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

(5%)
SUGGESTED ANSWER:
The legal consequences when a bank honors a forged check are as follows:
(a) 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 vs. Buenaventura G.R.
No. 148196, September 30, 2005; Section 23, Negotiable Instruments Law).
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 (BPI Family Bank v. Buenaventura,
G.R. No. 148196, September 30, 2005). 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, August 13,
2004). If the drawee-bank has charged drawer's account, the latter can recover such
amount from the drawee-bank (Associated Bank v. Court of Appeals,
G.R. No. 107382, January 31, 1996; Bank of P. I. v. Case Montessori Internationale,
G.R. No. 149454, May 28, 2004).
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.
Court of Appeals, G.R. No. L62943, 143 SCRA 20, July 14, 1986).
(NOTA BENE: The question does not qualify the term "forged check". An answer
addressing the liabilities of a drawer should be deemed sufficient. Answers addressing
liabilities of parties should likewise be given full credit)
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. Court of Appeals, G.R. No. L-26001, October 29, 1968).

(b) 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, October 10, 2002; Westmont Bank v. Ong, G.R.
No. 132560, January 30, 2002).
(c)

Forged Indorsement:

Drawer's account cannot be charged, and if charged, he can recover from the

drawee-bank
(Associated Bank v. Court of Appeals, G.R. No. 107382 January 31,1996).

Drawer has no cause of action against collecting bank, since the duty of

collecting bank is only to the payee. A collecting bank is not guilty of negligence over a
forged indorsement on checks for it has no way of ascertaining the authority of the
endorsement and when it caused the checks to pass through the clearing house before
allowing withdrawal of the proceeds thereof
(Manila Lighter Transportation, Inc. v. Court of Appeals,
G.R. No. 50373, February 15, 1990). On the other hand, a collecting bank which
endorses a check bearing a forged endorsement and presents it to the drawee bank
guarantees all prior endorsements including the forged endorsement itself and should
be held liable.
2.) Incomplete Instruments; Incomplete Delivered Instruments vs. Incomplete
Undelivered Instrument (2006)
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 P30,000.00 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 drawee bank to dishonor the check. When Marie
encashed the check, it was dishonored.
1. Is Jun liable to Marie? (5%)
SUGGESTED ANSWER:
Yes. This covers the delivery of an incomplete instrument, under Section 14 of the
Negotiable Instruments Law, which provides that there was prima facie authority on the
part of Ruth to fill-up any of the material particulars thereof. Having done so, and when it
is first completed before it is negotiated to a holder in due course like Marie, it is valid
for all purposes, and Marie may enforce it within a reasonable time, as if it had been
filled up strictly in accordance with the authority given.
2. Supposing the check was stolen while in Ruth's pos-session and a thief filled
the blank check, endorsed and delivered it to Marie in payment for the goods he
purchased from her, is Jun liable to Marie if the check is dishonored? (5%)
SUGGESTED ANSWER:
No. Even though Marie is a holder in due course, this is an incomplete and undelivered
instrument, covered by Section 15 of the Negotiable Instruments Law. 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,
including Jun, whose signature was placed thereon before delivery. Such defense is a
real defense even against a holder in due course, available to a party like Jun whose
signature appeared prior to delivery.