§ 3-206 RESTRICTIVE INDORSEMENT. Uniform Commercial Code LII Legal Information Institute

(a) An indorsement limiting
payment to a particular person or otherwise prohibiting further transfer or negotiation of
the instrument is not effective to prevent further
transfer or negotiation of the instrument. Subsection (f) allows a restrictive indorsement to be used as a defense by a person obliged to pay the instrument if that person would be liable for paying in violation of the indorsement. (f) In an action to enforce the obligation of a party to pay the instrument, the obligor has a defense if payment would violate an indorsement to which this section applies and the payment is not permitted by this section. You go to the endorsement section on the back, write “Pay to the Order of,” the person’s name next to it and sign the check. Depending on specific guidelines enforced by each financial institution, this endorsement phrase may be included above your signature or below your signature.

To avoid any issues, make sure you understand your financial institution’s guidelines and communicate them to the payee. Any use of this information should be done only in consultation with a qualified and licensed professional who can take into account all relevant factors and desired outcomes in the context of the facts surrounding your particular circumstances. The information in this document was developed with reasonable care and attention. However, it is possible that some of the information is incomplete, incorrect, or inapplicable to particular circumstances or conditions. Some banks will require you to add “Mobile Deposit” to the endorsement when you deposit a check using your phone. Some banks will accept other endorsement styles for mobile deposit.

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In that case, you should read this article about restrictive endorsements. This information could be the difference between saving thousands and owing thousands of dollars. Subsection (a) provides that an indorsement that purports to limit further transfer or negotiation is ineffective to prevent further transfer or negotiation. If a payee indorses “Pay A only,” A may negotiate the instrument to subsequent holders who may ignore the restriction on the indorsement. Subsection (b) provides that an indorsement that states a condition to the right of a holder to receive payment is ineffective to condition payment.

Either way, you’re authorizing the bank to convert the check into cash on your behalf. Endorsing a check by signing the back of it is a security step that simultaneously helps to verify you as the proper recipient of the funds and authorizes the bank to complete the transaction. Writing a FBO check helps to ensure that the funds will be used for a specific purpose, but in this case, the assisted living facility is considered as the custodian of the funds.

restrictive endorsement

Sometimes checks will be payable to a person or company for the benefit of another person. Equifax Data BreachThis is the largest data breach in history, affecting over 40 million people. Make sure your credit reports and personal information have not been affected. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is legally bound to act in your best interests.

Some courts have ruled that the use of a restrictive endorsement to pay off a creditor is only appropriate if a previous settlement agreement existed between the parties, or if there is a good-faith dispute between the parties regarding the amount of the debt. In the case of a dispute, many courts have ruled that the consumer must have given the creditor prior notice of the dispute. If you are sending a restricted check only to «trick» the creditor into a settlement, a judge may not support your claim that an accord and satisfaction exists. Special endorsement differs from the restrictive endorsement in that a special endorsement becomes a blank endorsement after the named individual has endorsed the check. This means that it can be transferred and cashed out by anyone in its possession.

A restrictive endorsement is a mix of understanding safe harbor and accord and satisfaction. Using restrictive endorsement is appropriate when the check is to be mailed to the bank, and the payee would not be physically handling the check. It is also appropriate when settling debts with a supplier to help evade debt settlement disputes.

How to Endorse a Check

However, not long ago, the two traders had gotten into a dispute over debt payment. Mary claimed that she did not receive funds indicating full settlement for the goods. Linda insisted she had issued a check in a blank, which allowed cashing out or depositing into the account. James conducts business with David and endorses a check in blank to David to settle for payment.

• This type of endorsement passes title of the check to the payee, but with certain conditions/restrictions.
• There, it refers to an amendment that modifies and adds something to the original policy.
• The name of the Federal Reserve bank of the district must appear on the plate or stamp used for the imprinting of the endorsement, and presentation to the appropriate branch of the Federal Reserve bank named will be considered as presentation to the bank.
• It is also appropriate when settling debts with a supplier to help evade debt settlement disputes.

Usually, a restrictive endorsement allows the payer to have more control over the instrument in a transaction. Companies may use it as a part of their internal controls to prohibit any unidentified or unauthorized usage of their bills. Most companies use it to settle debt and protect against future disputes. However, it may create issues for the payee and may not be an ideal choice for suppliers. «For Deposit Only» endorsement is usually used if the check would be out of the payee’s physical access for some time. A good example is when the check must be mailed to the bank for deposit.

restrictive endorsement definition

(4) Except as otherwise provided in paragraph (3),
a payor bank or intermediary bank may disregard the indorsement and
is not liable if the proceeds of the instrument are
not received by the indorser or applied consistently
with the indorsement. (1) A person, other than a bank, who purchases the instrument when
so indorsed converts the instrument unless the amount paid for the instrument
is received by the indorser or applied consistently
with the indorsement. (b) An indorsement stating a condition to the right of the indorsee to receive payment does not affect the right of the indorsee to enforce the instrument. A person paying the instrument or taking it for value or collection may disregard the condition, and the rights and liabilities of that person are not affected by whether the condition has been fulfilled. Other institutions may ask that you guarantee the endorsement or may insist that you prove your identity before processing the check.

• When the overall accountant manages deposits for each officer, he makes the work easier by stamping the back of the check deposit with «For Deposit Only» and then indicating the relevant account number.
• Mary claimed that she did not receive funds indicating full settlement for the goods.
• Read the fine print in your financial institution’s service agreement before you open a bank account.
• The account of the grocery store is credited and the check is forwarded to Payor Bank which pays the check.

Thus if a payee indorses “Pay A if A ships goods complying with our contract,“ the right of A to enforce the instrument is not affected by the condition. In the case of a note, the obligation of the comparative balance sheet maker to pay A is not affected by the indorsement. In the case of a check, the drawee can pay A without regard to the condition, and if the check is dishonored the drawer is liable to pay A.

What does it mean to endorse a check?

The special endorsement, also known as a full endorsement, is the type of endorsement whereby the check ownership is transferred to another individual whose name is specified. However, these checks can be transferred to another person upon the endorsement by the new endorser. A special endorsement is a form of blank endorsement that differentiates it from a restrictive endorsement. Unlike the restrictive endorsement, the person whose name has been specified on the check can endorse it to be transferred freely to other parties. If a creditor claims you owe money, but you dispute the debt or dispute the amount owed, a restrictive endorsement can be used to attempt to resolve the dispute. In Washington, a debtor can tender to a creditor a check or accompanying written communication that contains a conspicuous statement to the effect that the check is tendered as full satisfaction of the claim.

This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional. Sam may ask, »What’s the difference between a blank endorsement and a restrictive endorsement? » He wants to know exactly how different they are from each other so that he can identify and use the appropriate of the two when needed. He thinks that he knows the answer but he just needs to make sure that he’s right.

Mobile Endorsement on a Check

Although some checks have a pre-printed checkbox indicating mobile deposit, the endorsement process isn’t legally complete until you write the phrase “for mobile deposit only” on the back of the check. Unlike a blank check, a special endorsement check enables only the person/institution whose name appears on the endorsement to deposit or cash it. This endorsement prevents anyone else, other than the intended payees, from negotiating (or cashing) the check. Blank endorsements are the most common type of check endorsement.

Restrictive endorsements are popular among creditors and debtors’ transactions, whereas special endorsements work in a similar manner to blank endorsements. Here are examples where restrictive endorsement and special endorsements can be used. A restrictive endorsement is a conditional guaranty of a transfer of a negotiable instrument. That is, an endorsement that takes effect only on the occurrence or non-occurrence of another act or event. Also spelled “restrictive indorsement.” The Uniform Commercial Code § 3–206 lays out generally accepted rules on restrictive endorsements. For example, § 3–206(a) prevents a restrictive endorsement from being effective beyond the payment for which the endorsement applies.