Cashing Checks For Clients is Risky: They Could Be Scammers And Your Insurance Will Not Likely Cover the Losses
by
David Grossbaum, Esquire

Sophisticated scammers have successfully targeted lawyers and taken them for millions of dollars. Oftentimes the stolen money belongs to other clients. And if all that was not enough, insurance companies have successfully disclaimed coverage for the loss. Whether due to greed, naivete, or desperation to earn some money during a down economy, lawyers just cannot seem to resist the temptation.

I. How the Scheme Works

The scheme is deceptively simple. Most often, the person purports to act for an overseas company that is owed money by an American trade debtor. The company requests the lawyer’s assistance in collecting from the American entity and, in exchange, agrees to pay the lawyer a healthy percentage of whatever he or she can collect. After the lawyer agrees to be involved, the company reports that the debtor has agreed to pay the full amount of the debt, and the lawyer will be receiving the funds by cashier’s check. The company asks the lawyer to deposit the check, and wire the funds, less a generous payment to the lawyer, to the company’s overseas bank account.

Sometimes the lawyer is contacted by a person who impersonates a member of a Nigerian royal family and is asking the lawyer to assist in getting money out of the country. The lawyer is simply asked to receive the funds and then wire them to a designated account.

The lawyer then receives the funds in some form, usually a very authentic-looking cashier’s check drawn on a well-known American bank. The lawyer puts these funds in a separate account or in a client’s funds account.

Some lawyers are skeptical and will not order the wire transfer until they have confirmed that the cashier’s check has “cleared” or that the funds from the check are “available.” The problem is that most lawyers do not understand banking jargon. The bank may very well confirm that the lawyer can draw on the funds from the cashier’s check, and agree to send the wire. This does not mean, however, that the funds from the cashier’s check are irrevocably credited to the lawyer’s account and have been actually withdrawn from the account on which the cashier’s check was written. Rather, the bank is providing provisional credit to the lawyer. This means that the bank can still reverse the transaction if the cashier’s check is ultimately dishonored by the issuing bank. The funds from the cashier’s check are not irrevocably credited until there is “final settlement,” and this can take a week or more.

Of course, the cashier’s check is a forgery and the lawyer’s bank reverses the credit to the lawyer’s account. If the lawyer used a client’s funds account, and there are sufficient other funds in the account to cover the wire (funds belonging to other clients), the bank will simply remove those clients’ funds to cover the wire. If, on the other hand, the lawyer used a separate account with no other funds in it, the bank will demand that the lawyer repay the bank the amount of wire.

As lawyers get wise to this scheme, scammers have attempted to interpose fictitious American law firms into the process. Instead of getting an email directly from a foreign company, the lawyer may get an email from a fictitious law office somewhere else in the United States indicating that the target lawyer’s name was provided to the soliciting lawyer. The target’s natural assumption is that this foreign client has already been vetted by another American lawyer and that the transaction is legitimate.

II. Don’t Count on Your Insurance Company to Bail You Out

There are at least three trial court rulings where the lawyer’s malpractice insurer did not cover these losses. In the most recent case, Nardella Chong, P.A. v. Medmark Casualty Insurance Company, 2009 WL 4855737 (N.D.Fla. December 10, 2009), the lawyer received a cashier’s check in the amount of $197,350, which he deposited into his firm’s client’s funds account. The lawyer then had the bank wire $180,000 to an overseas company and he never saw the “client” or the money again. Because the bank account contained money belonging to other clients, the bank took those funds to cover the wire.

The malpractice insurer denied coverage because the loss did not arise from the rendering, or failing to render, professional services, a necessary condition for coverage under all such policies. The court distinguished the present situation from one where the lawyer improperly uses a client’s money without the client’s authorization, a loss covered by insurance. In the check cashing scheme, however, the lawyer explicitly followed the instructions as to cashing the check. The lawyer simply did not wait until the cashier’s check was honored by the issuing bank. While both situations result in funds belonging to clients being disbursed to unauthorized third parties, the court held that the check cashing fraud did not occur because of a “negligent act or negligent omission on the part of [the lawyer] but instead involved misfortune and bad luck.” A professional liability policy does not protect a lawyer from such fraud. Additionally, the court viewed the potential claims by the clients as seeking restitutionary damages (that is, return of their own funds), not compensatory damages (that is, payment for losses suffered by them) for the failure to provide professional services.

In a case from Georgia, Fidelity Bank v. Stapleton, Superior Court of Cobb County, Civil Action No. 07A-11482-2 (January 14, 2009), the exact same scheme was perpetrated on a Georgia lawyer. In this matter, however, the lawyer deposited the cashier’s check for $197,000 in a separate account. According to the lawyer, before he arranged for the wire of $187,000, he asked the bank whether the money was “available,” and he was told that the funds had been “verified.” After the wired funds were sent overseas, the cashier’s check was dishonored, leaving the lawyer with an overdraft of $187,000. The bank demanded that the lawyer replace the funds pursuant to the deposit agreement. Like the carrier in the Nardella Chong case, the insurance company argued that the lawyer was not engaged in the rendering of, or failure to render, professional services for others. The court agreed, finding that “[n]o application of legal knowledge unique to the practice of law is implicated by [the lawyer’s] actions in this case. While he may have initially been contacted on the pretense of providing some legal services to the entity ... , it is ‘the nature of the act the insured performed, rather than on the title or status of the insured’ that determines what is professional services.

The carrier was also successful in relying on an exclusion in the policy for any liability “assumed by an insured under any oral or written contract or agreement . . .“ as the bank was claiming under the deposit agreement. The lawyer was however, successful in defeating a summary judgment motion brought by the bank on that contract, as the court found that there was a disputed issue of fact as to whether the bank had breached the contract based on representations of its employee to the lawyer.

Finally, a Massachusetts trial court ruled in favor of an insurer in the case of Fleet National Bank v. Wolsky, Middlesex Superior Court, Civil Action No. 04-cv-5075 (December 6, 2006). In this case, the amount in dispute was only about $56,000, and involved the Nigerian royalty scam. This lawyer received an email from a Nigerian national promising lots of legal work if the lawyer would receive a check and disburse the money in accordance with the “client’s” instructions. The lawyer received a check in the amount of about $71,000 and deposited it in his client’s funds account. He then disbursed about $55,000 of it by purchasing money orders and sending wire transfers. Unfortunately, a few weeks later, the lawyer was notified that the check he had deposited was an altered check and the bank sued him for $55,000.

The professional liability insurer denied coverage on the basis that the lawyer was not rendering legal services at the time of the loss. Like the other cases, the Massachusetts court relied on the standard definition of professional services as those “involving specialized knowledge, labor, or skill, and a labor or skill involved that is predominantly mental or intellectual, rather than physical or manual . . .” Marx v. Hartford Accident and Indemnity Company, 183 Neb. 12, 13 (1968). The court found that the receipt of a check, endorsing it, and depositing it, did not involve a lawyer’s specialized knowledge or skill and was not a covered “professional service.” The court was not persuaded by the lawyer’s argument that he gave professional advice to the Nigerian national as to withholding money for tax purposes. That advice, even if it was a professional service, was unrelated to the cause of the loss, according to the court.

III. Conclusion

Regardless of whether these decisions are correct, they represent a serious problem for lawyers who are inclined to take a risk on clients they have never met, and who ask them to cash checks for them. All professional liability policies require that the lawyer be rendering professional services in order for any losses to be covered, and many include an exclusion for restitutionary damages and for damages that arise from contracts.

The risk of easy money in these cases is clearly outweighed by the almost certainty of financial ruin. Although it is sometimes appropriate to get clients through email, a lawyer must do some independent verification of the client and the transaction and never part with any money until the lawyer is clear that he is drawing on good funds that have finally settled and that cannot be reversed.