We have a collection company customer that uses its own endorsement stamp to deposit checks made out to companies on whose behalf it is pursuing collections. The customer claims that getting endorsements from their clients would be too onerous due to the high volume of checks they handle. Instead, they say they have “agency agreements” with all of their clients giving them the necessary authority to deposit these checks. However, they are unwilling to share copies of these agreements with us. Could we face any liability for allowing this practice to continue?

Yes, we believe that allowing the practice described would put your bank at risk of liability for breach of its presentment warranties and conversion under the Illinois Uniform Commercial Code (UCC).

Under the Illinois UCC, your bank could be liable to the payor bank for allowing your customer to deposit checks without a proper endorsement. When your bank presents a check to a payor bank for collection, your bank warrants that it is entitled to enforce the check, which “in effect is a warranty that there are no unauthorized or missing indorsements.” By allowing your customer to endorse checks on behalf of its clients, your bank would be putting itself at risk for a claim of a breach of its presentment warranties by the payor bank if the payee disputes the payment with their bank.

Further, a bank can be held liable for conversion under the Illinois UCC if it makes or obtains payment with respect to an instrument for a person not entitled to enforce the instrument or receive payment. By depositing a check into the account of someone other than the named payee without the payee’s endorsement, your bank also would be putting itself at risk for a claim of conversion by the payee if they dispute that they consented to the deposit.

You could avoid much of the risk of liability for conversion if the payees negotiated the checks to the collection company by endorsing the checks and transferring them back to the collection company. However, that may not be an option here, as the collection company has stated that getting its clients’ endorsements is too onerous. Additionally, the collection company has refused to provide copies of its agency agreements with you. In that case, whether to accept the checks and the accompanying risk of liability for conversion is a business decision.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/3-417(a)(1) and 810 ILCS 5/4-208(a)(1) (“Presentment warranties. (a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that: (1) the warrantor is or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft . . . .”)

UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)

Illinois UCC, 810 ILCS 5/3-420(a) (“The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.“)

Illinois UCC, 810 ILCS 5/3-204(a) (“‘Indorsement’ means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser’s liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.“)

Illinois UCC, 810 ILCS 5/3-205 (“(a) If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a ‘special indorsement’. When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person. The principles stated in Section 3-110 apply to special indorsements.
(b) If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a ‘blank indorsement’. When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed. . . .“)