Losses On Deposits

An important decision regarding attorneys' endorsements was handed down recently in the state of Georgia.

Attorneys often deposit checks into their attorney trust accounts that are made payable to the client AND to the attorney. Because there are two payees on the check, and only one of the payees (the attorney) is the customer of the financial institution, there is a risk in accepting both endorsements as being genuine. The acceptance of the deposit will depend on how well the attorney is known to the institution. (There's "Know Your Customer" again!)

In the case in Georgia, the check for $320,000 was payable to the client and to the attorney. The attorney endorsed the check with both his name and his client's-without the client's knowledge or permission.

Shortly after that the attorney committed suicide. The balance in his attorney trust account was $55,717.

The client (the other payee on the check) sued the financial institution for $320,000, under the charge of forged endorsement.

The court in Georgia found in her favor, and awarded her the $320,000, which the financial institution had to pay.

Important decision
The reason this decision is important is because the financial institution held that it had acted in "a commercially responsible manner" under the Uniform Commercial Code (UCC).

According to the court decision, the UCC contains no special exception for attorneys. Therefore, an attorney's endorsement without authority has the same legal operation as a forgery.

There can be state laws that apply to an endorsement situation such as this, but even taking those into consideration, the new UCC puts a great deal of liability on the "party best able to stop the loss." That would be the financial institution that accepts the deposit and has the opportunity to examine the endorsement.

One of the most difficult parts of training in this industry is for people to understand how the financial institution can lose money through the acceptance of deposits.

The preceding is a good illustration of that point.

Copyright © 1995 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 5, No. 11, 8/95