I recently read a case summary, Melley v. Pioneer American Bank (23 Fidcu. Rep.2d 200 - Phila. Civil Div.), where a mother deposited into her personal checking account, wrongful death and survival action settlement checks for two minors. The face of the checks indicated that she held the funds as guardian of the minors (her daughters).

The court held the bank liable for the loss to the minors because the teller was on sufficient notice (based on the face of the checks) that funds deposited were fiduciary funds. Therefore the funds should not have been deposited into a personal checking account. Furthermore, the court stated that the teller had a duty to contact the attorney who issued the checks.

If a bank has a duty to contact a third party in investigating potential fraud, how can a bank successfully obtain the information when the third party may be unwilling or unable to provide it due to the frenzy surrounding the privacy and customer data protection rules?

Also, I just became aware of a situation where a customer is depositing checks, payable to another individual, into his business account. This customer, who is an investment advisor, purportedly has POA over the individual. We do not have a POA document. Even if we did, wouldn't this situation be similar to the court case? If so, wouldn’t we have a duty to investigate?

The checks should have been deposited to an account as drawn (fiduciary account), after securing documentation to support the opening of a fiduciary account - reviewing restrictions, etc. If you cannot secure documentation, etc. simply don't open the account until you do.

Checks payable to a business such as a corporation must be deposited to the corporate account. You should not allow anyone the deposit checks payable to a business, non-corporate entity, to another account unless you have documentation on file (POA, etc.). You are really at risk in the situation that is outlined.

Thanks for your response TENACIOUS. But, for you or others, what are your thoughts on the court's mandate that a bank should obtain information from a third party, and in the process, notify that third party of a potential fraud?

The court seems to be simply stating the obvious - based on the way the check is drawn, it needs to be negotiated with that in mind - in this case to a trust type account for the benefit of the children. If that is not "happening" at the teller line, someone should step in to assure that it does happen or the check would not be negotiated. If you don't negotiate the check, no notice to anyone is required - if you negotiate the check and it is completed correctly, no notice to anyone is required. The point is that you have no idea whether or not a fraud is involved, so why would you report it? You're obligation is to secure the documentation to support negotiating the check.

I agree with you that the check should be properly negotiated. This of course would alleviate any need to further investigate an issue like this. Unfortunately, CSRs and tellers make errors and may become too busy to ask for a POA document or consider the payee before deposit. I am not making any excuses, I just know it happens.

Regarding your comment about whether or not we know a fraud is involved, I understand that a teller may not know that a fraud is occurring. However, it appears the court is saying that if a bank employee has an inkling that something is not right, the employee must investigate to determine whether or not there is a likelihood of fraud. And, that investigation should involve the contacting of the maker of the check when a check deposit is involved. Of course if the situation rises to a “suspicious transaction”, an SAR must be filed.

To me, it seems like a bank employee is damned if he/she contacts the maker, because of privacy issues, and damned if he/she does not because of the court’s mandate to investigate.

I won't agree that the teller had a duty to inquire of the third party. But I do agree that the bank did. The teller ought to have realized something wasn't right (training issue), and kicked the transaction upstairs to someone equipped to handle it. The teller clearly doesn't have the time or expertise to deal at the level needed to obtain the needed background information/documentation in this instance.

There may have been other mitigating arguments that could have been raised on the bank's behalf. I'm not an attorney and won't second-guess the bank's counsel on that question.