Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

BACKGROUND
Forgery, in general, is the process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive. Perhaps the most common application of forgery is imitating anothers signatures without his/her consent. But forgery can also be applied in art, music, or event currencies, as seen in counterfeiting. Consumer goods may also be counterfeits if they are not manufactured or produced by the designated manufacture or producer given on the label or flagged by the trademark symbol. When the object forged is a record or document it is often called a false document. In any case, the main intention in forgery is to deceive. It may be as petty as affixing your dads signature in your report card, or as consequential as forging the companys signatories to withdraw money from the corporate funds. Nevertheless, the similar crime of fraud is the crime of deceiving another, including through the use of objects obtained through forgery. Forgery is one of the techniques of fraud, including identity theft. Aside from the provision stated in the Negotiable Instruments Law, we can also find provisions relating to forgery in the Revised Penal Code, Title IV, which deals with Crimes against Public Interest. These are crimes which involve deceit, misrepresentation, or falsity against the public at large. If the misrepresentation or deceit or falsity was purposely availed of against a particular person the same will constitute estafa. The crimes are grouped into three categories: A. Forgeries: these refer to deceits involving: 1. 2. 3. The seal of the government, the signature and stamp of the chief executive Coins Treasury or bank notes, obligations and securities of the government

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

4.

Documents

B. Other Falsities: these are deceits pertaining to : (1). Authority, rank or title (2) Names (3) Uniforms and insignias and (4) False Testimonies C. Frauds or acts involving machinations in public biddings and Combinations and Monopolies in Restraint of Trade and Commerce.

FORGERY AS DEFINED IN THE NEGOTIABLE INSTRUMENTS LAW

As the law in negotiable instruments deals with various financial instruments which derive its validity through signatures, it is warranted that a provision against forgery is made part of this act. In Section 23 of Act. No. 2301 or the Negotiable Instruments Law, it states: Sec. 23. Forged signature; effect of. - When a signature is forged or made 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 a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Forgery, in relation to Sec. 23 of the Negotiable Instruments Law, may be defined as counterfeit making or fraudulent alteration of any writing, and may consist in

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

the signing of anothers name, or the alteration of an instrument, in the name, amount, description of the person and the like, with the intent to defraud. Section 23 only applies to forged signatures or signatures made without the authority of the person whose signature purport it to be. Thus, a forged signature, whether it is that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. Section 23 does not avoid the instrument but only the forged signature. Thus, a forged endorsement does not operate as the payees endorsement. In general, there are two cases of forgery: 1. Forgery of promissory notes which may be further subdivided into:
a. forgery of indorsement in the note b.

forgery of the makers signature

2. Forgery of bills of exchange which may be further classified into: a. forgery of an indorsement on the bill b. forgery of the drawers signature, either with acceptance by the drawee, or without such acceptance but the bill is paid by the drawee According to the said section, the effects of a forged signature are as follows: a. It is wholly inoperative b. The forger has no right to retain the instrument c. The forger has no right to discharge or enforce payment against any party However, the last effect has a caveat. The general rule is that, transactions acquired through or under a forged signature does not give the forger the right to discharge or enforce payment. However, the provision in Section 23 provides an exception to this general rule when the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority:

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

Those who warrant or admit to the genuineness of the signature in questionindorsers, persons negotiating by delivery, and acceptors Those who, by their acts, silence or negligence, are estopped from setting up the defense of forgery

APPLICATIONS OF SECTION 23 ON FORGERY

A. G.R. No. 139130 Ilusorio v. CA, MBC November 27, 2002 The exception to the general rule, pertaining to parties who warrant the genuineness of the signature in question by their negligence, is exhibited in G.R. No. 139130. The petitioner was Ramon Ilusorio, Managing Director of Multinational Investment Bancorporation and the Chairman and/or President of several other corporations. He was a depositor in good standing of respondent bank, the Manila Banking Corporation, under current Checking Account No. 06-09037-0. As he was then running about 20 corporations, and was going out of the country a number of times, he entrusted to his secretary, Katherine E. Eugenio, his credit cards and his checkbook with blank checks. It was also Eugenio who verified and reconciled the statements of the said checking account. Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and deposit to her personal account about seventeen (17) checks drawn against the account of the petitioner at the respondent bank, with an aggregate amount of P119,634.34. The petitioner did not bother to check his statement of account until a business partner apprised him that he saw Eugenio use his credit cards. Petitioner fired Eugenio immediately, and instituted a criminal action against her for estafa thru falsification before the Office of the Provincial Fiscal of Rizal. Private respondent, through an affidavit executed by its employee, Mr. Dante Razon, also lodged a

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

complaint for estafa thru falsification of commercial documents against Eugenio on the basis of petitioners statement that his signatures in the checks were forged. Mr. Razons affidavit states that he has examined and scrutinized the checks in accordance with prescribed verification procedures with utmost care and diligence by comparing the signatures affixed thereat against the specimen signatures of Mr. Ramon K. Ilusorio which were on file at their office on the said dates. The petitioner requested the respondent bank to credit back and restore to its account the value of the checks which were wrongfully encashed but respondent bank refused. G.R. No. 139130 was a clear case of forgery, as Eugenio forged the signature of his boss, Ramon Ilusorio. Thus, she should not have enforced payment of the checks whose signatures were forged. The fact that she was able to negotiate the checks at Manila Banking Corporation warranted the petitioner to run after the said bank instead. However, during the course of the trials, it was proven that Mr. Ilusorio was negligent due to the following grounds: 1. The NBI then suggested that petitioner be asked to submit seven (7) or more additional standard signatures executed before or about, and immediately after the dates of the questioned checks. Petitioner, however, failed to comply with this request. The Court of Appeals thus found that the petitioner, through his own inaction, was precluded from setting up forgery in his defense. 2. It appears that petitioner accorded his secretary unusual degree of trust and unrestricted access to his credit cards, passbooks, check books, bank statements, including custody and possession of cancelled checks and reconciliation of accounts. 3. While the bank was sending him the monthly Statements of Accounts, he was not personally checking the same until his partner asked him whether he had entrusted his

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

credit card to his secretary because the said partner had seen her use the same. It was only then that he was minded to verify the records of his account. Although the petitioner contends that under Section 23, a forged check is inoperative and that Manila Bank had no authority to pay the forged checks, the rule does provide for an exception. In this case, the petitioner is precluded from setting up the forgery due to his own negligence as cited in the incidents above. Such was the decision of the Supreme Court, which dismissed the petitioners claims against the defendant bank.

B.

G.R. No. 132560 Westmont Bank v. Ong January 30, 2002 The defense of forgery may be raised not just for forgery of check signature, as

what was the case in the first case. In G.R. No. 132560, forgery on check endorsement was exemplified. The facts of the case are as follows: Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated Banking Corporation, but now known as Westmont Bank. Sometime in May 1976, he sold certain shares of stocks through Island Securities Corporation. To pay Ong, Island Securities purchased two (2) Pacific Banking Corporation managers checks both dated May 4, 1976, issued in the name of Eugene Ong as payee. Before Ong could get hold of the checks, his friend Paciano Tanlimco got hold of them, forged Ongs signature and deposited these with petitioner, where Tanlimco was also a depositor. Even though Ongs specimen signature was on file, petitioner accepted and credited both checks to the account of Tanlimco, without verifying the signature indorsements appearing at the back thereof. Tanlimco then immediately withdrew the money and absconded. Instead of going straight to the bank to stop or question the payment, Ong first sought the help of Tanlimcos family to recover the amount. Later, he reported the

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

incident to the Central Bank, which like the first effort, unfortunately proved futile. It was only on October 7, 1977, about five (5) months from discovery of the fraud, did Ong cry foul and demanded in his complaint that petitioner pay the value of the two checks from the bank on whose gross negligence he imputed his loss. In his suit, he insisted that he did not deliver, negotiate, endorse or transfer to any person or entity the subject checks issued to him and asserted that the signatures on the back were spurious.i The bank did not present evidence to the contrary, but simply contended that since plaintiff Ong claimed to have never received the originals of the two (2) checks in question from Island Securities, much less to have authorized Tanlimco to receive the same, he never acquired ownership of these checks. Thus, he had no legal personality to sue as he is not a real party in interest. The bank then filed a demurrer to evidence which was denied. On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila, Branch 38, rendered a decision, thus: In view of the foregoing, the court hereby renders judgment for the plaintiff and against the defendant, and orders the defendant to pay the plaintiff. In this case 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. Petitioner, as the collecting bank, committed an error in making payment by virtue of said forged signature. The payee, should therefore be allowed to recover from the collecting bank. The collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payees endorsement was genuine before cashing the check. As a general rule, a bank or corporation who has obtained possession of a check upon an unauthorized or forged indorsement of the payees signature and who collects the amount of the check from the drawee, is liable for the proceeds thereof to the payee

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

or other owner, notwithstanding that the amount has been paid to the person from whom the check was obtained. The theory behind is that the possession of the check on the forged or unauthorized indorsement is wrongful, and when the money had been collected on the check, the bank or other person or corporation can be held liable, and the proceeds are held for the rightful owners who may recover them. The position of the bank taking the check on the forged or unauthorized indorsement is the same as if it had taken the check and collected the money without indorsement at all and the act of the bank amounts to conversion of the check. Unlike in the first case, it cannot be said that respondent was negligent in asserting his rights. He immediately acted after knowing of the forgery by proceeding to seek help from the Tanlimco family and later the Central Bank, to remedy the situation and recover his money from the forger, Paciano Tanlimco. Only after he had exhausted possibilities of settling the matter amicably with the family of Tanlimco and through the CB, about five months after the unlawful transaction took place, did he resort to making the demand upon the petitioner and eventually before the court for recovery of the money value of the two checks. These acts cannot be construed as undue delay in or abandonment of the assertion of his rights. Thus, the decision of the Court of Appeals to sustain the decision made by the Regional Trial Court is affirmed. Though Tanlimco was the one who actually committed forgery, the bank may still be held liable for authorizing the negotiation of the check. The 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. In addition, the bank may also be considered as negligent because even though Ongs specimen was on file, the bank accepted and credited both checks to the account of Tanlimco without verifying the signature indorsements appearing at the back thereof.

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

CONCLUSION
Forgery, as discussed in the Negotiable Instruments law, usually results in the loss of a certain amount of money when the forger succeeds in defrauding through imitating anothers signature or making alterations in the instrument. If this happens, the court would decide on who should bear the loss. We find, in the court cases exemplified in this paper, that the one who would bear the loss is usually the negligent party in the transaction. This may be the reason why banks rarely accept checks bearing two or more endorsements although no law requires the bank to reject checks bearing two or more endorsements. As checks and other negotiable instruments are endorsed from one person to another, the endorsers become debtors of the holder of the check. Thus, the more debtors there are, the greater are the chances that the holder of the check, who may have forged the signature therein, can collect payment in spite of the instrument being wholly inoperative. If this happens, the party who may be proven to be negligent will be liable for the loss. Under Section 23 of the Negotiable Instruments Law, a forged signature in a check, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it. A person whose signature was forged was never a party and never consented to the contract. Thus, a forged endorsement does not operate as the payees endorsement. They are those who warrant or admit the genuineness of the forged signature and those who by their acts, silence or negligence, are barred from setting up forgery. An endorser is an example of a party who is precluded from setting up forgery as he warrants, among other things that the instrument is genuine and in all respects what it purports to be. The dilemma of the endorsers then, would be, how would they know that the

Forgery under the Negotiable Instruments Law

A Requirement in Business Law Jophalyn D. Davadilla

endorsement was forged? The verification process becomes feasible if the person whose signature is being forged, is also a client of the endorser bank, in which case, the bank may verify the authenticity of the signatures against their file, or do check calls. It is also important that any of the parties are neither negligent nor dawdling in exercising their right to action for them not to be estopped in setting up the defense of forgery.

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