Now You See It, Now You Don't

This article follows up a previous one in which the traditional “Nigerian scam” was attempted in Shalimar, Florida in a very elaborate way. Remember, I did not send $198,000 to someone in “California” who needed a quick wire transfer. I write this article not because I am fixated on the subject, but because of the danger to local businesses, particularly to real estate closing agents and law firms, in light of a case decided in the last 2 weeks.

The case of Suntrust Bank vs. Cauthon, involved exactly the facts I wrote about last month. A law firm in Gainesville had received a check, this one in the amount of $289,500. The firm deposited the check in its trust account. According to the testimony of attorney Cauthon, he called two different bank employees about the check. Both assured him the check was good, and based on that advice he instructed the bank to wire the proceeds of the check to the client. The bank soon learned that the check was in fact a forgery, and it reversed the credit in Mr. Cauthon’s account. It then emptied the law firm’s escrow account to pay the amount of the check it had inadvertently advised was a good check.

The firm sued the bank, of course. The First District Court of Appeals said that Florida law allows the bank to do exactly as it had done. In addition, the court said, the law firm’s depository agreement, the several-page, fine print agreement that all depositors sign when they open an account, had a provision that the bank was not to be held to anything said by its employees to a depositor if their statement turned out not to be true. That language, the court said, immunized the bank from its mistake.

Please remember the advice given in this article last month: Any deposit in a bank is conditional, even if the depository bank gives immediate credit, until the item clears through the bank on which it is written. Remember also that in the Shalimar example we called Citibank of New York; they advised immediately that the check was a forgery, and it was never deposited. Apparently, if the Gainesville case is indicative of the outcome, if Citibank had given wrong advice by reporting to us that the check was good, and had the check been deposited in Shalimar and the proceeds wired out before learning the check was bogus, a law firm in Shalimar would have been in the same position as the Cauthon firm in Gainesville.

This article is not written to castigate Suntrust Bank. Instead, it is written in search of rules that can help those of us who must rely upon checks and other payment instruments to make payments to others. One rule that comes to mind is that the only assistants whom we can hire in real estate closings are those who can prove they are paranoid about everything they see and hear. Paranoia is accepted behavior whenever an out of town check is received where credit is to be given right away. Anything less is grounds for termination.

Try this for a lesson:

The more immediate suggestion is to review the fine print in your bank agreements and seek to take out language that makes the account owner the fall guy for the bank’s error. I have for years marked through the language in every agreement that permits a bank to debit my trust account for amounts any signer on the account owes the bank personally. That provision is preprinted in every depository account agreement. Obviously for the bank to do that in any trust account would make those with money in the account pay the personal liabilities of the account owner and would destroy the purpose of a trust account. I’ve never parsed the language in those agreements to find or reject fine print that holds the bank harmless from its own errors. Now I will.

Money, especially money coming from outside the immediate area, should be deposited with the escrow or closing agent at least 10 days before credit is to be given on the funds. By so doing, the funds can be confirmed before they must be written out. If the agent you are dealing with requires less than that, the agent is gambling with the funds in his trust account, and likely will gamble with yours in the same way.

Finally, if you are the closing agent, when someone pressures you to credit funds quickly and wire out proceeds, we’ve learned from Cauthon that you can’t call the bank. Obviously, don’t call your lawyer, because he’ll just call the bank. Call your psychiatrist. While you’ve got him on the phone, see if he also handles lawyers.

The world (not just Florida, or even the U.S.) has a growing number of completely amoral but imaginative people who literally steal money. There is no sheriff’s department or even FBI that can stop internet schemes or get your money back. Paranoia is the only healthy state of mind.