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Is a Business Responsible for a Client’s Bad Check?

Written by Lawrence Opalewski on August 10, 2015 Category: Business Law & Transactions, Commercial Litigation

With the rise of online payment systems such as Paypal and Square, the use of checks as a method of payment has been declining for years, but the practice still endures. One industry that has largely remained loyal to checks is the legal industry. Many law firms still do not accept credit cards, and require their clients to make payment by check. However, while often seen as a conservative payment method, checks do carry some significant risk.

In the case of Wesseling & Brackman PC v. Huntington Bancshares Financial Corp., a law firm entered into an agreement with a client for representation in connection with the sale of a large piece of machinery. The client sent the law firm a cashier’s check for $380,000 as a retainer. When the law firm received the check, it deposited the check into the firm’s IOLTA account with Huntington Bancshares Financial Corp. (“Huntington”).[1]

Some time later, the client asked the firm to transfer $200,000 from the IOLTA account to an account at a different bank. The law firm relayed the instructions to Huntington, after allegedly being told that the cashier’s check had cleared the bank. However, when Huntington began transferring the funds, it discovered that the check was fraudulent.

Although it attempted to recoup the funds, Huntington failed to reclaim $58,155.20 of the original amount. Huntington then refused to reimburse the law firm, leading to a $58,000 shortage in the law firm’s IOLTA account. The law firm then sued Huntington in Kent County Circuit Court, alleging negligence, promissory estoppel, and misrepresentation.

During the case, Huntington moved for summary disposition and argued that MCL 440.4207 shielded it from the law firm’s claims. MCL 440.4207 essentially says that the party who took from the preparer of a fraudulent instrument is in the best position to have prevented the fraud. The law imposes a warranty upon the first party that “all signatures on the item are authentic and authorized,” according to the judge. The law further states that the recipient of the fraudulent check, in this case Huntington, can recover damages from the first party as long as the recipient took the check in “good faith.”

The law firm argued that MCL 440.4207 did not apply because Huntington had been negligent, and had even gone so far as to assure the law firm that the check had cleared the bank. The court disagreed, reasoning that even if Huntington had been negligent, the negligence did not rise to the level of “bad faith,” which was the requirement to escape the warranty of MCL 440.4207.

In one interesting passage, the judge observed: “Every experienced law firm knows better than to take seriously an offer to transfer funds for a Nigerian prince who reaches out to the firm in an e-mail, but modern legal representation routinely involves dealings with seemingly legitimate clients who choose to correspond with firms exclusively via e-mails and telephonic communications.” Yet despite this acknowledgment, the judge granted Huntington’s motion for summary disposition, although the door was left open for the law firm to amend its complaint.

While this case involved a law firm, any business can fall into a trap such as this one. It is easy to simply assume that a bad check is the responsibility of the person writing that check, but that is often not the whole story. Many states, like Michigan, have laws that place some responsibility for bad checks on the entity that received the check and did not take action to verify its contents. If your business receives a large check from an unknown client, consider looking deeper into the client before using the funds.

The attorneys at Dalton & Tomich, PLC have a great deal of experience in banking law, business law, and transactional law. We represent both banks and businesses. If you would like legal advice on an issue like this, or you have been sued, please do not hesitate to contact us. We would be happy to speak with you.

 


[1] An IOLTA account is a special account in which a law firm holds money to which it is not yet entitled.

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