A Decision Heard ‘Round the Legal World—Fischer & Mandell LLP v. Citibank.’

In February 2011, the Court of Appeals for the Second Circuit (including New York) handed down a decision that should have every attorney dotting their “I’s” and crossing their “T’s.” In Fischer & Mandell LLP v. Citibank, 632 F.3d 793 (2d Cir. 2001), the court affirmed summary judgment against a law firm who deposited a client’s check into a bank, and disbursed the funds as requested by the client before the check cleared the account.

The facts were as follows: in January 2009, plaintiff-appellant, Fischer & Mandell LLP, received from a new client what appeared to be an official Wachovia Bank check. Id. at 795. The check was made payable to the firm, and the firm was advised that it represented partial payment of a debt owed by another entity to the client. The firm then deposited this check for $225,351 into its account at defendant-appellee, Citibank. In the usual case, if there is enough money in the account to cover the check, the bank will make the funds available immediately, before the check clears-that is what happened here. Id.

The client then requested two wire transfers of a portion of the funds-one to South Korea, and then next to Canada. After both transfers were complete, the Federal Reserve Bank returned the check as dishonored and unpaid. Id. at 796. A Citibank representative then telephoned the firm to advise them of the counterfeit check. Citibank then charged back to the trust account the amount of the check and a $10 returned check fee, resulting in an overdraft. Id. Next, Citibank debited an amount necessary to satisfy the overdraft from a money market account the firm had at Citibank.

Once aware of the counterfeit check, the law firm requested that Citibank cancel and recall the two wire transfers. Citibank then attempted to cancel the transfers the next morning. The transfers could not be cancelled, however, because the funds had already been withdrawn.

The law firm then commenced an action for breach of contract and negligence against Citibank asserting that it relied on Citibank’s advice that the funds were “available” and that Citibank should be responsible for any losses. Id. at 797. The district court considered the agreements, and concluded that they were clear and unambiguous, and held as a matter of law that Citibank did not breach its contractual obligations to the law firm. The district court also held that the negligence claim was preempted by Article 4-A of the U.C.C. The Court of Appeals affirmed.

A very expensive practical tip arises from this case: make sure that any check given to the firm by a client has fully cleared before any money is disbursed from the account. Even thought it may be commonplace to immediately disburse for a longstanding client who has always paid timely, it only takes one time for things to go terribly wrong.

The bottom line: do not disburse funds before they are cleared by the bank; be weary of new clients looking to disburse immediately; and cover your bases with an “OK” from the bank before any transactions are completed!

P.S.– this is a common scam.