Different Methods of Endorsing a Check
An indorsement is made by the holder of a check when he or she wants to negotiate it or wants to indicate a limitation as to its specific purpose. An example of a specific purpose is when the indorser only wants the check to be deposited to an account, not cashed over the counter. A third purpose of indorsement is when a bank or a person paying for the amount indicated in the check wants to obtain the liability of the person negotiating the check. Indorsement could be done by the holder in several ways, namely: by special indorsement, blank indorsement, restrictive indorsement, and qualified indorsement. (Mallor-Barnes-Bowers-Langvardt, 2007)
Special indorsement means that the holder of the check affixes his or her signature on the back of the check and then writes down the name of the specific person who could negotiate it or authorize to have it negotiated. For instance, a check has been specially indorsed to John Smith if the holder of the check (say, Mary Walters) wrote on the back thereof his name as payee and affixes his/her signature below John Smith’s name.
A holder, for this purpose, refers to the person who has in his or her possession a check which is “payable to bearer” or made out in his or her name.
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When the check has been specially indorsed to John Smith, he, in turn, becomes a holder of the check who is authorized either to negotiate the check or indorse it to someone else. (Mallor et al. , 2007) §3-205 of the Uniform Commercial Code (UCC) specifically states that “When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person.” (Cornell University Law School, n. d. )
Blank indorsement occurs when the holder simply affixes his or her signature at the back of the check without identifying any person as payee or indorsee. In the example, Mary Walters, as payee of the check, simply signs her name on the back of the check without naming any particular person to whom the check could be paid. In this case, having indorsed the check in blank, Mary has converted the check into a “payable to bearer” check. It could therefore be transferred by anyone who acquires it.
If it is John Smith who takes possession of the check, he can negotiate it by simply writing his or her name on the back of the check, thereby identifying him as the person to whom the check could be paid. His act of writing his name effectively converts a blank-indorsed check to a specially indorsed check. (Mallor et al. , 2007) “When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed. ” (Cornell University Law School, n. d. ) Restrictive indorsement refers to a situation when a check is indorsed to satisfy a specific purpose only.
A case in point is when a person wants that a check issued to him – like for example a paycheck or a check which represents proceeds from an insurance claim – should only be deposited in his account at a specified bank, he or she should indicate in so many words by writing down, for instance, the following: “For Deposit to my Account at Chase Manhattan Bank. ” This restricts the indorsement to the purpose specified. If, for any reason some other person other than the payee presents the check which is so indorsed to a bank, the law states that said bank should ensure that the proceeds of the check should go to the specified account.
If the bank releases the amount to the person who presents the check, said bank will be liable under the principle of conversion. Judge McEwen of the New York Supreme Court, in Lehigh Presbytery v. Merchants Bancorp, Inc. (Penn. Super. Ct. 1991) said that the UCC orders banks to honor such restrictions or be liable for any resulting losses, saying that this principle was meant “to prevent” fraud. (As cited in Mallor et al. , 2007) Qualified indorsement is a type of indorsement which could be made on checks which have been indorsed specially or in blank.
This is resorted to by an indorser who wishes to free himself or herself from any liability in case of default on the part of the person who issued the check by writing the words “Without Recourse. ” In other words, if the maker of the check fails to meet his or her obligation, the indorser would not be liable if he or she qualifies the indorsement. § 3-415 of the UCC has specifically provided that although the indorser “is obliged to pay the amount due” on a dishonored instrument, in a qualified indorsement “the indorser is not liable … to pay the instrument.” (Cornell University Law School, n. d. )
The law governing negotiable instruments, specifically the methods of indorsing a check, is one of those laws which were passed not only to govern the conduct of business in the country but also to help Americans protect their hard-earned wealth from scheming, unscrupulous individuals. As it stands, the law on negotiable instruments which has withstood the test of time merits the support of every well-meaning citizen of the country.