Beware of phony checks at closing

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Scammers continue to target lawyers in Virginia and elsewhere with schemes involving counterfeit checks.

The latest warning comes from leaders of the real estate bar who warn of phony checks being offered for real estate closings.

The attempts at real estate fraud are similar to previous reported scams. The bad check comes with instructions to deposit it into a lawyer’s trust account, with an excess amount to be wired as soon as possible to a foreign entity. Lawyers have been burned when they thought the check had cleared, only to find out it was fake. By then, the wired funds were gone.

Charlottesville lawyer Larry J. McElwain, current chair of the Virginia Bar Association real estate section, said two attempts were made to use phony checks for real estate purchases while he served as closing attorney.

In the first instance, a cashier’s check apparently issued by a major national bank turned out to be counterfeit. The bank caught an error in the check number sequence and notified the law firm in time to prevent a loss, McElwain said.

In the second incident, a foreign check was presented. McElwain said his office took it by hand to the bank. After several fruitless presentations for collection, the check proved to be worthless.

In both cases, “we recognized what the situation was before any loss occurred,” McElwain said.

Nevertheless, the hope for a sale was dashed. “The sellers had moved out. It was a real shock and created a tremendous hardship on them,” he said.

As stories of the near disaster made the rounds, lawyers took precautions, according to James P. Cox III who chairs the real estate section of the Charlottesville-Albemarle Bar Association. “It is affecting us, in the sense that most closing attorneys are now insisting on wired funds,” he said.

The Federal Deposit Insurance Corp. has pages full of warnings about counterfeit cashier’s checks listed under Special Alerts on the FDIC website, www.fdic.gov.

Matt McDonald, a lawyer and president of a Tennessee real estate title firm, posted warnings about counterfeit check scams on his company’s blog. According to his post, he received eight FDIC alerts about counterfeit checks in one day. His company has announced a policy of requiring wire transfers for any closing involving more than $10,000.

McMullan agreed with the advice to use wire transfers instead of cashier’s checks for real estate closings. He adds an extra caveat – to make sure the wire transfer has not been recalled at the last minute. He said wire transfers can be cancelled within a day or two, and lawyers are wise to check with the bank to make sure there has not been a recall.

Lawyers can fall victim to counterfeit check scams in a completely different ways. Only the sharp eye of a small town banker kept one Southwest Virginia lawyer from falling prey to scammers, according to Wendy Inge, director of risk management programming for Minnesota Lawyers Mutual.

The lawyer – Inge declined to provide a name – regularly handled real estate closings, issuing checks from his trust account to disburse funds. Someone apparently used one of those checks as a model to draw up a few counterfeit versions. Inge said two or three of them were passed in out-of-state locations.

When the checks arrived at the lawyer’s hometown bank, an employee noticed the signature didn’t look right. A phone call prevented a loss for the lawyer, but Inge said the lawyer had to close his trust account and transfer all the funds to a new account to avoid the risk of other bad checks making it through.

Inge said even the numbers on the fake check were consistent with the lawyer’s account. “But for the fact it was a really tiny town and the bank knew his signature, the bank would have paid,” Inge said.

Lawyers who suffer a loss from a bad check scheme understandably seek relief from anyone else they can find to share the pain. The effort was unavailing for a New York City firm that got stung two years ago and tried to blame the bank.

The law firm of Fischer & Mandell sued its bank for negligence and breach of contract for indicating funds were “available” from the check that was later dishonored.

A federal court dismissed the case. This month, the 2nd U.S. Circuit Court of Appeals affirmed. Making funds available from a deposited check does not mean the check has cleared, the court found.

Meanwhile, scammers keep fishing for victims. Two North Carolina firms apparently dodged disaster recently after receiving counterfeit checks by mail from purported divorce clients. North Carolina’s attorney general issued a warning in December for lawyers to be on the alert for suspicious checks for large sums.