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Agabayani: Where a negotiable instrument is materially altered, it is avoided in the hands of one who is not a holder in due course as against any prior party who has not assented to the alteration. However, the law makes certain exceptions. The instrument is not avoided as against:

1) a party who has made the alteration;

2) a party who authorizes or assented to the alteration; and 3) subsequent indorsers.

But when an 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 its original tenor.

A holder in due course can enforce the instrument according to its original tenor regardless of whether the alteration was innocent or fraudulent because the law does not make any distinction.

Campos: A material alteration avoids the instrument and discharges all parties, unless they authorized or consented to the alteration. A subsequent indorser is excepted from this rule because by the indorsement he warrants, among other things, that the instrument is in all what it purports to be and that it was valid and subsisting at the time of his indorsement. On the other hand, a holder in due course may enforce the altered instrument according to its original tenor. This presupposes that the alteration is not apparent on the face of the instrument, otherwise it would be irregular and no holder thereof could be a holder in due course. Where the alteration is of the amount, the holder in due course may recover the original sum. The drawee bank can likewise charge the drawer’s account with the original amount. If the holder is not one in due course, he cannot recover anything and the drawee bank cannot charge any part of the amount against the drawer’s account. Where the interest rate is altered, the holder in due course can recover the principal sum with the original rate of interest. Where the date of payment is changed, the original date of maturity controls in determining whether or not a holder is a holder in due course.

Material alteration is therefore a personal defense when used to deny liability according to the original tenor of the instrument. It is a real defense when relied on to deny liability according to altered terms.

Since Section 124 made no distinction, the instrument will be avoided whether the material alteration was made with or without fraudulent intent, and whether it proves beneficial or prejudicial to the interests of prior parties.

General rule denies the drawee bank’s right to charge against the drawer’s account the amount of an altered check. However, the drawer’s negligence, before or after alteration, may estop him from setting up such alteration as against an innocent drawee bank who has paid the check. Thus, where the drawer of a check who in filling it out negligently leaves spaces, making it possible for another to alter the amount by inserting words and figures therein, the drawer cannot complain should the bank pay and charge the amount as altered against his account. It was his negligence which proximately caused its payment. However, there is a conflict of opinion as to whether such estoppel can apply in favor of a holder in due course. Some courts refuse to apply such estoppel against the drawer in favor of a holder in due course, who, in spite of the drawer’s negligence is allowed to recover only the original amount. The basis given for the difference lies in the fact that since a bank has the duty of honoring checks drawn against it by its depositors, the drawer owes a corresponding duty to his bank to fill in his checks carefully. On the other hand, one to whom a check is negotiated is under not duty to take it. The drawer therefore owes him no duty of diligence. The Uniform Commercial Code rejects this view and provides that the drawer is liable to a holder in due course for the terms as altered.

Where the negligence of the drawer consists in failing to discover alterations previously made, the rule is similar to that applicable to a forged check. Thus, in a series of alterations of several checks, if the drawer could have discovered the alterations by a comparison between his cancelled checks and his check stubs, or by a diligent observation of his record, and could thus have prevented the drawee bank from subsequently cashing other altered checks, the latter can charge the subsequent checks against the negligent drawer’s account.

Suppose a drawee bank has cashed a check on which the amount has been altered, can it recover back from the recipient-holder in due course the difference between the original and altered amount? Similarly, if the drawee bank has paid a check on which the payee’s name was changed, can it recover back the money it paid? The prevailing view, which was the common law rule, allows recovery by the drawee bank on the ground that the amount paid is under mistake and under Section 124, a holder in due course can recover only according to the original amount and not the altered tenor of the instrument. The opposite view however asserts that under Section 62, the acceptor engages to pay according to the tenor of his acceptance and is therefore estopped from recovering.

NEGOTIABLE INSTRUMENTS LAW REVIEWER–SEBASTIAN DLSULAW

LEXSOCIETAS 41

The arguments set forth by the majority view find strong support in the legal provisions. Acceptance is defined by Sec. 132 as the “signification of the drawee of his assent to the order of the drawer.” Sec. 62 should be related to this definition.

“Assent to the order of the drawer” means assent to the actual not the apparent order of the drawer. In like manner, Section 139 in defining general and qualified acceptance provides: “A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn.” In both these provisions, acceptance is definitely associated with the order of the drawer and not with what appears to be the drawer’s order after the alteration. The words “according to the tenor of his acceptance” should thus be construed to mean the kind of acceptance – whether qualified, or general.

Furthermore, Section 124 avoids the instrument “except as against a party who has himself made, authorized or assented to the alteration and subsequent indorsers.” An acceptor has not assented to the alteration because “assent” can only mean assent with knowledge of the facts. Neither is he a subsequent indorser. The final and perhaps strongest legal argument is that Sec. 124 expressly provides that a holder in due course can recover only according to the original tenor of the instrument. There is however one important and desirable effect of the minority view cannot be ignored – denying recovery to the drawee bank would tend to give stability to checks. Furthermore, as between the holder and the drawee bank, it seems that the latter is in a better financial position to shoulder the loss, since it can and probably should insure itself against such eventualities.

It will be recalled that the rule in forgery of the drawer’s signature is that the drawee bank cannot recover from the holder in whose favor it cashed such check.

The basis of this rule is that a s between the holder and the drawee bank, the latter is in much better position to know the signature of the drawee since the latter is its customer. It is for this reason that Section 62 incorporates the acceptor’s warranty of the genuineness of the drawer’s signature. In the case of the altered check however, there can be no similar basis for holding the drawee bank responsible for non-apparent alterations. Although it is bound to know the drawer’s signature, it would be unfair to burden it with knowledge of the drawer’s handwriting. And many times checks are not filled in by hand but by typewriter or in print. Payment by the drawee bank of the altered check would therefore indeed be a mistake, and should be effective only to the extent of the original and not the altered tenor of the instrument.

Our Supreme Court has in effect come to the same conclusion as the minority view but on an entirely different basis. The drawee bank was denied recovery based on a Central Bank Circular regulating clearing of checks and limiting the period within which a drawee bank may return a spurious check. No mention of Section 62 or of Section 124 or of any provision of the Negotiable Instruments Law was made. The Circular has since been amended.

A drawee bank is bound to know the signature of its depositors, so when it honors checks on which the drawer-depositor’s signature is forged, it has no excuse for later trying to recover from the collecting bank. And even in the case where the forgery is so skillfully done that the drawee could not have detected it, still the drawee would be estopped from recovering because under Sec. 62 the drawee bank by accepting or paying a check admits the genuineness of the drawer’s signature. As earlier stated, the justification for this rule is that payment on a check must at some time or another become final. Any other rule would affect the stability of commercial transactions.

Alteration of the payee’s name or of any other material terms of the check is an entirely different matter. If the altreation is not apparent on the face of the check, the drawee banks would not disvoer the alteration until it is informed by the drawer after the latter has received the cancelled check. Then, because of Section 124, it would have to recredit the drawer with the amount of the check. When it receives an altered check through the clearing house, the check looks regular on its face. There would be absolutely nothing to warn it about the defect, and thus all it would do and should be expected to do is to check the sufficiency of the drawer’s funds and the genuineness of his signature. It would be highly impractical to require the bank to check with each drawer the correctness of the terms of the check he has issued, even in the cases where his signature is admittedly genuine and his deposit is sufficient to cover the check. Yet this is in effect the burden which the HSBC case places on drawee banks. But would it be possible for them to do this with all checks drawn daily against them within the short period allowed by the clearing house rule referred to in the case?

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, whether of the drawee of the same bill, or of any other person whose name appears upon it, or any other part of the bill, is sustained by an unbroken current of authority.

When the bill is presented for acceptance, the acceptor looks to the handwriting of the drawer with which he is presumed to be acquainted, and he affirms its genuineness by giving credit to the bill, by his acceptance in favor of the legal holder thereof.

The drawee bank which has paid an altered check to a collecting bank bears the loss only if it is itself negligent in failing to return the check promptly after discovery. Recovery of the the difference between the original and the altered amount from a holder in due course may be made.

Sebastian: Parties prior to alterations cannot be made liable on the altered instrument. The instrument cannot be voided because Section 124 says that it is not avoided against subsequent holders. Meaning, there can be subsequent parties after the alteration that had nothing to do with the alteration.

NEGOTIABLE INSTRUMENTS LAW REVIEWER–SEBASTIAN DLSULAW

LEXSOCIETAS 42

When you change the contractual relationship of the parties, the instrument is avoided as to parties prior to the alteration and thereby released from liability.

But as to parties subsequent, they already saw the alteration and thus it cannot be avoided as to them.

Banco Atlantico v Auditor General – Payment of checks by foreign bank to payee without previously clearing said checks by foreign bank to payee without previously clearing said checks with the drawee bank is contrary to normal and ordinary banking practice especially where drawee bank is a foreign bank and the amounts involved are large and bars recovery.

Agbayani: Paying bank must clear check with drawee bank before paying.

Banco Atlantico was not a holder in due course as defined in Section 52 because it was obvious that it had knowledge of the infirmity or defect of the check.

Sebastian: This case boils down to the doctrine of estoppel by negligence. It was the negligence of Banco Atlantico (collecting bank) that gave rise to the loss. Its negligence were manifested by paying cash to a check which was not cleared by the drawee bank. The collecting bank was not a holder in due course becase it was obvious that it had knowledge of the infirmity or defect of the check. Had the collecting bank been a holder in due course, it would have been able to at least recover the original amount of the check.

Since Banco Atlantico was not a holder in due course, it may not even enforce payment according to the instrument’s original tenor.

Foutch v Alexandria Bank – We call attention to a distinction of essential importance recognized generally between bank checks and negotiable instruments of the note and bill class. This distinction is strongly emphasized because one who purchases a note is under no manner of compulsion and acts purely at his option or election, under which circumstances it is not inappropriate to apply, by analogy, the caveat emptor rule; whereas the Bank is under a direct and peculiar 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 of damages. Furthermore, the depositor, on the other hand, owes to his bank the duty to exercise care in drawing his checks in order to avoid possible loss.

Campos: That duty is so to fill up his check as that when it leaves his hands as a signed document, it shall be properly and fully filled up so that tampering with its contents or filling in a sum different from what the customer meant it to cover shall be prevented.

When a drawer of a bill or the maker of a note has himself, by careless execution of the instrument, left room for any alteration to be made, either by insertion or erasure, without defacing it or exciting the suspicion of a careful man, and the opportunity which he has afforded has been embraced, and the instrument filled up with a larger amount of different terms than those which it bore at the time he signed it, he will be liable upon it as altered to any bona fide holder without notice. In the hands of such holder a negotiable instrument may be enforced if a sum in excess of that authorized by the maker is inserted in a bank left for the amount of the instrument.

Sebastian: Since Foutch was negligent, he should bear the loss.

Saving Bank of Richmond v National Bank of Goldsboro –

Campos: The liability against the drawer of the draft as forged exists only for the original amount thereof. The language of the statute and its obvious purpose and intent are too manifest to leave room for cavil or doubt as to its meaning, and we should so take it, if left alone to our judgment thereof.

Recovery could only be had against the defendant for the original face value of the draft; that where a negotiable note was delivered in completed form, the possibility that it might be raised or altered by the willful fraud or forgery of another was too remote to afford the basis of an action either in tort or in contract; that suit as upon a contract should not be maintained upon the note in its forged and altered state, because it was not the contract of the maker of the instrument; and that in such case, the issuing of the note could in no sense be considered the proximate cause of the loss.

Sebastian: In this case, the maker was not held liable because the check was delivered complete in all its part. The Court said that it was the duty of the bank to verify the check. This case was covered by the law of the State of California which says that the holder in due course may only enforce an instrument only up to the original tenor of the instrument.

Critten v Chemical National Bank –

Campos: The relation existing between a bank and a depositor being that of debtor and creditor, the bank can justify a payment on the depositor’s account only upon the actual direction of the depositor. The question of negligence cannot arise unless the depositor has in drawing his check left blanks unfilled, or by some affirmative act of negligence has facilitated the commission of a fraud by those into whose hands the check may come.

The rule is settled that the depositor owes his bank the duty of a reasonable verification of the returned checks. It would prevent the successful commission of continuous frauds by exposing the first forgeries.

NEGOTIABLE INSTRUMENTS LAW REVIEWER–SEBASTIAN DLSULAW

LEXSOCIETAS 43

Sebastian: This case modifies the whole theory of negligence. The liability for the damages are directly attributable to the negligence that caused it.

Marine National Bank v National City Bank – An acceptor of a bill of exchange by acceptance only admits to the genuineness of the signatures of the drawer, and does not admit the genuineness of the indorsements, whether of the drawee of the same bill, or of any other person whose name appears upon it, or any other part of the bill. The reason for this is when the bill is presented for acceptance the acceptor looks to the handwriting of the drawer with which he is presumed to be acquainted, and he affirms its genuineness by giving credit to the bill, by his acceptance in favor of the legal holder thereof. But the acceptor cannot be presumed to have such knowledge of the other facts upon which the rights of

Marine National Bank v National City Bank – An acceptor of a bill of exchange by acceptance only admits to the genuineness of the signatures of the drawer, and does not admit the genuineness of the indorsements, whether of the drawee of the same bill, or of any other person whose name appears upon it, or any other part of the bill. The reason for this is when the bill is presented for acceptance the acceptor looks to the handwriting of the drawer with which he is presumed to be acquainted, and he affirms its genuineness by giving credit to the bill, by his acceptance in favor of the legal holder thereof. But the acceptor cannot be presumed to have such knowledge of the other facts upon which the rights of