It is one of the most-common email scams targeting law firms. An email arrives from an overseas company asking to hire you for a quick-and-easy matter, often collection of a debt or sale of equipment. If the attorney agrees, a check arrives from the purported debtor or purchaser. The attorney deposits it in trust and then disburses the funds to the supposed client’s overseas bank account. By the time the check is discovered to be fraudulent, the funds are lost.
In 2015, a prominent Boston law firm, Sarrouf Law LLP, fell victim to this scam, losing $311,500 after depositing a counterfeit check to its trust account with First Republic Bank and then instructing the bank to disperse the funds by wire transfer to banks in Cambodia and Hong Kong.
Yesterday, the firm lost a second time, when the Massachusetts Appeals Court dismissed the firm’s lawsuit seeking to recover the lost funds from the bank.
The Appeals Court affirmed summary judgment by the Massachusetts Superior Court dismissing the firm’s claims against the bank for negligence and breach of the California Uniform Commercial Code.
“Sarrouf attempts to impose on First Republic an obligation to detect the counterfeit nature of a check drawn on another bank, deposited by Sarrouf,” the court said. “This obligation does not appear in the code or the parties’ agreements.”
It was the firm that was in the best position to guard against the risk of a counterfeit check, the court said, by knowing its “client,” its client’s purported debtor and the recipient of the wire transfer.
An Email from the Netherlands
In this case, lawyer H. Glenn Alberich, who was of counsel to the firm, received an email on Sept. 23, 2015, from someone claiming to be with a company in The Netherlands who was selling a piece of heavy equipment located in Quincy, Mass.
In subsequent emails, the person identified himself as Henny van den Biggelaar, the CEO of a company called Big Machinery. He said he needed Alberich’s help drafting an agreement to sell a crawler crane to a purchaser in Mass.
Alberich sent and van den Biggelaar signed a fee agreement. On Sept. 29, Alberich and van den Biggelaar spoke by phone. van den Biggelaar said the buyer was being represented by a broker, and that the broker would deliver Alberich a check for the initial purchase deposit, from which Alberich could take his requested retainer of $3,000.
A few days later, on Oct. 5, the lawyer received a delivery at his home office purportedly from the buyer’s insurance broker Zurich North America. It contained a letter of intent and two checks, one for $3,000 payable to Alberich, and the other for $337,044 payable to Sarrouf, purportedly for the initial deposit.
Alberich deposited the retainer into his own account and sent the other check to the firm by overnight mail asking that it be deposited in the firm’s IOLTA account. The next morning, Oct. 6, Alberich sent an email to the firm’s bookkeeper, with a copy to one of the firm’s principals, reiterating the request to deposit the check, which the bookkeeper did. Because the bank does not put a hold on IOLTA deposits, the funds were available immediately.
On Oct. 8, van den Biggelaar emailed Alberich early in the morning asking him to disburse the funds by 11 a.m. to bank accounts in Cambodia and Hong Kong. Alberich did not see the email until 11:30 a.m., by which time his bank had returned his retainer check as unpayable. Despite this, he forwarded the wire-transfer instructions to Sarrouf’s bookkeeper, who immediately placed the transfer orders.
Later that evening, at 8:23 p.m. the bank was notified that the deposit check had been returned. The bank subsequently learned that the check was counterfeit. On Oct 9, the bank notified the firm, but by then it was too late to recall the transfers.
Court Finds No Liability
To prevent its IOLTA account from being overdrawn, the firm deposited the amount of the transfers, $311,550, from its own funds. It then sued the bank for negligence and breach of California’s UCC, seeking to recover that amount.
But the Appeals Court agreed with the lower court that the firm had not established grounds to recover under either theory.
On the negligence claim, the court said that the firm had not established any relevant duty that the bank had breached. Even if it had, the specific provisions of the U.C.C. would displace the common law of negligence in this situation, the court said.
As to the U.C.C. claim, the court said that the firm had failed to establish any failure by the bank to perform in good faith. “On the contrary, the parties’ contracts plainly disclaim any liability based on the facts asserted here.”
The court also found that the bank satisfied its obligation to exercise ordinary care in its handling of the deposit check. Rather, it said, the firm was in the best position to guard against the risk of a counterfeit check.