What are a North Carolina lawyer's duties when a debt-collection matter shows signs of a counterfeit-check scam, and what happens if the lawyer disburses trust funds against a fake check?

Plain-English summary

The opinion addresses the familiar counterfeit-check collection scam: an unsolicited "client" asks the lawyer to collect a debt, the "debtor" promptly offers to pay, a cashier's check drawn on an out-of-country bank arrives, and the lawyer is asked to take a fee and quickly wire the rest to out-of-state and foreign accounts before the bank discovers the check is fake. The opinion concludes the lawyer in the inquiry violated the Rules in several ways.

On competence and diligence, the opinion concludes the lawyer violated Rules 1.1 and 1.3 by failing to investigate the check's authenticity. The duty of competence includes keeping abreast of the benefits and risks of relevant practice realities (Rule 1.1, Comment 8), and state and federal agencies, bar associations, and malpractice carriers have warned lawyers about this scam for at least ten years. The totality of the red flags here (an unsolicited representation, a debtor eager to pay with little effort, a foreign-bank cashier's check, and a check dated before the debtor's call) should have prompted the lawyer to confirm the check with the issuing bank or wait to confirm it cleared before disbursing.

On trust accounting, the opinion concludes the lawyer violated Rules 1.15-2(a), (k), and (n) by disbursing entrusted funds for the client when no client funds were actually in the account; because the check was counterfeit, the lawyer disbursed other clients' funds without their permission and for someone other than the owner, which is misappropriation. The opinion explains that while RPC 191 and the Good Funds Settlement Act allow disbursing against provisionally credited reliable instruments, a lawyer should never disburse on provisional credit unless virtually certain the instrument will be honored, and where suspicious circumstances are present the lawyer should not disburse on provisional credit until satisfied the instrument is authentic. The opinion further concludes the lawyer must replace the misappropriated funds because his rule violations were a proximate cause of the loss (2015 FEO 6), and must report the misappropriation to the State Bar's Trust Account Compliance Counsel under Rule 1.15-2(p), even though he replenished the funds.

In practice

Under this opinion, a North Carolina lawyer must treat the hallmarks of a counterfeit-check scam (an unsolicited collection matter, a debtor eager to pay quickly, a foreign-bank cashier's check, and a check predating contact) as red flags requiring investigation; failing to do so violates the competence and diligence duties of Rules 1.1 and 1.3. The opinion holds that disbursing trust funds against a counterfeit check, when no client funds are actually present, misappropriates other clients' funds under Rules 1.15-2(a), (k), and (n), even though disbursing against reliable provisionally credited instruments is generally permitted (RPC 191; Good Funds Settlement Act). The lawyer must not disburse on provisional credit until virtually certain the instrument will be honored, must replace funds lost through his rule violations (2015 FEO 6), and must report the misappropriation to the State Bar's Trust Account Compliance Counsel under Rule 1.15-2(p).

Common questions

Q: Does a North Carolina lawyer have to investigate a suspicious check in a collection matter?

A: Yes. Opinion #1 concludes that the red flags here (an unsolicited matter, a debtor eager to pay, a foreign-bank cashier's check, and a check dated before contact) required investigation, and the lawyer's failure to confirm the check's authenticity violated the competence and diligence duties of Rules 1.1 and 1.3.

Q: What is wrong with disbursing from the trust account after the bank says funds are "available"?

A: Opinion #2 concludes that "available" is not the same as collected; because the counterfeit check produced no actual client funds, the lawyer disbursed other clients' funds without permission, misappropriating entrusted funds under Rules 1.15-2(a), (k), and (n). A lawyer should not disburse on provisional credit when suspicious circumstances are present (RPC 191).

Q: Does the lawyer have to repay the lost trust funds out of pocket?

A: Yes. Opinion #3 concludes the lawyer is professionally obligated to replace the misappropriated funds because his failures of competence, diligence, and safekeeping were a proximate cause of the loss (2015 FEO 6).

Q: Must the lawyer report the loss even after replacing the funds?

A: Yes. Opinion #4 concludes that under Rule 1.15-2(p) a lawyer who discovers or reasonably believes entrusted property was misappropriated must promptly inform the State Bar's Trust Account Compliance Counsel, even if the lawyer promptly replenished the funds.

Background and rules framework

The opinion interprets North Carolina Rule 1.1 (competence, including the Comment 8 duty to keep abreast of practice realities), Rule 1.3 (diligence), and Rule 1.15-2 (safekeeping of entrusted property, including subsections (a) and (b) on depositing and holding funds, (k) on not using entrusted property for the benefit of a non-owner, (n) on disbursing only for the client's benefit, and (p) on reporting misappropriation). These correspond to ABA Model Rules 1.1, 1.3, and 1.15. The opinion relies on prior NC opinions RPC 191 (disbursing against provisionally credited funds; the Good Funds Settlement Act) and 2015 FEO 6 (duty to replace funds). It cites N.C. Gen. Stat. § 45A-4 (Good Funds Settlement Act).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.1 / NC Rule 1.1 (competence; Comment 8)
• Model Rule 1.3 / NC Rule 1.3 (diligence)
• Model Rule 1.15 / NC Rule 1.15-2(a), (b), (k), (n), (p) (safekeeping; misappropriation; reporting)

Statutes:

• N.C. Gen. Stat. § 45A-4 (Good Funds Settlement Act)

Other opinions cited:

• RPC 191 (disbursing against provisionally credited reliable instruments)
• 2015 FEO 6 (duty to replace misappropriated funds)

See also

• NYC Bar Op. 2015-3: Lawyers Who Fall Victim to Internet Scams
• Ohio Op. 2016-007: Prompt Delivery of Funds and Holding Until a Check Clears

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2021-formal-ethics-opinion-2/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry #1:

Client contacted Lawyer seeking to collect debt from a third party. Client’s communication with Lawyer was unsolicited – Lawyer does not advertise for his practice, and Lawyer had not previously solicited Client’s business. Client provided Lawyer with documentation supporting Client’s claim. Lawyer made preliminary investigation and verified the existence and address of third party. Lawyer contracted with Client to file a lawsuit against third party for the amount owed to Client. A few days after Lawyer sent third party a letter introducing himself as Client’s representative, third party contacted Lawyer stating that he wished to pay the amount owed to Client without the need for litigation, and that third party would be back in touch to make payment arrangements. Without further communication with third party, Lawyer subsequently received a cashier's check from third party drawn on an out-of-country bank. The cashier's check was dated prior to third party's earlier conversation with Lawyer, and third party did not mention the cashier's check to Lawyer. Third party's note also stated that he would pay the remainder of debt owed to Client within weeks. Lawyer did no further investigation of third party and did not investigate the authenticity of the foreign bank cashier’s check.

Did Lawyer violate the Rules of Professional Conduct by not investigating the authenticity of the foreign bank cashier’s check?

Opinion #1:

Yes. Lawyer violated his duties of competency and diligence in representing Client because the scenario described above raises a number of red flags that should alert a lawyer practicing today to the potential for fraud in both the representation and the receipt and disbursement of funds. Rules 1.1 and 1.3.

A lawyer’s duty of competency requires the lawyer to have the necessary “legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation.” Comment 8 to Rule 1.1 further states,

To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with the technology relevant to the lawyer’s practice, engage in continuing study and education, and comply with all continuing legal education requirements to which the lawyer is subject.

The fraud accomplished through the counterfeit check scam described in the present inquiry is, unfortunately, not a new problem for the legal community. State and federal agencies have alerted the public to the existence and persistence of these counterfeit check scams for some time. See, e.g., Counterfeit Check Scams, North Carolina Department of Justice, https://ncdoj.gov/protecting-consumers/sweepstakes-and-prizes/counterfeit-check-scams/; How to Spot, Avoid and Report Fake Check Scams, Federal Trade Commission, https://www.consumer.ftc.gov/articles/how-spot-avoid-and-report-fake-check-scams. Similarly, state and national bar associations, lawyer regulatory bodies, and malpractice carriers have reported on and alerted lawyers to the reality that such scams often target members of the legal profession. See, e.g., Six Indicted in $32M Internet Collection Scam That Snagged 80 Lawyers, ABA Journal (Nov. 22, 2010), https://www.abajournal.com/news/article/six_indicted_in_32m_internet_collection_scam_that_snagged_80_lawyers/; Counterfeit Check Scams Continue to Target Law Firms, California Bar Journal (January 2012), https://www.calbarjournal.com/January2012/TopHeadlines/TH6.aspx; New York City Bar Formal Ethics Opinion 2015-3, Lawyers Who Fall Victim to Internet Scams (April 22, 2015), https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/formal-opinion-2015-3-lawyers-who-fall-victim-to-internet-scams; Laura Loyek, Counterfeit Check Scams are Still Snaring Lawyers, Lawyers Mutual North Carolina (March 22, 2019), https://www.lawyersmutualnc.com/risk-management-resources/articles/counterfeit-check-scams-are-still-snaring-lawyers; Joanna Herzik, Scams Continue to Target Texas Attorneys, Texas Bar Blog (July 14, 2020), https://blog.texasbar.com/2020/07/articles/law-firms-and-legal-departments/scams-continue-to-target-texas-attorneys/; E-Mail Scams and Lawyer Trust Accounts, Illinois Attorney Registration and Disciplinary Commission, https://www.iardc.org/information/alert.html. The North Carolina State Bar has also published a number of warnings to the legal profession in North Carolina about these scams. See, e.g., New Variation of Fake Check Scam Targets Law Practices, North Carolina State Bar (December 6, 2010), /news-publications/news-notices/2010/12/fake-check-scam/; Bruno Demoli, Bruno’s Top Tips: Protect Yourself from Financial Con-Artists, North Carolina State Bar Journal (Fall 2011 pp. 34 & 37); Alert: Beware of Scams that Target NC Law Practices, North Carolina State Bar (January 8, 2016), /news-publications/news-notices/2016/01/scams-targeting-nc-law-practices/. These publications describe the scenarios associated with the scams and identify the relevant warning signs to assist lawyers in detecting and avoiding such scams.

Lawyer’s mistaken reliance on the counterfeit check is unexcused. Given the breadth of notice provided to the legal profession on this common scam, Lawyer should have realized that the circumstances surrounding this purported representation required additional investigation. As noted above, Lawyer has a duty to represent his clients with competency and diligence. Rules 1.1 and 1.3. Lawyer’s duty of competency includes the need to “keep abreast of changes in the law and its practice[.]” Rule 1.1. For at least ten years, lawyers have been warned about being targets of scams such as the one at issue in this inquiry. Lawyer should have been alerted to the suspicious nature of this transaction based upon the circumstances in this scenario, including the unsolicited request for the representation; the willingness of the purported defendant to quickly resolve the dispute without much effort from Lawyer; the cashier’s check drawn on an out-of-country bank; and the cashier check being dated prior to Lawyer’s conversation with the purported defendant Although one of these circumstances standing alone may not give cause for suspicion, the totality of the circumstances should have alerted Lawyer to the suspicious nature of the representation and the transaction. Lawyer’s failure to recognize the scam given the vast notice and information directed to lawyers on the topic demonstrated his lack of competency in violation of Rule 1.1. Furthermore, given the suspicious nature of the representation and transaction, Lawyer should have diligently investigated the legitimacy of the cashier’s check. Lawyer could have accomplished this by contacting the bank that issued the cashier’s check to confirm authenticity, or Lawyer could have informed Client of his concerns and waited to see that the cashier’s check was in fact honored and accepted by the issuing bank.

Inquiry #2:

Lawyer deposited the cashier's check into his firm's trust account. Lawyer notified Client of Lawyer's receipt of payment from third party. Client directed Lawyer to promptly deduct 20% of the cashier's check for Lawyer’s fee and to disburse the rest of the money via two disbursements: one to an account in another state and the remainder to an account in a different country. The day after Lawyer deposited the cashier’s check into his trust account, Lawyer called his bank and was informed that the funds from the cashier's check were available. Without clarifying what available means, Lawyer then proceeded to make the disbursements from his trust account per Client’s direction.

Subsequently, the foreign bank upon which third party’s cashier’s check was drawn became suspicious and determined that the cashier's check was counterfeit. Lawyer was unable to recall and recover the trust account disbursements made to Client’s accounts. Lawyer then replenished the disbursed funds, including his fee, to his trust account using funds from his operating account. Lawyer reported the incident to the State Bar’s Trust Account Compliance Counsel, expressing remorse and stating that his reliance on the counterfeit cashier’s check was an unintentional mistake.

Did Lawyer violate the Rules of Professional Conduct by depositing the check into his trust account and making the disbursements as directed by Client from the trust account?

Opinion #2:

Yes. By disbursing funds from Lawyer’s trust account on Client’s behalf when Lawyer did not actually have funds belonging to Client in Lawyer’s trust account, Lawyer disbursed entrusted funds belonging to other clients in violation of Rules 1.15-2(a), (k), and (n). Safeguarding entrusted client funds is one of the most important professional responsibilities that a lawyer possesses. The Rules of Professional Conduct require lawyers to deposit and hold entrusted client funds in the lawyer’s general or dedicated trust account, and to only disburse those funds for the client’s benefit upon the client’s directive. Rules 1.15-2(a), (b), and (n). Rule 1.15-2(k) specifically prohibits a lawyer from using “any entrusted property to obtain credit or other personal benefit for . . . any person other than the legal or beneficial owner of that property.”

Although Lawyer believed he was disbursing Client’s funds from his trust account after depositing the purportedly valid cashier’s check, Lawyer actually disbursed funds belonging to his other clients because the cashier’s check was counterfeit and resulted in no actual deposit of funds belonging to Client into Lawyer’s trust account. Lawyer’s disbursement of other clients’ funds to Client and to himself occurred without his other clients’ permission. By disbursing his other clients’ funds from his trust account without their permission and for the benefit of someone other than the client, Lawyer misappropriated entrusted client funds in violation of Rules 1.15-2(a), (k), and (n).

RPC 191 references N.C. Gen. Stat. §45A-4 (Good Funds Settlement Act) and rules that a lawyer may make disbursements from his or her trust account in reliance upon the deposit of funds provisionally credited to the account if the funds are deposited in the form of cash, wired funds, cashier’s check, or by specified instruments which, although they are not irrevocably credited to the account upon deposit, are generally regarded as reliable. However, a lawyer should never disburse against any provisionally credited funds unless he or she reasonably believes that the underlying deposited instrument is virtually certain to be honored when presented for collection. RPC 191. When reasonably identifiable suspicious circumstances are present surrounding the receipt and disbursement of funds, a lawyer should not disburse on provisional credit – even if statutorily authorized to do so – until the lawyer satisfies him or herself that the instrument is authentic and the transaction is legitimate. Lawyer’s failure to do so in this situation not only unnecessarily put other clients’ funds at risk but resulted in actual harm to his clients through the misappropriation of his clients’ funds.

Inquiry #3:

Does Lawyer have a duty to replace the funds that were improperly disbursed as a result of the counterfeit check scam?

Opinion #3:

Yes. Under these circumstances, Lawyer failed to follow the Rules of Professional Conduct with regards to competency, diligence, and safekeeping of funds. See Opinion #1. Because Lawyer’s failure to follow the Rules of Professional Conduct is a proximate cause of the loss of entrusted client funds, Lawyer is professionally obligated to replace the misappropriated funds. See 2015 FEO 6.

Inquiry #4:

Does Lawyer have a duty to report to the State Bar’s Trust Account Compliance Counsel the misappropriation of funds from Lawyer’s trust account resulting from the deposit and disbursement of the fraudulent cashier’s check?

Opinion #4:

Yes. Rule 1.15-2(p) states that, “[a] lawyer who discovers or reasonably believes that entrusted property has been misappropriated or misapplied shall promptly inform the Trust Account Compliance Counsel (TACC) in the North Carolina State Bar Office of Counsel.” Even if Lawyer promptly replenished the funds disbursed after learning the cashier’s check was counterfeit, a misappropriation of funds belonging to other clients occurred that requires reporting to the State Bar under Rule 1.15-2(p).