Lawyers are increasingly receiving emails from alleged potential foreign clients looking to collect debts from customers. More likely than not, the email is the first step in a fraudulent scheme which involves a deposit and withdrawal from your special client fund account. A basic knowledge of Article 4 of the UCC and simple precautions can help lawyers avoid becoming a victim of these schemes and protect against other potential fraudulent deposits into lawyer’s special accounts, including fraudulent settlement checks and retainer checks.
The scenario is a familiar one by now for many lawyers. There are variations, but it generally unfolds something like this:
The mistake most lawyers make is that they assume that once they hear from their bank that the deposited check has "cleared" and the funds are available there is no risk in wiring those funds. This is simply not true.
The Expedited Funds Availability Act, 12 U.S.C. 4001, et seq., requires banks to disclose when deposited funds will be made available. However, a bank's making funds available is only provisional until the check is actually paid by the payor bank (i.e., final settlement). UCC § 4-201 provides that prior to final settlement, the depositor's bank merely acts as the customer's agent for collection of the check and any advancement of funds by the depositor's bank is provisional. UCC § 4-214 further provides that if there is no final settlement (i.e., the payor bank does not pay the check), the depositor's bank may charge back the sum of any provisional advancement of funds or demand a refund from the customer.
As applied to our illustration above, this means that the attorney who deposits the check and wires the funds to his "client" once the check clears may ultimately be liable to the bank for the amount of the fraudulent check. The bank may either charge the lawyer's account if sufficient funds are available in the lawyer's account or demand a refund and pursue legal action against the lawyer for the amount of the check.
Lawyers can take some steps to avoid being victims of these fraudulent check schemes. First, be extremely wary of taking on any representation from a foreign client who contacts you only via email. As with any new client, a lawyer should investigate the client thoroughly. This includes determining the actual existence of the client and the validity of its operations. A diligent lawyer should call references for the client, check public records, and obtain supporting documentation of the alleged debt that it owed to the client.
Second, never assume that simply because a check has cleared and funds are available that a check has been paid by a payor bank. Upon receiving a check from a suspicious client, a diligent lawyer should call the payor bank to verify the account and determine if the check is a forgery. A lawyer should also not draw on deposited funds from a suspicious client until he or she receives confirmation from the bank that there has been a "final settlement" and the deposited check has actually been paid by the payor bank.
Finally, lawyers should be cognizant that any check they receive may ultimately be dishonored and they may be liable if they draw upon any provisional funds supplied by the depositor bank. Prudent practice dictates that an attorney ensure that is "final settlement" on retainer checks from clients and settlement checks from opposing parties and attorneys before disbursing funds from those checks.