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The courts are going to have to decide the issue: one that can change the future of controlled disbursement banking.
Available to large corporate accounts, controlled disbursement allows the linking of accounts at two banks owned by the same holding company and allows customers to maximize the use of their float time between writing a check and having the check cashed. The customer can find out each morning the amount of money needed to clear the checks presented for payment that day. Should there be uncollected balances, the customers pay interest. And, of course, there are fees charged for such privileges, high fees, but in some cases it is cheaper for the customer to pay those fees than to obtain a short term loan.
There are those who think the concept of controlled disbursement accounts should be renamed “introduction to Check-Kiting 101” because it educates the customer, perhaps too well, on the use of the float.
Restaurateur George M. Schellgell of Milwaukee got caught up in a controlled disbursement account. His attorney, Dean Strang, argued that Bank One Milwaukee bore partial responsibility for the $459,000 lost by the bank in the check-kiting scheme Schellgell was accused of masterminding. He claimed that the bank had not only revealed the process to the customer, it had also revealed its willingness to tolerate the repeated use of uncollected funds.
And while the judge in the case did criticize the concept of the controlled disbursement accounts, he rejected the argument that Bank One’s conduct in the case should reduce Schellgell’s sentence. So Schellgell, the 66-year-old businessman from Elm Grove, is heading off to federal prison, but attorney Strang says the argument is far from over.
Strang will be representing Steve Weiland in another similar case. Weiland is one of four people charged with bank fraud in conjunction with an alleged check-kiting scheme in Minnesota. The main defendant in that trial is John Morken, a cattleman who is accused of defrauding Firstar Corp and a second bank out of $41 million. The total amount of kited checks is believed to be $2.9 billion.
The banks hope for a similar verdict to the one handed down in the Schellgell case; anything less could cause serious industry reconsideration when it comes to the use of controlled disbursement accounts.
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