Illinois Court Rejects Law Firm's Claim Against Bank For Fraudulent Check

DIXON, LAUKITIS AND DOWNING, PC v. Bank, Ill: Appellate Court, 3rd Dist. 2013 - Google Scholar:

Over the past several years, lawyers have become victims to check scams. The scam works like this. The lawyer receives a fraudulent check and deposits the check in his trust account. The lawyer is unaware that the check is fraudulent. The lawyer deducts his legal fee from the check and remits the balance to the client. Two or three weeks later the bank discovers that the check is fraudulent and deducts the amount of the check back to the lawyer's account. The problem is that there is a time gap between when a check is deposited (Here May 25, 2011) and when the bank learns that the check is a fraud (here June 10, 2011). By writing checks on their trust account, the lawyers often unwittingly convert other client funds that they hold. They must then reach in their pockets and make good the losses to their clients.

Here the law firm was a victim of such a scam. It tried to sue the bank that dishonored the check, Busey Bank, but was unsuccessful.

The trial court rejected the law firm's negligence claim on the ground that the bank had no duty to the law firm. Instead, the parties' duties were set forth in the account agreement, which provided that the law firm bore the risk of loss until the final settlement of the check.  The account agreement provided: "Deposits - We will give only provisional credit until collection is final for any items, other than cash, we accept for deposit (including items drawn 'on us')."

Further, the Uniform Commercial Code, Section 4-214(a) "provides that a collecting bank may charge back a customer's account when the bank makes provisional settlement but does not receive final payment on an item if the collecting bank gives notice to its customer by midnight of the next banking day."

Here, the bank complied with Section 4-214(a) by giving prompt notice to the law firm that the check was fraudulent.

The appellate court affirmed the dismissal of the law firm's negligence action against the bank.

Comment: The lesson here is that if there is any doubt as to the validity of the check, the lawyer should wait until the bank confirms that collection is final before paying out the proceeds. Thus, the lawyer must wait before paying out the funds even if the client calls repeatedly and threatens to sue the lawyer or file a grievance with the ARDC. The case is clear - if you draw funds on a check before final settlement of the check (several weeks after the check is deposited) it is your fault if the check is a fraud. I agree with this result. Any other result would require the bank to act as an insurer for bad checks. That would inevitably lead to losses by the taxpayers.

Edward X. Clinton, Jr.

www.clintonlaw.net

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