This section is from the book "Elementary Banking", by John Franklin Ebersole. Also available from Amazon: Elementary Banking.
A draft may be transferred from one person to another by indorsement when it is made payable to order. When payable to bearer no indorsement is necessary except that it is customary for banks to induce, as far as possible, the person receiving the proceeds of a bearer draft to indorse the draft in order that there may be evidence showing who received the money. The person who makes the indorsement is the "indorser"; the one to whom he indorses it, is the "indorsee," If an instrument is payable to the order of two or more payees or indorsees who are not partners, then all must indorse when the bill is given to any one else, unless the one who does indorse has authority to indorse for the others. Thus, a bill is payable to A and B. A, without authority from B, indorses it to C. C, however, does not get the title to the bill, because the transfer is not the act of both owners, A and B together being the owners of the bill. Suppose the bill had been payable to a firm. If one partner indorses it in his own name no title passes to the indorsee, even if the one partner has been authorized by all the other partners to indorse it, for the indorsement is not the indorsement of all the owners. The proper way is to indorse it in the firm name. To be effective an indorsement must be in writing on the draft. It must be an order to pay the indorsee (who is also known as the "transferee"). It must direct the payment to the transferee of the whole sum due on the instrument. Of course, there is no objection to indorsing a draft after part of the sum due has been paid - provided that the whole of what is yet due is directed to be paid. The draft with the indorsement on it must be "delivered" to the transferee. "Delivery" means a physical transfer of the bill. "Indorsement," as used in this connection, therefore means indorsement and delivery, both of which must occur. Suppose A, the payee of a bill, wrote on it: "Pay to the order of C (Signed) A," and put it in his safe. The indorsement in such a case is not complete. Let us imagine that C breaks open the safe and steals the draft - the indorsement is then complete. Of course C himself, because he is a thief, cannot take advantage of his theft by trying to collect on it. But he can transfer it to an innocent purchaser who may collect on it.
In Favor OF
By Whom Purchased
Am'ts Brought Forward
The First National Bank
We have drawn the following drafts on you to day
(Many banks still use this form but the city banks are in some cases discouraging the use of these notices to save what may be unnecessary work.)