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Banks Owe No Duty of Care to Non-Customers in Normal Banking Procedures
BY: John Burrus, Esq.

A recent Colorado Court of Appeals decision holds that a bank does not have a legal duty to take steps which would have prevented embezzlement of funds from one who is not a bank customer.

In Weil v. First National Bank of Castle Rock, (Ct. App. No. 95 CV 306, decided June 24, 1999), two employees of an insurance agent opened an account under a tradename which the insurance agent also used, but which had not been registered. The two employees took checks payable to the common tradename, deposited them into the account and then wrote checks on that account for their own purposes. The insurance agent argued that the bank was negligent in permitting the account to be established without taking various steps to confirm the authority of the two employees to use the tradename.

The Court of Appeals cited a number of cases from other jurisdictions holding that, as a general rule, a bank owes no duty of care to someone who is not its customer in regard to normal banking operations. As a result, the Court held that the bank was not liable to the insurance agent under these circumstances.

In the decision the Court refers to and distinguishes a similar case in which a bank was held liable to a non-customer for permitting the deposit of checks payable to the non-customer. In Central, Inc. v. Cache National Bank, 748 P.2d 351 (Colo. App. 1987), an officer of "Central, Inc." opened an account under the tradename "Central." The officer deposited checks payable to "Central, Inc." into this account and then used the funds for his own benefit. In this case, it was held that since the checks were clearly payable to a corporation and could only be endorsed by an authorized agent of the corporation, it was incumbent on the bank to verify the authority of the officer who endorsed the items.

In the Weil case, however, the checks were payable to "CWI Insurance" and the Court noted that this "failed to indicate in any manner the existence of a separate and distinct entity different from the individual endorsing and negotiating the instrument." Presumably, if the payee on these checks had been a corporation, limited liability company or other "separate and distinct entity," then the rule in the Central, Inc. case would have applied and the bank would have been held liable.

Contact John E. Burrus at jeb@bsblaywers.com

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