Challenging an Incomplete Indorsement

When ever a claim is brought before a court where an indorsement of a negotiable instrument (Note) is challenged, the bank’s attorney will always claim that the absence or omission of a named payee is a negotiable instrument “indorsed in blank”. He will also claim that the note indorsed in blank is lawful pursuant to UCC, Article 3, Section 205(b) and thus becomes a “bearer instrument”. You can read more about the differences between these two types of negotiable instruments in my article titled “Order Paper vs Bearer Paper” here on Pro Se Foreclosure.

The first thing we should look at in order to understand this argument is the definition of “indorsement” We find this term defined in UCC 3-204(a) wherein the term indorsement is defined as follows,

Indorsement” means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser’s liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.” [Emphasis added]

Now we need to know how the law defines, “blank indorsement” and “special indorsement” “indorsed in blank”. For these definitions we go to UCC 3-205(a),(b), and (c) with emphasis on the key points,

(a) If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a “special indorsement.” When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person. The principles stated in Section 3-110 apply to special indorsements.

(b) If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a “blank indorsement.” When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.

(c) The holder may convert a blank indorsement that consists only of a signature into a special indorsement by writing, above the signature of the indorser, words identifying the person to whom the instrument is made payable.

Now that we have defined these critical terms, let’s look at how someone acquires the right to enforce the instrument. For this information we go to UCC 3-203 wherein the law provides the following,

(a) An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.

(b) Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but the transferee cannot acquire rights of a holder in due course by a transfer, directly or indirectly, from a holder in due course if the transferee engaged in fraud or illegality affecting the instrument.

(c) Unless otherwise agreed, if an instrument is transferred for value and the transferee does not become a holder because of lack of indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified indorsement of the transferor, but negotiation of the instrument does not occur until the indorsement is made.

(d) If a transferor purports to transfer less than the entire instrument, negotiation of the instrument does not occur. The transferee obtains no rights under this Article and has only the rights of a partial assignee.

Let’s look closer at what we have here in the law, and compare that the law says to what we generally see on a copy of a note as it exists today.

  • We see in 3-204(a) that an indorsement is a signature.
  • We see in 3-205(b) that a note indorsed in blank is payable to the bearer of the instrument.
  • We see in 3-205(c) that the holder may convert the blank indorsement into a special indorsement by writing his name in the payee line.

Now this is what we usually see on the copy of the note that a bank will send you if you ask for a copy of the note from the servicer in a debt validation request pursuant to 15 USC §1629(g). Look on the last page of the note and you will usually see –

Somebody’s Signature

What’s missing? This says pay to the “ORDER” of, but it does not say who. It is not a “special indorsement” because it does not have an named payee, nor does it say “Bearer”.

Though an incomplete indorsement may be construed as to show an alleged intent to negotiate, or transfer a negotiable instrument, intent alone does not supersede statutory requirements of a true negotiation.

This can only mean one thing, that this is an incomplete and insufficient indorsement. If you have a copy of the note as it exists today there is a 99.9% chance that this is the case and you have the proof in black and white that who ever signed it acquired no rights under the instrument and that they are not the proper party to enforce the note. Now they have a major problem because who ever received the document only has a partial right as a partial assignee. A foreclosing party must have full rights in order to foreclose.

Steve Skidmore

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2 Responses to Challenging an Incomplete Indorsement

  1. Thank you for your comment lanikk. You mentioned UCC 3-203(d) and the transfer of rights. 3-203 is the “only” section of United States Code applicable to negotiable instruments that governs the transfer of rights, and rights acquired. I wrote an article a while back I think might interest you titled, When is a Negotiable Instrument no longer eligible for negotiation?. You can read the article here

  2. Homegrown's rubicon says:

    In the words of the bar themselves. “PETE status is typically
    conferred by being a “holder” of the note, and one becomes a “holder” by getting
    possession of the original, but endorsed, note”

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