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Thursday, March 17, 2011

The proper way to endorse a check to a third party

Properly endorsing a check to a third party involves passing over of a check to a party other than the person or company to whom the check is originally made payable. Not all banks accept third party checks as a matter of bank policy and liability risk control. Additionally, not all checks can be endorsed to third parties. 

For example, a check issuer may specifically restrict third party endorsement on the check. If a bank accepts a third party check, it may require your signature below the endorsement as evidence you have taken ownership of the check, and therefore any financial consequences should it bounce. The following illustrations detail 3 ways a third party check endorsement can be made, after which reference is made to applicable law for clarification of the endorsement terms and rules.

Regular third party check endorsement


The clearest way to endorse a check to a third party endorsement is to make it payable to a single person.  This would be done by placing the following endorsement at the appropriate end of the reverse side of the check. It is important to note banks use purple ink for check processing purposes and according to the Federal Deposit Insurance Corporation (FDIC), Regulation CC of the Expedited Funds Availability Act requires endorsements made to banks to not be purple. A regular third party endorsement looks like this:

Pay To the Order of:
Mr. Alfred E.A. Jones
Date (optional)

Your signature

The phrase 'Pay to the order of', is not specifically stated as required by the Uniform Commercial Code (UCC) regarding 'indorsements'. That is to say, it describes a blank indorsement as being a signature of a holder, making the check payable to the new bearer such as a bank. With the same reasoning, the same can be true for another person who holds a check that is indorsed.

Dual third party check endorsement


Sometimes you may want to give a check payable to you to another person through a specific company, organization or account. In such case the check is still endorsed to a third party, however the endorsement includes two third party recipients, only one of which will receive the funds. This endorsement includes the company name followed by the letters FBO or words For the Benefit Of and the third party's name. This method is also used to verify the financial institution in which the check is to be deposited.

ABC Company/For the Benefit Of (FBO)
Mr. Alfred E.A. Jones
Date (Optional)

Your signature

The following video by Financial Advisor Patrick Munroe explains FBO check endorsements further:


Double third party check endorsement


This type of endorsement is written out below, and may also include your name in the second part of the third party endorsement. For example, in the Pay To the Order of endorsement above, if you are that party and you want to use that check to open a new account at ABC Company, the second 3rd party endorsement would be required under the first 3rd party endorsement like this:

Pay to the Order of:
Ms. Elaine I.D. Norman

Signature of endorser

ABC Company/FBO
Elaine I.D. Norman

Signature of Elaine I.D. Norman

Keep in mind the above double endorsement must still remain within the specified endorsement box at the end of the check's reverse side, in addition to complying with regulatory standards of check indorsement. Banks retain the right to not accept a third party check for reasons having to do with liability protection and risk management.

Check Indorsement law


Check indorsement is required by law; although it often referred to as endorsement, the legal terminology describes it with an 'i'. The Uniform Commercial Code (UCC) outlines some of the acceptable practices regarding check indorsement and is a collection of common state laws and rules regarding interstate commerce. Nevertheless, state laws and the Uniform Commercial Code are subordinate laws to Federal laws such as the Check 21 Act, according to the Check 21 Act.  Title 31 of the U.S. Code makes statutory the requirement for indorsement of checks. The US Code is derived from Federal legislation such as Check 21 and the Expedited Funds Availability Act.

Sources:

1. http://cfr.vlex.com/vid/240-13-indorsement-payees-19742462 (Title 31 USC)
2. http://www.law.cornell.edu/ucc/3/3-205.html (Uniform Commercial Code)
3. http://www.fdic.gov (Federal Deposit Insurance Corporation)