Issues of Endorsement Chain and Discontinuities in Promissory Notes
Issues of Endorsement Chain and Discontinuities in Promissory Notes
1. Introduction
One of the most important characteristics of negotiable instruments (bills of exchange, promissory notes, checks) their negotiability. Thanks to this ability, negotiable instruments can change hands and be transferred to different individuals, just like money. The most important tool used in the transfer of an instrument is endorsement.
Endorsement is a written declaration of transfer made on a promissory note. However, the order and sequence in endorsement transactions directly affect the validity of the note and the rights of the holder. Breaks in the chain of endorsements ( i.e., irregularities in the endorsement sequence) lead to significant disputes in commercial law.
2. The Concept of Turnover
2.1. Definition
Endorsement is a written declaration and signature made for the purpose of transferring, collecting, or providing collateral for a negotiable instrument.
2.2. Legal Basis
- Turkish Commercial Code Article 683 (bill of exchange)
- Turkish Commercial Code Article 686 (bond)
- Turkish Commercial Code Article 700 (check)
2.3. Functions
- Transfer Function → Transfers ownership of the security.
- Collection Function → Ensures the collection of the promissory note.
- Collateral Function → A promissory note is given as collateral for a debt.
3. Types of Revenue
- Full Endorsement → Endorsement made specifying the beneficiary's name.
- Blank (Open) Endorsement → Only a signature is required; no new beneficiary is written.
- Nama Ciro → Endorsement made with a record of payment to a specific person.
- Collection Endorsement → Made with the phrase "For collection purposes".
- Endorsement of Collateral → Made with the annotation "For collateral purposes".
- Partial Endorsement → An attempt is made to transfer only a portion of the bill's value; this is invalid.
- Unauthorized Endorsement → An endorsement made by someone who is not the holder of the promissory note is invalid.
4. Sales Chain
4.1. Definition
The chain of endorsements refers to the entire line of endorsements on a promissory note, starting from the first payee and extending to the holder.
4.2. Importance
- It enables the circulation of the promissory note.
- It demonstrates the legitimacy of the holder.
- It grants the right to appeal against debtors.
4.3. Chain Arrangement
Each endorsement must be based on the previous holder of the instrument. In other words, the chain must continue unbroken.
5. Disconnection Issues
5.1. What is Discontinuity?
In the chain of turnover, a break occurs when the link between the transferor and the transferee is interrupted.
Example: If the payee of a promissory note, A, endorses the note to B, but B appears to have transferred it to C, who does not have a signature, there is a break in the chain.
5.2. Legal Consequences
- In case of a break in the bond, the holder is not considered the rightful owner of the instrument.
- The promissory note does not lose its negotiability, but the holder loses their status as a "legitimate holder".
- No enforcement proceedings specific to negotiable instruments can be initiated against debtors.
5.3. Supreme Court Practice
- The 11th Civil Chamber of the Supreme Court of Appeals, Case No. 2017/2211: “A holder whose chain of endorsements is broken cannot assert their rights arising from the promissory note through enforcement proceedings.”
- Supreme Court 12th Civil Chamber, Case No. 2019/8743: “If the chain of endorsements is broken, the enforcement court cancels the proceedings.”
6. The Legitimacy Function of the Turnover Chain
6.1. Right of the Holder
If the chain of endorsements is complete, it is presumed that the last holder is the rightful owner.
6.2. Debtor's Trust
The debtor is released from debt by paying the pregnant woman who sees the chain intact.
6.3. Risk of Discontinuity
In case of a disconnection, the debtor may make a payment to the wrong person.
7. Problems Encountered in Practice
- Blank Endorsement Risk → Blank endorsements, where only a signature is affixed, can cause the chain to be broken by malicious individuals.
- Endorsement on a Photocopy → Endorsements not made on the original promissory note are invalid.
- Discontinuities in Promissory Notes → Irregularities in the chain of promissory notes given as collateral are frequently observed.
- Unauthorized Endorsement → Endorsement by someone who is not the holder of the promissory note breaks the chain of transmission.
- Partial Endorsement → It's already invalid and causes confusion in the chain.
8. Views on Doctrine
Hard View
Even the slightest break in the chain of transmission should not invalidate the holder's claim. This approach protects commercial security.
Flexible View
In cases of blank endorsements and similar situations, the holder's good faith must be protected; minor deficiencies should not completely invalidate the negotiable instrument.
9. Proposed Solutions
- Electronic Endorsement System → A digital endorsement chain record must be maintained for e-bills of exchange.
- Bank Supervision → Banks should control the chain of endorsements, especially for checks.
- Legal Clarification → Provisions regarding partial endorsement and unauthorized endorsement have been clarified.
- Business Education → Awareness should be raised about the importance of the turnover chain in the business world.
10. Conclusion
The chain of endorsements is the most important guarantee of the negotiability of bills of exchange. A break in the chain eliminates the holder's legitimacy and makes prosecution impossible.
Supreme Court rulings strictly evaluate breaks in the chain of transmission and prioritize commercial security. However, electronic systems and clearer legal regulations are necessary to prevent abuses in practice.
In conclusion, issues of chain of transmission and discontinuityare a critical matter in commercial law, directly affecting the rights of both creditors and debtors.
Gozdenur Turna
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