MODULE LAW ON NEGOTIABLE INSTRUMENTS

CHAPTER 2-FORGERY

Learning Objectives:

1. Define forgery.
2. Identify the different scenarios under forgery.
3. Understand the concept of accommodation party.

I. FORGERY

Forgery is the counterfeit making or fraudulent alteration of any writing.

When is there forgery?

Signature is affixed by one who does not claim to act as an agent and who has
no authority to bind the person whose signature he has forged.

When is there want of authority?

Signature is affixed by one who purports to be an agent but has no authority to

bind the alleged principal.

What is the effect when there is forgery?

GR: It does NOT render the instrument void. The signature is wholly inoperative, and no
right to retain the instrument, or to give a discharge thereof, or to enforce payment
thereof against any party to it, is acquired through or under such signature. (Cut‐off rule)
XPN:

If the party against whom it is sought to enforce such right is precluded from
setting up forgery or want of authority. (Sec. 23)

Where the forged signature is not necessary to the holder’s title, in which case,
the forgery may be disregarded (Sec. 48)

Can a payee sue the collecting bank for the amount of the checks when it made
payment of the same under a forged endorsement in favor of the forger?

Answer:

Yes, since the signature of the payee was forged to make it appear that he had made
an indorsement in favor of the forger; such signature should be deemed as inoperative
and ineffectual. The collecting bank grossly erred in making payment by virtue of said
forged signature. The collecting bank is liable to the payee and must bear the loss
because it is its legal duty to ascertain that the payee’s endorsement was genuine
before cashing the check. (Westmont Bank v. Ong, G.R. No. 132560, Jan. 30, 2002)

Who are precluded from setting up the defense of forgery?

1. Those who admit/warrant the genuineness of the signature: indorsers, persons

negotiating by delivery and acceptor; (Sec 56)

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 2. Those who by their acts, silence, or negligence, are estopped from claiming
forgery;
3. A holder of a bearer instrument who subsequently negotiates such instrument
with a prior forged indorsement (forged indorsement is not necessary to his title it
being a bearer instrument).

What are the rights of the parties in cases of forged instruments?

Where note payable to order:

1. Party whose signature was forged is not liable to a holder, even a HIDC
2. Indorsement is wholly inoperative.

Where note payable to bearer:

1. The party whose indorsement is forged is liable to a HIDC, but not to one who is
not a HIDC Reason: it can be negotiated by mere delivery
2. The only defense available is want of delivery but this defense can be raised only
against a holder not in due course.

Where bill payable to order: The party whose indorsement is forged is not liable to any
holder even a HIDC. The forged indorsement is wholly inoperative.

A client indorsed a check with a forged indorsement. The collecting bank

indorsed the check with the drawee bank. What are the liabilities of the parties?

The collecting bank is bound by its warranties as an indorser and cannot set up
the defense of forgery as against the drawee bank.

The drawee bank is under strict liability to pay the check to the order of the
payee. Payment under a forged indorsement is not to the drawer's order. Since the
drawee bank did not pay a holder or other person entitled to receive payment, it has no

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right to reimbursement from the drawer. (Associated Bank v. CA, G.R. No. 107382, Jan.
31, 1996)

What is the remedy of the drawee bank?

The drawee bank may not debit the account of the drawer but may generally
pass liability back through the collection chain to the party who took from the forger and,
of course, to the forger himself, if available. If the forgery is that of the payee's or
holders indorsement, the collecting bank is held liable, without prejudice to the latter
proceeding against the forger. Since a forged indorsement is inoperative, the collecting
bank had no right to be paid by the drawee bank. The former must necessarily return
the money paid by the latter because it was paid wrongfully. (Associated Bank v. CA,
G.R. No. 107382, Jan. 31, 1996)

What is the liability of the drawee bank and the drawer for the amount paid on
checks with forged indorsements, if the same was due to the negligence of both
the drawee bank and the drawer?

The loss occasioned by such negligence should be divided equally between the
drawer/depositor and the drawee.

Can a drawer‐depositor who entrusted his check books, credit cards, passbooks,
bank statements and cancelled checks to his secretary and who had introduced
the secretary to the bank for purposes of reconciliation of his accounts hold the
drawee bank liable for the amounts withdrawn by the secretary by forging his
signature on the checks?

No, he is precluded from setting up the forgery due to his own negligence in
entrusting to his secretary his credit cards and check book including the verification of
his statements of account. (Ilusorio v. CA, G.R. No. 139130, Nov. 27, 2002)

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Can a drawer, from whom checks were stolen but failed to report the same to the
authorities or the drawee bank, recover the value of the checks paid by the
drawee bank on the forged checks which was stolen from the drawer?

No, the drawer cannot recover. He is the one which stands to be blamed for its
negligence/predicament. (Security Bank and Trust Company v. Triumph Lumber and
Construction Corp., G.R. No. 126696, Jan. 21, 1999)

How is forgery proven and who has the burden of proof?

Forgery, as any other mechanism of fraud must be proven clearly and

convincingly, and the burden of proof lies on the party alleging forgery. (Chiang Yia Min
v. CA, G.R. No. 137932, Mar. 28, 2001)

Discuss the legal consequences when a bank honors a forged check.

When drawer's signature is forged – Drawee‐bank by accepting the check cannot

set up the defense of forgery, because by accepting the instrument, the drawee bank
admits the genuineness of signature of drawer (BPI Family Bank v. Buenaventura, G.R.
No. 148196, Sept. 30, 2005; Sec. 23, NIL).

Unless a forgery is attributable to the fault or negligence of the drawer himself,

the remedy of the drawee‐bank is against the party responsible for the forgery.
Otherwise, drawee‐bank bears the loss. A drawee‐bank paying on a forged check must
be considered as paying out of its funds and cannot charge the amount to the drawer
(Samsung Construction Co. Phils, v. Far East Bank, G.R. No. 129015, Aug. 13, 2004). If
the drawee‐bank has charged drawer's account, the latter can recover such amount
from the drawee‐bank (Associated Bank v. CA, G.R. No. 107382, Jan. 31, 1996; BPI v.
Case Montessori Internationale, G.R. No. 149454, May 28, 2004).

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 However, the drawer may be precluded or estopped from setting up the defense
of forgery as against the drawee bank, when it is shown that the drawer himself had
been guilty of gross negligence as to have facilitated the forgery (Metropolitan
Waterworks v. CA, G.R. No. L 62943, July 14, 1986).

Drawee bank versus collecting bank– When the signature of the drawer is
forged, as between the drawee‐bank and collecting bank, the drawee‐bank sustains the
loss, since the collecting bank does not guarantee the signature of the drawer. The
payment of the check by the drawee bank constitutes the proximate negligence since it
has the duty to know the signature of its client‐drawer. (Philippine National Bank v. CA,
G.R. No. L‐26001, Oct. 29, 1968).

Forged payee's signature – When drawee‐bank pays the forged check, it must be
considered as paying out of its funds and cannot charge the amount so paid to the
account of the depositor. In such case, the bank becomes liable since its primary duty is
to verify the authenticity of the payee's signature (Traders Royal Bank v. Radio
Philippines Network, G.R. No. 138510, Oct. 10, 2002; Westmont Bank v. Ong, G.R. No.
132560, Jan. 30, 2002).

Forged endorsement – Drawer's account cannot be charged, and if charged, he

can recover from the drawee‐bank (Associated Bank v. CA, G.R. No. 107382, Jan.
31,1996).

Drawer has no cause of action against collecting bank, since the duty of
collecting bank is only to the payee (Manila Lighter Transportation, Inc. v. CA, G.R. No.
L‐50373 Feb. 15, 1990). Drawee‐bank can recover from the collecting bank (Great

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Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, G.R. No. 18657, Aug. 23, 1922)
because even if the indorsement on the check deposited by the bank's client is forged,
collecting bank is bound by its warranties as an indorser and cannot set up defense of
forgery as against drawee bank (Associated Bank v. CA, G.R. No. 107382, Jan. 31,
1996).

What are the kinds of fraud relating to a negotiable instrument?

1. Fraud in the execution or fraud in factum – A person, without negligence, has

signed an instrument which was in fact a negotiable one, but was deceived as to
the character of the instrument and without knowledge of it (real defense).
2. Fraud in the inducement or simple fraud– Relates to the quantity, quality, value
or character of the consideration of the instrument. Deceit is not in the character
of the instrument but in its amount or terms (personal defense).

The drawer’s signature was forged. There is, however, a provision in the monthly
bank statement that if the drawer’s signature was forged, the drawer should
report it within 10 days from receipt of the statement to the drawee. The drawer,
however failed to do so. What will be its effect insofar as the drawer’s right is
concerned?

The failure of the drawer to report the forgery within ten days from receipt of the
monthly bank statement from the drawee bank does not preclude the drawer from
questioning the mistake of the drawee bank despite the provision. (BPI v. CASA
Montessor, G.R. No. 149454, May 28, 2004)

If forgery was committed by an employee of the drawer whose signature was

forged, does the relationship amount to estoppel such that the drawer is
precluded in recovering from the drawee bank?

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 The bare fact that the forgery was committed by an employee of the party whose
signature was forged can not necessarily imply that such party’s negligence was the
cause of the forgery in the absence of some circumstances raising estoppel against the
drawer. (Samsung Construction Co. v. Far East Bank and Trust Company, G.R. No.
129015, Aug. 13, 2004)

II. CONSIDERATION

It is an inducement to a contract that is the cause, price or impelling influence,

which induces a party to enter into a contract.

What is the presumption recognized by law as to the existence of consideration?

Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration. (Sec. 24)

What constitutes value?

It is any consideration sufficient to support a simple contract.

Note: An antecedent or pre‐existing debt constitutes value and is deemed such

whether the instrument is payable on demand or at a future time. (Sec. 25)

Love and affection do not constitute value within the meaning of the law.

Who is a holder for value?

One who has given a valuable consideration for the instrument issued or
negotiated to him (Sec. 26).

Up to what extent can a holder be considered a holder for value?

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 The holder is deemed as such not only as regards the party to whom the value
has been given to by him but also in respect to all those who became parties prior to the
time when value was given.

Note: Where the holder has a lien on the instrument arising either from contract
or by implication of law, he is deemed a holder for value to the extent of his lien. (Sec.
27)

What is the effect of want of consideration?

It becomes a matter of defense as against any person not a holder in due course
(Sec. 28);

What is the effect of partial failure of consideration?

Partial failure of consideration is a defense pro tanto, whether the failure is an

ascertained and liquidated amount or otherwise (Sec. 28) Who has the burden of
proving that a negotiable instrument was issued for a consideration?

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 The drawer of a check, not the payee, has the burden of proof to show that the
instrument was issued without sufficient consideration. Since a negotiable instrument is
presumed to have been issued for a valuable consideration, the mere presentation of a
dishonored instrument in evidence entitles the holder to recover from the drawer even if
the payee did not establish the accountability of the drawer. (Travel‐On v. CA, G.R. No.
L‐56169, June 26, 1992)

Can a logging concessionaire which issued promissory notes in favor of a bank

to secure advances in connection to its log exportations raise the defense of
want of consideration in a case filed by the bank for the payment of the PN?

No, the promissory note appears to be negotiable as they meet the requirements
of Sec.1 of the NIL. Such being the case, the notes are prima facie deemed to have
been issued for consideration. It bears noting that no sufficient evidence was adduced
by the logging concessionaire to show otherwise. (Quirino Gonzales Logging
Concessionaire v. CA, G.R. No. 126568, Apr. 30, 2003)

What is meant by “failure of consideration”?

Failure of consideration means the failure or refusal of one of the parties to do,
perform or comply with the consideration agreed upon.

How is absence or failure of consideration distinguished from inadequacy of

consideration?

Inadequacy of consideration does not invalidate the instrument, unless there has
been fraud, mistake or undue influence (Art. 1355, NCC). However, knowledge of
inadequacy of consideration would render the holder not a holder in due course. (Sec.
53)

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III. ACCOMODATION PARTY

Who is an accommodation party?

One who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to some other
person.(Sec. 29)

What are the requisites to be an accommodation party?

 Accommodation party must sign as maker, drawer, acceptor or indorser.

 No value is received by the accommodation party for the accommodated party;

and
 The purpose is to lend the name.

Note: It does not mean, however, that one cannot be an accommodation party merely
because he has received some consideration for the use of his name. The phrase
“without receiving value therefor” only means that no value has been received for the
instrument and not for lending his name.

What are the distinctions between an accommodation party and a regular party?

ACCOMODATION PARTY REGULAR PARTY

Signs an instrument without receiving Sign the instrument for value (Sec. 24)
value therefore (Sec. 29)

Purpose of signing: lend his name to Not for that purpose

another person. (Sec. 29)

May always show, by parol evidence, that Cannot disclaim personal liability by parol

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he is only such evidence

Cannot avail of the defense of May avail

absence/failure of consideration against a
holder not in due course

May sue reimbursement after paying the May not sure

holder/subsequent party

Up to what extent is an accommodation party liable?

1. Right to revoke accommodation – before the instrument has been negotiated for
value.
2. Right to reimbursement from accommodated party – the accommodated party is
the real debtor. Hence, the cause of action is not on the instrument but on an
implied contract of reimbursement. Right to contribution from other solidary
accommodation maker. (Sadaya v. Sevilla, G.R. No. L‐17845, Apr. 27, 1967)

Can a party who signed on the note as an accommodation party raise the defense
of absence or want of consideration?

No. An accommodation party who lends his name to enable the accommodated
party to obtain credit or raise money is liable on the instrument to a holder for value
even if he receives no part of the consideration. He assumes the obligation to the other
party and binds himself to pay the note on its due date. By signing the note, the
accommodation party thus became liable for the debt even if he had no direct personal
interest in the obligation or did not receive any benefit there from. (Dela Rama v.
Admiral United Savings Bank, G.R. No. 154740, Apr. 16, 2008)

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Can a corporation be an accommodation party, if so, does the liability of an
accommodation party attach to a corporation?

No. The issue or indorsement of negotiable paper by a corporation without

consideration and for the accommodation of another is ultra vires. Hence, one who has
taken the instrument with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation party. (Crisologo‐Jose
v. CA, G.R. No. 80599, Sept. 15, 1989)

May a holder for value recover from an accommodation party notwithstanding his
knowledge of such fact?

Yes, a holder for value may recover. This is so because an accommodation party
is liable on the instrument to a holder for value, notwithstanding that such holder at the
time of taking the instrument knew him to be only an accommodation party. The
accommodation party is liable to a holder for value as if the contract was not for
accommodation. It is not a valid defense that the accommodation party did not receive
any valuable consideration when he executed the instrument. Nor is it correct to say
that the holder for value is not a holder in due course merely because at the time he
acquired the instrument, he knew that the indorser was only an accommodation party.
(Ang Tiong v. Ting, G.R. No. L‐26767, Feb. 22, 1968)

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To know more information about CHAPTER 2- FORGERY

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=JSvsmh8u9UQ

To know more information about Chapter 2-Accommodation Party

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REFERENCE:

Law on Negotiable Instruments

Author: Hector S. De Leon
Hector S. De Leon, Jr.

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