Managing the check deposit function at your bank

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Published on 6/5/06

For the most part, lawyers still get paid by personal checks from clients, and must physically deposit those checks with the bank -- at least until you have a sound enough customer service relationship that you can bank by mail or have someone make deposits for you.

The check deposit transaction can involve some special considerations relating to lawyers, and establishing a sound cash deposit relationship with your bank can help manage them.

Never wait to deposit checks. This is the first rule of cash flow management. While a check is being held for deposit, too many problems can happen: The client may become angry and stop payment, or have insufficient funds when the check is finally presented for clearance, or become party to a lawsuit or other proceeding in which financial assets are attached.

Deposit all checks even if the amount paid does not match what you billed; negotiate or correct the variance later.

Sometimes, unfortunately, depositing checks is not a simple process. For example, an attorney is not automatically authorized to endorse the client's name to checks. This can be an issue with a two-party check in which one of the parties is not available (out of the country on business, for example) to endorse it. Too many discipline cases involve lawyers forging endorsements to settlement checks, lying to the client about whether the check was received or about the amount, and then walking off with the proceeds.

Banks can refuse any deposit for any reason. By accepting a two-party check as a deposit the banks may feel they have liability if there were a dispute between the parties. But by cashing rather than depositing the check, the liability for any dispute is on the account holder, and the bank believes it does not assume liability. As long as you have the funds in your account to cover the check, it should go through.

There are two caveats to this.

First, your funds equivalent to the amount of the check will be placed on hold until the check clears. This won't be a problem if you turn around and deposit the funds to the account. Any hold can only be until the check actually clears, which is usually midnight the same day according to the newest check clearing rules, although some banks will hold checks for more than $5,000 slightly longer.

Second, if the check is refused by the originating bank or is disputed elsewhere, you are liable to make your bank whole.

There is a final check deposit consideration that affects all banking customers, and that lawyers should be aware of.

The USA Patriot Act requires financial institutions to verify the identity of each person who opens an account. Some banks, however, reportedly use the Patriot Act to refuse deposit of checks made out in ways other than the exact name of the checking account (for example, to "John Smith Law Offices" when the name of the account is "The Law Offices of John Smith").

Avoid such a problem with the multiple ways people make out checks by creating an endorsement stamp that says, "Pay to the Order of The Law Offices of John Smith, For Deposit Only," and that includes the bank name and account number.

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