If a customer asks your bank to be his or her surety on a bond required for the customer to be appointed guardian for a minor’s assets, your answer would almost certainly be an emphatic: “Our bank does not do that!”
However, that is almost exactly what you are doing when you open a restricted or blocked account for the deposit of a minor’s financial assets on which the guardian has not obtained surety. This typically happens when a minor is a tort victim and receives a settlement or judgment award.
Until the minor is 18, the minor’s assets are under the control of a conservator or guardian appointed by order of a District Court. KRS 387.070 requires a prospective guardian to post a bond, with surety, to assure the faithful discharge of their duties in handling the minor’s assets.
Because many applicants for a guardianship appointment cannot obtain a bond surety, the statute allows the District Court, as an alternative, to exempt a guardian from giving surety on a bond if the minor’s assets are deposited in a “restricted account.” The account must be in a bank “subject to withdrawal by the guardian or conservator only upon authorization of the District Court.”
The account is usually opened upon presentation of an “Order of Appointment of Guardian/Conservator for Minor,” a form document (AOC-854) completed by the Court over the signature of a district judge. The typical language directs the guardian to deposit the assets “into a blocked account…withdrawn only with leave of the Court…”. Even more problematic are the orders that provide the assets can be “expended” only with leave of the Court.
Your bank may view itself only as a depository with obligation to pay properly payable checks. But the Court will view the bank as having the additional duty of enforcing the Court’s order on use of the deposit account; a duty carrying with it much more risk than that of a payor bank. Your personnel essentially become special deputies to guard the minor ward’s assets.
Restricted accounts can be very attractive deposits; substantial average daily balances, and little account activity. But beware of the associated risks. How will you flag the account in the computer system? Will the special information on the opening page of the account screen adequately warn your personnel that a court order must authorize the withdrawal? What training do you need to provide your employees?
If you change your core system, will the restriction carry over in the new system? Will it appear in a manner to adequately warn your tellers that it is their duty to make sure a withdrawal from the account is authorized? Is the expenditure of the guardian for benefit of the ward if the Court Order contains that sort of restriction?
In our experience, once a defalcating guardian learns the depository bank is not policing the restrictions of the Order under which the account was opened, it won’t take long for a series of subsequent transactions to drain the assets of the account.
What if that happens when the minor ward is eight years old when the assets are improperly dissipated? Your bank will not only be liable for money illicitly withdrawn, it will also be on the hook for interest on each withdrawal from the date it was paid until an action is brought to recover the funds, usually after the ward is 18 and seeks the benefit of the account.
Are there defenses to a claim that the bank violated the terms of the Order under which the account was established? Lawyers can always, or nearly so, find a defense. But consider the facts; a bank that may not have precisely followed a court order versus a child tort victim. Those are facts under which the scales of justice will not be balanced.
Our purpose is not to dissuade you from accepting restricted accounts. We only warn you of the risks and advise you to make sure your operating system adequately notifies branch personnel of the restrictions on the account. For checks not presented at a teller’s window, make sure the processing system kicks them out for manual review. You might consider a special account agreement that clearly and conspicuously sets out succinct rules to which the appointed guardian acknowledges and agrees.
Restricted deposits can be valuable assets of a bank but the failure to properly administer even one restricted account can wipe out the profits of the entire account category.
by John T. McGarvey
John T. McGarvey’s practice concentrates on secured transactions, municipal law, the representation of banks and other lenders in litigation, and matters under the Uniform Commercial Code.