When a customer presents a check made out to “John Doe, Successor Trustee,” can John Doe endorse the check and deposit it into his personal account? The check does not identify a specific trust, but since it refers to a “Successor Trustee” does it identify a fiduciary role and indicate that it should be deposited into a trust account? The customer stated it is a distribution payable to him, not the trust.

Yes, we believe that John Doe may endorse a check payable to himself as trustee and deposit it into his personal account, and your bank would likely be protected from any potential resulting liability under the Fiduciary Obligations Act (FOA).

The FOA generally shields banks from potential liability that may result from allowing a trustee to deposit checks payable to that individual as trustee into a personal account. A bank will be liable for a trustee’s misuse of check proceeds only if it has actual knowledge of a breach of fiduciary duty or is acting in bad faith.

To confirm that the FOA is applicable, your bank should verify that John Doe is a trustee of the trust with authorization to endorse checks on the trust’s behalf. You could ask the trustee to fill out and sign a Certification of Trust form to establish these facts. Additionally, it does not appear that your bank has actual knowledge of a breach of the trustee’s fiduciary duty, since the trustee may have legitimate reasons for depositing this check into a personal account (for example, if the check was issued by the trust as reasonable compensation to the trustee).

The FOA expressly preempts other law, and a number of Illinois courts have held that the FOA’s less-stringent “actual knowledge” rule preempts other state laws, including the Uniform Commercial Code (UCC) (which otherwise would subject banks to potential liability for allowing fiduciaries to deposit trust-related checks into personal accounts). However, if your bank wishes to do so, you may also justifiably decline to deposit the check under the relevant UCC provisions.

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 him as fiduciary . . . 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, 49–50 (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 (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.’”)

Beedie v. Associated Bank Ill., N.A., 2011 WL 2460959 (C.D. Ill. 2011) (“The Illinois Courts have defined ‘actual knowledge’ as an ‘awareness at the moment of the transaction that its fiduciary is defrauding the principal’ and as ‘having express factual information that funds are being used for private purposes that violate the fiduciary relationship.’”)

Beedie v. Associated Bank Ill., N.A., 2011 WL 2460959 (C.D. Ill. 2011) (“Illinois courts have fleshed out the definition of bad faith by explaining that it includes situations ‘where the bank suspects the fiduciary is acting improperly and deliberately refrains from investigating in order that the bank may avoid knowledge that the fiduciary is acting improperly.’ When determining whether bad faith exists, courts consider whether it is ‘commercially unjustifiable for the payee to disregard and refuse to learn facts readily available.’ At some point obvious circumstances become so cogent that it is ‘bad faith’ to remain passive.”)

Illinois Trust Code, 760 ILCS 3/1013(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 that designate the trustee and confer upon the trustee the power to act in the pending transaction.”)

Illinois Trust Code, 760 ILCS 3/1013(f) (“A person who acts in reliance upon a certification of trust without actual 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. . . .”)

Illinois Trust Code, 760 ILCS 3/1013(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.”)

Illinois Trust Code, 760 ILCS 3/708(a) (“If the trust instrument does not specify the trustee’s compensation, a trustee is entitled to compensation that is reasonable under the circumstances.”)

UCC, 810 ILCS 5/3-307(b) (“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: . . . (2) In the case of an instrument payable to the represented person or the fiduciary, as such, 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.”)

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.”)