Recovering Embezzled Funds from a Bank

Unfortunately, the chances of doing so are unlikely.

The American Parkinson Disease Association, Inc. v. First National Bank, 584 N.W.2d 437 (Minn. App. 2000)

Background. If church funds are embezzled, can the church recover any of its losses from its bank? Probably not, according to a recent case in Minnesota. An officer of a national charity embezzled a substantial amount of his charity's funds. He authorized a volunteer worker to establish a bank account in a local bank for a "local chapter" that the officer said he was creating. The officer then stole contribution checks made payable to the charity, and sent them to the volunteer for deposit in the new bank account. The volunteer deposited the checks, and then sent either checks or money orders back to the officer "to further the work of the charity." Over the course of seven years, the officer embezzled more than $1 million. The scheme was discovered shortly after the officer retired.

The charity sued the bank in which the "local chapter" account had been established. It claimed that the bank was legally responsible for the embezzlement, and asked to be compensated for all the funds the officer embezzled. The charity based its case for recovery on two arguments, which are summarized below:

(1) Unreasonable commercial practice. The charity asserted that the bank engaged in a commercially unreasonable practice by accepting checks payable to the national charity for deposit in an account bearing the name of the local chapter. The court noted that the local chapter's account included the name of the national charity, and that it used the national charity's tax-exempt number. As a result, it was not unreasonable for bank employees to accept checks payable to the national charity for deposit in the local chapter's account.

(2) Lack of authority. The charity also argued that the officer was not authorized to open an account that he planned to use in his embezzlement scheme, and therefore the bank was liable for allowing him to do so. The court disagreed, noting that the officer did have the "apparent authority" to open bank accounts. It also observed, "the fact that he [opened] an account for fraudulent purposes does not convert his authorized actions into unauthorized actions."

What this means for churches

Embezzlement is an all-too-common occurrence in churches, often because of sloppy controls over cash handling. In some cases church funds have been embezzled because of schemes similar to the one involved in this case. A pastor or church officer opens a separate "church" account, usually at a different bank. Sometimes the church name is used together with a second name (such as missions or building fund). Some church checks are then deposited in this second account, with the embezzler having sole signature authority. This case suggests that a church in such a case will not be able to recover the embezzled funds from the second bank, since (1) it is highly unlikely that the second bank would be guilty of an unreasonable commercial practice under these circumstances, and (2) the pastor or officer in most cases would be deemed to have "apparent authority" to open the second account. Any recovery of the embezzled funds ordinarily must come from the embezzler, or in some cases an insurance company (if the church has insurance to cover such a loss).

The only way for churches to prevent these embezzlement schemes involving second "church accounts" is to exercise sufficient control over cash and checks, including those that come to the church office in the mail.

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