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"Is It Ok To Deposit Checks Payable To A Corporation Into A Personal Account?"
By Mary Beth Guard, Esq.

Liz and Richard inherited an antiques business, Old and Creaky, Inc., from Liz's dad. The business had done quite well, and under Richard's leadership, it grew to include several locations. Times were good and the stores were profitable.

Richard was President, CEO and Chairman. Liz was the bookkeeper. Nearly everyone in town knew the successful couple, and they were considered to be among Silly Bank's best customers. As far as most locals were concerned, Liz and Richard were the company. It was theirs. They inherited it. They ran it. They were responsible for its success.

One day, Richard brought a check into the bank that was made payable to Old and Creaky, Inc., from a customer who had purchased a complete Louis XIV bedroom suite. The corporation's rubber stamp signature appeared on the back, but when the teller looked closely at the transaction she noted that the deposit slip was for Richard's personal account, rather than the corporation's. Thinking he must have simply grabbed the wrong deposit slip, she spoke right up, telling him he needed the corporation's deposit slip to properly deposit the check into the corporate account.

Richard didn't want to deposit the check into Old and Creaky's account, however. He fully intended for the funds to go into his joint account with Liz. The teller politely, but firmly, informed Richard that he could not deposit a check made payable to a corporation into an account other than the corporation's account.

That was not what Richard wanted to hear.

"I own this company," he bellowed. "This is my money! Don't you know who I am? I am the President, CEO and Chairman of this company. If I want these funds to go into my own account, you'd better put them into my account. And if you don't - I'll pull my accounts from this bank so fast it will make your head spin, and we'll see how long you keep your job after that!"

Just about that time, Eddie, one of the loan officers, was passing by. He heard the commotion and went over to try to calm the bank's good customer. When he learned the details of the controversy, he shook his head and chided the teller. "This is our good customer Richard. If Richard wants to deposit this check into his joint account, let him".

Not knowing what else to do or say, the teller complied.

Over the next few years, Richard deposited many of the corporation's checks into his personal accounts, despite the objections raised by Silly Bank's tellers. After a while, they even began to feel comfortable with the arrangement. After all, the world hadn't come to an end just because a few checks of the corporation went into other accounts. Besides, since Richard and Liz were the majority owners of the company, the money was really theirs, wasn't it? Who was this really hurting?

Richard, as it turns out, didn't know his Art Deco from his Early American. The antiques business fell apart and its creditors forced it into bankruptcy. A trustee was appointed to liquidate the corporation's assets to satisfy claims against the company.

The trustee was a thorough man. When he investigated the company's assets, he became perplexed. Comparing the records of the company's purchases of antiques against actual inventory and sales proceeds, he soon found nothing added up.

Digging deeper, he learned why. Corporate funds had been diverted to the personal coffers of Liz and Richard, to the detriment of the corporation's creditors. The couple had spent the money long ago, so suing them to get it back would have proven fruitless.

The trustee did the next best thing: he sued the bank!

The bank lost. After all, the bank was deemed to be on notice of breach of fiduciary duty under UCC 3-307 when Richard, the corporate officer, took checks made payable to the corporation - to whom he owed a fiduciary duty - and deposited them in his personal account, or cashed them for his personal benefit. In addition, the bank's actions were contrary to generally accepted banking practices, since that is to require checks made payable to a corporation to be deposited into the corporation's account. Not only that, the bank's own policies and procedures prohibited precisely the conduct the bank had engaged in! The trustee was able to recover, in the lawsuit against the bank, the full amount of the corporate checks that the bank had allowed to be wrongly deposited in the CEO's personal account. Could it get any worse than that?!?

Well, yes, actually it could. When the bank then attempted to seek reimbursement from its insurer for this loss, the insurer refused to pay, and the court upheld the insurer's refusal, saying the insurer had a right to expect the bank would follow its own policies and procedures and would adhere to generally accepted banking practices and its failure to do so negated the insurer's liability on the claim.

Sometimes, when a customer threatens to pull his accounts and leave the bank, it's best to wave goodbye and let them walk. It's always good, however, to insist that checks payable to a corporation must be deposited to the corporate account.

Copyright © 2000 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 10, No. 6, 2/00

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