A customer who is the trustee of a trust received a grain elevator check made out to the trust, after they had already closed the trust’s account at our bank. Since we have the trust papers on file, can we issue cashier’s checks to the individual beneficiaries specified in the trust who should receive the funds? Also, should the check first be deposited into the trustee’s personal account, or can we deposit the check into our bank’s general ledger account? The parties involved have been customers for many years, and we are familiar with how the funds should be distributed.

We recommend depositing the check into the trustee’s personal account — after confirming that they are empowered to endorse checks made payable to the trust — then issuing cashier’s checks as the trustee directs and pays for with their personal funds.

The Fiduciary Obligations Act (FOA) generally shields banks from potential liability that may result from allowing a trustee to deposit checks payable to a trust into a personal account. Additionally, the fiduciary must be “empowered to indorse” checks payable to the trust. A bank will be liable for a trustee’s misuse of check proceeds only if it has actual knowledge that the fiduciary is committing a breach of their obligations or is acting in bad faith.

To verify that your customer is still the trustee of the trust with the power to endorse checks on the trust’s behalf, we recommend asking them 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 appears to have a legitimate reason for depositing the check into their personal account, since the trust account was recently closed, and they intend to request cashier’s checks made out to the beneficiaries of the trust.

The FOA expressly preempts other law, and several 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 his principal 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 as fiduciary . . . 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.”)

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.”)