|Oregon State Bar Bulletin JULY 2008|
By Sylvia Stevens
The Florida Supreme Court recently issued an opinion that makes two important points about lawyer trust accounts.
The first point is that lawyer trust accounts enjoy no special status with regard to garnishment law. Funds in a lawyer trust account are, by definition, client funds and are subject to claims of the client’s creditors.1 At issue in Arnold, Matheny and Egan, PA v. First American Holdings, Inc., 2008 LEXIS 755 (May 1, 2008) was whether a law firm had a duty to stop payment on a trust check that had been written but not presented to its bank prior to the firm’s receipt of a writ of garnishment.
The facts were simple. On June 21, 2002, a law firm received settlement proceeds and deposited the funds into its trust account. On the same day, the firm issued and hand-delivered to its client a check for the client’s share of the proceeds. On June 25, a creditor of the client (the bank) served a writ of garnishment on the law firm, which responded that it held no funds of the client/debtor. Upon discovering that the trust check had not been presented to the law firm’s bank for payment until June 28, the creditor bank filed an action seeking to hold the law firm responsible for the funds represented by the trust check issued to the client.
After thoroughly examining the statutory garnishment scheme and applicable provisions of the Uniform Commercial Code, the court concluded that funds remain in the possession and control of the issuer of a check until the check has been presented to the issuer’s bank for payment, and therefore, a garnishee has a statutory duty to stop payment on a check that has not yet been presented for payment.2 The court found no basis in law for — and thus rejected the law firm’s arguments that — lawyer trust accounts should not be subject to the stop payment obligation and that lawyer trust account checks are analogous to certified or cashiers’ checks. The court also considered Florida’s equivalent to RPC 1.15, which requires lawyers to protect funds subject to non-frivolous third party claims from wrongful interference by the client: "[t]he special relationship between an attorney and his or her client is an insufficient basis upon which to circumvent the requirements of the garnishment statute." The court held that the law firm, as any garnishee, had a duty to inquire of its bank within a reasonable time after being served with the writ of garnishment to determine whether the check had been presented for payment and, if not, issue a stop payment order.
The Florida decision is a valuable reminder that money in a trust account remains within the lawyer’s "possession and control" for garnishment purposes notwithstanding the issuance of a check that has not yet been presented for payment. While we have no Oregon authority precisely on this point, the Florida opinion sounds a cautionary note.
The Florida case is also an important reminder on another, related, point: a check is not "payment" until it has been presented and honored. A check is merely a promise to pay upon presentment at the bank on which it was drawn. Why is this important, outside the garnishment context? As discussed in a prior article, a lawyer who deposits a check into trust on behalf of Client A and disburses to Client A (or to others at Client A’s instructions) before the funds are "collected," (i.e., before the drawee bank has paid the check and the funds have been actually received by the lawyer’s bank) risks misusing another client’s funds or overdrawing the account.
The importance of the distinction between a check and collected funds was demonstrated recently when two local lawyers were targeted in separate Internet check fraud scams in the same week. In one case, the lawyer’s familiarity with the law of negotiable instruments, coupled with some natural skepticism and prudent trust account practice, prevented him from being a victim of the scam. The other lawyer wasn’t so lucky.
What our lawyers experienced was a new variant on what is known as the "Nigerian letter scam," in which the victim is contacted by e-mail and asked to advance funds in exchange for the opportunity to share in a large fortune that will be secured with the advanced funds. In the fake check scam, the victim is asked to assist with a funds transfer by depositing a check into her own bank account, retaining some for herself as compensation for her help, then transferring the remainder to another account by wire or otherwise. Unfortunately, the original check turns out to be fake and the victim is responsible for reimbursing her bank for the uncollected funds that were distributed.
In one of the cases mentioned above, the lawyer received an e-mail that purported to be from an employee (Sally) of a Chinese toy manufacturer, requesting legal representation to collect a commercial debt owed by a local toy distributor. The lawyer determined from the Internet that there was a Chinese company of that name and that it had an employee named Sally. He also confirmed that the named debtor was an actual local business. E-mails were exchanged to confirm the engagement, including the execution of a fee agreement. Shortly after, Sally told the lawyer to hold off taking any action, as the debtor had agreed to make payment and would be forwarding a large cashiers’ check to the lawyer. Sally instructed the lawyer that he should deposit the check upon receipt, pay himself the agreed fee, then immediately wire the balance to a bank account in Korea. The lawyer deposited the check into his trust account, but in accordance with his firm’s standard procedures, he waited to disburse any funds until his bank confirmed the check had cleared. He also asked his bank to investigate the legitimacy of the check. Initially, all reports indicated that the check was genuine. Within a few days, however, the lawyer was informed by his bank that the check was a forgery, albeit a very good one. Because the lawyer hadn’t disbursed any of the funds from the phony check, no funds of the lawyer or his clients were put at risk.
The other lawyer was taken in by a very similar scam. In that case, however, the lawyer instructed his bank to wire the net funds (after deducting his fee) right away, without waiting to ensure he had collected funds. It is not clear whether he believed a cashiers’ check was the equivalent of cash or whether he was under the impression that the bank would not wire from uncollected funds. It also appears he had no standard protocol for waiting a set period of time before disbursing funds from trust. (For more on this point, see "Waiting for ‘Go Dough’," OSB Bulletin, June 2006 here). When his bank discovered that the cashiers’ check was fake, the lawyer’s trust account was debited and the lawyer had to cover the shortfall. The lawyer was unable to recall the wired funds, which had already been deposited in the designated sender’s account; it also appears that none of the intermediary banks have any liability for accepting the fake check.
When I related these check fraud tales to colleagues, the most frequent response was that lawyers should know better. But the reality is that we don’t. It doesn’t help that scammers rely on the fundamental honesty and good faith of their victims; lawyers may be particularly vulnerable because we are trained to help. One hopes that lawyers aren’t a new target group for scam artists, but in the event we are, the National Consumers’ League3 offers some helpful tips for avoiding fake check scams:
- There are many variations of the fake check scam.
- Fake check scammers hunt for victims.
- They often claim to be in another country.
- They tell you to wire money to them after you’ve deposited the check.
- The checks are fake but they look real.
- You don’t have to wait long to use the money, but that doesn’t mean the check is good.
- You are responsible for the checks you deposit.
- There is no legitimate reason
for someone who is
giving you money to ask you to wire money back.
- Don’t deposit it — report it!
Knowledge is power, so being aware of the existence, nature and incidence of fake check scams should make us all more alert. It is also important that lawyers, who hold funds of clients and others as fiduciary trustees, understand the laws and regulations that pertain to those responsibilities. Your banker is a good source of information and guidance on the intricacies of checks and banking processes; if you don’t have a personal relationship with a banker, establish one. Finally, lawyers should have an unconditional rule that no disbursements are made from trust until the deposited check has cleared the banking process and the funds are collected.
1. The garnished lawyer may have possessory lien or setoff rights that take priority over other creditor claims. See e.g., ORS 18.615 and 87.430. Nothing in this article is intended to suggest otherwise.
2. This case is obviously based on Florida statutory law; however, the opinion cites Pacific First Federal Savings & Loan Ass’n. v. Flathead Properties, Inc., 47 OrApp 407, 614 P2d 1210 (1980) for the same proposition. In the Oregon case, the court didn’t decide the specific issue, but noted that where a check was issued but not paid before a notice of garnishment was served, the garnishee held money belonging to the debtor.
3. For more information, go to http://www.nclnet.org/fraud.
ABOUT THE AUTHOR
Sylvia Stevens is general counsel for the Oregon State Bar. She can be reached at (503) 620-0222, or toll-free in Oregon at (800) 452-8260, ext. 359, or by e-mail at email@example.com. Ethics opinions are published and updated on the bar’s website at http://www.osbar.org/ethics/toc.html
© 2008 Sylvia Stevens