Bank Acted Within Reasonable Commercial Standards in Opening an Account and Honoring Drafts
 
May 16, 2005
 
Michael Weissman - Chicago

The United States District Court for the District of Columbia was asked to decide whether a bank had acted in accordance with reasonable commercial standards in opening an account and honoring withdrawals from it in Robin Littlejohn/Lam Supply Corp. v. Provident Bank, 357 F.Supp.2d 45 (D.D.C. 2004).

Using the federal tax identification number of Lam Supply Corp. (Lam), the general manager and the secretary of Lam opened a savings account with Provident Bank (Provident) under Lam’s name. The signature card that was used to open the account permitted the two officers to withdraw funds from the account. These same two officers were authorized signatories on other accounts established in Lam’s name.

After the account was opened, the two officers deposited $205,000 in it in the form of checks payable to Lam. Subsequently, they withdrew those funds for their personal use.

Lam sued Provident contending Provident was negligent in opening the account without proof that the two employees had authority to do so, and in allowing the two employees to withdraw funds from the account.

The court took notice of the fact that prior to the instant case, Lam had brought a lawsuit in the Superior Court for the District of Columbia that culminated in an agreed order closing the account and calling for all funds to be deposited with that court. The order stated that once Provident paid the money into the registry of the court, Provident was released from all liability. The funds were deposited on July 29, 2003.

Notwithstanding the state court order, Lam persisted in its efforts to impose liability on Provident. But the court would have none of that.

First, the court held that the state court order was a voluntary settlement of all claims against Provident and that there was no reason to set it aside.

Second, the court said Provident was not negligent with respect to the savings account. There was evidence that Lam’s president had authorized the opening of the account by signing the necessary account form and executing a signature card. In addition, because the two employees were named as signatories on Lam’s other accounts, it was reasonable for Provident to assume that they had actual or apparent authority to open the account and sign drafts withdrawing funds. Furthermore, since Lam’s president had signed the same signature card the two employees had signed, Provident had no reason to doubt the authority of the two employees to open the account. And the corporate resolution form listed the two employees as having authority to deposit and withdraw funds from the account.

What’s the point?

A depository bank will not be subjected to liability so long as it acts in conformity with documentation that established the account.

For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.