Pub. 5 2016 Issue 2

KBS Security Officer’s By-Word Midwest State Bank employees pro- cessed the check as they would have any other foreign ATM deposit. The check was sent through the normal clearing process. The funds were credited to the East Coast National Bank for deposit to the account linked to the ATM card. Similar ATM deposits became a regular occurrence over the next three years, with more than 300 deposits totaling in excess of $500,000. Eventually, the management of Business Decorations noticed their accounts receivable were growing rapidly and began investigating their records. Many of their customers claimed payments had been made on their accounts. These customers produced copies of the paid checks. Business Decorations then discovered that its bookkeep- er, Jane Crook, had been depositing the checks through an ATM into her personal account. Business Decorations brought suit against both Midwest State Bank and East Coast National Bank. Under Uniform Commercial Code §3-206(c)(2), if a check bears the words “for deposit,” a conversion liability is imposed on the depositary bank if it fails to deposit the check to the payee’s account unless the payee otherwise receives the amount of the check. However, it was unclear which bank was the depositary bank. Under UCC §4- 105(2), a depositary bank is the first bank to take the check. This would make Midwest State Bank the depositary bank. Under Reg CC (12 CFR §229.2), a depositary bank is the bank holding the account into which the check is deposit- ed, even though the check is physically received and endorsed first by another bank. This would make East Coast National Bank the depositary bank. Both banks argued that they were not the de- positary bank based on these opposing definitions. In an instance similar to this, the court applied the UCC definition, finding that the bank that owned the ATM was liable. In a future case, a court could easily decide to use the Reg CC definition, or an ATM Network Agreement could hold the bank that holds the account liable as the depositary bank. This liability could occur even though the bank would never see the deposited check and would never know the check is endorsed “for deposit only”. March 2016 The bankers division of Berkshire Hathaway Homestate Insurance Company M idwest State Bank received in its ATM a $1,500 check for deposit. The check was payable to Business Decorations, and was endorsed “For Deposit Only”. The depositor was a customer of East Coast National Bank and was depositing the check to an account in East Coast National Bank. Midwest State Bank did not have any information about this account except that the account number was an account at East Coast National Bank. 0 1 2 abc 3 def 4 ghi 5 jkl 6 mno 7 pqrs 8 tuv 9 wxyz Enter Clear Cancel xxxxxxxxxxxxxxxx Deposits To Your ATM By Noncustomers May Result in Significant Losses