Endorsements of Checks and Drafts
Endorsement is a term that refers to the signing of a document which allows for the legal transfer of a negotiable instrument from one party to another. The endorser of the draft, when placing their name and signature on the reverse side, indicates good title and is authorized to receive payment for their account, or for the account of the original payee, or for the account of another person from whom title has been obtained. Various endorsement styles include:
- A Blank Endorsement -- When the endorser merely signs his or her name on the back of a bill, he or she is said to have endorsed it "in blank" making it payable to the bearer. Thereafter, the endorser may pass title to the instrument by simply delivering it to someone else. A bill endorsed in blank becomes bearer paper, but the holder may make it payable to his or her own order by writing immediately above the blank endorsement the phrase "Pay to the order of (the holder's name)."
- A Restricted Endorsement -- When the endorsement specifies the person to whose order the bill is payable, it is called a restricted endorsement. The subsequent endorsement of such an endorsee is necessary for further negotiation of the bill. Most endorsements are of this type. They not only give the full chain of persons who may have had an interest in the bill, but also give the holder full recourse against all endorsers preceding them. Moreover, a person to whom a bill has been specially endorsed and who has not as yet endorsed it themselves is protected against the loss of the bill as the casual finder could not negotiate it without the missing endorsement of the holder. If the finder provides the missing endorsement, he or she has committed forgery.
- A Qualified Endorsement -- When the endorser, by the use of words, intends to pass title to a bill made payable to their order without assuming the usual responsibilities of an endorser, the endorsement is qualified by adding to it words to that effect. The most common qualified endorsement is one in which the words "without recourse" have been added. In this scenario, the endorser in effect, says, "Here is a bill. I will give you title to it, but do not look to me in the event it is dishonored." The qualified endorsee, however, may look to all other parties prior to the qualified endorser.
The Legal Rights and Liabilities of Endorsers
The endorser of a bill that has paid value for it is in the same legal position as the payee who has purchased or discounted the bill with this additional right:
Upon the dishonor of the bill either by non-acceptance or by non-payment, the endorser can seek and obtain reimbursement from the party who negotiated the bill to them - if that party is the original payee or another intervening endorser. The endorser also has recourse against the drawer, but has no rights against the drawee except in the case of a time bill that has been duly accepted but dishonored by non-payment.
By their endorsement, an endorser in blank as well as a special endorser warrants the following:
- The instrument is genuine and is in all respects what it purports to be,
- He or she has a valid or good title to it,
- All prior parties have capacity to contract,
- The instrument is at the time of the endorsement, valid and subsisting,
- When presented it shall be accepted, paid, or both (according to its tenor),
- If it is not honored, and the necessary proceedings on dishonor are taken, he or she will pay the amount to the holder, or to any subsequent endorser who may be compelled to pay it.
Whenever a bank presents a draft for payment through the established banking channels or offers the draft for negotiation, and the draft bears irregular or restrictive endorsements, the bank may elect to guarantee such endorsements. This is accomplished when the endorsement stamp of the bank contains a phrase reading "Prior Endorsements Guaranteed." Under such circumstances, the guarantor bank assumes the liabilities of a regular endorser and will be considered as making the usual warranties of a regular endorser.
Edited by Michael Dennis