Disbursements Against Cashier’s Checks – You’ve Got to Know When to Hold ‘Em

August 6, 2014

Have you ever received an email from a potential client asking you to collect a debt owed to them by an ex-spouse, a corporation, or other person or entity?  Did the email offer to pay you a hefty percentage of the amount collected?  Many of us have received similar emails.  More often than not, such requests are scams which involve fraudulent cashier’s checks.  Some emails are easily identifiable as scams due to spelling and grammatical errors, but some are fairly sophisticated.  Cashier’s checks have had the reputation of being reliable in the past, but these schemes are making attorneys a bit more wary of immediately distributing against them, and rightfully so.

RPC 191 permits attorneys to immediately disburse funds from a trust account upon the deposit of a financial instrument specified in the Good Funds Settlement Act (“Act”) (N.C. Gen. Stat. Chapter 45A).  Certified checks, cashier’s checks, teller’s checks, and official bank checks drawn on an FDIC insured bank are all listed under the Act.  Attorneys are allowed to immediately disburse against the provisional credit extended to these kinds of instruments because they are considered extremely reliable and have a low risk of noncollectibility.  Due to the increasing scams involving cashier’s checks and the NC Court of Appeals decision in Lawyers Mutual v. Mako, should attorneys still be allowed to immediately disburse against these instruments?

In Lawyers Mutual v. Mako, a firm received an email from a prospective client asking for assistance in collecting $350,000 owed by his former employer in a workers’ compensation matter. 756 S.E.2d 809 (2014). The firm agreed to accept the case on a contingent fee basis of 20%.  The firm received the first cashier’s check for $175,000 and deposited it into the trust account, but the firm was unable to wire the client his money or collect the contingent fee due to an error in the account information provided.  The firm then received a second cashier’s check for $175,000, deposited it into the trust account, immediately wired $140,000 to the Japanese account and retained the $35,000 contingent fee.  The bank later notified the firm that both checks were dishonored.  Id. at 810-11.

The firm made a claim under its policy with Lawyers Mutual.  Lawyers Mutual denied the claim stating that pursuant to the language of the policy, it was not obligated to cover losses for instruments that were not irrevocably credited to the trust account.  Defendants argued that the “irrevocably credited” language of the insurance policy was ambiguous.  They stated that they understood this term to mean that losses from forged cashier’s checks would be covered, as such checks are irrevocably credited upon deposit.  Lawyers Mutual ultimately brought an action for declaratory judgment asserting that the cashier’s checks were not irrevocably credited, and it was not required to provide coverage.  Id.

The Wake County Superior Court granted summary judgment on behalf of Lawyer’s Mutual and the Court of Appeals affirmed the decision.  The opinion explained that “pursuant to N.C.G.S. § 25-3-104(f), a cashier’s check is treated the same as a traditional check.  A traditional check cannot be deemed fully credited until its provisional settlement period has elapsed without action by the bank to reject the check; the same is true for a cashier’s check.  Therefore, the provisional settlement period that accompanies traditional checks must also apply to cashier’s checks.”  Id. at 811-12.

The purpose of allowing attorneys to disburse against the instruments listed in the Act is to avoid delay and inconvenience, but is the inconvenience worth it?  It is likely much more inconvenient to replace the amount of any failed deposit which is required under RPC 191.  The safer course of action may be to ensure that any funds received have been irrevocably credited before distributing, even though the rules may permit otherwise.

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