04
Nov
11

Major Coverage Decisions on Attorney Check Fraud Schemes

Thus far, three state court trial court level decisions have denied coverage for the check fraud schemes discussed last week, including a Georgia trial court.  Importantly, however, an appellate court in New York and the 11th Circuit Court of Appeals has issued a published decision finding that such claims are covered.  The 11th Circuit was applying Florida law.  Click to check out these decisions.

Getting checks cashed fast means taking a risk.

NO COVERAGE CASES:

Georgia:  

Georgia has not had a binding appellate decision, but one trial court has sided with insurers on this scam and denied coverage.  In Fidelity Bank v. Stapleton, Civil Action No. 07A-11482-2 (Georgia 2009), a case decided at the trial court level, the attorney deposited a cashier’s check for nearly $200,000 in a special account created for the transaction.  The language of the communications betweent the attorney and bank were typical for these case.  The attorney asked if the funds were “available,” and the bank told the attorney that the funds had been “verified.”  After all but $10,000 of the funds were wired overseas, the cashier’s check was dishonored.  This left an overdraft of $187,000.  The bank demanded that the funds be replenished.

The attorney demanded that the E&O coverage pay the demand.  The insurer challenged coverage and prevailed.  The trial court held that no “application of legal knowledge unique to the practice of law is implicated by [the attorney’s] actions in this case. While he may have initially been contacted on the pretense of providing some legal services . . . , it is the nature of the act the insured performed, rather than the title or status of the insured, that determines what actions taken by an insured amount to the provision of professional services.”

Massachusetts:

Massachusetts has a trial court opinion consistent with Georgia.  The client in Fleet National Bank v. Wolsky, Middlesex Superior Court, Civil Action No. 04-cv-5075 (December 6, 2006), impersonated Nigerian royalty.  The attorney deposited funds into his client fund account and dispersed most of it per instructions.  About two weeks later, he learned that the check was dishonored.  The bank sued the attorney for the disbursed funds.

The court held there was no coverage because the receipt, endorsement and depositing of a check did not involve a lawyer’s specialized knowledge or skill and was, therefore, not a covered “professional service.”

South Carolina Federal Court:

In an unpublished district court opinion, Bradford & Bradford, P.A. v. Attorneys Liability Protection Society, Inc., 2010 WL 4225907 (D.S.C. 2010), the Court denied coverage to an attorney that was defrauded in a typical scheme.  The amount of the fraud was over $350,000. 

The Court’s ruling relied on the lack of professional services in the loss.  Although there was a signed retainer agreement, the court held that there was never an attorney-client relationship because the only services were cashing checks and wiring funds – no legal advice was provided.  While recognizing the harshness of the result, the court noted that E&O coverage was to protect attorneys from negligent legal services, not to protect the attorneys from fraud.

COVERAGE FOUND: 

Lack of coverage for check fraud can be scary!

The opinions finding coverage thus far may be fewer, but they are published appellate decisions, thus meaning they may carry more weight in future litigation.

New York:

A New York appellate court has found coverage in favor of the scammed attorney.  Lombardi, Walsh, Wakeman, Harrison, Amodeo & Davenport, P.C. v. American Guarantee, 85 A.D.3d 1291, 924 N.Y.S. 2d 201 (2011), involved a very typical fact pattern.  The attorney was solicited by e-mail to perform collection services for a supposed foreign client.  A retainer agreement was signed, the attorney received a $385,000 fraudulent cashier’s check, the check was deposited into a special account and  wired to the client.  When the check was dishonored, the bank demanded reimbursement.

The trial court sided with the insurer, finding that the UCC issues involved in a check fraud scheme did not involve covered “professional services.”  The appellate court reversed, reasoning that placing a clients’ funds in a trust account is a common and integral part of the legal profession, is subject to the rules of professional conduct, and the attorney was subject to these rules while handling the funds.  The appellate court further noted that the attorney believed that he was dealing with an actual client, and the policy did not require a real client to cover the events.

11th Circuit Court of Appeals (applying Florida law):

A major decision in favor of the insured came out of the Eleventh Circuit Court of Appeals recently.  In Nardella Chong, P.A. v. Medmarc Casualty Insurance Company, 642 F.3d 941 (11 Cir. 2011), the scam was a variation on the meme.  The “client” retained the attorney to establish a corporate subsidiary in the United States.  The foreign parent then sent the attorney a cashier’s check to cover payments.  The “client” then instructed the attorney to wire most of the funds to purported overseas business partners.  The attorney followed the instruction, then learned that the cashier’s check was forged.  The trust account had other client funds, so the transfer lessened the client funds in the account.  The attorney demanded indemnity to repay his liability to his clients.  The insurer denied the claim.

The Court of Appeal held that there was coverage, reasoning that the management of trust funds held for clients constituted a professional service under the policy.  The policy referred to professional services performed as a trustee or “any similar fiduciary capacity” as long as the services are typical and customary for an attorney.  The Court relied upon the Florida Bar Rules, which devoted an entire chapter to the subject, to determine that the management of trust accounts was a professional service.

Conclusion:

The most important thing to learn from the decisions is to not be taken in by this scam.  While some fraudsters are easy to sniff out (does Nigeria really have any royalty that is involved in a fraud scam), others are much more sophisticated and difficult to spot.  The key is to not forward money on a cashier’s check unless it has been honored by the drawn bank (this can take a while, although you may be able to request an expedited inquiry to determine the check’s validity before proceeding with a wire) or you have a significant track record with and “know” the client.  If an attorney does become a victim of the fraud, the claim should be reported, but coverage will likely be challenged.  The most common challenge is under the professional services clause, though other clauses (e.g., contract clause or restitutionary damages exclusions) potentially apply.  Georgia does not have a binding precedent on the issue.

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1 Response to “Major Coverage Decisions on Attorney Check Fraud Schemes”



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