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Check Payable to Co. Deposited Into Personal

Question: 
Bank A issues a cashier's check for $25,000 payable to Smith Jones Construction. Bank B accepts the check for photo deposit into Mr. Jones' personal, private account indorsed with only his single signature. The cashier's check is never endorsed in the name of the payee company. Bank A then accepts the check from Bank B. Mr. Jones quickly withdraws the money from Bank B and misappropriates the funds. The business itself never gets paid. If it matters, this is in Ohio. What banking errors were made here and by whom? The business is asking for recourse.
Answer: 

by John Burnett:

What banking errors? First, Bank B erred in accepting the check without indorsement by Smith Jones Construction. It also erred in accepting it for deposit into Jones' personal account unless Smith Jones Construction happens to be a sole proprietorship owned by Mr. Jones (a highly unlikely circumstance, since most construction companies are LLCs or corporations to insulate their owners from liability).

Bank A had a right to refuse payment on the cashier's check when it was presented for payment without the appropriate indorsement.

Answer: 

by Jim Bedsole:

And as I understand it, Bank A had a right to refuse payment, but not an OBLIGATION to refuse payment based on incorrect indorsement. Bank B is likely to have some liability exposure to the construction company, but I don't think Bank A will.

Answer: 

by Randy Carey:

Bank B is ultimately liable.

The depository bank is ultimately liable in the case of a forged or missing endorsement because of its warranty to the payor bank under section 4.208(a)(1).   A depository bank warrants to a payor bank to which a missing endorsement check is presented for payment that it was entitled to enforce the draft on behalf of a person entitled to enforce the draft.   Thus, a depository bank is liable for conversion as a matter of law when it accepts for deposit into a third party's account checks that were not endorsed in the name of the payee.

First published on 04/29/2018

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