I. WHAT LIABILITY WILL THE BANK INCUR UPON FINDING THAT IT DID NOT COMPLY WITH A RESTRICTIVE INDORSEMENT?
U.C.C. § 3-206 on restrictive indorsements provides that if a check has an indorsement that is in blank or to a particular bank using the words “for deposit,” “for collection,” or other words that indicate a purpose of having the check collected by a bank for the indorser or for a particular account, a depository bank must either pay the amount of the check to the indorser or apply the proceeds consistently with the indorsement. If the bank does not do so, it will be found to have converted the funds.
II. EXAMPLE
If a check has been indorsed by John Doe, with the restrictive legend “for deposit only,” John may change his mind when he gets to the bank and ask for cash instead. So long as he, the indorser, receives the funds, the bank should not incur liability. The same is true when a payor bank takes such a check for immediate payment over the counter from a person other than a collecting bank. The payor bank would be deemed to have converted the instrument unless the proceeds of the instrument are received by the indorser or applied consistently with the indorsement.