In addition to our usual disclaimer (that we cannot provide legal advice), we note that the rules described below would apply only when an authorized signer deposits business checks into a personal account. In other situations (for example, where the authorized signer uses business checks to pay personal debts), other rules will apply.

While there is some conflicting law in this area, a bank generally will not be liable for allowing a business owner who is an authorized signer for a business to endorse the business’s checks and deposit them into a personal account. However, it is important that the bank obtain a resolution or other agreement from the business showing that the individual is the authorized signer for the business who has the power to endorse the checks — as we explain below, a signature card signed by the authorized signer may not be sufficient to establish his authority. If the business is a sole proprietorship, it does not have a legal status separate from the owner. If the business is a corporation, partnership, limited liability company (LLC), or any other kind of business entity, we would recommend obtaining a resolution signed by the officers of the company authorizing the individual to endorse the business entity’s checks. See IRS Publication 583, Starting a Business and Keeping Records, Forms of Businesses.

Once the bank has established and documented that an individual is the authorized signer for a business accounts, there are some narrow situations in which the bank may be liable for the wrongdoing of the authorized signer. Of course, the authorized signer may have legitimate reasons for depositing checks into his personal account (for example, because he is entitled to receive payment for salary, expenses, and so on). See County of Macon v. Edgcomb, 274 Ill. App. 3d 432, 436 (4th Dist. 1995). However, the authorized signer may be trying to defraud or embezzle from the business. If so, the business could sue the bank recover any checks paid to the authorized signer in certain situations:

• The Illinois Fiduciary Obligations Act states that “[n]otwithstanding any other law, if a fiduciary [the authorized signer] makes a deposit in a bank to his personal credit  . . . of checks payable to his principal [the business] 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 . . . .” 760 ILCS 65/9.

• Essentially, the bank is liable only if a bank employee knows that the individual is defrauding the business or if the employee “deliberately refrains from investigating” to avoid knowledge of the fraud. Mikrut v. First Bank of Oak Park, 359 Ill.App.3d 37 (1st Dist. 2005).

• Merely having the signature of the authorized signer on a signature card is not enough to establish that the individual is “empowered to indorse such checks.” The bank should also obtain a corporate resolution or other appropriate documentation that the business has given the individual signature authority for the business’s accounts. National Bank of Monticello v. Quinn, 126 Ill.2d 129, 137 (1988).

• We note that the Uniform Commercial Code (UCC) has a stricter rule, which states that whenever a fiduciary deposits a check made to the fiduciary’s business entity into an account that is not the business entity’s account (and is not an account of the fiduciary in his or her fiduciary capacity), the bank is on notice that the fiduciary is breaching his or her duty to the business. 810 ILCS 5/3-307(b)(2)(iii). Under this rule, the bank may be liable for the fiduciary’s bad acts merely because the bank knows the fiduciary is not depositing the business’s checks into that business’s account.

• However, several cases in Illinois have held that that the less-stringent rule from the Fiduciary Obligations Act would govern, rather than the strict UCC rule. Mikrut v. First Bank of Oak Park, 359 Ill.App.3d 37 (1st Dist. 2005); Crawford Supply Grp., Inc. v. Bank of America, N.A., 2010 WL 320299 at *9, n. 5 (N.D. Ill. Jan. 21, 2010)Beedie v. Associated Bank Ill., N.A. (C.D. Ill. June 21 2011).

• Further, Section 9 of the Fiduciary Obligations Act states that it applies “notwithstanding any other law.” Therefore, we believe that the Fiduciary Obligations Act rule would trump the UCC rules governing the bank’s responsibility for the authorized signer’s actions.