IBA Compliance Connection

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We have a consumer deposit account with an authorized signer. The authorized signer endorsed and cashed a check that was payable to the authorized signer (not to the account owner) using this account. The authorized signer signed the back of the check, without specifically endorsing it to the account owner. If the check is returned to us for insufficient funds, under a stop payment order, or another reason, can we charge the check amount back to the account, even though the authorized signer is not the account owner? Our account agreement states that the account owner “is responsible for any transactions of the authorized signer” and that we have no obligation to monitor account transactions to ensure that they are on the owner’s behalf.

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No, under this scenario, we do not believe that your bank could assess a returned check fee or setoff the returned check amount against the account associated with the authorized signer. In the situation described here, the check would have been made payable to the authorized signer and endorsed by the authorized signer, but it would not have been endorsed by the authorized signer on behalf of the account owner or deposited into the owner’s account (nor would the check be an on-us item drawn from the owner’s account). Essentially, your bank would be cashing a non-customer’s check as a courtesy based on your bank’s familiarity with the payee, with all the attendant risks.

Your bank would have a valid claim against the authorized signer for the amount of the dishonored check (provided that you provide notice to the authorized signer of the dishonor). By endorsing the check, the authorized signer would be liable for the returned check if it is dishonored.

For resources related to our guidance, please see:

  • Illinois Uniform Commercial Code, 810 ILCS 5/3-415(a) (“Subject to subsections (b), (c), and (d) and to Section 3-419(d), if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument . . . .”)
  • Illinois Uniform Commercial Code, 810 ILCS 5/3-415(c) (“If notice of dishonor of an instrument is required by Section 3-503 and notice of dishonor complying with that Section is not given to an indorser, the liability of the indorser under subsection (a) is discharged.”)
  • Illinois Uniform Commercial Code, 810 ILCS 5/3-503(a) (“The obligation of an indorser stated in Section 3-415(a) . . . may not be enforced unless (i) the indorser or drawer is given notice of dishonor of the instrument complying with this Section or (ii) notice of dishonor is excused under Section 3-504(b).”)