One of our customers is a college that has offered their students the ability to have checks issued to them from the college (for Covid relief, fee refunds, etc.) to be applied to their outstanding tuition balance, instead of the students depositing the checks. Students are required to complete a form that they return to the college if they elect to do this. If we receive a copy of this completed form signed by the student, can we accept and redeposit these checks into the college’s account so that the college can credit the student’s tuition?

Sep 17, 2021

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We believe that allowing the practice described would put your bank at risk of liability for conversion under the Illinois Uniform Commercial Code (UCC). Whether that is an acceptable risk to your institution is a business decision.

Under the Illinois UCC, a bank can be held liable for conversion if it makes or obtains payment with respect to an instrument for a person not entitled to enforce the instrument or receive payment. By depositing a check into the account of someone other than the named payee without the payee’s endorsement, your bank would be putting itself at risk for a claim of conversion if the student payee disputes that they consented to this practice.

Additionally, whether your bank could effectively defend itself by shifting the risk of liability onto the college for the described practice is questionable. The Northern District of Illinois has held that conversion under the Illinois UCC is an intentional tort that defendants are not allowed to seek contribution for, though Illinois courts seem to be conflicted as to whether a party may agree to indemnify another for an intentional tort.

You might note that the college could unilaterally apply any amounts due to students to a student’s tuition balance after obtaining their consent. This would avoid the need for the college to issue any checks at all.

If a check must be issued, you could avoid much of the risk of liability for conversion if the student payees negotiated the checks to the college by endorsing the checks and transferring them back to the college. As the described form would require the student’s signature anyway, the college could also have the students endorse the relevant checks and transfer them back at the same time so that they can be applied to their tuition balance.

For resources related to our guidance, please see:

Illinois 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.”)

Lawyers Title Ins. Corp. v. Dearborn Title Corp., 904 F.Supp. 818, 821 (N.D. Ill. 1995) (“In Illinois, a defendant sued for an intentional tort may not assert a claim for contribution. . . . First Midwest may similarly not pursue contribution for its liability based on Lawyers Title’s conversion claim. Lawyers Title asserts a statutory conversion claim, based on section 420 of the UCC, codified in Illinois as 810 ILCS 5/3-420. First Midwest argues that because the UCC does not mention mens rea, conversion under the UCC is not an intentional tort. I disagree. The common law tort of conversion is an intentional tort. The UCC codified the common law of conversion. First Midwest may not seek contribution for its violation of the UCC.”)

Mollfulleda v. Phillips, 882 F.Supp. 689, 696 (N.D. Ill. 1994) (“Phillips argues that, as a matter of law, the Bally Defendants’ claims must be dismissed because an intentional tortfeasor is not entitled to contribution or indemnity for that tortfeasors intentional torts. Defendant Phillips correctly states the law. An intentional tortfeasor may not seek a contribution for its intentional torts. . . . Accordingly, to the extent that Plaintiff’s First Amended Complaint seeks damages for the intentional torts of the Bally Defendants, they are not entitled to a contribution.”)

Smith v. Village of Norridge, 2008 WL 697352 (N.D. Ill. 2008) (“Finally, the Illinois Supreme Court has specifically rejected the argument that an agreement to indemnify a party for intentional torts is void as against public policy. . . .”)

Illinois UCC, 810 ILCS 5/3-204(a) (“‘Indorsement’ means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser’s liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.”)

Illinois UCC, 810 ILCS 5/3-205 (“(a) If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a ‘special indorsement’. When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person. The principles stated in Section 3-110 apply to special indorsements.
(b) If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a ‘blank indorsement’. When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed. . . .”)