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Commercial Banking

Banking Law

Customer Permitted to Proceed on Claim Against Bank for Violation of Common Law Duty of Care Jan-Feb-03

                       The Illinois Appellate Court held that a Chicago bank that permitted unauthorized checks to be deposited into an account at the same bank could be liable to the maker of the checks, when the circumstances were such that the bank’s actions violated its duty of care to its customer.  This case makes it clear that banks must be vigilant for possible embezzlement and fraud involving their customers’ accounts.

                        The controller of a corporation was not authorized to sign checks on behalf of his employer (“Company”).  Nevertheless, the controller prepared a number of checks payable to the bank – purportedly to pay withholding taxes – which he deposited at ATMs with deposit slips for credit to his personal account at the same bank.  The deposits ultimately totaled approximately $400,000.  The bank was unaware of the controller’s scheme until the IRS alerted the bank in the course of an IRS investigation of the controller.  Needless to say, the controller and the money had disappeared.


                        The Company sued the bank to recover the embezzled funds, claiming the bank breached its contractual obligation to use due care to make certain the checks payable to the bank were properly applied. The bank asserted two defenses.  First, the bank claimed that the bank had no duty to inquire as to the propriety of crediting checks payable to the bank to a personal account.  The court rejected this argument, holding that the Uniform Commercial Code (the “Code”) did not give the bank any protection because the checks were actually deposited into an account at the bank.  (Had the bank simply been the payor bank, the bank could have asserted this defense successfully.)  The court found that the Code does not protect a bank against its own negligence in handling its depositors’ accounts.

                       The bank also contended that the Illinois Fiduciary Obligations Act (the “Act”) protected the bank if it did not have knowledge of the fraud.  However, the court held that the Act does not provide a defense if the bank paid the check with actual knowledge of the breach by the fiduciary (in this case, the controller) or if the bank had sufficient knowledge of such facts that its failure to act amounts to bad faith on the part of the bank.  Thus, the bank was not permitted to rely on the Act to insulate it from the Company’s claim that the bank should have advised the Company that the controller was depositing checks payable to the bank into the his personal account.

Attorney to Contact

• Jerome F. Crotty
• Douglas C. Conover