October 13th, 2011

NY Top Court: Law Firm Burned in Check Scam Can’t Blame Bank, as Bank Not Liable for Clearing Bogus Check Because “Cleared” Is Ambigious

This is what banks used to look like.

Another law firm gets burned in a check scam, and now New York’s top court weighs in on the subject: Don’t blame the banks, the court ruled today, because when a bank tells you a check has “cleared,” the word “cleared” is actually “ambiguous” and the bank can’t be held to it.

The last several years have seen a spate of scams targeting law firms who are asked to  make an easy collection of money. The client is always on some distant soil, and the purported debtor is local. And the scam works by the lawyer collecting the money, depositing it in his escrow account, waiting for the money to clear, and then wiring the bulk to the client while keeping a fee. The scam works because after the collected funds have cleared, and after the funds wired out, the bank then discovers the fraud, reverses itself, and asks the law firm to pony up the funds for the bogus check.

Cleared, say the banks, doesn’t really mean cleared.

On this fact pattern, New York’s Court of Appeals tossed out the suit by a firm against its  bank that had cleared its collection of funds for a presumed client, only to see the check later turn up bogus. And the Court said this was the fault of the law firm, not the bank, and that the firm must bear the loss. The case is Greenberg, Trager & Herbst, LLP v HSBC Bank USA.

If this decision sounds somewhat familiar, it is because I’ve covered appellate rulings on this twice before. In February, the Second Circuit Court of Appeals held against the law firm in similar circumstances: See, So, You Think It’s Safe To Disburse Those “Available” Funds In Your Account? At that time, a friend sagely wrote to me:

When I was taking my commercial paper course in law school 8,000 years ago, the teacher – who was a good guy and nobody’s fool – said that the underlying principle that trumped all other is simply this: “the bank wins”. Everything else is a corollary, an elaboration, a commentary, or (once in a blue moon) an exception to this.

And I hit the subject again in June of this year when the Appellate Division, Third Department, also ruled against a law firm. See, When A Law Firm Gets Scammed, Must the Liability Insurer Defend and Indemnify?

In today’s case, after $197,750 had been collected by Greenberg, Trager and Herbst, and after HSBC told a firm partner the money had cleared, the firm took a $10,000 fee and wired the rest to the fictional client. You know the rest. Despite the partner having called the bank to make sure the check had “cleared”, the high Court tossed out the firm’s claim for negligent misrepresentation.

In dismissing the claim, the Court wrote that the bank’s statement that the check had “cleared” was:

an ambiguous remark that may have been intended to mean only that the amount of the check was available (as indeed it was) in GTH’s account. Reliance on this statement as assurance that final settlement had occurred was, under the circumstances here, unreasonable as a matter of law.

But the comment that really strikes home, and the one thing every lawyer must know in dealing with potential clients, is this that comes from the opinion regarding the law firm:

[It]was in the best position to guard against the risk of a counterfeit check by knowing its ‘client'”

Justice Piggot dissented, being  unhappy that summary judgment was granted to the bank on the negligent misrepresentation claim. He felt that, since “a bank has a duty to exercise ordinary care when dealing with its customers,” there was a question of fact for a jury. Unlike the majority, he finds no ambiguity in the word “cleared’ and noted:

Indeed, the Federal Trade Commission in a bulletin addressed to consumers states that “it’s best not to rely on money from any type of check . . . unless you know and trust the person you’re dealing with or, better yet — until the bank confirms that the check has cleared

And Justice Piggott had scathing words for the two banks involved regarding these check scams:

Counterfeit check scams are pervasive. That Citibank could not recognize one of its own checks as counterfeit is testament to the seriousness of this problem within the banking industry. It is no answer that Citibank and HSBC seemed to stumble along over a period of ten days resulting in one of their customers being bilked out of $187,500. This problem has long been known to the banks and a mere recitation of their normal practices does not, in my view, establish the appropriate standard of care in this day and age and certainly not their entitlement to summary judgment.

If you haven’t received these scam emails, it means just one thing: You have have a brand new email address that the scammers haven’t found yet.

Update (10/14/11): This post proves I’m a lousy headline writer. Better ideas:

  • Banker to Lawyer: The check cleared. Ct App translation: You’re screwed, brother (Scott Greenfield via Twitter)
  • If your bank says a check has “cleared,” you’re liable if they’re wrong. (David Wells via Twitter)
  • Banks Not Liable Over Check Deposited by Swindled Law Firm (NYLJ)
  • Court to Lawyers: The Bank Always Wins (Didn’t you learn that in law school?)
  • Banks no longer required to mean what they say  (Elie Mystal via Twitter)
  • Another Meaningless Question: Has the Check Cleared? (Joshua P. Fershee @ Business Law Prof Blog)


June 6th, 2011

When A Law Firm Gets Scammed, Must the Liability Insurer Defend and Indemnify?

This one is for all lawyers, not  just the personal injury folks. Because we all get those scam emails asking us to do some work for the out-of-country “client” who just needs this tiny bit of work done to collect a big fee. And some folks get taken, despite what they see as their best efforts to make sure they don’t.

And this comes as a follow-up to a post a few months ago about a case from the Second Circuit, where a law firm was hustled by accepting a check and depositing it in its account. After the bank said the funds were available, it disbursed the funds and kept a portion for a legal fee. Then the bank called and said the original check was counterfeit, and by the way, “available” means something different to the bank than to everyone else. The law firm lost and, when the music stopped, didn’t have a chair to sit in.

Now comes a different twist on the same story out of a New York state appellate court, and the issue is whether the law firm’s malpractice liability carrier has to defend and indemnify the firm for getting suckered. These were the bare bones facts in Lombardi, Walsh v. American Guaranteee and Liability that came out of the Third Department a few days ago:

Plaintiff, a law firm, was contacted via e-mail by an individual purporting to be the chief executive officer of a Taiwanese corporation seeking legal assistance in collecting debts in North America. After the individual sent plaintiff a signed retainer agreement, plaintiff received a $384,700 check from a purported debtor of the corporation. Plaintiff opened an account at Berkshire Bank and deposited the check. At the request of the purported chief executive officer, plaintiff instructed Berkshire Bank to wire the value of the check, minus a legal fee for plaintiff, in two transfers to a third party in South Korea, who was allegedly a supplier of the Taiwanese corporation. After the funds were transferred, Berkshire Bank notified plaintiff that the check was counterfeit and plaintiff’s account was overdrawn.

The firm made a claim through its liability carrier and the carrier disclaimed. The firm settled with the bank and then brought action against its insurance company.

The lower court granted summary judgment to the insurance company under the theory that legal services were not being rendered.

Not so fast, said the appellate court. This did take place in the rendering of legal services, even if turned out to be fraudulent. The Court said that:

Regardless of whether the imposter qualified as a “client,” the policy does not require an actual “client”; the policy only requires that plaintiff “render Legal Services for others,” and the imposter fell within that broad category.

The carrier is on the hook both to defend the firm. Since the settlement was confidential, the case was sent back to the lower court for further proceedings.

But, this is the kicker, and the reason I follow up today from that post a few months back out of the Second Circuit. There is this comment in the footnotes that should stand as a warning to all lawyers about what the bank really means when it says the funds are available:

Plaintiff had instructed Berkshire Bank to wait until the check “cleared,” which it did, before wiring funds. Unfortunately, plaintiff did not understand that a bank may be required to make funds deposited by check available for the account holder to use even if the funds have not been finally collected by the bank (see 12 CFR 229.10 [c]). If the bank later determines that the check does not constitute good funds and cannot be finally collected, the bank may require repayment of those funds that had been made available to the account holder.

So when a bank says the funds are available, they might retract that statement in the future leaving the lawyer holding the bag. Unless, of course, you have insurance.

(hat tip, Jay Breakstone, The Nigerian Shuffle Strikes Again)


February 4th, 2011

So, You Think It’s Safe To Disburse Those “Available” Funds In Your Account?

This one isn’t just for personal injury attorneys, but anyone that drops a check into an attorney trust account, waits for it to clear, and then disburses the funds. Warning: Banks may suspend the ordinary usage of English.

An interesting decision yesterday out of the Second Circuit regarding funds placed in a lawyer’s bank account that Citibank said were “available.” Except when they said “available,” they didn’t really mean it in the sense that you and I mean it. Because after they were “available,” and the lawyers wired the money money overseas, the bank called to say the check was counterfeit. Now the funds weren’t so available anymore.

This case arose out of a scam. The firm of  Fischer & Mandell collected $225, 351 that was allegedly a partial debt owed to another. Then, when their Citibank website said the funds were “available” they disbursed the money by wire transfer. Then they were unavailable, and the bank took the money needed for the wire transfers from another account of theirs.

“Available,” it seems, isn’t the same as “cleared.” Apparently, Citibank has in one of its agreements — the bank agreements drafted by the bank that no one ever reads until something bad happens — that the funds are only “provisionally” cleared. Nice. If you happen to be the bank.

You can almost hear the BigLaw lawyers that likely wrote the agreement chuckling about this over a beer.

Local attorney Stephen Chawkin emailed me his own thoughts on this when the subject came up for discussion later yesterday:

When I was taking my commercial paper course in law school 8,000 years ago, the teacher – who was a good guy and nobody’s fool – said that the underlying principle that trumped all other is simply this: “the bank wins”. Everything else is a corollary, an elaboration, a commentary, or (once in a blue moon) an exception to this.

The decision is here: Fischer&Mandell-v-Citibank

Hat tip: Blawgletter: Sucker Law Firm Loses Claim to Undo Wire Transfers