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New York's Highest Court Holds that Final Settlement of a Check Must Occur Before Depositor May Use Funds
January 25, 2012, 12:45 pm
By: John K. Rottaris, Esq. with the help of Amy E. Belmont.
The New York Court of Appeals issued a decision in Greenberg, Trager and Herbst, LLP v. HSBC Bank USA, 17 N.Y.3d 565 (2011) which could have serious implications for law firms and other businesses.
The plaintiff “GTH,” a law firm, received an email from a Hong Kong company seeking legal representation in collecting a debt owed to it by one of its customers. GTH requested a $10,000 retainer, and was informed that the customer of the company owing the debt would be sending a check to GTH. GTH was instructed to deduct the retainer fee from the total amount and wire the remaining balance to the Hong Kong company. GTH subsequently received a “Citibank” cashier’s check in the amount of $197,750, deposited the check into its attorney trust account, and wired the balance to the company after being notified by a bank representative that the check had “cleared.” However, the bank later discovered that the check was fraudulent and as a result, the full amount of the check was charged back to GTH’s trust account.
GTH filed a suit against both the depositor and payor banks, asserting, among other things, causes of action for negligence and negligent misrepresentation. In its negligence action, GTH argued that Citibank breached its duty in failing to detect that the check was counterfeit when it processed the check, alleging that Citibank did not have effective procedures in place to detect counterfeit checks. Specifically, GTH argued that Citibank should have been on notice that something was wrong because Citibank had returned six (6) checks the same day which were all made out for the same amount as the check received by GTH. However, the Court found for Citibank, holding that Citibank, as payor bank, did not owe any duty to GTH because GTH was not a customer of Citibank.
GTH also argued that HSBC, the depositor bank, was liable for negligent misrepresentation in affirming that the check had “cleared.” However, despite the fact that GTH was informed by a bank representative that the check had “cleared,” the Court nonetheless granted HSBC’s Motion for Summary Judgment. The Court held that the Uniform Commercial Code explicitly states that the depositor bears the risk of loss until the final settlement of a check occurs. Therefore, any risk pertaining to the check fell not upon HSBC, but rather upon GTH (HSBC’s customer), to ensure that the funds were available for disbursement before wiring the money.
As a result, law firms and businesses alike must be cautious and confirm that final settlement of a check has in fact occurred to avoid serious consequences. As Greenberg makes clear, being told that a check has “cleared” does not mean that the money is available for the depositor to use.
If you have any questions regarding this topic, please call John K. Rottaris or contact John at jrottaris@gross-shuman.com.