IBA Compliance Connection

Your go to source for compliance!

We have a deposit account customer, XYZ Co., that ordered checks through a third-party vendor with the name “ABC Co.” printed on the checks. Our understanding is that both of these corporations share the same ownership. What is our bank’s liability for paying these checks? Should we refuse to pay checks printed with the incorrect drawer name? Does the drawer name on a check convey ownership?

—

by

admin

We do not recommend paying checks drawn on the account of a customer when the drawer identified on the check is not the account holder.

Generally, a bank is required to pay an item that is properly payable, unless the payment would result in an overdraft. A check is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank. The UCC defines a “drawer” as “a person who signs or is identified in a draft as a person ordering payment.”

Here, it would be difficult for your bank to determine whether these checks are properly payable, because the actual drawer’s name (XYZ Co.) differs from the name that appears on the check (ABC Co.). In fact, under the UCC definition of “drawer,” these checks appear to have two different drawers — the person signing the checks, XYZ Co., and the person identified on the checks, ABC Co. Additionally, your bank would have to train its staff to remember that it must use XYZ Co.’s signature card to confirm the identity and signature of the authorized signer for checks that come in under ABC Co.’s name, which could be unworkable and ripe with potential for errors.

Given the potential for confusion and claims that these checks were not properly authorized, your bank may wish to direct its customer to have new checks printed listing the account owner as the drawer.

Also, we note that obtaining checks with ABC Co. identified as the drawer for an account owned by XYZ Co. is not sufficient to convey ownership of the account to ABC Co.

For resources related to our guidance, please see:

  • 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.”)
  • UCC, 810 ILCS 5/4-402(a) (“Except as otherwise provided in this Article, a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it had agreed to pay the overdraft.”)
  • UCC, 810 ILCS 5/3-103(a)(3) (“‘Drawer’ means a person who signs or is identified in a draft as a person ordering payment.”)