I. GENERAL
The purpose of an indorsement is to pass a negotiable instrument from one party to another. Negotiable instruments may be classified as either “order” instruments or “bearer” instruments. Under the UCC, the rules for negotiating the two are different. Bearer paper (e.g., “pay bearer” or “pay cash”) may be negotiated by transfer of possession alone. For order paper (e.g., check stating “Pay to the order of John Doe”), negotiation requires transfer of possession of the instrument and its indorsement by the holder (See, U.C.C. § 3-201). Order paper allows for payment not only to “John Doe”, but to any other party John Doe may designate. An indorsement then serves as the “order” and the recipient of the paper becomes the party to whom the paper is properly payable.
An indorsement serves two purposes. The actual indorsement is a contract in which the order instrument’s title is transferred by the endorser upon delivery to the endorsee. Also, the act of indorsement promises (subject to conditions) that the endorser will make good on the instrument’s amount if the maker or drawer previously dishonored payment. Note that the last indorsement on order paper will control the next transfer.
II. TYPES OF INDORSEMENTS
There are several types of indorsements, as discussed below:
A. Blank – “John Doe”; “Pay bearer, John Doe”
Since the indorsement specifies no endorsee, the paper is payable to any bearer and may be negotiated by transfer of possession alone. A blank indorsement may later be specially endorsed by the holder (See, U.C.C. § 3-205(b) and (c) and following articles).
B. Special – “Pay to order of Jane Smith, John Doe”; “Pay to Jane Smith or order, John Doe”
This type of indorsement specifies the person to whom the paper is payable and can only be transferred with the endorsee’s indorsement (See, U.C.C. § 3-205(a)).
C. Qualified – “Without recourse pay to John Doe”
The UCC doesn’t recognize the term “qualified” indorsement, but does allow for the contract of endorser to be disclaimed or qualified (See, U.C.C. § 3-415). Use of the term “without recourse” or other words that disclaims liability on the party of the endorser is recognized under the UCC as a method to allow for the instrument to be transferred by the endorser upon delivery to the endorsee, but disclaims liability that the act of indorsement promises that the endorser will make good on the instrument’s amount if the maker or drawer previously dishonored payment.
D. Restrictive – “Pay to order of Bank for deposit only, John Doe”
By this indorsement, bank is made agent of deposit for collection and credit to the depositor’s account. Restrictive indorsements limiting payment to a particular person or otherwise prohibiting further transferee or negotiation does not prevent further transfer or negotiation, but generally, transferee must give value and act consistently with purpose of collection (See, U.C.C. § 3-206 and following articles).
E. Conditional – “Pay John Doe on completion of Jane Smith’s garage”
The “conditional” indorsement is treated as a restrictive indorsement and the payor may disregard the condition and the collecting bank is not affected by the condition (See, U.C.C. § 3-206(b)).
F. Anomalous
Anomalous means an indorsement by a person who is not the holder of the instrument and does not affect the manner in which the instrument may be negotiated (See, U.C.C. § 3-205(d)).
III. WHAT INDORSEMENTS ARE NECESSARY WHEN A CHECK IS PAYABLE TO TWO OR MORE PERSONS?
U.C.C. § 3-110 addresses situations involving checks payable to two or more persons (multiple payee checks). These issues are discussed in a following article under the heading entitled “Indorsements Required on Multiple Payee Checks.”
IV. WHAT LIABILITY WILL THE BANK INCUR UPON FINDING THAT IT DID NOT COMPLY WITH A RESTRICTIVE INDORSEMENT?
U.C.C. § 3-206 addresses situations involving checks with restrictive indorsements. This issue is discussed in a following article under the heading entitled “Compliance With Restrictive Indorsements.”