KRS 355.3-206: Restrictive indorsement.

(1) An indorsement 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 indorsement stating a condition to the r ight of the indorsee to receive payment

does not affect the right of the indorsee 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) (a) If an instrument bears an indorsement:

1. Described in KRS 355.4-201(2); 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 indorser or for a particular account,

the rules set out in paragraph (b) of this subsection apply.

(b) 1. A person, other than a bank, who purchases the instrument when so

indorsed converts the i nstrument unless the amount paid for the

instrument is received by the indorser or applied consistently with the

indorsement.

2. A depositary bank that purchases the instrument or takes it for collection

when so indorsed converts the instrument unless the amount paid by the

bank with respect to the instrument is received by the indorser or applied

consistently with the indorsement.

3. A payor bank that is also the depositary bank or that takes the instrument

for immediate payment over the counter from a per son other than a

collecting bank converts the instrument unless the proceeds of the

instrument are received by the indorser or applied consistently with the

indorsement.

4. Except as otherwise provided in subparagraph 3. of this paragraph, a

payor bank or intermediary bank may disregard the indorsement and is

not liable if the proceeds of the instrument are not received by the

indorser or applied consistently with the indorsement.

(4) Except for an indorsement covered by subsection (3) of this section, if a n

instrument bears an indorsement using words to the effect that payment is to be

made to the indorsee as agent, trustee, or other fiduciary for the benefit of the

indorser or another person, the following rules apply:

(a) Unless there is notice of breach of fiduciary duty as provided in KRS 355.3 -

307, a person who purchases the instrument from the indorsee or takes the

instrument from the indorsee for collection or payment may pay the proceeds

of payment or the value given for the instrument to the indorsee without

regard to whether the indorsee violates a fiduciary duty to the indorser.

(b) A subsequent transferee of the instrument or person who pays the instrument

is neither given notice nor otherwise affected by the restr iction in the

indorsement 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 indorsement to which this section applies does

not prevent a pu rchaser of the instrument from becoming a holder in due course of

the instrument unless the purchaser is a converter under subsection (3) of this

section or has notice or knowledge of breach of fiduciary duty as stated in

subsection (4) of this section.

(6) In an action to enforce the obligation of a party to pay the instrument, the obligor

has a defense if payment would violate an indorsement to which this section applies

and the payment is not permitted by this section.