Legal Definitions - irregular indorsement

An irregular indorsement occurs when someone signs a negotiable instrument, such as a check or a promissory note, but they are not the original payee (the person or entity the instrument is made out to) or a subsequent owner in the normal chain of transfer. This signature is typically made to add their creditworthiness to the instrument, essentially guaranteeing its payment to a future holder, even though they don't have a direct interest in the underlying transaction. This person is often referred to as an "accommodation party" because they are accommodating another party by lending their financial backing.

• Example 1: Small Business Loan Guarantee

  Imagine a new entrepreneur, Sarah, needs a loan from a bank to start her bakery. The bank is hesitant because Sarah's business is brand new and lacks a strong credit history. To secure the loan, Sarah's financially stable friend, Tom, agrees to sign the promissory note (the loan agreement) alongside Sarah. Tom is not receiving any of the loan money and is not an owner of the bakery.

  How it illustrates the term: Tom's signature is an irregular indorsement. He is not the primary borrower (Sarah) and doesn't directly benefit from the loan. He signs solely to lend his credit to Sarah, making him an accommodation party. If Sarah defaults on the loan, the bank can pursue Tom for payment, relying on his irregular indorsement.

• Example 2: Cashing a Check for a Friend

  Maria receives a large check from an insurance company, payable to her. She needs to cash it quickly but doesn't have an account at the bank the check is drawn on. The teller at that bank is hesitant to cash such a large check for a non-customer without additional assurance. Maria asks her sister, Elena, who has a well-established account at that bank, to sign the back of the check below Maria's own signature.

  How it illustrates the term: Elena's signature is an irregular indorsement. She is not the payee (Maria) and did not issue the check. She signed the check solely to lend her credit and identity to the transaction, assuring the bank that if the check were to bounce for any reason, they could potentially seek payment from her.

• Example 3: Purchasing a Car with a Guarantor

  A young adult, David, wants to buy his first car but has no credit history. The car dealership requires a co-signer or an additional guarantor on the promissory note for the car loan. David's father, Robert, agrees to sign the promissory note. Robert is not buying the car, will not be the registered owner, and will not be making the primary payments.

  How it illustrates the term: Robert's signature is an irregular indorsement. He is not the primary borrower (David) and does not receive the car. His signature serves to guarantee David's debt, making him an accommodation party who would be liable to the dealership if David fails to make his car payments.