Lawyer Victim of Fake Foreign Client Scam

On February 11, 2015, Justice Emerson of the Suffolk County Commercial Division issued a decision in Margot J. Garant, Inc. v. Suffolk County National Bank, 2015 NY Slip Op. 50119(U), discussing a common scam targeted at lawyers.

In Margot J. Garant, Inc., the plaintiff law firm sued the defendant bank for refusing to credit a wire transfer to it. We repeat the full facts below because they relate to a type of e-mail scam of which most of us have been the target at one time or another.

The plaintiff Margot Garant, an attorney with an office in the Village of Port Jefferson, New York, represents clients in real estate transactions. On July 9, 2014, a client named Yang Jun was referred to her in connection with the purchase of a home in Port Jefferson. The record reflects that Garant never met Yang, who claimed to be from China, and that they communicated with each other via email. On July 17, 2014, Garant received a check for the purchase in the amount of $399,585.60 from John Owen of CI Investments, with whom Yang purportedly had investments. The check was drawn on the account of Euro Vinyl Windows & Doors, Inc., at the Bank of Nova Scotia in Ontario, Canada. On July 24, 2014, Garant brought the check to the Port Jefferson branch of the defendant, Suffolk County National Bank ("SCNB"), and deposited it into her attorney escrow account. The deposit was rejected because the check was drawn on a foreign bank and had to be sent out for collection. On July 25, 2014, Garant was given the option of having the funds wired into her escrow account or sending the check out for collection. She chose the latter. The check was sent to SCNB's Operations Department, which mailed it to the Federal Reserve Bank of Atlanta on July 31, 2014. After the Federal Reserve processed the check and mailed it to the Bank of Nova Scotia, SCNB received a provisional credit therefor in the amount of $399,585.60. On August 8, 2014, SCNB provisionally credited that amount to Garant's escrow account. However, unbeknownst to SCNB, the Bank of Nova Scotia had rejected the check as forged/counterfeit on August 7, 2014, and mailed it back to the Federal Reserve Bank of Atlanta. August 12 and 13, 2014, Yang sent Garant three emails with instructions for wiring some of the funds to his wife or ex-wife. Each email contained different instructions. The third and final email directed Garant to wire $265,000 to an account entitled Overseas Consultants at Ameriserve Financial Bank in Pennsylvania, which she did on August 13, 2014. On August 18, 2014, SCNB received an envelope postmarked August 14, 2014, from the Federal Reserve Bank of Atlanta. Enclosed therein was a Cash Letter Summary dated August 13, 2014, returning the check. Also enclosed were the check itself and the Bank of Nova Scotia's return slip indicating that the check was being returned as forged/counterfeit. SCNB telephoned Garant on August 18, 2014, to advise her that the check had been "recalled." On August 19, 2014, SCNB revoked the provisional credit and charged back Garant's escrow account $399,585.60.

The plaintiff sued the bank for the $399,585.60 it took from the plaintiff's escrow account. The court granted the bank's motion to dismiss, explaining:

The Court of Appeals recently decided a case that is remarkably similar to the one at bar. In Greenberg, Trager & Herbst, LLP v HSBC Bank USA, the plaintiff, a law firm, received an email from Northlink Industrial Limited ("Northlink"), a Hong Kong company, looking for legal representation to collect debts owed by its North American customers. The plaintiff agreed to represent Northlink and requested a $10,000 retainer. Northlink sent Greenberg, Trager & Herbst ("GTH") a Citibank check from a Northlink customer in the amount of $197,750 with instructions to take its $10,000 retainer out of the check and wire the balance to Citibank in Hong Kong. GTH deposited the check into its attorney trust account at HSBC on Friday, September 21, 2007. HSBC provisionally credited GTH's account in the amount of $197,750 on the next business day, Monday, September 24, 2007. HSBC sent the check to the Federal Reserve Bank of Philadelphia for presentment to Citibank. Citibank rejected the check because the routing number was not recognized by its automated sorting system and sent the check back to HSBC the next day, September 25, 2007.[FN1] HSBC repaired the routing number; determined that the check belonged to Citbank, Las Vegas; and sent it to the Federal Reserve Bank of San Francisco. On September 27, 2007, in response to an inquiry by GTH regarding whether the check had "cleared," HSBC advised GTH that the funds were "available." Later that day, GTH wired $187,750 from its account to Hong Kong pursuant to Northlink's instructions. On September 28, 2007, HSBC confirmed to GTH that the wire transfer had been consummated. On October 2, 2007, HSBC received a notice from Citibank that the check had been dishonored as "suspect counterfeit" and so advised GTH. HSBC then revoked its provisional settlement and charged back GTH's account.

GTH commenced an action against HSBC and Citibank sounding in negligence and negligent misrepresentation. GTH claimed that Citibank was negligent in breaching its obligation to implement effective procedures for detecting counterfeit checks and that HSBC was negligent for failing to inform GTH and charge back the check when it was first returned by Citibank on September 25, 2007. GTH also claimed that HSBC negligently misrepresented to it that the check had cleared and that the funds were available for transfer. Both HSBC and Citibank moved for summary judgment dismissing the complaint, which was granted by the Supreme Court. The Appellate Division affirmed, as did the Court of Appeals (Pigott, J., dissenting in part). The Court of Appeals applied the Uniform Commercial Code to the negligence claims to find that they were properly dismissed. As for the negligent-misrepresentation claim, the Court found that GTH's reliance on HSBC's statement that the check had cleared was unreasonable as a matter of law. Finally, the Court rejected GTH's estoppel argument. Finding that neither Citibank nor HSBC had breached any duty owed to GTH, the Court agreed with the Appellate Division that GTH was in the best position to guard against the risk of a counterfeit check by knowing its client.

This court finds Greenberg to be controlling. Like GTH, the plaintiffs seek to hold a defendant bank liable for a counterfeit check. While the plaintiffs do not assert a negligence claim against SCNB, they assert claims under the UCC and argue that SCNB did not comply therewith.

. . .

With the foregoing in mind it is clear how a fraud of this type is accomplished. Its object is to cause a worthless check deposited for collection to take a sufficiently long detour in its progress to the drawee bank, to insure that the notice of non-payment will not arrive at the depositary bank until after the expiration of the hold which it placed on the availability of the proceeds from transit items. Having received no such notice before the expiration of the hold, the depositary bank supposes the items to have been paid and allows its proceeds to be withdrawn. By the time notice arrives the malefactor has, of course, absconded with the spoils. The crucial detour is caused by imprinting the fraudulent check with the wrong MICR routing number—i.e., one that does not correspond to the bank designated on the face of the check as the drawee bank, but to a different bank, preferably one that is distant from the institution designated as the drawee bank on the face of the check.

Here, the delay was not caused by a wrong routing number on the check, but by a foreign routing number. Because the check was drawn on a bank located in a foreign country (Canada), it had to be sent out for collection, and U.S. return item deadlines and policies did not apply to it. Sending the check out for collection meant that it had to be mailed to the Federal Reserve Bank of Atlanta, which then mailed it to the Bank of Nova Scotia. SCNB advised Garant that putting a foreign check through the collection process could take two weeks or more to be completed. The Federal Reserve warns foreign check customers that some foreign institutions take longer than 20 business days to pass credit and that they could experience a return on an item weeks after the original credit is passed. In addition, an item sent on collection is not safe from return when, as here, the item is determined to be forged or fraudulent. The Federal Reserve, like the Appellate Division and the Court of Appeals, advises that it is important to "know your customer".

(Internal quotations and citations omitted).