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Information > Financial Terms > This page

Endorsement 

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)
                                

The writing on the back of a negotiable or other instrument.  The endorsement of a check, bill of exchange, or note consists of words, qualifying nor not, followed by the signature of the endorser, who may be the payee, drawee, accommodation endorser, or holder, or simply the signature alone thereof.  Endorsement is the means, plus delivery, by which order instruments are negotiated to another person.  Negotiation consists of the transfer of title to and rights in an instrument from one person to another so that the transferee becomes the legal holder.  If the instrument is payable to bearer, it is negotiable by delivery alone; if payable to order, it is negotiated by the endorsement of the holder completed by delivery.

An endorsement must be written on the instrument itself or upon a paper attafched thereto, called an ALLONGE.  An endorsement must be an endorsement for the full amount of the instrument, but where the instrument has been paid in part, it may be endorsed as to the remainder.  There is no limit to the number of endorsements that may be made on a negotiable instrument, except where negotiability has been destroyed.

There are five kinds of endorsements recognized in the Uniform Commercial Code:

1.  Endorsement in blank, also known as general endorsement.  If the instrument is payable to
     A.B. See, the endorsement in blank is his simple signature without additional words, i.e.,
     “A.B. See.”  It specifies no particular endorsee, and thereafter is payable to bearer and may
     be negotiated by delivery alone.  It is a common form of endorsement, but has the objection
     that if the instrument is lost or stolen, it may be more easily negotiated by the finder or thief
     to a holder in due course, the latter as such then having superior rights as against the
     original owner.  The holder may convert an endorsement in blank into a special
     endorsement.

An endorsement in blank is an unqualified endorsement, and thus the endorser thereof makes all the warranties to all subsequent holders in due course specified in Section 3-417, Uniform Commercial Code.

2.  Special endorsement, also known as direct endorsement and endorsement in full.  This
     endorsement specifies the person to whom or to whose order the instrument is payable,
     and the endorsement of such endorsee is necessary to the further negotiation of the
     instrument.  If an instrument is payable to A.B. See, the special endorsement is “Pay to
     Adam Smith, A.B. See.”  This is the most proper form of unqualified endorsement and
     offers the owner the greatest protection from both a legal and a practical standpoint. 
    
Without Adam Smith’s endorsement, the instrument cannot be negotiated except by
     forgery, and forgery is a “real” defense against a subsequent holder in due course.

A special endorsement is an unqualified endorsement, and the endorser thereof makes all the warranties to all subsequent holders in due course detailed in Section 3-417 of the Uniform Commercial Code.

3.  Conditional endorsement.  This is an infrequent form of endorsement in which the endorser
     imposes some condition upon the transferee, e.g., “Pay Adam Smith upon the satisfactory
     performance of his contract, (signed) A.B. See,” or “Pay Adam Smith or order if I am
     elected to the City Council, (signed) A.B. See.”  Where an endorsement is conditional, a
     party required to pay the instrument may disregard the condition and made payment to the
     endorsee or his transferee, whether the condition has been fulfilled or not; but any person to
     whom an instrument so endorsed is negotiated will hold the same, or the proceeds thereof,
     subject to the rights of the person endorsing conditionally.

The conditional endorsement is an unqualified endorsement dependent upon the condition’s fulfillment, and the endorser thereof thus makes all the warranties, if the condition is fulfilled, specified in Section 3-417, Uniform Commercial Code.  Qualified endorsements are of two types and constitute the endorser a mere assignor of title to the instrument:

4.  Qualified endorsement “Without Recourse,” or words of similar import.  The qualified
     endorsement “Without recourse, (signed) A.B. See” does not destroy the negotiability of the
     instrument.  The effect of this endorsement is to limit the warranties and engagement to pay;
     instead the “without recourse” endorser makes the limited warranties found in 
     Section 3-417, Uniform Commercial Code.

5.  Restrictive endorsement.  A restrictive endorsement is a blank or special endorsement
     accompanied by words which either (1) prohibit the further negotiation of the instrument; or
     (2) constitute the endorsee the agent of the endorser; or (3) vest the title in the endorsee in
     trust for or to the use of some other person.  The endorsement “Pay Adam Smith for
     collection, (signed) A.B. See” constitutes the endorsee the agent of the endorser for the
     specified purpose.  The third type, “Pay Adam Smith in trust for John Jones, (signed) A.B.
     See,” is rare.

A restrictive endorsement confers upon the endorsee the rights to (1) receive payment of the instrument; (2) bring any action thereon that the endorser could bring; (3) transfer his rights as such endorsee, where the form of the endorsement authorizes him to do so.  All subsequent endorsees acquire only the title of the first endorsee under the restrictive endorsement.

The restrictive endorser is a qualified endorser, and makes the limited warranties found in Section 3-417, Uniform Commercial Code.

For further details and incidents of endorsements, see Article 3, Part 2 of the Uniform Commercial Code.

A restrictive endorsement confers upon the endorsee the rights to (1) receive payment of the instrument; (2) bring any action thereon that the endorser could bring; (3) transfer his rights as such endorsee, where the form of the endorsement authorizes him to do so.  All subsequent endorsees acquire only the title of the first endorsee under the restrictive endorsement.

The restrictive endorser is a qualified endorser, and makes the limited warranties found in Section 3-417, Uniform Commercial Code.

For further details and incidents of endorsements, see Article 3, Part 2 of the Uniform Commercial Code.


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