IBA Compliance Connection

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A customer brought a check to our bank for deposit that was payable to “Jane, as custodian for her minor son, John, until age 21.” Jane requested that the check be deposited into her personal account, and she endorsed the check with her name. Jane does not have a custodial account at our bank, and John does not have a deposit account. Also, John is 22 years old. Should we have deposited the check, or should we have requested that the customer obtain a replacement check from the drawer?

Oct 5, 2018

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We believe that your bank should have asked the customer to obtain a replacement check from the drawer in this scenario.

Under the Uniform Commercial Code, your bank warranted that there were no missing indorsements when it forwarded the check to the payor bank for payment. The same presentment warranty also applied when your customer deposited the check at your bank.

Here, we believe that your bank (and the customer) breached these warranties by forwarding the check without the custodian’s endorsement as custodian. The issuer of the check authorized payment to the custodian of the account, not to Jane in her individual capacity. Consequently, Jane’s endorsement on the check in her individual capacity likely is ineffective under the UCC, and the payor bank may bring a claim for breach of a presentment warranty against your bank.

For resources related to our guidance, please see:

UCC, 810 ILCS 5/3-417(a)(1) and 810 ILCS 5/4-208(a)(1) (“Presentment warranties. (a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that: (1) the warrantor is or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft. . . .”)

UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)

Continental Cas. Co., Inc. v. Am. Nat. Bank and Trust Co., 329 Ill.App.3d 686, 698 (1st Dist. 2002) (“[W]hen a bank makes an improper payment . . . the drawer can bring an action for improper payment under section 4-401(a) and have its account recredited.”)