When a customer with a personal deposit account at our bank seeks to cash a check made out to a trust account, our general policy is not to cash the check. Typically, the trust account is held at another bank, the customer is the trustee, and the check is made out to the “John Doe Trust,” or to “John Doe as Trustee for the John Doe Trust.” We also would not deposit a check made out to a trust or a trustee into the customer’s personal checking account. Customers frequently do not understand why we will not cash or deposit these checks since it is “their money and their trust.” Can you please advise what laws or rules support our policy?

There are two answers to your question. Your policy of not cashing and depositing these checks is supportable under the Uniform Commercial Code (UCC), but you also could be protected by the Fiduciary Obligations Act (FOA) when cashing or depositing them under certain conditions.

The UCC places a bank on notice of a potential breach of fiduciary duty whenever a trustee seeks to deposit a check made payable to a trust or payable to the trustee in their capacity as the trustee into their personal account. Under this rule, if the person to whom the fiduciary duty is owed alleges that the fiduciary breached their duty, your bank could be held liable to that person because it had knowledge that the fiduciary was not depositing the check into the trust’s account. Consequently, your bank justifiably may decline to cash or deposit a check that is made payable to a trust when your customer attempts to cash the check or deposit it into their personal account.

On the other hand, the Fiduciary Obligations Act (FOA) can shield your bank from liability when a trustee personally endorses and cashes checks made payable to a trust or deposits checks payable to the trust into their personal account. Generally, under the FOA, a bank will not be held liable for a trustee’s misuse of check proceeds unless the bank has actual knowledge of the fiduciary’s breach of duty to the trust. Moreover, a number of Illinois courts have held that this less stringent “actual knowledge” rule in the FOA preempts other state laws, including the UCC.

To be protected by the FOA, a bank must know that: (1) the person presenting the check is a fiduciary of the trust, and (2) the person is authorized to endorse checks on behalf of the trust. Since your customer’s trust account is held at another bank, we are assuming that you do not have documentation establishing facts that would enable you to meet this test. However, if you decide to change your policy and begin cashing and depositing these checks, we suggest obtaining a “certificate of trust” from your customer, which can establish these facts, and then we believe you can avail yourself of the FOA’s protections (assuming you have no actual knowledge of your customer misusing the check proceeds).

In sum, we believe you either should continue your policy of not cashing or depositing these checks, or alternatively, you should obtain a certificate of trust that establishes your customer is the trustee of the trust and is authorized to endorse checks on behalf of the trust (provided your bank has no actual knowledge that your customer is engaging in fraud).

For resources related to our guidance, please see:

Uniform Commercial Code, 810 ILCS 5/3-307(b)(2)(iii) (“If (i) an instrument is taken from a fiduciary for payment or collection or for value, (ii) the taker has knowledge of the fiduciary status of the fiduciary, and (iii) the represented person makes a claim to the instrument or its proceeds on the basis that the transaction of the fiduciary is a breach of fiduciary duty, the following rules apply: . . . 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.”)

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.”

Fiduciary Obligations Act, 760 ILCS 65/1 (“‘Fiduciary’ includes a trustee under any trust, . . . or any other person acting in a fiduciary capacity for any person, trust or estate.”)

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. . . . The Fiduciary Obligations Act also: ‘[R]elieves the bank of liability to the principal unless the bank has actual knowledge that the fiduciary is committing a breach of his obligation or the bank has knowledge of facts that its action in paying the check amounts to bad faith.’”)

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 for all claims arising from a bank’s honest interactions with fiduciaries.”)

Trust and Trustees Act, 760 ILCS 5/8.5(e) (“A recipient of a certification of trust may require the trustee to furnish copies of those excerpts from the original trust instrument and later amendments which designate the trustee and confer upon the trustee the power to act in the pending transaction.”)

Trust and Trustees Act, 760 ILCS 5/8.5(f) (“A person who acts in reliance upon a certification of trust without knowledge that the representations contained therein are incorrect is not liable to any person for so acting and may assume without inquiry the existence of the facts contained in the certification. . . .”)

Trust and Trustees Act, 760 ILCS 5/8.5(g) (“A person who in good faith enters into a transaction in reliance upon a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification were correct.”)

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.”)