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Forged Negotiable Instrument and Holder Status

Cite this article as: Jason Mance Gordon, "Forged Negotiable Instrument and Holder Status," in The Business Professor, updated January 20, 2015, last accessed March 30, 2020, https://thebusinessprofessor.com/knowledge-base/forged-negotiable-instrument-and-holder-status/.
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Forged Negotiable Instrument - Holder Status
This video explains how a forged instrument affect the ability of a subsequent holder to become a holder in due course.

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What is the result if a negotiable instrument is forged?

A forged negotiable instrument is not enforceable against the party whose name was forged. The forged instrument is, however, enforceable against the forger. Basically, the instrument is treated as though the forger signed her own signature. Also, a forged negotiable instrument puts affirmative duties on parties implicated in the forgery. For example, a drawee bank on a forged check must use ordinary care in inspecting a potentially forged signature when paying check. The owner of the check may be liable if the check is stolen and forged because of her own negligence. The owner has a duty to verify records to identify forged instruments. The drawer is barred from contesting improper payment of the check by a one-year statute of limitations.

•    Discussion: How do you feel about the ability to enforce a forged instrument against the forger? What do you think about the additional responsibilities placed upon the parties?

•    Practice Question: Cathy is an employee of ABC Corp. She steals a check from the company, signs her manager’s name, and makes the check out to herself. The check is drawn on ABC’s account at First Bank. She then indorses the check and transfers it to Doris. Doris presents the check to First Bank for payment. Who is potentially liable on the check?

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