A definitive answer to your question would require a review of the trust instrument, which could authorize the trustee to deposit trust funds into a personal account (though it is not common for a trust to specifically authorize this practice). It is possible that the trustee’s actions are appropriate, depending on the circumstances, but there is also a risk that the trustee is not meeting the trust’s obligations by commingling trust funds with personal funds, and possibly by defrauding other beneficiaries of the trust. In many cases a bank may not have access to an entire trust agreement to make a determination as to a trustee’s authority over trust funds, and there may be no signs indicating that a trustee is violating a fiduciary duty by depositing trust funds into his or her personal account.

However, due to a conflict between Illinois laws on this subject, we cannot determine whether a bank could incur any liability in allowing a trustee to deposit checks made out to the trust into his or her personal account. There are two, conflicting Illinois laws that govern whether a bank would be liable for a trustee’s (or any kind of fiduciary’s) fraud or other breach of duty:

• Under the Uniform Commercial Code (UCC) rule, whenever a fiduciary deposits a check made to the fiduciary’s business entity into an account that is not the business entity’s account (and is not an account of the fiduciary in his or her fiduciary capacity), the bank is on notice that the fiduciary is breaching his or her duty to the trust. 735 ILCS 5/3-307(b)(2)(iii). Under this rule, the bank may be liable for the fiduciary’s bad acts merely because the bank knows the fiduciary is not depositing the business’s checks into that business’s account.

• On the other hand, the Illinois Fiduciary Obligations Act states that a bank will not be liable for a fiduciary’s breach of duty in depositing an endorsed check, unless the bank took the check with “actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith.” 760 ILCS 65/9. Under this rule, the bank would not be liable for the fiduciary’s bad acts unless it actually knew the fiduciary was breaching his or her duty or taking the instrument in bad faith. However, the bank could be liable if it takes a check in payment for one of the fiduciary’s personal debts.

We are aware of several cases holding that the less-stringent rule from the Fiduciary Obligations Act preempts the stricter UCC rule. Mikrut v. First Bank of Oak Park, 359 Ill.App.3d 37, 48–49 (2005)County of Macon v. Edgcomb, 274 Ill.App.3d. 432, (4th Dist. 1995)Crawford Supply Grp., Inc. v. Bank of America, N.A., 2010 WL 320299 at *9, n. 5 (N.D. Ill. Jan. 21, 2010)Beedie v. Associated Bank Ill., N.A. (C.D. Ill. June 21 2011). However, at least one case cited to the stricter UCC standard as evidence of a bank’s bad faith in allowing a bookkeeper to use her employer’s funds to pay off her personal loans at the bank. Falk v. Northern Trust Co., 327 Ill.App.3d 101 (1st Dist. 2001). Another case applied both the UCC and the Fiduciary Obligations Act to other fiduciary situations, without stating whether one law trumps the other (likely because the bank was not liable under either law, and thus the question of whether one law trumps the other did not affect the case’s outcome). Mutual Service Casualty Insurance v. Elizabeth State Bank, 265 F.3d 601 (7th Cir. 2001).

Clearly, there is still some ambiguity in this area of law, and we recommend consulting with bank counsel before making or changing the bank’s trust account policies.