Banks hate third-party checks and here's a case that explains why.
In B.D.G.S., Inc. v. Balio , a Washington State based corporation hired two New York gentlemen to manage a local warehouse. Their responsibilities included finding tenants and collecting rent (which was to be forwarded to B.D.G.S.).
Over the course of the parties' relationship, it became apparent that rent payments and other proceeds had been "misappropriated" and deposited into an account held by Beechgrove Warehouse Corporation (an entity formed by the two New Yorkers). With some variations, the rent checks (payable to B.D.G.S.) were endorsed as follows:
DBGS, Inc.Pay to the order ofBeechgrove WarehouseFor Deposit
After the discrepancies were uncovered, B.D.G.S. commenced suit to recover its monies and asserted a claim against Savings Bank of Utica (SBU) "for money had and received." Under this common-law theory, a bank is obligated to pay the proceeds of a check to the "true payee owner," and remains liable for such sums "in the absence of a valid endorsement."
In response to the lawsuit, SBU countered that state law -- the Uniform Commercial Code -- limited the bank's liability to such sums which remained under its control.* The problem with SBU's argument was that it concededly violated its own internal policy and "reasonable commercial standards" when it came to the handling of third-party checks.
After a jury trial, SBU was found liable for $1,152,933.83. Both the Appellate Division (Fourth Department) and Court of Appeals affirmed. As the state's highest court noted in its decision:
In this case, the record supports the affirmed findings that SBU's actions were not commercially reasonable. There was expert testimony concerning aspects of the transactions at issue that should have raised red flags for SBU. Further, there was testimony indicating that the bank did not comply with its own procedures for handling business checks. As a result, the Appellate Division properly determined that SBU did not act in accordance with reasonable commercial standards.
* * *
As noted above, section 3-419 (3) limits a depositary bank's liability on an action for money had and received only when the bank satisfies the statutory criteria — compliance with restrictive indorsements, good faith and acting in accordance with reasonable commercial standards. Since SBU did not satisfy all of the above criteria, because it did not act in conformity with reasonable commercial standards, the defense is unavailable and the bank's liability is not limited to the amount of the proceeds remaining in its possession.
Did someone yell ...
"JACKPOT!"
For a copy of the Court of Appeals's decision, please use the following link: B.D.G.S., Inc. v. Balio
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*UCC Section 3-419(3) provides as follows:
Subject to the provisions of this Act concerning restrictive indorsements a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.
To download a copy of the statute, please use the following link (enter "UCC" and select the desired section): http://public.leginfo.state.ny.us/menugetf.cgi?COMMONQUERY=LAWS