RSK.IQ Question of the Week 11/3/14

Check without Indorsement Deposited into IOLTA


New Jersey Bank has a law firm as a customer which deposits checks payable to clients into its IOLTA account, typically without the indorsement of the client. The firm has provided a very basic power of attorney letter which the client has signed, but it is not dated or notarized.  Would this be acceptable?

Response Summary

Checks deposited into an IOLTA should be handled as any other deposit item would, so far as indorsements are concerned. The bank can accept a check without indorsement, but it incurs greater liability in doing so.

A power of attorney must be in writing signed and acknowledged by the principal, authorizing an agent to act on their behalf. The requirement that it be acknowledged means that the principal has gone before an officer authorized to take acknowledgments and acknowledged that he executed the power of attorney. In New Jersey, such an officer would include an attorney-at-law and a notary public.

Response Detail

A check payable to a client that is deposited into a law firm’s IOLTA is held in trust for the client. The applicability of the rules regarding checks and indorsements, however, is no different for client trust funds than they are for any other account. The IOLTA is in the name of the law firm. If the check being deposited is payable to someone other than the law firm, it should carry that payee’s indorsement, followed by the law firm’s indorsement.

The bank can accept a check without indorsement, but it incurs greater risk in doing so.

Under the version of the Uniform Commercial Code adopted by New Jersey, a depository bank becomes a holder of an item at the time it receives the item for collection if the customer was the holder of the item, whether or not the customer indorses the item. In so doing, it warrants to collecting banks down the line, the payor bank, and the drawer of the check, that the amount of the item was paid to the customer or deposited to the customer’s account. [N.J.S.A. 12A:4-205].

This means that if there is a dispute as to whether the law firm was the holder of the check or whether the client received the funds, the bank will be liable under its warranty.

A power of attorney can be quite basic, but it must be a duly signed and acknowledged written document in which the principal authorizes an agent to act on his behalf. [N.J.S.A. 46:2B-10].

The requirement for acknowledgment means that the principal has acknowledged before an officer authorized to take acknowledgments that he executed the power of attorney. In New Jersey, these officers would include an attorney-at-law, a county clerk or register of deeds, or a notary public. [N.J.S.A. 46:14-6.1]. The date of acknowledgment would be a requisite of the acknowledgment.

The power of attorney must specify what acts the agent is authorized to perform. In this case, it should at least grant the law firm authority to indorse and deposit checks made payable to the principal. Under New Jersey law, however, if the power of attorney contains language conferring authority to “conduct banking transactions,” the agent would be permitted to perform a variety of responsibilities, including:

  • To continue, modify, or terminate any account or other banking arrangement made on behalf of the principal
  • To open an account in the name of the principal alone, the agent alone, or the principal and agent together
  • To hire, remove the contents of, or surrender a safe deposit box or vault space
  • To draw, sign and deliver checks for any purpose
  • To make, assign, endorse, discount, guaranty, and negotiate for any purpose all promissory notes, checks, and drafts
  • To withdraw any funds or property of the principal on deposit
  • To receive periodic statements
  • To borrow money by bank overdraft, loan agreement, or promissory note. N.J.S.A. 46:2B-11

A bank can accept and rely on a power of attorney which otherwise conforms to the law, but not if the signature of the principal is not genuine or for other specified reasons, such as knowledge that the principal has passed away or revoked the power of attorney. If the bank in good faith believes that the signature of the principal does not appear to be genuine, it shall have a reasonable time within which to decide whether it will rely on the power of attorney. [N.J.S.A. 46:2B-13]. The acknowledgment of the principal, however, would be evidence that the signature is genuine.

This entry was posted on Friday, October 31st, 2014 at 9:06 pm.

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