Printable Format84-3-206. Restrictive endorsement. (a) An endorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation of the instrument is not effective to prevent further transfer or negotiation of the instrument.
(b) An endorsement stating a condition to the right of the endorsee to receive payment does not affect the right of the endorsee to enforce the instrument. A person paying the instrument or taking it for value or collection may disregard the condition, and the rights and liabilities of that person are not affected by whether the condition has been fulfilled.
(c) If an instrument bears an endorsement (1) described in K.S.A. 84-4-201(b), or (2) in blank or to a particular bank using the words "for deposit," "for collection," or other words indicating a purpose of having the instrument collected by a bank for the endorser or for a particular account, the following rules apply:
(A) A person, other than a bank, who purchases the instrument when so endorsed converts the instrument unless the amount paid for the instrument is received by the endorser or applied consistently with the endorsement.
(B) A depository bank that purchases the instrument or takes it for collection when so endorsed converts the instrument unless the amount paid by the bank with respect to the instrument is received by the endorser or applied consistently with the endorsement.
(C) A payor bank that is also the depository bank or that takes the instrument for immediate payment over the counter from a person other than a collecting bank converts the instrument unless the proceeds of the instrument are received by the endorser or applied consistently with the endorsement.
(D) Except as otherwise provided in paragraph (3) [C], a payor bank or intermediary bank may disregard the endorsement and is not liable if the proceeds of the instrument are not received by the endorser or applied consistently with the endorsement.
(d) Except for an endorsement covered by subsection (c), if an instrument bears an endorsement using words to the effect that payment is to be made to the endorsee as agent, trustee or other fiduciary for the benefit of the endorser or another person, the following rules apply:
(1) Unless there is notice of breach of fiduciary duty as provided in K.S.A. 84-3-307, a person who purchases the instrument from the endorsee or takes the instrument from the endorsee for collection or payment may pay the proceeds of payment or the value given for the instrument to the endorsee without regard to whether the endorsee violates a fiduciary duty to the endorser.
(2) A subsequent transferee of the instrument or person who pays the instrument is neither given notice nor otherwise affected by the restriction in the endorsement unless the transferee or payor knows that the fiduciary dealt with the instrument or its proceeds in breach of fiduciary duty.
(e) The presence on an instrument of an endorsement to which this section applies does not prevent a purchaser of the instrument from becoming a holder in due course of the instrument unless the purchaser is a converter under subsection (c) or has notice or knowledge of breach of fiduciary duty as stated in subsection (d).
(f) In an action to enforce the obligation of a party to pay the instrument, the obligor has a defense if payment would violate an endorsement to which this section applies and the payment is not permitted by this section.
History: L. 1991, ch. 296, § 25; February 1, 1992.
KANSAS COMMENT, 1996
This section is identical to the 1995 Official Text. It is derived from clarifications and modifications of the former 84-3-205 and 84-3-206. Historical case and statutory references may be obtained from the 1965 and the 1983 bound Volume 7 of the Kansas Statutes Annotated.
Despite the form of the indorsement, an instrument which is indorsed and negotiated can be further negotiated, even if the indorsement states that the indorsee must meet a condition. Because the instrument is, by definition, a negotiable instrument, the conditions are only effective between the parties.
Subsection (c). Indorsements such as "pay any bank" (84-4-201(b)) or "for deposit" can reduce the number of persons to who the instrument is payable: (A) the instrument is converted unless a bank receives the instrument or its proceeds; (B) the bank receiving it must apply the proceeds to the indorser's account; (C) a payor bank is liable for conversion unless the indorser receives the funds, or the indorser's directions are followed (thus the payor bank could pay the proceeds to the indorser or apply the funds to the indorser's account); and (D) payor banks and intermediary banks are not bound to see that banks previously receiving and paying for the instrument followed the restrictive indorsement, except as provided in paragraph (C), which is referenced in the 1995 Official Text.
Subsections (d), (e) and (f). This subsection applies to indorsements of instruments to fiduciaries as fiduciaries, and generally restates the case law under the prior provisions. The person who takes an instrument from a fiduciary or gives the proceeds to the fiduciary is not liable if the fiduciary misapplies the funds unless that person knows of the breach. Thus, for example, a bank or a transferee can give the fiduciary cash without liability, even if the fiduciary embezzles the cash, as long as the transferee does not know of the breach. If the transferee applies the funds to fiduciary's personal obligations, however, there is notice of a breach of the restrictive indorsement, such as where the funds are applied to the personal obligation of the fiduciary, such as a personal debt. 84-3-307(b)(B)(i). Subsection (d), paragraph (2) provides that subsequent transferees, dealing with the instrument, after the person taking it from the restrictive indorsee, are not affected by the indorsement unless they know of the fiduciary's breach of the fiduciary duty. Stated positively, a subsequent transferee's knowledge of the fiduciary's breach will be notice and will prevent holder in due course status, subjecting them to a suit for conversion under 84-3-420, but those without knowledge will be holders in due course, if they otherwise qualify.
The terms of a restrictive indorsement are a defense if the payment would violate the terms of the restrictive indorsement. Thus where there has been a breach of a restrictive indorsement and the instrument has been dishonored, a subsequent mere holder would take subject to the restrictive indorsement, but the holder in due course would be able to overcome this defense. See 84-3-305(a)(1), the listing of the "real" defenses which are good against a holder in due course (84-3-305(b)).
Revisor's Note:
Former section 84-3-206 was repealed by L. 1991, ch. 296, § 111 and the number reassigned to the current text.