Know Your Endorsements!

Blank Endorsements

Blank endorsements are a very basic form of endorsement, which do not involve any kind of stipulation in the endorsement. A blank endorsement is just a signature on a check or other form of negotiable instrument. Blank endorsements are commonly used all throughout both business worlds and everyday life. But blank endorsements bear with them certain clear problems, as a check endorsed with a blank endorsement becomes a bearer instrument allowing anyone to present it for payment.

Special Endorsements

Unlike blank endorsements, special endorsements do identify the party to whom the negotiable instrument is being transferred. These endorsements add another "Pay to the order of...." clause which do not affect the negotiability of the instrument.

Qualified Endorsements

Qualified endorsements are a type of endorsement used to protect the endorser from any restrictions.

Restrictive Endorsements

Restrictive endorsements are similar to special endorsements in that they include clauses in the endorsement which limit the use of those endorsements. But the difference lies in that while special endorsements simply restrict the party to whom the negotiable instrument is endorsed, restrictive endorsements provide special conditions which must be followed for the endorsement to be upheld.

The primary issue that would seem to immediately arise with endorsements of this type is that they would seem to negate one of the basic necessities of negotiable instruments. Negotiable instruments must be unconditional promises to pay, and adding conditions through a restrictive endorsement would seem to violate this aspect of negotiable instruments, making any instrument with such an endorsement non-negotiable. But this is not true, as restrictive endorsements take specific forms which are allowable under the terms of negotiable instruments.

The first form of restrictive endorsement that one might see is an endorsement which would prevent any further endorsement of that instrument. This type of endorsement would generally take the form of the phrase "Pay to [x] only," instead of special endorsements' more typical "Pay to [x]". But this additional "only" does not actually add any greater effect than a special endorsement, as the person to whom it is being endorsed would actually then still be able to negotiate the instrument to other holders.

Next are conditional endorsements of the type which come to mind when thinking of ways that would violate negotiability. Adding clauses such as "Pay to [x] if she finishes painting my bathroom by January 1, 2011," along with a signature would at first glance appear to violate the unconditional nature of negotiable instruments.

Another type of restrictive endorsement involves those endorsements made for collection or deposit only. This type of restrictive endorsement simply defines the way in which the endorsed negotiable instrument can be used and is generally only employed with relation to either collecting agents or banks. Adding the clause of "For Deposit Only" to a negotiable instrument, for example, would ensure that the instrument could only be deposited with the bank and could go to no other purpose. It furthermore would ensure that the next holder of the check after the endorser who added the "For Deposit Only" clause would have to be a bank. Adding the account number into which the check was to be deposited would also restrict the check even further.

The final type of restrictive endorsement is that of a trust endorsement, which fills a role similar to the intermediary role involved in qualified endorsements. A trust endorsement allows one person to give a negotiable instrument to another on the express conditions that this second person or party use the instrument only for the benefit of the original party.

This is the type of endorsement that would be used when having an agent perform monetary tasks on the behalf of the original endorser. The endorsee receiving the instrument would gain rights to that instrument, effectively becoming its holder, but only insofar as that endorsee uses the instrument in accordance with the restrictive endorsement. If the instrument were to be negotiated to another party, then the requirements of the trust endorsement would not transfer with the instrument unless specifically cited in the subsequent endorsement.

Transferring Order and Bearer Instruments

Negotiating a negotiable instrument to a new holder is a process that takes its form depending upon exactly what type of negotiable instrument that particular instrument may be. A bearer instrument is easily transferred from holder to holder, as the only necessary element of being a holder for a bearer instrument is the actual physical possession of the instrument. If one holder gives a new holder the physical instrument, then holder-ship would have transferred.

For an order instrument, on the other hand, the only way to transfer the instrument to a new holder is to endorse that instrument over, whether through a blank endorsement, a special endorsement, or any other form of endorsement.

Instruments can also be transferred by converting them from an order instrument into a bearer instrument, and vice versa. An order instrument, for example, could be converted into a bearer instrument by the introduction of a non-specific endorsement to the instrument. At that point, negotiation of the instrument would require only physically exchanging the instrument, as opposed to endorsing it over to a new holder.

A bearer instrument, on the other hand, might be modified by a special endorsement, even if it were originally a "pay to cash" instrument, thereby superseding the "pay to cash" and changing the instrument into an order instrument. The instrument could then only be negotiated to a new party through endorsement.

Endorsement Issues

There are many possible issues that might arise with any kind of endorsement, many of which likely arise from confusion regarding mistakes or slightly ambiguous terms. As an example, one of the foremost issues arising around endorsements is that of simply misspelled names on the instrument.

A misspelled name would seem to cause problems because the instrument would then appear to be made out to the incorrect individual. But the problem is easily remedied, as the intended party can actually still endorse the negotiable instrument using the misspelled name, the correct name, or even both. Common practice is actually to use both, endorsing with the misspelled name first and then listing the correct spelling beneath it.

Another problem that often arises regarding negotiable instruments is when those instruments are made payable to a larger entity, as opposed to a single individual. In such a case, when the instrument is payable to an organization, at first glance it is unclear who can endorse the instrument.

But a legally authorized representative of the organization can endorse the instrument and negotiate it, even though he or she is not technically the party to whom the instrument was made payable. This also carries truth with regard to public offices, as an instrument can be made payable to an office; the individual holding that office at any given time could then endorse that instrument.

The other main surmountable issue for negotiable instruments involves the method for dealing with alternative or joint payees. An instrument is payable "in the alternative", and therefore, to "alternative payees," if it is specially endorsed to two individuals or parties with the "or" conjunction used in the endorsement clause. For example, if the endorsement read, "Pay to the order of Patrick or Werner," then Patrick and Werner are alternative payees for the instrument.

With alternative payees, only one of the two mentioned parties needs to endorse the instrument. If the instrument is instead made payable to two or more individuals or parties jointly, however, then all listed parties would have to endorse the instrument. A joint endorsement would read as follows: "Pay to the order of Patrick and Werner." In this case, both Patrick and Werner would have to endorse the instrument. If multiple individuals or parties are mentioned, but the relationship is not specified to be either alternatively payable or jointly payable, then it defaults to being alternatively payable.

The above are common issues of confusion that may arise surrounding negotiable instruments, but all of which have a clear solution. There are other issues regarding negotiable instruments, such as theft of bearer instruments or forged or unauthorized endorsements. But these are major criminal issues, separate from the issues of confusion discussed above.

NEXT: Negotiating Order and Bearer Instruments