NCSB Opinion 2, 2021: A Lawyer’s Professional Responsibility in Identifying and Avoiding Counterfeit Checks

Published: 29 October 2021

                    close up of man writing a check

On July 16, 2021, the North Carolina State Bar issued an ethics opinion that should be of interest to lawyers in every state. It deals with the ethical responsibilities of a lawyer who receives a check from a questionable source for a client which turns out to be part of a “scam.” The facts as laid out by the opinion are as follows:

Client contacted Lawyer seeking to collect debt from a third party. Client’s communication with Lawyer was unsolicited – Lawyer does not advertise for his practice, and Lawyer had not previously solicited Client’s business. Client provided Lawyer with documentation supporting Client’s claim. Lawyer made preliminary investigation and verified the existence and address of third party. Lawyer contracted with Client to file a lawsuit against third party for the amount owed to Client. A few days after Lawyer sent third party a letter introducing himself as Client’s representative, third party contacted Lawyer stating that he wished to pay the amount owed to Client without the need for litigation, and that third party would be back in touch to make payment arrangements. Without further communication with third party, Lawyer subsequently received a cashier’s check from third party drawn on an out-of-country bank. The cashier’s check was dated prior to third party’s earlier conversation with Lawyer, and third party did not mention the cashier’s check to Lawyer. Third party’s note also stated that he would pay the remainder of debt owed to Client within weeks. Lawyer did no further investigation of third party and did not investigate the authenticity of the foreign bank cashier’s check.

Unfortunately for the lawyer, it turned out that the check from the third party was a fraud and uncollectible. Further, this “counterfeit check scam” is, according to the opinion, one that has been used against countless lawyers and law firms throughout the United States and one about which numerous state and federal agencies have issued warning bulletins. The opinion faults the lawyer in question for his failure to know about these scams and his failure to investigate the check he received, in spite of the “red flags” he should have noticed. The opinion states:

Lawyer’s mistaken reliance on the counterfeit check is unexcused. Given the breadth of notice provided to the legal profession on this common scam, Lawyer should have realized that the circumstances surrounding this purported representation required additional investigation. As noted above, Lawyer has a duty to represent his clients with competency and diligence. Rules 1.1 and 1.3. Lawyer’s duty of competency includes the need to “keep abreast of changes in the law and its practice[.]” Rule 1.1. For at least ten years, lawyers have been warned about being targets of scams such as the one at issue in this inquiry. Lawyer should have been alerted to the suspicious nature of this transaction based upon the circumstances in this scenario, including the unsolicited request for the representation; the willingness of the purported defendant to quickly resolve the dispute without much effort from Lawyer; the cashier’s check drawn on an out-of-country bank; and the cashier check being dated prior to Lawyer’s conversation with the purported defendant Although one of these circumstances standing alone may not give cause for suspicion, the totality of the circumstances should have alerted Lawyer to the suspicious nature of the representation and the transaction. Lawyer’s failure to recognize the scam given the vast notice and information directed to lawyers on the topic demonstrated his lack of competency in violation of Rule 1.1. Furthermore, given the suspicious nature of the representation and transaction, Lawyer should have diligently investigated the legitimacy of the cashier’s check. Lawyer could have accomplished this by contacting the bank that issued the cashier’s check to confirm authenticity, or Lawyer could have informed Client of his concerns and waited to see that the cashier’s check was in fact honored and accepted by the issuing bank.

The opinion’s reliance upon Rules 1.1 (on competence} and 1.3 (on diligence), two of the most basic rules regulating lawyer conduct, makes this failure by the lawyer even worse.

One interesting aspect of the opinion is interpretation of Comment 8 to Rule 1.1 (Comment 8 in Kansas; Comment 6 in Missouri) and the requirement that lawyers be familiar with the risks “associated with new technologies.” Often lawyers interpret this to refer to the need to have internet security programs to protect them against hacking and information breaches. In this North Carolina opinion, the notion of such risk is extended to the risk that humans (lawyers) will fall for internet scams and confidence games over the internet.

It seems quite possible that both Kansas and Missouri authorities could take a position as to violations of Rules 1.1 and 1.3 similar to that taken in North Carolina Ethics Opinion 2, 2021

Unfortunately for the lawyer involved, not only did he run afoul of Rules 1.1 and 1.3, he also violated North Carolina’s version of Rule 1.15 when he deposited the cashier’s check in his client trust account and immediately—i.e., before the check was sent out for collection—disbursed the amount of the check to his client. In practical terms, this meant that the lawyer had disbursed funds from the client trust account owned by other clients who had not given permission for this disbursement:

Although Lawyer believed he was disbursing Client’s funds from his trust account after depositing the purportedly valid cashier’s check, Lawyer actually disbursed funds belonging to his other clients because the cashier’s check was counterfeit and resulted in no actual deposit of funds belonging to Client into Lawyer’s trust account. Lawyer’s disbursement of other clients’ funds to Client and to himself occurred without his other clients’ permission. By disbursing his other clients’ funds from his trust account without their permission and for the benefit of someone other than the client, Lawyer misappropriated entrusted client funds in violation of Rules 1.15-2(a), (k), and (n).

As the opinion points out, protection of client funds “is one of the most important professional responsibilities that a lawyer possesses.” In light of this, the opinion states:

A lawyer should never disburse against any provisionally credited funds unless he or she reasonably believes that the underlying deposited instrument is virtually certain to be honored when presented for collection. … When reasonably identifiable suspicious circumstances are present surrounding the receipt and disbursement of funds, a lawyer should not disburse on provisional credit – even if statutorily authorized to do so – until the lawyer satisfies him or herself that the instrument is authentic and the transaction is legitimate. Lawyer’s failure to do so in this situation not only unnecessarily put other clients’ funds at risk but resulted in actual harm to his clients through the misappropriation of his clients’ funds.

Further, the opinion holds that the lawyer was personally obligated to replace the funds disbursed improperly and that:

“[a] lawyer who discovers or reasonably believes that entrusted property has been misappropriated or misapplied shall promptly inform the Trust Account Compliance Counsel (TACC) in the North Carolina State Bar Office of Counsel.” Even if Lawyer promptly replenished the funds disbursed after learning the cashier’s check was counterfeit, a misappropriation of funds belonging to other clients occurred that requires reporting to the State Bar under Rule 1.15-2(p).

Kansas and Missouri Rules 1.15 differ somewhat from North Carolina Rule 1.15 (upon which this opinion rests). In Missouri, the applicable rule would be Missouri Rule 4-1.15(a)(6) which states:

No disbursement shall be made based upon a deposit:

  1. If the lawyer has reasonable cause to believe the funds have not actually been collected by the financial institution in which the trust account is held; and
  2. Until a reasonable period of time has passed for the funds to be actually collected by the financial institution in which the trust account is held.

Comment 5 to 4-1.15(a)(6) further states:

Rule 4-1.15(a)(6) establishes that a lawyer must wait a reasonable period of time for deposited funds to be collected by the financial institution in which the trust account is located before disbursing funds on that deposit. This is often referred to as the deposit being “good funds.” It is not sufficient to wait only until the deposit is “cleared” or “available” according to financial institution records. In either of those situations, the transaction may be reversed by the financial institution if a problem arises. The amount of time that is reasonable to wait may vary from one financial institution to another, depending on the financial institution’s processing method. Waiting 10 days after the date the bank records the deposit is presumed to be a reasonable period, unless a lawyer has actual notice of a reason to wait longer on a specific deposit. A shorter period may be reasonable, in some circumstances. A lawyer must also delay disbursement and take extra measures to ensure collection before disbursement if the lawyer is aware of information that causes doubt about the collection or collectability of the deposit. (emphasis added).

Presumably, a Missouri lawyer acting in the way the North Carolina lawyer did might well have a problem with Rule 4-1.15(6) and Comment 5.

Kansas does not have a provision exactly analogous to either the North Carolina rule or the Missouri rule described. Nevertheless, KRPC 1.15(a) does require that a client’s property be “appropriately safeguarded.” In addition, KRPC 1.15(d)(2)(iv) requires that a lawyer “shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.” Finally, Comment 7 to Rule 1.15 states, in part:

Rule 1.15 of the Kansas Rules of Professional Conduct requires that lawyers in the practice of law who are entrusted with the property of law clients and third persons must hold that property with the care required of a professional fiduciary.

See also KRPC 1.15, Comment 1.

Whether a Kansas court or disciplinary tribunal would find a KRPC 1.15 violation on the North Carolina opinion’s facts is difficult to determine, but it is a possibility.

The takeaway from North Carolina Ethics Opinion 2, 2021 for Kansas and Missouri lawyers is that they should be cognizant of the types of scams described in the North Carolina opinion and take care that they fully investigate any checks or other financial instruments they receive—especially from foreign sources—before they make disbursements based thereon.

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