We are not aware of any statute or regulation that prohibits this practice, but your bank could incur some risk if the owner does not have the authority to endorse and cash checks made payable to the corporation. Without evidence of this authority, the bank could be liable to the corporation under any number of scenarios where the owner improperly endorsed and cashed the corporation’s checks.
Generally, under the Illinois Fiduciary Obligations Act, a bank incurs no liability when a person acting as a fiduciary of a corporation endorses and cashes checks made payable to the corporation. The fact that the person is acting as a fiduciary ordinarily is evidenced by a board resolution or other acceptable corporate document granting the person the authority to endorse and cash the corporation’s checks (merely listing the person as an authorized signer on the account is insufficient). Your bank only would be liable for such a fiduciary’s misuse of check proceeds if it exercised bad faith or had actual knowledge of the fiduciary’s breach of a duty to the corporation. (Notably, the UCC imposes a more stringent liability standard for banks, but several Illinois courts have held that the less-stringent “actual knowledge” rule in the Fiduciary Obligations Act governs in these situations.)
Consequently, we would recommend that you require the owner to provide a corporate resolution granting him or her the authority to endorse and cash checks made payable to the company.
For resources related to our guidance, please see:
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Fiduciary Obligations Act, 760 ILCS 65/1 (“‘Fiduciary’ includes a . . . partner, agent, officer of a corporation, public or private . . . or any other person acting in a fiduciary capacity for any person, trust or estate.”)
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Fiduciary Obligations Act, 760 ILCS 65/2 (“A person who in good faith pays or transfers to a fiduciary any money or other property which the fiduciary as such is authorized to receive, is not responsible for the proper application thereof by the fiduciary . . . .”)
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Fiduciary Obligations Act, 760 ILCS 65/8 (“If a check is drawn upon the account of his principal in a bank by a fiduciary who is empowered to draw checks upon his principal’s account, the bank is authorized to pay such check without being liable to the principal, unless the bank pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in drawing such check, or with knowledge of such facts that its action in paying the check amounts to bad faith.”)
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St. Stephen’s Evangelical Lutheran Church v. Seaway Nat. Bank, 350 N.E.2d 128, 131 (1st Dist. 1976) (“There is no difference in substance between a payee bank crediting a check to the fiduciary’s personal account and then permitting the fiduciary to draw on that account . . . and paying the proceeds of the check in cash to the fiduciary . . . .”)
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Beedie v. Associated Bank Illinois, N.A., 10-CV-1351, 2011 WL 2460959, at *3 (C.D. Ill. June 21, 2011) (“The purpose of the IOFA is to facilitate banking and financial transactions and to shift the burden of employing honest fiduciaries to the principal and away from the banking institution. The statute is meant to limit liability to relatively uncommon cases in which the person who deals with the fiduciary knows all the relevant facts. The IFOA thus relieves banks of negligence liability and provides a defense for banks accused by principals of improper dealings with fiduciaries. Section 9 of the IFOA 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. Simply put, under Illinois law the IFOA provides a blanket defense to suit, exculpating banks from liability any time its provisions apply.”) (internal citations omitted)
- National Bank of Monticello v. Quinn, 126 Ill.2d 129, 137 (1988) (“Is the indorsement of a general partner who is a listed signatory on the partnership’s bank signature card without more sufficient to establish an authority to deal with a check in any manner he so chooses? We answer that question in the negative. . . . [a business owner’s] failure to indorse the check in a manner which indicated the named payee [which was the business], followed by deposit into his personal account, is fatal to the bank’s denial of liability.”)