What do you do?
These are the facts of several currently circulating email scams targeting lawyers. There are several variations: One involves a claim for unpaid severance from an Ohio health care company; another involves the collection of overdue loan payments from a Massachusetts restaurant company. The purported adverse party is often a real company and the underlying documents put together with a sophisticated touch—there are no “Nigerian princes” involved. But the check is counterfeit and the goal of the scam is to cause the attorney to disburse funds before learning that the check is no good.
A recent decision of the Massachusetts Appeals Court highlights the danger—and how easy it can be to make a mistake—while providing a cautionary review of applicable UCC principles. Sarrouf Law LLP v. First Republic Bank, No. 19-P-31 (Mass. App. Ct. May 20, 2020), involved a variation on these frauds in which a new “client” sought assistance in purchasing heavy construction equipment from a seller in Massachusetts. The law firm was sent a large check to deposit into its attorney trust account and asked to wire the funds out to counterparties two days later. The law firm did so. The check it had been sent was counterfeit and, by the time it learned this, it could not stop the wires. Its attorney trust account was withdrawn by several hundred thousand dollars.
Notably, when a law firm employee deposited the new client’s check, the bank teller gave her a receipt and told her that the funds would be immediately available because the bank did not place “holds” on funds deposited into attorney trust accounts. However, the deposit receipt—like the business account agreement between the firm and the bank—read, “All items are credited subject to final payment. Any item may be charged back at any time before final payment.”
The law firm sued the bank, and the resolution of its claims was governed by Article 4 of the UCC. Consistent with the business account agreement, in a situation like this, the UCC puts all the risk of a fraudulent check on the depositor. Under Article 4, the law firm’s bank was the “collecting bank,” and under UCC section 4-201, when a collecting bank credits a depositor’s account in the amount of a deposited check, this is a provisional credit only. The depositor remains liable for a fraudulent check until the “payor bank,” that is, the bank on which the check was drawn, honors the check. This may take some time, as checks commonly run through intermediaries, called “presenting banks,” as they make their way to the payor bank. Only when the payor bank honors the check does the provisional settlements through the chain of banks become final.
The Massachusetts court noted that this was appropriate from a policy perspective: A loss from fraud is best placed on the party in a position to prevent the fraud. In the fact situation of the Sarrouf case, that was the law firm because it was in the best position to know its “client,” its client’s purported debtor, and the reason for and recipient of the outgoing payment.
What lessons can be drawn from this case as email scams targeting lawyers become more sophisticated? Here are four tips:
- Be careful when you receive a check from a party that you do not know, particularly when the check is associated with a new attorney-client relationship.
- Do not disburse funds until your bank confirms that the deposit has cleared and the funds are actually credited in the account—a caution that applies doubly when a check is deposited into an attorney trust account.
- Understand that even though your bank has made funds available for withdrawal the check may not have cleared and you may remain responsible for the funds; ask your bank if you are not sure whether the funds are actually credited to your account
- Establish internal controls on the timing of checks and wires from your accounts, including and especially your attorney trust account.