Pub. 11 2014 Issue 4

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S 14 NMBA Associate Member BANK AS PAYEE EXPOSES BANK TO LOSS By Charles M. Towle Senior Vice President, Kansas Bankers Surety Co. SECURITY OFFICER’S BY-WORD There are two things to consider. First, banks have experienced substantial losses (often uninsured losses) when they took checks payable to the bank and allowed such checks to be deposited into an ac- count of someone other than the maker of the checks. The Uniform Commercial Code §3-307 (b)(2) specifically states that a bank can be held liable for repayment of the amount to the business if an employee of the business delivers a check payable to the bank and the bank allows such check to be deposited into any account other than the business’s own account. This same law also applies when any person presents a check payable to the bank on behalf of another individual and deposits such check to an account of anyone other than the maker of the check. Second, other banks have experienced H ow do your tel lers handle checks made payable to the bank as payee? Can the check be deposited to some individual’s account? Can the check be cashed? Can the check be used to purchase a cashier’s check? If you answered “yes” to any of these questions, your bank could face a large loss. substantial losses (often uninsured losses) when they took checks payable to the bank in exchange for cash or cashier’s checks given back to an employee of a business. In numerous cases where the business lat- er claimed the employee misappropriated the funds, the courts found that the bank was liable for repayment of the amounts to the business. The following is one of many examples of court rulings on the subject. In the 1998 case of Dalton & Mayberry vs. Nations- Bank, an accounting firm filed an action against the bank for breach of duty to in- quire as to the authority of the accounting firm’s employee to present checks payable to the bank in exchange for cashier’s checks. The Court of Appeals ruled that (1) the bank had a common-law duty to inquire as to the authority of the firm's employee, (2) the bank was not a holder in due course and (3) the accounting firmdid not have to prove that the bank knew the cashier's check proceeds were being used for the personal benefit of the employee. The bank was found liable. The courts have been extremely an- ti-bank in cases involving this subject. In February 2001, a Court of Appeals stated: "Other courts have specifically found that the payment of a check by a payee bank to an unauthorized third party without inquiry by the bank is commercially un- reasonable as a matter of law. In charity we will with hold characterizing such conduct as 'abject stupidity' and call it merely negligence of the grossest kind. The bank's showing that other area banks, following identical procedures, would also have allowed payment of these checks cannot alone make those procedures reasonable in contemplation of law. An entire industrymay behave unreasonably. ... If for the sake of efficiency banks feel that they must forgo these prudent safe- guards, they should also appreciate that they must bear the losses that result as a cost of doing business." In that case, the bank had an uninsured loss of over $503,000 as a direct result of the bank’s method of handling checks payable to the bank. The courts would have us believe that if a bank simply inquired as to the authority of an employee, the bank would not be liable. Unfortunately, this duty to inquire