Brief Fact Summary. A minor was named as beneficiary of a life insurance policy. The guardian of the minor’s estate opened a personal account with the life insurance check and used the funds for his own personal use.
Synopsis of Rule of Law. When a bank allows a check made payable to a guardian to be deposited in the guardian’s personal account instead of the guardianship account, the bank is a holder in due course because it has notice of the guardian’s breach of fiduciary duty.
For a private individual to initiate an action under the Consumer Protection Act, the conduct complained of must: (1) be unfair or deceptive; (2) be within the sphere of trade or commerce; and (3) impact the public interest.View Full Point of Law
Issue. Did the bank have knowledge that the guardian was breaching his fiduciary duty when it allowed him to deposit the check in his personal accounts?
Held. Yes. UCC 3-304(2) states that a purchaser has notice of an adverse claim when, “he has knowledge that a fiduciary has negotiated the instrument in payment of or as security for his own debt or in any transaction for his own benefit or otherwise in breach of duty.” Von Gohern v. Pacific Nat’l Bank is persuasive and controlling. In Von Gohern, the court held that “notice need not always consist of actual knowledge of a breach of a fiduciary duty, but can be predicated upon reasonable commercial standards.” It this case, it was determined that the bank knew that it was dealing with guardianship funds. The father indorsed the check as a guardian, when the attorney called to inquiring as to fees for guardianship accounts the trust officer replied with a letter referring to the “Estate of Chad Alcombrack.” Commercial practices establish that when the bank knew that the funds were deposited in a personal account rather than a guardianship account, the defendant also knew that the
father was breaching his fiduciary duty. Therefore, the defendant had notice and therefore will not be considered a holder in due course.
Discussion. In order to qualify as a holder in due course the bank must meet five requirements, “It must be (1) a holder (2) of a negotiable instrument (3) that took the instrument for value (4) in good faith and (5) without notice that it was overdue, dishonored, or of any defense or claim to it on the part of any person.” The court found that there is no need to decide the first four elements as it is determined that “the bank took the check with notice of an adverse claim to the instrument and, therefore, is not a holder in due course.” Therefore, the only element at question in this case is whether the bank had knowledge of the guardian’s actions.