14. What are the various types of indorsement of a negotiable instrument?
Indorsement is the signature of an individual on the commercial instrument. There are several common types of endorsement, each of which has a different effect upon the instrument:
• Blank Indorsement – This means signing the instrument without designating any particular payee or making any other form of limiting designation. A blank endorsement turns order paper into bearer paper.
⁃ Example: A promissory note is payable to “Frank or order”. If Frank signs the promissory note, it is a blank endorsement that makes the paper enforceable by any holder.
• Special Indorsement – Special indorsement is a signature and instruction that limits the instrument to a particular person. A special indorsement may limit the indorser’s potential liability, but is not effective to prevent further negotiation by the holder.
⁃ Example: Isabelle writes “Pay Tom” or “Pay to the Order of Tom” on a note along with her signature. Remember, however, the the paper must contain “to order” to remain negotiable. Also, “Pay to the Order of Tom” establishes the paper as order paper, but it does not restrict Tom’s abilities. Tom can indorse the paper and negotiate it.
• Restrictive Indorsement – A restrictive indorsement includes the payee’s signature and instructions that limit the instrument to a particular use. Generally, a restrictive indorsement is not effective to prevent further negotiation of the paper. There are, however, special rules that apply to certain restrictive indorsements of checks.
⁃ Note: A conditional indorsement including words such as, “pay Tom if he washes my car” is ineffective. It does not qualify as a restrictive indorsement and does not limit negotiability.
⁃ Example: Signing the instrument and writing “For Deposit Only” is a restrictive indorsement on a check.
• Qualified indorsement – A qualified indorsement is an individual’s signature including the words, “without recourse”. The purpose of this form of indorsement is to limit the potential liability of the indorser who is transferring the instrument in the event the payor ultimately dishonors the instrument. The idea is that the indorser is transferring any rights she has in the instrument, but she is not warranting that the payor of the instrument will honor it. While this type of indorsement may limit the indorser’s liability to subsequent holders of the instrument, it does not affect or limit the ability to further transfer or negotiate the instrument.
⁃ Example: Darla is the payee on a note. She signs the note and writes “no recourse”. She then transfers the note to Dawn. Dawn cannot sue Darla to enforce or pay the instrument if the instrument is later dishonored by the payor at the time of presentment.
• Anomalous indorsement – This is an indorsement by someone other than the holder or transferor of the instrument. It is made to guarantee or incur surety liability on the instrument. This can give a transferee confidence in accepting the instrument. This type of indorsement is not necessary for negotiation.
⁃ Example: Neo is the payee of a note. He signs the note and seeks to transfer it Arthur. Arthur is comfortable in accepting the instrument. He agrees to accept the instrument when Mr. Gates agrees to sign the note. By indorsing the instrument, Mr. Gates is stating that the holder can seek payment of the instrument from him if it is first dishonored by the payor.
• Discussion: How do you feel about the ability of an indorser to change the nature of the instrument? Should a qualified indorser be able to limit personal liability on the instrument? Why or why not? Can you think of situations when an anomalous indorsement would be common?
• Practice Question: Kelly is the holder and named payee of a negotiable promissory note (order paper). She signs the note and writes the words “Pay Eric” and “Without Recourse”. What are the effects of indorsing the instrument with these additional instructions?