Massachusetts Court Finds Bank Not Liable for IOLTA Scam Loss

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The Business Litigation Session of the Massachusetts Superior Court has joined other courts in holding that a bank is not liable to its customer for wiring money to a foreign account at the customer's instruction. The Plaintiff, Sarrouf Law LLP ("Sarrouf"), alleged negligence and breach of the California Uniform Commercial Code, but the Court found that the UCC expressly displaced common law and that the bank's conduct comported with the UCC's requirements. Sarrouf Law LLP v. First Republic Bank, No. SUCV2016-03069-BLS1 (Mass.Super. Aug. 2, 2018).

The Sarrouf Law firm entered into representation of "Henry van den Biggelaar" to facilitate sale of a crawler crane. Upon receipt of approximately $340,000 in checks purportedly from the buyer's insurance broker, Sarrouf deposited the checks into its IOLTA account. The deposit receipt contained the statement that "All items are credited subject to final payment. Any item may be charged back at any time before final payment."

Sarrouf's purported client instructed the firm to conduct a prompt transfer by wire to bank accounts in Cambodia and Hong Kong. Prior to wiring the funds, the bank did an internet search on the recipients of the wires and employed other security protocols but found nothing concerning. Once the wire transfer was completed, the funds wired to Hong Kong and Cambodia were quickly withdrawn. Shortly thereafter, the check deposited into the firm's IOLTA account was returned as fraudulent.

Sarrouf contended that the bank should have determined the check was counterfeit and should have done more to discover the fraudulent scheme. The Court disagreed, noting that the UCC expressly displaces common law where the UCC's provisions apply. The checks bore no obvious signs of fraud, were made out to the firm, and were presented for deposit by a person from the firm known to the bank. Further, the bank could not be liable under the UCC for following the firm's clear instructions to wire the funds. The UCC required no more, and the bank had even taken additional precautionary steps not required by the UCC or its customer agreement with Sarrouf. Accordingly, the Sarrouf firm, and not the bank, bore the loss arising from the wire transfers.

Law firms, like any other enterprise, are vulnerable to complex internet scams. Banks' customer agreements and the Uniform Commercial Code provide that funds are made provisionally available immediately, but the banks retain the right to charge back any check ultimately returned as unpayable. Attorneys need to be vigilant about wiring substantial sums of money from their IOLTA accounts.

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