"Without Recourse" - Ramifications & Restrictions

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Question:

Please help me understand the ramifications and restrictions of the following endorsement. A check is presented to a teller for negotiation and the check is payable to Jane Doe and Big Bank, USA. Big Bank, USA stamps the back of the check with "Pay to the order of named Payee without recourse" followed by a signature line for a designated person from the bank to sign (which they have). Exactly what does the "without recourse" statement mean? Is "Big Bank, USA" signing the check over to the payee "without recourse" to them (the payee) or to the negotiating bank, or does the "without recourse" mean that the negotiating bank has no recourse against the business that stamped the check?

Answer:

That form of endorsement is an attempt on the part of Big Bank to indicate that it is releasing its claim to the proceeds of the check, but because it received no value for its endorsement no one should look to Big Bank for a transfer, presentment or other warranty claim. The use of this form of endorsement is common for insurance proceeds checks. Typically, such checks are payable jointly to the insured and to a lienholder or mortgagee. Also typically, if the lienholder or mortgagee is satisfied that its collateral for the loan isn't impaired and the loan is current, the lienholder/mortgagee has no reason to want a piece of the check.

First published on BankersOnline.com 9/17/07