No, the bank is not likely to be held liable. The Fiduciary Obligations Act states that when a business owner (referred to as the “fiduciary”) deposits a check payable to a business in a personal deposit account, the bank will not be liable unless the bank acted in bad faith or knew of the owner’s breach of his or her fiduciary duty.

Commentary to the Uniform Fiduciaries Act, as cited in Illinois court cases, provides an example of bad faith: where the bank “suspects that the fiduciary is acting improperly and deliberately refrains from investigating in order that [it] may avoid knowledge that the fiduciary is acting improperly.” However, several Illinois courts have refused to impose a duty on depositary banks of seeing that funds are properly applied, even when a check is endorsed into the fiduciary’s personal account, in the absence of other facts that would give rise to a suspicion about the fiduciary’s activities. In an everyday situation where your institution has no reason to be suspicious of the business owner’s actions, the bank will not be liable.

The Fiduciary Obligations Act conflicts with the Uniform Commercial Code (UCC), which places a bank on notice of a potential breach of fiduciary duty whenever a business owner deposits a check payable to the business into an account that is not owned by the business. However, several Illinois courts have held that the less-stringent rule from the Fiduciary Obligations Act governs, as opposed to the UCC rule. Additionally, the Fiduciary Obligations Act states that it applies “notwithstanding any other law.”

Because the Fiduciary Obligations Act rule trumps the UCC rule, your institution will not be liable unless the bank has actual knowledge that the business owner is breaching obligations owed to the business or acts in bad faith.

For resources related to our guidance, please see:

• Fiduciary Obligations Act, 760 ILCS 65/9 (“Notwithstanding any other law, if a fiduciary makes a deposit in a bank to his personal credit  . . . of checks payable to his principal and indorsed by him, if he is empowered to indorse such checks . . . the bank receiving such deposit is not bound to inquire whether the fiduciary is committing thereby a breach of his obligation as fiduciary; and the bank is authorized to pay the amount of the deposit . . . without being liable to the principal, unless the bank receives the deposit or pays the check with actual knowledge that the fiduciary is committing a breach of his obligation . . . or with knowledge of such facts that its action in receiving the deposit or paying the check amounts to bad faith.”

• Uniform Fiduciaries Act § 6 Comment 7, cited by County of Macon v. Edgcomb, 274 Ill.App.3d 432, 436 (4th Dist. 1995) (“An example of bad faith is where the taker suspects that the fiduciary is acting improperly and deliberately refrains from investigating in order that he may avoid knowledge that the fiduciary is acting improperly.”)

• Mikrut v. First Bank of Oak Park, 359 Ill.App.3d 37, 49 (1st Dist. 2005) (“The [Fiduciary Obligations Act] relieves the depository bank of the duty of seeing that funds are properly applied. It becomes the principal’s burden to employ honest fiduciaries.”)

• Uniform Commercial Code, 810 ILCS 5/3-307(b)(2)(iii) (“In the case of an instrument payable to the represented person . . . the taker has notice of the breach of fiduciary duty if the instrument is . . . (iii) deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.”)

• Beedie v. Associated Bank Ill., N.A., 2011 WL 2460959, at 3 (C.D. Ill. 2011) (Section 9 of the Fiduciary Obligations Act “has been interpreted to have a preclusive effect thereby preempting other state law and establishing a total defense to banks . . . .”)