Friday, 18 October 2013
Urologists take investment battle to court - Health Care News - Crain's Chicago Business
Posted on 07:57 by Unknown
Monday, 14 October 2013
District Court Dismisses 10b-5 Lawsuit Against Green Mountain Coffee
Posted on 16:19 by Unknown
GOLESORKHI v. GREEN MOUNTAIN COFFEE ROASTERS, INC., Dist. Court, D. Vermont 2013 - Google Scholar:
The decision set forth above granted the defendants' motion to dismiss, but gave the plaintiffs leave to amend their complaint. The case is a 10b-5 securities lawsuit where the plaintiffs have alleged that they lost money because the defendants (the company and three officers) made false statements about the company's future prospects in a press release and an analyst meeting in February 2012.
Plaintiffs were stockholders of Green Mountain Coffee. The fact-pattern is a typical one: Green Mountain made certain projections of sales and then "missed estimates" in that its actual results were not as good as it had projected.
Plaintiffs challenged two sets of statements, a press release from February 1, 2012 and statements at an analyst meeting on February 21, 2012.
In the February 1, 2012 press release, the company reaffirmed prior guidance as to earnings and sales growth. According to the district court's opinion, "The "prior revenue and earnings estimates" to which [the company officer] referred included a total consolidated net sales growth of 60 to 65 percent in 2012, non-GAAP earnings per diluted share in the range of $2.55 to $2.65, and capital expenditures between $630 million and $700 million for fiscal year 2012."
Later, on May 2, 2012, the company announced that it had missed estimates as to sales growth and that it was lowering its earnings estimates for the year. Sales grew 37%, which was substantially less than the 40-50% growth that had been estimated in February 2012. In the May 2012 announcement, the company lowered its earnings estimate for the year from $2.65 to $2.50. Plaintiffs then filed their class action.
The court explains that the statements were accompanied by disclaimers:
"The Press Release also contained a litany of disclaimers and warnings. First, it explained that the Company was providing non-GAAP results in the interest of transparency even though the numbers provided did not take into account certain expenses and liabilities, including currency risks, legal and accounting expenses, and non-cash related items. Id. Second, the release contained a lengthy paragraph warning readers that certain representations in the document were "Forward-Looking Statements" that reflected management's best analyses at that point in time and therefore might not prove to be accurate predictions of the Company's actual results. GMCR further stated that among other factors, "the difficulty in forecasting sales and production levels," "the impact of the loss of major customers for the Company or reduction in the volume of purchases by major customers," "the Company's level of success in continuing to attract new customers," "sales mix variances," and "delays in the timing of adding new locations with existing customers," could all affect whether the Company would meet its performance expectations. Id. at 5.
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The decision set forth above granted the defendants' motion to dismiss, but gave the plaintiffs leave to amend their complaint. The case is a 10b-5 securities lawsuit where the plaintiffs have alleged that they lost money because the defendants (the company and three officers) made false statements about the company's future prospects in a press release and an analyst meeting in February 2012.
Plaintiffs were stockholders of Green Mountain Coffee. The fact-pattern is a typical one: Green Mountain made certain projections of sales and then "missed estimates" in that its actual results were not as good as it had projected.
Plaintiffs challenged two sets of statements, a press release from February 1, 2012 and statements at an analyst meeting on February 21, 2012.
In the February 1, 2012 press release, the company reaffirmed prior guidance as to earnings and sales growth. According to the district court's opinion, "The "prior revenue and earnings estimates" to which [the company officer] referred included a total consolidated net sales growth of 60 to 65 percent in 2012, non-GAAP earnings per diluted share in the range of $2.55 to $2.65, and capital expenditures between $630 million and $700 million for fiscal year 2012."
Later, on May 2, 2012, the company announced that it had missed estimates as to sales growth and that it was lowering its earnings estimates for the year. Sales grew 37%, which was substantially less than the 40-50% growth that had been estimated in February 2012. In the May 2012 announcement, the company lowered its earnings estimate for the year from $2.65 to $2.50. Plaintiffs then filed their class action.
The court explains that the statements were accompanied by disclaimers:
"The Press Release also contained a litany of disclaimers and warnings. First, it explained that the Company was providing non-GAAP results in the interest of transparency even though the numbers provided did not take into account certain expenses and liabilities, including currency risks, legal and accounting expenses, and non-cash related items. Id. Second, the release contained a lengthy paragraph warning readers that certain representations in the document were "Forward-Looking Statements" that reflected management's best analyses at that point in time and therefore might not prove to be accurate predictions of the Company's actual results. GMCR further stated that among other factors, "the difficulty in forecasting sales and production levels," "the impact of the loss of major customers for the Company or reduction in the volume of purchases by major customers," "the Company's level of success in continuing to attract new customers," "sales mix variances," and "delays in the timing of adding new locations with existing customers," could all affect whether the Company would meet its performance expectations. Id. at 5.
In its Press Release, GMCR also directed investors to the set of risks it had described more thoroughly in the Company's Annual Report on Form 10-K for fiscal year 2011 and other filings with the SEC. See Compilation of Cautionary Statements, ECF No. 32-13 at *2-8. That document describes many of the aforementioned factors in greater detail, including several passages that specifically address the difficulties of predicting demand and the effect that changes in demand would have on the Company's financial performance. For example, GMCR stated that its results were extremely dependent on the sales of Keurig® single-cup brewing systems and K-Cup® portion packs; "any substantial or sustained decline in the acceptance of [those products]," GMCR explained, "would materially adversely affect us." Id. at *2. In addition, GMCR stated that demand for its products could be dampened by competition from other brands; changes in consumer tastes and preferences; changes in consumer lifestyles; national, regional, and local economic conditions; perceptions or concerns about the environmental impact of its products; demographic trends; and perceived or actual health benefits. Id. at 2, 4. GMCR also noted that the nature of its products—mainly hot beverages—exposed the Company to seasonal variations in demand. Id. at 6."
The disclaimers were sufficient to defeat the 10b-5 claim. The district court concluded that the statements at issue were forward-looking statements and that those statements were accompanied by meaningful cautionary language. Thus, the statements were not actionable and the complaint was dismissed.
In the alternative, the court held that the plaintiffs had not pleaded scienter, or intent to defraud, because there were insufficient allegations that the defendants knew their statements were false or misleading.
Edward X. Clinton, Jr.
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Monday, 23 September 2013
LLC Operating Agreement Defeats Unjust Enrichment and Breach of Fiduciary Duty Claims
Posted on 19:16 by Unknown
WOSS, LLC v. 218 ECKFORD, LLC, 102 AD 3d 860 - NY: Appellate Div., 2nd Dept. 2013 - Google Scholar:
The plaintiff LLC was a member of the defendant LLC 218 Eckford. It then brought numerous claims against the defendant LLC on the ground that it had not received the appropriate share of profits. Plaintiff's claims were entirely defeated because plaintiff was a member of 281 Eckford and signed the operating agreement. Plaintiff could not bring a claim for unjust enrichment because the operating agreement (a written contract) controlled the outcome. Plaintiff could not bring a claim for breach of fiduciary duty because plaintiff did not allege a fiduciary relationship.
Comment: the lesson here is that the operating agreement was thoughtfully drafted. The provisions of the operating agreement are a contract that governed the parties' business relationship. There were no holes in the agreement (at least according to the court) for the plaintiff to run through to bring a cause of action.
In sum, where there is more than one person involved in a business venture or undertaking, the operating agreement is crucial. It governs the parties' business relationship. This is where legal work is most valuable to the entrepreneur. The lawyer can draft the agreement to reflect the client's wishes and can avoid many pitfalls.
Edward X. Clinton, Jr.
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The plaintiff LLC was a member of the defendant LLC 218 Eckford. It then brought numerous claims against the defendant LLC on the ground that it had not received the appropriate share of profits. Plaintiff's claims were entirely defeated because plaintiff was a member of 281 Eckford and signed the operating agreement. Plaintiff could not bring a claim for unjust enrichment because the operating agreement (a written contract) controlled the outcome. Plaintiff could not bring a claim for breach of fiduciary duty because plaintiff did not allege a fiduciary relationship.
Comment: the lesson here is that the operating agreement was thoughtfully drafted. The provisions of the operating agreement are a contract that governed the parties' business relationship. There were no holes in the agreement (at least according to the court) for the plaintiff to run through to bring a cause of action.
In sum, where there is more than one person involved in a business venture or undertaking, the operating agreement is crucial. It governs the parties' business relationship. This is where legal work is most valuable to the entrepreneur. The lawyer can draft the agreement to reflect the client's wishes and can avoid many pitfalls.
Edward X. Clinton, Jr.
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Wednesday, 18 September 2013
Corporate Law - Dissolved Corporation Lacks Standing To Sue For Claims Arising After Dissolution
Posted on 21:39 by Unknown
Sometimes a client asks whether a dissolved corporation can bring a lawsuit. The answer is not clear. If the claim accrued before the corporation was dissolved, the corporation can sue. However, under this case (see below) a dissolved corporation cannot sue if the claim "arose" after it was dissolved.
Corporations are dissolved usually when the corporation fails to pay its annual fee to the Illinois Secretary of State.
The case is A Plus Janitorial Co., v. Group Fox, Inc., 2013 Il App (1st) 120245. In the A Plus case, the plaintiff attempted to bring a breach of contract claim against another party. Section 12.80 of the Illinois Business Corporation Act states that the dissolution of a corporation does not "take away or impair any civil remedy available to or against such corporation...." The court reasoned that the statute preserves any claims that were in existence (or which had accrued) before the corporation was dissolved. However, the A Plus court held that the dissolved corporation does not have the ability to sue for a claim that arose after it was dissolved.
Since the alleged breach of contract occurred after dissolution, the corporation could not sue.
Comment: This is a case of careless behavior by the plaintiff. A corporation can be reinstated by paying a fine and the past due fees to the Illinois Secretary of State. At most, the fees would run a few hundred dollars. Failing to pay these fees wasted years of work on the litigation that followed. The lesson here is simple - if there is any doubt about corporate status, clean it up before filing.
Edward X. Clinton, Jr.
www.clintonlaw.net
Corporations are dissolved usually when the corporation fails to pay its annual fee to the Illinois Secretary of State.
The case is A Plus Janitorial Co., v. Group Fox, Inc., 2013 Il App (1st) 120245. In the A Plus case, the plaintiff attempted to bring a breach of contract claim against another party. Section 12.80 of the Illinois Business Corporation Act states that the dissolution of a corporation does not "take away or impair any civil remedy available to or against such corporation...." The court reasoned that the statute preserves any claims that were in existence (or which had accrued) before the corporation was dissolved. However, the A Plus court held that the dissolved corporation does not have the ability to sue for a claim that arose after it was dissolved.
Since the alleged breach of contract occurred after dissolution, the corporation could not sue.
Comment: This is a case of careless behavior by the plaintiff. A corporation can be reinstated by paying a fine and the past due fees to the Illinois Secretary of State. At most, the fees would run a few hundred dollars. Failing to pay these fees wasted years of work on the litigation that followed. The lesson here is simple - if there is any doubt about corporate status, clean it up before filing.
Edward X. Clinton, Jr.
www.clintonlaw.net
Seventh Circuit Holds That A Demand on the Board of Directors Was Not Required
Posted on 19:16 by Unknown
In a shareholder derivative lawsuit, the plaintiffs are the shareholders of the company. They bring a lawsuit against someone for wrongdoing. Because the proceeds of the case really belong to the corporation, a doctrine of corporate law has developed under which the plaintiffs must first "demand" that the directors of the corporation bring the lawsuit themselves. What happens when the directors themselves are accused of wrongdoing? Can they really be expected to comply with a demand that they sue themselves for money? Thus, under this exception, courts have held that the "demand" requirement is "excused" in certain cases. The Seventh Circuit has recently decided one such case.
See Westmoreland County Employee Retirement System v. Parkinson, Jr. et. al. No.12- 3342 (August 16, 2013).
According to the opinion, Baxter International had severe problems with a medical device called Colleague Infusion Pump (Pump). The Pumps were used to deliver intravenous fluids to patients. The Pumps had a range of difficulties over a period of years. At first Baxter worked diligently to fix the problems but then its efforts allegedly tapered off. The FDA sent a series of warning letters to Baxter.
The plaintiff shareholders filed their lawsuit several years after the problems became known. By that time, about 200,000 Pumps were in use throughout the country. Plaintiffs sued 13 directors of Baxter and several corporate officers. Plaintiffs made no demand before filing the lawsuit that the directors take action. According to the District Court the plaintiffs failed to show that demand was not necessary. The district court dismissed the lawsuit.
The Seventh Circuit reversed and reinstated the case.
The defendants were directors and a few interested officers. The complaint alleged that the defendants breached their fiduciary duties by consciously disregarding their duties to bring Baxter in compliance with a consent decree and applicable law.
According to the court demand is necessary unless there is reasonable doubt that the directors are disinterested or the action was otherwise the product of a valid exercise of business judgment.
According to the Court if a director breaches his duty of loyalty he can not rely on the business judgment rule. The 7th circuit said that the Defendants gave up in trying to fix the pumps and threw in the towel. Baxter began to focus on the development of a new pump and to a great extent did not continue to fix the problems with the old pump despite warnings of the FDA.
According to the 7th Circuit, the defendant directors actions fell outside the protection of the business judgment rule. The Court said ”the directors knew of the problem, having been warned but took no steps to remedy the situation.” The Court went on to say that there was a reasonable probability of a finding of bad faith by the directors.
The judgment of the district court was reversed.
Cases holding that the demand requirement was excused are rare, but significant.
Edward X. Clinton, Sr.
See Westmoreland County Employee Retirement System v. Parkinson, Jr. et. al. No.12- 3342 (August 16, 2013).
According to the opinion, Baxter International had severe problems with a medical device called Colleague Infusion Pump (Pump). The Pumps were used to deliver intravenous fluids to patients. The Pumps had a range of difficulties over a period of years. At first Baxter worked diligently to fix the problems but then its efforts allegedly tapered off. The FDA sent a series of warning letters to Baxter.
The plaintiff shareholders filed their lawsuit several years after the problems became known. By that time, about 200,000 Pumps were in use throughout the country. Plaintiffs sued 13 directors of Baxter and several corporate officers. Plaintiffs made no demand before filing the lawsuit that the directors take action. According to the District Court the plaintiffs failed to show that demand was not necessary. The district court dismissed the lawsuit.
The Seventh Circuit reversed and reinstated the case.
The defendants were directors and a few interested officers. The complaint alleged that the defendants breached their fiduciary duties by consciously disregarding their duties to bring Baxter in compliance with a consent decree and applicable law.
According to the court demand is necessary unless there is reasonable doubt that the directors are disinterested or the action was otherwise the product of a valid exercise of business judgment.
According to the Court if a director breaches his duty of loyalty he can not rely on the business judgment rule. The 7th circuit said that the Defendants gave up in trying to fix the pumps and threw in the towel. Baxter began to focus on the development of a new pump and to a great extent did not continue to fix the problems with the old pump despite warnings of the FDA.
According to the 7th Circuit, the defendant directors actions fell outside the protection of the business judgment rule. The Court said ”the directors knew of the problem, having been warned but took no steps to remedy the situation.” The Court went on to say that there was a reasonable probability of a finding of bad faith by the directors.
The judgment of the district court was reversed.
Cases holding that the demand requirement was excused are rare, but significant.
Edward X. Clinton, Sr.
Sunday, 8 September 2013
Ninth Circuit Rejects Securities Fraud Claim By Purchasers of Hard Rock Hotel Condominiums
Posted on 22:01 by Unknown
The case is captioned Salameh v. Tarsadia Hotel. It is an investment contract case, where the plaintiff alleges that certain contracts he signed were really securities and that the securities should have been registered under the Federal Securities laws.
The facts, from the plaintiffs' complaint, were as follows:
Forty plaintiffs signed contracts to purchase condominium units in a Hard Rock Hotel then under construction. Plaintiffs alleged that they were obligated also to sign Rental Management Agreements with Defendant Tarsadia in which Tarsadia would be the exclusive management agent for the hotel.
Plaintiffs alleged that they were not given keys to the units purchased and could not occupy the units for more than 28 days each year. Therefore, according to plaintiffs, the purchase should be viewed as an investment contract, not a purchase of real estate.
Plaintiffs alleged that Defendants did not comply with the Securities Act of 1933, Sections 12 (a) and Section 10 B of the Securities Exchange act of 1934, the California Securities Law and were guilty of common law fraud.
The District Court held that the defendants did not sell securities. It reasoned that the contract to purchase the condominium and the contract under which the hotel was to be managed were two separate contracts signed 15 months apart.
The 9th Circuit affirmed.
The 9th Circuit acknowledged that the both the Securities Act of 1933 and the Securities Exchange Act of 1934 defines the term security to include the term “investment contract” . The Court also noted that the term “investment contract” has been interpreted to include novel, uncommon devices.” The investment contract concept embodies a flexible rather than a static principle, one that is capable of adaptation to meet countless and variable schemes by those who seek the use of the money of others on the promise of profits. SEC v. Howey 328 U.S.281. The Court went on to say whether a real estate transaction is a security, substance governs, not label, or form. However, the Court held that the Condo Purchase and Management Agreements were not offered as a package.
The material delivered to plaintiffs do not allege that management agreement forthcoming. The Court said that there was a significant time gap between the execution of the Condo Purchase Agreement and the Management Agreement The Court said that the two transactions were distinct. The Court went on to say that there was no reason why there could not be a market for ownership of a condo as a short term vacation home.
The Court said that taking all nonconclusionary allegations as true, Plaintiffs did not sufficiently allege claims under federal or state securities laws. The Court also went on to reject the common law fraud claims.
Although the Court made passing reference to the amicus brief of the SEC, it was not persuaded. The well-written and thoughtful brief of the SEC stated in part :
“The Commission believes that the district court, in determining that the hotel-room sales did not sales of investment contracts, failed to give effect to the economic realities of the transaction as required by Supreme Court and Ninth Circuit precedents.
The Commission is concerned that the district court’s holding on the investment contract issue, unless reversed, would seriously erode the investor protection of the securities laws. It would impermissibly allow a promoter to avoid the coverage of these laws by (1) artificially dividing a single investment into ostensibly separate parts and (2) including a written disclaimer that falsely state that there is no investment exception.”
The brief also stated that (1) the sales agreements left the plaintiffs with so little use or control that it was obvious from the beginning that the defendants would exercise exclusive control to rent and operate the rooms; the reality of the defendant’s plan made if obvious from the outset that these rooms would be necessary to serve as the hotels guest rooms; and the hotel was under construction during the entire period, making the time gap between the room sales and rental program inconsequential.
The Ninth Circuit rejected the arguments of the SEC:
"Plaintiffs' strongest argument that the two contracts, signed about a year apart, form a single transaction is their assertion that the "economic reality" shows that the two transactions are part and parcel of one scheme. They contend that the Purchase Contract, combined with external factors, such as the zoning ordinance, gave them no choice but to sign the Rental Management Agreement when it was later presented. This argument has some force. See Hocking, 885 F.2d at 1461; see also Tcherepnin v. Knight, 389 U.S. 332, 336 (1967). But to accept this argument, we not only would have to ignore the large time gap between the two transactions that were executed with different entities, but also the fact that Plaintiffs' complaint is void of any allegation that they were induced to buy the condominiums by the Rental Management Agreement. The economic reality as we see it is that these two transactions were distinct. Moreover, Plaintiffs' economic-reality argument rests on the implicit assumption that the only viable use for the condominiums was as an investment property, but there is no plausible reason why there cannot be a viable market for owner-occupied hotel-condominiums for use as short-term vacation homes. See Brief of Amici Real Estate Roundtable & National Association of Realtors 3-6. This conclusion undercuts Plaintiffs' economic assumptions. See Forman, 421 U.S. at 858 (holding that a security does not exist "where [a consumer] purchases a commodity for personal consumption or living quarters for personal use")."
In my opinion, this is an unfortunate result that is not consistent with precedent Doubtless there were substantial losses suffered by the investors.
Edward X. Clinton, Sr.
The facts, from the plaintiffs' complaint, were as follows:
Forty plaintiffs signed contracts to purchase condominium units in a Hard Rock Hotel then under construction. Plaintiffs alleged that they were obligated also to sign Rental Management Agreements with Defendant Tarsadia in which Tarsadia would be the exclusive management agent for the hotel.
Plaintiffs alleged that they were not given keys to the units purchased and could not occupy the units for more than 28 days each year. Therefore, according to plaintiffs, the purchase should be viewed as an investment contract, not a purchase of real estate.
Plaintiffs alleged that Defendants did not comply with the Securities Act of 1933, Sections 12 (a) and Section 10 B of the Securities Exchange act of 1934, the California Securities Law and were guilty of common law fraud.
The District Court held that the defendants did not sell securities. It reasoned that the contract to purchase the condominium and the contract under which the hotel was to be managed were two separate contracts signed 15 months apart.
The 9th Circuit affirmed.
The 9th Circuit acknowledged that the both the Securities Act of 1933 and the Securities Exchange Act of 1934 defines the term security to include the term “investment contract” . The Court also noted that the term “investment contract” has been interpreted to include novel, uncommon devices.” The investment contract concept embodies a flexible rather than a static principle, one that is capable of adaptation to meet countless and variable schemes by those who seek the use of the money of others on the promise of profits. SEC v. Howey 328 U.S.281. The Court went on to say whether a real estate transaction is a security, substance governs, not label, or form. However, the Court held that the Condo Purchase and Management Agreements were not offered as a package.
The material delivered to plaintiffs do not allege that management agreement forthcoming. The Court said that there was a significant time gap between the execution of the Condo Purchase Agreement and the Management Agreement The Court said that the two transactions were distinct. The Court went on to say that there was no reason why there could not be a market for ownership of a condo as a short term vacation home.
The Court said that taking all nonconclusionary allegations as true, Plaintiffs did not sufficiently allege claims under federal or state securities laws. The Court also went on to reject the common law fraud claims.
Although the Court made passing reference to the amicus brief of the SEC, it was not persuaded. The well-written and thoughtful brief of the SEC stated in part :
“The Commission believes that the district court, in determining that the hotel-room sales did not sales of investment contracts, failed to give effect to the economic realities of the transaction as required by Supreme Court and Ninth Circuit precedents.
The Commission is concerned that the district court’s holding on the investment contract issue, unless reversed, would seriously erode the investor protection of the securities laws. It would impermissibly allow a promoter to avoid the coverage of these laws by (1) artificially dividing a single investment into ostensibly separate parts and (2) including a written disclaimer that falsely state that there is no investment exception.”
The brief also stated that (1) the sales agreements left the plaintiffs with so little use or control that it was obvious from the beginning that the defendants would exercise exclusive control to rent and operate the rooms; the reality of the defendant’s plan made if obvious from the outset that these rooms would be necessary to serve as the hotels guest rooms; and the hotel was under construction during the entire period, making the time gap between the room sales and rental program inconsequential.
The Ninth Circuit rejected the arguments of the SEC:
"Plaintiffs' strongest argument that the two contracts, signed about a year apart, form a single transaction is their assertion that the "economic reality" shows that the two transactions are part and parcel of one scheme. They contend that the Purchase Contract, combined with external factors, such as the zoning ordinance, gave them no choice but to sign the Rental Management Agreement when it was later presented. This argument has some force. See Hocking, 885 F.2d at 1461; see also Tcherepnin v. Knight, 389 U.S. 332, 336 (1967). But to accept this argument, we not only would have to ignore the large time gap between the two transactions that were executed with different entities, but also the fact that Plaintiffs' complaint is void of any allegation that they were induced to buy the condominiums by the Rental Management Agreement. The economic reality as we see it is that these two transactions were distinct. Moreover, Plaintiffs' economic-reality argument rests on the implicit assumption that the only viable use for the condominiums was as an investment property, but there is no plausible reason why there cannot be a viable market for owner-occupied hotel-condominiums for use as short-term vacation homes. See Brief of Amici Real Estate Roundtable & National Association of Realtors 3-6. This conclusion undercuts Plaintiffs' economic assumptions. See Forman, 421 U.S. at 858 (holding that a security does not exist "where [a consumer] purchases a commodity for personal consumption or living quarters for personal use")."
In my opinion, this is an unfortunate result that is not consistent with precedent Doubtless there were substantial losses suffered by the investors.
Edward X. Clinton, Sr.
Thursday, 22 August 2013
Illinois Court Rejects Law Firm's Claim Against Bank For Fraudulent Check
Posted on 17:29 by Unknown
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
'via Blog this'
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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