Legal Definitions - restrictive indorsement

A restrictive indorsement is a signature on a negotiable instrument, such as a check or a promissory note, that limits or specifies how the instrument can be used. Unlike a general indorsement, which simply transfers ownership, a restrictive indorsement imposes conditions or directs the funds for a particular purpose, preventing further negotiation or use for any other reason.

Here are some examples illustrating restrictive indorsements:

• Example 1: "For Deposit Only" on a Check

  Imagine Sarah receives a check for $500 as payment for a freelance project. To ensure the money goes directly into her bank account and cannot be cashed by anyone else if lost or stolen, she writes "For Deposit Only" above her signature on the back of the check.

  This is a restrictive indorsement because it limits the check's use solely to being deposited into Sarah's bank account. The bank cannot cash it for her or allow someone else to deposit it into a different account; it must go into the account associated with her indorsement.

• Example 2: Promissory Note for a Specific Loan

  A small business, "Innovate Solutions," holds a promissory note (a written promise to pay a specific sum of money) from a client. Innovate Solutions needs to use this note as collateral to secure a specific loan from "City Bank." To ensure the note is used only for this purpose, Innovate Solutions' CFO indorses the note with "Pay to City Bank for the sole purpose of securing Loan #98765."

  This indorsement restricts City Bank's ability to use the promissory note. The bank cannot sell it, transfer it to another party, or use it as collateral for a different loan. Its use is strictly limited to securing Loan #98765, as specified by the indorsement.

• Example 3: Check Payable to a Specific Institution

  Mr. Chen writes a check to his daughter, Emily, for her university tuition. He wants to ensure the funds go directly to "State University" and not be used by Emily for other expenses. On the back of the check, above Emily's signature, he adds the indorsement "Pay to State University only, for Emily Chen's tuition."

  This indorsement restricts the check's negotiation. Emily cannot cash the check herself or deposit it into her personal account. The check must be presented to and accepted by State University for the specific purpose of paying her tuition, ensuring the funds are used exactly as intended.