Legal Definitions - restricted indorsement

A restricted indorsement is a specific instruction written on a negotiable instrument, such as a check or promissory note, that limits or specifies how the instrument can be used or transferred. Unlike a blank indorsement, which allows the instrument to be freely transferred or cashed by anyone who possesses it, a restricted indorsement places conditions or restrictions on the rights of the person or entity receiving it. This ensures the funds are handled in a particular way or used for a specific purpose.

Here are some examples illustrating a restricted indorsement:

• "For Deposit Only"

  Scenario: Maria receives a check for services rendered. To ensure the check is safely deposited into her account and cannot be cashed by anyone else if lost or stolen, she writes "For Deposit Only to Account #987654321" on the back of the check above her signature.

  Explanation: This is a classic example of a restricted indorsement. It explicitly limits the check's use, instructing the bank to only deposit the funds into the specified account. The bank cannot cash the check for Maria or any other individual, thereby restricting its negotiability and providing security.

• "Pay to [Specific Person/Entity] Only"

  Scenario: David owes money to Emily, and Emily, in turn, owes money to Frank. David writes a check to Emily. Emily wants to transfer this payment directly to Frank. On the back of the check, above her signature, Emily writes "Pay to Frank Smith Only."

  Explanation: This indorsement restricts the further transfer of the check. While Frank can cash or deposit the check himself, he cannot sign it over to another party (e.g., to pay off a debt he owes to someone else). The indorsement ensures the funds go directly to Frank and limits any subsequent negotiation of the instrument.

• "Pay to [Bank Name] for Collection"

  Scenario: A small business, "Green Gardens Inc.," receives a check from a client. The business owner indorses the check by writing "Pay to City Bank for Collection" above the company's signature.

  Explanation: This indorsement restricts the bank's role to simply collecting the funds on behalf of Green Gardens Inc. It signifies that the bank is acting as an agent to collect the payment, rather than becoming the owner of the instrument itself. This limits the bank's rights concerning the check, ensuring the funds are processed and credited to the business's account as intended, without the bank acquiring full ownership of the instrument.