IBA Compliance Connection

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When a customer withdraws funds by check, we require that the check be made payable to “cash” or to the individual who is withdrawing the funds, but we won’t cash a check made payable to our bank’s name (except for loan repayments and safe deposit box payments). Do you have any guidance to support why our policy is appropriate?

Mar 26, 2018

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Yes, Illinois law supports your bank’s policy regarding checks that are made payable to the bank. Under Illinois law, if a check is made payable to a bank and is presented to that bank, Illinois courts have found that the bank has a duty to negotiate the check according to the account owner’s wishes (because the check is made payable to the bank, the check is not a negotiable instrument until the bank itself endorses the check). Consequently, the bank would be taking a risk when cashing a check made payable to the bank without confirming that person’s authority to receive payment on the check. Your policy mitigates that risk by requiring checks to be made payable to the presenter (or to cash).

On the other hand, if the account owner owes your bank a debt, such as in the two examples you provided, then it is appropriate for the check to be made payable to your bank to satisfy the debt.

For resources related to our guidance, please see:

Mutual Service Cas. Ins. v. Elizabeth State Bank, 265 F. 3d 601, 613–614 (7th Cir. 2001) (“Put another way, when a drawer owes nothing to a bank but writes a check payable to the bank’s order, the drawer places that check in the bank’s custody, with the expectation that the bank will negotiate the check according to the drawer’s wishes; the bank may not, therefore, treat the check as bearer paper and blindly disburse the proceeds according to the instructions of any individual who happens to present the check to the bank”).

Continental Cas. Co., Inc. v. Am. Nat. Bank and Trust Co., 329 Ill.App.3d 686, 698 (1st Dist. 2002) (“[W]hen a bank makes an improper payment . . . the drawer can bring an action for improper payment under section 4–401(a) and have its account recredited.”)

Illinois UCC, 810 ILCS 5/4-401(a) (“A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.”)