Pub. 5 2010-2011 Issue 6

www.nebankers.org 10 Extraordinary Service for Extraordinary Members. SECURITY OFFICER’S BY-WORD T H E C U S T OM E R A L S O H A D business loans at the bank, but her businesses were not do- ing well. Any time she needed to make a loan payment, she would simply write the bank a check on her uncle’s trust account and deposit the check to her own personal account. Then she would make her loan pay- ment. The bank once questioned the niece, who explained that her uncle had agreed to loan her the funds from the trust. The bank tellers jokingly referred to the trust account as her “moola moola account.” drawn on another bank and the niece was an authorized signer on the trust account, the bank was still liable to the trust for the funds taken by the niece. In another matter, Jon Smith obtained checks payable to Smith Partnership. He endorsed the checks as “Smith Partnership by Jon Smith, General Partner” and deposited the checks in Jon Smith’s personal ac- count. The bank was aware that Jon Smith was the general partner for Smith Partnership. Three years later, the other partners accused Jon Smith of stealing from the partnership by taking checks payable to the part- nership and keeping the funds. They made claim against the bank. The bank was liable because under UCC 3-307(b)(2)(ii), the law states that the bank had notice of the breach of fiduciary duty in the case of a check payable to the represented person (the partnership) if the check was taken in a transaction known to the taker (the bank) to be for personal benefit of the fiduciary (Jon Smith). In the first case, had the bank refused to take checks payable to the bank but instead required the checks bemade out personally to theniece as payee, thebank would have had no liability. In the second case, had the bank re- quiredMr. Smith to deposit the checks into the partnership’s account and had Mr. Smith then written checks on the partnership’s account made payable to himself as payee, the bank would not have had liability. When a check is signed by a fidu- ciary as maker, if the check is made payable to that person individually as payee, the bank does not automatically have notice of a breach of fiduciary duty, even though the fiduciary, as payee, is receiving personal benefit. This is made clear by UCC 3-307(b)(3). If a check payable to the bank as payee is from any corporation, part- Understanding & Avoiding Fiduciary Liability Charles M. Towle , Senior Vice President, Kansas Bankers Surety Co. When the uncle became ill, another relative started looking into his fi- nances and discovered that the checks payable to the bank had been deposited into the niece’s personal account. Because the bank knew that the niece was a trustee of the uncle’s trust and the bank knew that the funds were being put in the niece’s personal ac- count, the bank was, under Uniform Commercial Code 3-307(b)(4)(ii), on notice of the niece’s breach of her fiduciary duty when each check was de- posited. Even though the checks were A bank customer was trustee for her uncle’s trust. The trust had an account at another bank. She would issue checks payable to the bank drawn on the trust account at the other bank and then deposit the checks to her personal account.