over the signature which are sufficient in form to make it a check or note. Actionable negligence involves, first, the existence of a duty; second, the omission to exercise ordinary and reasonable care in connection therewith; and third, injury resulting in consequence thereof. Sec. 34 (NIL 15) states: Where an incomplete instrument has not been delivered, it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. The next section in the same act to the effect that where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed must be read with Sec 34 (NIL 15), and this provision does not apply in the case of an incomplete instrument completed and negotiated w/o authority. Court concludes: The delivery of a PN by a maker is necessary to a valid inception of a contract. The possession of such a note by the payee or indorsee is prima facie evidence of delivery. But if it appears that the note has never been actually delivered, and that without any confidence, or negligence, or fault of the maker, but by force and fraud, it was put in circulation, there can be no recovery upon it, even when in the hands of an innocent holder. So, defendant did not obtain any title to the check, and cannot recover upon it. I. Delivery of instrument Delivery must have been for the purpose of converting it to NI (There must be intent to deliver otherwise maker is not liable even to HDC) In order that such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given Authority extends to the insertion of the date, place of payment, the amount, the name of the payee and the time of payment o The insertion of a wrong date, by one having knowledge of the true date of issue, will avoid the instrument as to him, but an innocent party may enforce the same despite the improper date o First or subsequent holder may insert his name or the name of the person to whom he negotiates the NI but unless authorized, he cannot fill in a predecessors name enlarge the predecessors liability beyond the latters contract o As to time, Sec 14 provides that in order to be enforceable against a party prior to completion, it must be filled in within a reasonable time, which is reckoned from the date of issuance o o

DELIVERY OF INCOMPLETE INSTRUMENT This

is only a PERSONAL defense (See Sec 14 NIL) Two kinds of writings: 1. Incomplete instruments There is an intent to make it NI 2. Blank paper or paper so far incomplete that it does not constitute NI, but signed To be considered complete, it must be shown that:

1. Prima Facie Authority to complete the instrument Requisites: a. Want of a material particular in the instrument (Sec 125) b. Possession thereof by a person c. That such person had authority to fill up the blank (1) Strictly in accordance with the authority given; and (2) Within a reasonable time 2. Prima Facie Authority to Fill it up for any amount Requisites a. Signature on a blank paper b. Person signing in blank delivers it to another c. Delivery was for the purpose of converting it into NI NOTE: IF the holder of the NI, after it was filled up, is HDC, the holder may enforce the instrument as if it has been filled up
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strictly in accordance reasonable time. with the authority given and within possession. He is only given prima facie authority to fill a blank, and that the person filling the blank must do so strictly in accordance with the authority given. J.

SIMPSON V. NATIONAL BANK OF ROSEBURG 94 Ore. 147, 185 Pac. 913 (1919)
Subject: Promissory Note Maker: Mrs. M. Josephson Payee: intended to be blank Indorsee: National Bank of Roseburg Possessor: Grace Simpson FACTS: When the note was executed the name of the payee was left blank, and was still in that condition when the plaintiff received it. The plaintiff tells about writing the name of the in blank and avers that the plaintiff is entitled to the indorsement of the defendant herein upon said note and was at all times so entitled to the same ISSUE: WON plaintiff has a right against the defendant and the maker of the note HELD: (case was remanded, court merely discussed rules of the law of merchant if instrument is incomplete) When the maker of the note left a blank for the name of a payee and delivered the instrument in that condition to another person for value then that person to whom the note was delivered or any subsequent holder could insert his own name, or that of a transferee, as payee. The plaintiff could not have sued and recovered upon an incomplete instrument. Grace Simpson could, in the absence of knowledge of special instructions given by the maker, have filled the blank by writing her own name as payee. However, in this case, evidence show that the makers intention was that the name of the bank was to be filled in the blank as payee. A person upon whom authority is conferred to complete the instrument, is not referred to as the holder but as the one in

CONSIDERATION Sec 28 reiterates the rule laid down

by Sec 24 that every NI is deemed prima facie to have been issued for a valuable consideration The defendant has the burden of proving that there was no consideration for the NI Sec 28 provides that absence or failure of consideration is a personal defense available only against non-HDC o As to HDC, the presumption of consideration is conclusive Absence of consideration = total lack of consideration Failure of consideration means that something was agreed upon as consideration for a contract but for some reason, the consideration did not materialize Partial failure of consideration means that part of the consideration did not materialize o In such case, the maker may raise set up as a defense pro tanto (partial defense) against the payee or holder not in due course, i.e. he is not liable to the extent of the price of the undelivered portion

DOUGHERTY V. SALT 227 N.Y. 200, 125 N.E. 94 (1919)

FACTS: An action by Charles Doughtery, an infant, instituted by Susan Teves, his guardian against Emma Salt an executrix of the last will and testament of Helena Doughtery (aunt of Charles). Plaintiff received from his aunt a promissory note for $3,000 payable at her death or before. Use was made of a printed form which contains the words value received Salt explained how the note came to be: boys aunt visited one day and commented how she loved the boy so much to which Salt commented that her love was all talk. Aunt replied by saying that she would take care of the boy right at that instant. She asked the guardian to make a note for her which she signed. In the note were the words You have always done for me, and I have signed this note for you. Now, do not lose it. Some day it will be valuable.
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ISSUE: WON there was any consideration for the promised payment HELD: No. SC geld that the note was the VOLUNTARY AND UNINFORCEABLE promise of an executory gift. (no explanation why) The eight year old child was not a debtor, nor dealt with as one. The aunt was conferring a bounty. The promise was neither offered nor accepted with any other purpose. The plaintiff, through his own witness, the guardian who explained how the note came to be, has explained the genesis of the promise. There is no showing that consideration was given.

WILLIAM BARCO & SON V. FORBES 194 N.C. 204, 139 S.E. 227 (1927)
FACTS: Plaintiffs brought suit upon a note for $227.25 against defendant who issued it for the purchase of fertilizer from plaintiff. The note, dated Jan 10, 1923, was given in renewal of a former note dated July 1, 1922. Defendant contended that the fertilizer was bought for use in producing a sweet potato crop in 1922, and that the fertilizer was worthless and had no effect whatever upon the crop. This fact notwithstanding, TC ruled in favor of plaintiffs. ISSUE: WON defendant is liable HELD: Yes. One who gives a note in renewal of another note, with knowledge at the time of partial failure of the consideration for the original note, or of false representations by the payee, waives such defense and cannot set it up to defeat or to reduce the discovery on the renewal note. (Bank v Howard) The time for harvest was in July or August 1922 and the potatoes were dug at that time. It is obvious, therefore, that the defendant knew then that the fertilizer was worthless and that there was a total failure of consideration. Nevertheless, he executed the renewal note.

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