Legal Definitions - collection indorsement

A collection indorsement is a specific instruction written on a negotiable instrument, such as a check or promissory note, that limits how the instrument can be handled. It's a type of restrictive indorsement, meaning it restricts what can be done with the instrument.

When an instrument has a collection indorsement, it directs a bank or other financial institution to process the instrument *only* for the purpose of collecting payment and depositing it into a designated account. This prevents the instrument from being cashed by the holder or further transferred to another party. It acts as a safety measure to ensure that funds reach their intended destination securely.

Here are some examples:

• Business Deposit: Imagine "Green Valley Landscaping," a small business, receives several checks from clients for services rendered. To ensure these funds are securely deposited into their business checking account and not accidentally cashed or diverted, their office manager stamps the back of each check with the phrase "For Deposit Only to Account #987654321."

  This stamp is a collection indorsement. It legally restricts any bank from doing anything other than depositing the funds into the specified business account. If someone were to try and cash one of these checks, the bank would refuse because the indorsement explicitly limits its use to collection and deposit.

• Charitable Contribution: A generous donor writes a check for a significant amount to "Hopeful Futures Foundation." The foundation's treasurer receives the check and, before taking it to the bank, writes "For Collection Only" on the back, along with the foundation's bank account number.

  By writing "For Collection Only," the treasurer creates a collection indorsement. This ensures that the bank processes the check solely to collect the funds from the donor's bank and deposit them into the foundation's account. It prevents the check from being cashed by an individual or transferred to any other entity, safeguarding the donation.

• Inter-bank Processing: "First City Bank" receives a large check from one of its customers, which is drawn on "Regional Savings Bank." First City Bank needs to send this check to Regional Savings Bank to obtain payment. Before sending it, First City Bank stamps the check with "Pay Any Bank, For Collection Only."

  This stamp serves as a collection indorsement between the banks. It instructs Regional Savings Bank (or any intermediary bank) to process the check solely for the purpose of collecting the funds from the drawer's account and transferring them to First City Bank, rather than allowing it to be further negotiated or cashed by another party.