§ 41-03-25 — (3-206) Restrictive endorsement

1. 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.
2. 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.
3. The following rules apply to an instrument bearing an endorsement described in
subsection 2 of section 41-04-13, or 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:
a. A person, other than a bank, that 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 depositary 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 depositary 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 subdivision 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.
4. Except for an endorsement covered by subsection 3, the following rules apply to an
instrument bearing 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:
a. Unless there is notice of breach of fiduciary duty as provided in section 41-03-33,
a person that 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.
b. A later transferee of the instrument or person that pays the instrument is neither
given notice of 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.
5. 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 3 or has notice or
knowledge of breach of fiduciary duty as stated in subsection 4.
6. If 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.