On December 30, 2015, the Second Department issued a decision in Law Offices of Alexander E. Sklavos, PC v. First National Bank of Long Island, 2015 NY Slip Op. 09654, holding that while the defendant law firm had presented defenses precluding summary judgment, a bank has a right to charge back a cashier’s check that does not clear.
In Law Offices of Alexander E. Sklavos, the plaintiff faced a nightmare scenario for a law firm: “The plaintiff . . . deposited a cashier’s check into his attorney trust account . . . for the benefit of a certain client. After the check was found to be fraudulent, the defendant, First National Bank of Long Island . . . , sought to recoup the funds from the account. The funds, however, were no longer in the account because they had been wired to” the plaintiff’s client “several days before the fraud was discovered. The bank then placed a “hold” on the account . . . .”
The Second Department held that “UCC § 4-201(1) provides, in pertinent part, that unless a contrary intent clearly appears and prior to the time that a settlement given by a collecting bank for an item is or becomes final the bank is an agent or sub-agent of the owner of the item and any settlement given for the item is provisional.” (Internal quotations omitted) (emphasis added). Thus, the bank had the right to make the charge back, which leaves the law firm holding the bag for the fraudulent check and having to sue either its client or the party issuing the fraudulent check to get its money back.
However, the court also held that “the plaintiffs raised a triable issue of fact as to whether the defendant could seek recoupment of the loss through certain funds in the account [because it was a client escrow account]. Thus, although the Supreme Court correctly determined that the risk of loss for the fraudulent check was on the plaintiffs until final settlement and that the bank could pursue remedies against the plaintiffs for the amount of the loss, it erred in granting the bank’s motion” for judgment against the plaintiff. (Internal quotations and citations omitted).