2006 Bar examinations

II

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

Suggested Answer:

A bank which honors a check wherein the drawer’s signature was forged, must bear the loss, because
it has the legal duty to ascertain that the drawer’s signature is genuine before encashing a check. The
liability chain ends with the drawee bank.

On the other hand, if the drawee bank pays under forged indorsement, the drawee bank is still liable
to the payee as it has guaranteed the genuineness of all prior indorsements. However, the drawee
bank may generally pass liability back through the collection chain to the party who obtained the
check from the forger and from the forger himself.

III.

Jun was about to leave for a business trip. As his usual practice, he signed several blank checks. He
instructed Ruth, his secretary, to fill them as payment for his obligations. Ruth filled one check with her
name as payee, placed P 30,000.00 thereon, endorsed and delivered it to Marie. She accepted the check
in good faith as payment for goods she delivered to Ruth. Eventually, Ruth regretted what she did and
apologized to Jun. Immediately, he directed the drawer bank to dishonor the check. When Marie
encashed the check, it was dishonored.

1. Is Jun liable to Marie? 5%

Suggested Answer:

Yes. June is liable to Marie; as she is a holder in due course. Pursuant to Section 14 of Negotiable
Instruments law, in order that an incomplete instrument, when completed may be enforced against
any person who became a party thereto prior its completion, it must be filed up strictly in accordance
with the authority given and within a reasonable time. However, if any such instrument, after
completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his
hands, and he m at enforce it as if it had been filled up strictly in accordance with the authority given
and within a reasonable time. Considering that Marie accepted the check in good faith and for value,
she is a holder in due course, who has the right to enforce payment of the check for the full amount
thereof against Jun. That the blank check was filled-up not in accordance with the authority given is
only a personal defense that cannot be used against a holder in due course.

2. Supposing the check was stolen while in Ruth’s possession and a thief filled the blank check,
endorsed and delivered it to Marie in payment for the good he purchased from her, is jUne
liable to Marie if the check is dishonored? 5%

Suggested Answer:

No. Section 15 of the Negotiable Instruments Law provides that “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 want of delivery of an incomplete instrument is a real defense available against any holder,
including a holder in due course.