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Issue  212  Article  346
Published:  4/1/2014

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Cashier's Checks Not Irrevocably Credited Upon Deposit
Chris Burti, Vice President and Senior Legal Counsel

Case Note: Lawyers Mut. Liability Ins. Co. v. Mako, April 1, 2014 (13-691)

The defendant law firm in this case was the victim of an internet scam when they were engaged to assist in the recovery of, to receive and to disburse the proceeds from a Workers Compensation "settlement". Essentially, within a short time of entering into a retainer agreement with an unknown client, they received two different cashiers' checks, each for $175,000, and instead of waiting the requisite 10-day settlement period after they deposited each check into their trust account, they immediately disbursed their 20% contingency fee and successfully wired the balance of the funds of one of the deposits to the client's account in Japan. Since the checks were fraudulent, the depository bank returned them to the law firm unpaid.

They made a claim for the loss against their errors and omissions carrier which filed the declaratory action giving rise to the appeal. The trial court granted summary judgment to the carrier and the defendants appealed.

The defendants argued that the term 'irrevocably credited' in the policy of insurance was ambiguous, but the Court of Appeals citing relevant provisions of Chapter 25 of the North Carolina General Statutes declared that "a cashier's check is treated the same as a traditional check. A traditional check cannot be deemed fully credited until its provisional settlement period has elapsed without action by the bank to reject the check; the same is true for a cashier's check. Therefore, the provisional settlement period that accompanies traditional checks must also apply to cashier's checks."

This is a cautionary tale in two respects. First, there has been a surge in sophisticated email scams directed at solo attorneys and at large and small firms being reported by lawyers from around the US. These scams typically involve foreign individuals or corporations contacting attorneys by way of email or, increasingly, by telephone for the purposes of collecting a debt owed by an American corporation. The attorney is asked by the client to deduct agreed legal fees and to disburse the balance by a wire transfer to a foreign bank. They will accommodate a request for a retainer agreement making it seem even more plausible. Although the email and the cashier's check look authentic, the check is a counterfeit and the attorney can rarely recover any transferred funds.

The scam has several variations-including a request to seek collection on an unpaid property settlement from and ex-spouse pursuant to a divorce decree-but in all cases, the attorney is being used to run funds through their client escrow account. For the scheme to be successful, the scammer is relying on the attorney to transfer the funds owed to the foreign client before verifying that the deposited funds have been collected by the bank and have become available to cover the transferred amount.

Although the scam seems relatively simple, that fact adds to its plausibility and the damage caused to attorneys falling prey to the scheme from all over North America has been staggering, running to the millions of dollars nationwide. For every attorney falling victim to a counterfeit check fraud, there are countless others receiving these solicitations and who have either declined the offers, or have determined the true nature of the activity after receiving notice from their trust account bank that the deposited check is a forgery. In a slight variation of the scheme, the victim law firm receives an e-mail from what appears to be an attorney located in another state, who is requesting debt collection assistance for a client from a company located in the victim firm's state. Often, the name of the referring attorney and the debtor company used are legitimate entities being used as part of the scam. The volume of these attempts has increased so much that the Federal Bureau of Investigation is warning about them in generic fashion on their consumer protection webpage.

These solicitations are increasingly sophisticated form the earlier versions that are often easily spotted such as the "Nigerian Advance Fee Scheme" where the request to participate in a money-making venture is usually never personally addressed to the recipient, and uses the same confidence-building language, which is often riddled with misspellings and awkward grammar. Instead, they are personally addressed to the lawyer, and the initial email usually includes detailed information about the foreign corporation requesting legal services, the American corporation owing the debt, details about the nature of the debt including the debt amount and past attempt to collect on the debt, as well as bogus web links and telephone numbers to persons that can verify the debt. Attempting to verify the debt will often produce a quick and bogus verification as part of the scam.

The fact that the debt repayment comes in the form of a cashier's check gives the attorney a false sense of security that the funds are legitimate since they are not written on an account from the debtor corporation that is presumed to be struggling financially. The opportunity to earn a large fee with relatively little effort is what ultimately causes the scam victims to let down their guard and process the wire transfer once deposited. It is important to understand that counterfeit checks are not usually recognized as such at the teller line where they are accepted for deposit into the attorney's trust account. More problematic is that confirming with the bank that the funds are "available" is not necessarily confirmation that the check has cleared and the funds have been collected from the check writer's account. There is usually a flurry of this type of scam activity around bank holidays where the fraudster takes advantage of the fact that bank processing time is protracted over a lengthy three-day weekend adding to the amount of time the bank needs to identify the counterfeit check.

Always wait for bank verification that the deposited funds have been collected from the check issuer's account. A bank representative accepting the funds for deposit or orally affirming that the funds are available is no assurance that the funds have cleared. Attorneys will avoid becoming the victims of these fraud schemes by waiting for proper verification that the deposited funds have been collected and by resisting the client's pressing requests for a quick disbursement,.

Here are some tips for avoiding fraud losses:

1. Do not take on work outside your area of expertise. Debt collection is a complex area of practice that can tie up any attorney not familiar with the Fair Debt Collections Practices Act 15 U.S.C. 1692. These requests are very tempting if they seem to require relatively little work.

2. Vet the client. Ensure that the client is a legitimate person or organization seeking legal services. If you cannot meet personally, ask the client for references including names of other attorneys doing work for the client.

3. Vet the debtor. Do your own research for contact information and confirm with the comptroller of the debtor company who can verify whether the debt was owed and that the cashier's check was legitimately issued as repayment. Do not rely on contact information provided to you from the client.

4. Obtain a separate retainer payment. A check to your firm from the client prove that it is not a scam, but most scammers won't bother responding to such requests and will simply move on to easier prey.

5. Trust your instincts. You've heard this advice all of your adult life..."if the deal sounds too good to be true, it probably is.".

In the second respect, Chapter 45A of the North Carolina General Statutes, the Good Funds Settlement Act, authorizes a settlement agent to immediately disburse upon depositing a cashiers or certified check notwithstanding that these deposits made by settlement agents to their trust or escrow accounts do not constitute collected funds. However, the North Carolina North Carolina State Bar's RPC 86, issued April 13, 1990 makes it clear that the attorney must not so disburse unless "virtually certain" that the funds will be collect and must stand ready to make the deposit good if dishonored.

Inquiry #1:

Must the closing attorney collect earnest money held in the trust accounts of real estate agents or other attorneys in the form of certified funds?

Opinion #1:

No. While it is certainly the better practice for the closing attorney to issue trust account checks only against collected funds, CPR 358 recognized that under certain circumstances such checks may be drawn against funds which though uncollected have been provisionally credited to the attorney's trust account by the financial institution in which the trust account is maintained. A closing attorney should disburse against provisionally credited funds only when he or she reasonably believes that the underlying deposited instrument is virtually certain to be honored when presented for collection. In addition, an attorney should take care not to disburse against uncollected funds in situations where the attorney's assets or credit would be insufficient to fund the trust account checks in the event that a provisionally credited item is dishonored.

Following the 1995 financial failure of an out-of-state mortgage lender, a significant number of loan proceeds checks were returned unpaid. Though RPC 86 cautioned closing attorneys to avoid disbursing against provisionally credited funds unless reasonably believing the instrument "virtually certain" to be honored, attorneys had deposited and disbursed against the loan proceeds checks of the failed mortgage lender. When any of these checks were dishonored and charged back against the trust accounts of these closing attorneys and trust account checks issued for the closings were presented for collection and paid, it technically resulted in the use of other clients' funds to pay the presented checks. Due to the resulting losses, the North Carolina Legislature tightened up the definitions in the Good Funds Settlement Act to restrict the lenders a that a settlement agent could accept for disbursing upon provisional credit (Session Law 95-714 s. 1 (Reg. Sess., 1996). In addition, the North Carolina State Bar received numerous requests to reexamine RPC 86 and in 1997 issued the final version of RPC 191.

RPC 191 included the following quoted requirements:

"The disbursement of funds from a trust account by a lawyer in reliance upon provisional credit extended upon the deposit of an item into the trust account which does not take one of the forms prescribed in the Act constitutes professional misconduct, regardless of whether the item is ultimately honored or dishonored. However, a lawyer who disburses in reliance upon provisional credit extended upon the deposit of an item prescribed in the Act shall not be guilty of professional misconduct if that lawyer, upon learning that the item has been dishonored, immediately acts to protect the property of the lawyer's other clients by personally paying the amount of any failed deposit or securing or arranging payment from sources available to the lawyer other than trust account funds of other clients. An attorney should take care not to disburse against uncollected funds in situations where the attorney's assets or credit would be insufficient to fund the trust account checks in the event that a provisionally credited item is dishonored."

It should be noted that disbursing from an attorney's trust account only on collected funds is the rule and that the Good Funds Settlement Act and RPC 191 actually carve out limited exceptions to this rule. The rule is stated in RPC 191 and is set out as follows:

A lawyer who receives funds that belong to a client assumes the responsibilities of a fiduciary to safeguard those funds and to preserve the identity of the funds by depositing the funds into a designated trust account. Rule 10.1 of the Rules of Professional Conduct. It is a lawyer's fiduciary obligation to ensure that the funds of a particular client are used only to satisfy the obligations of that client and are not used to satisfy the claims of the lawyer's creditors. Rule 10.1 and comment. Furthermore, Rule 10.2 of the Rules of Professional Conduct requires a lawyer to maintain complete records of all funds or other property of a client received by the lawyer and to render to the client appropriate accountings of the receipt and disbursement of any of the client's funds or property held by the lawyer. Rule 10.2(e) recognizes a lawyer's obligation to pay promptly or deliver to the client, or to a third person as directed by the client, the funds in the possession of the lawyer to which the client is entitled. Strictly interpreted, these rules would appear to require a lawyer not to disburse upon items deposited in his or her trust account until the depository bank has irrevocably credited the items to the account.

As noted, these internet scams are widespread enough and plausible enough that any check received by your firm and not originating from a known lender and one defined in the Act should be considered suspect. No disbursements should be made relying upon the permission granted in the Act or the RPC's unless the law firm has sufficient liquidity or credit to cover the disbursements immediately upon notification of dishonor. As a result of these issues it is becoming increasingly common for attorneys to require electronic wiring of loan funds when immediate disbursement is required as will be the case in most loan closings. It should also be noted that in certain instances, even wires may be recalled and great care should always be observed in handling client's funds.

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