Pub. 8 2013-2013 Issue 5

www.nebankers.org 18 Extraordinary Service for Extraordinary Members. H ow do your tellers handle checks made payable to the bank as payee? Can the check be deposited to an individu- al’s account? Can the check be cashed? Can the check be used to purchase a cashier’s check? If you answered “yes” to any of these questions, your bank could face a large loss. Two things must be considered. First, banks have experienced sub- stantial losses (often uninsured losses) when they took checks payable to the bank and allowed such checks to be deposited into an account of someone other than the maker of the checks. Uniform Commercial Code § 3-307 (b)(2) specifically states that a bank can be held liable for repayment of the amount to the business if an employee of the business delivers a check payable to the bank and the bank allows such check to be deposited into any account other than the business’ own account. This same law applies when any person presents a check payable to the bank on behalf of another individual and depos- its such check to an account of anyone other than the maker of the check. Second, other banks have experi- enced substantial losses (often unin- sured losses) when they took checks payable to the bank in exchange for cash or cashier’s checks given back to an employee of a business. In numer- ous cases where the business later claimed the employee misappropri- ated the funds, the courts found the bank was liable for repayment of the amounts to the business. The following is one of many ex- amples of court rulings on the subject. In the 1998 case of Dalton &Mayberry v. NationsBank, an accounting firm filed an action against the bank for breach of duty to inquire as to the authority of the accounting firm’s employee to present checks payable to the bank in exchange for cashier’s checks. The Court of Appeals ruled that (1) the bank had a common-law duty to inquire as to the authority of the firm’s employee, (2) the bank was not a holder in due course, and (3) the accounting firm did not have to prove that the bank knew the cashier’s check proceeds were being used for the personal benefit of the employee. The bank was found liable. The courts have been extremely anti-bank in cases involving this subject. In February 2001, a Court of Appeals stated: “Other courts have specifically found that the payment of a check by a payee bank to an unauthor- ized third party without inquiry by the bank is commercially unreasonable as a matter of law. In charity we will withhold characterizing such conduct as ‘abject stupidity’ and call it merely negligence of the grossest kind. The bank’s showing that other area banks, following identical procedures, would also have allowed payment of these checks cannot alone make those pro- cedures reasonable in contemplation of law. An entire industry may behave unreasonably. . . . If for the sake of efficiency banks feel that they must forgo these prudent safeguards, they should also appreciate that they must bear the losses that result as a cost of doing business.” In that case, the bank had an unin- sured loss of more than $503,000 as a direct result of the bank’s method of handling checks payable to the bank. The courts would have us believe that if a bank simply inquired as to the authority of an employee, the bank would not be liable. Unfortunately, this duty to inquire is something ambigu- security officer’s by-word Bank as Payee Exposes Bank to Loss Charles M. Towle, Senior Vice President, Kansas Bankers Surety Co.