Don't Believe Your Bank When it Reports a Check has Cleared
At some point a scam becomes so old and tired that I assume no one would ever fall for it. Certainly one of my fellow attorneys could not be duped by, for example, the old "Nigerian trying to get money out of the country" scam, right?
Tell that to Houston attorney Richard Howell, Jr., a 23-year legal veteran and partner in the firm of Buckley, White, Castaneda & Howell. He fell for the oldest check fraud scam around. And he is not the only attorney victim of this variation on the Nigerian scam.
Here’s how it works. An attorney is contacted via e-mail from a foreign company ("FC"). FC did business with a company located near the lawyer’s office, and is looking for representation in collecting a huge unpaid account of, say, $900,000. The attorney is asked to handle the matter on a one-third contingency basis. The attorney is understandably intrigued by the possibility of collecting a $300,000 fee. But being wary of an email from a foreign company, he goes on line and confirms that there is in fact such a company located near his office, doing the sort of business discussed in the email.
Sometime later, perhaps even before the attorney has sent a fee agreement, FC sends another email stating that the local company has made a partial payment of, say, $300,000. FC still needs the attorney to collect the remaining $600,000, and it is honoring the contingency agreement. FC has instructed the local company to make the check payable to the attorney, and asks that the attorney please deposit the funds and wire $200,000 to FC’s account, keeping $100,000 for himself.
Sure enough, the check arrives a few days later, and the attorney deposits it in the firm’s account. But our savvy attorney is no fool. There is no way he is going to wire funds to FC until he is damn sure the check has cleared. He waits a full ten business days, and only after the bank confirms that the funds have cleared does he wire the money to FC. About six weeks later, the attorney gets a call from his bank stating the $300,000 deposit has been reversed. The attorney is now out $200,000.
But how is that possible if the check "cleared"? This scam only works because the vast majority of people, even attorneys, do not understand what it means when a bank says "the funds have cleared." In our scam, FC printed up some fraudulent checks from a company it knew would have lots of money in its account; let’s call the local company Humongo Steel. The account information is easy to come by, either by dumpster diving or just by getting a legitimate check from Humongo Steel, perhaps by way of a merchandise refund or being one of the company’s vendors. Alternatively, Humongo Steel might be in on the scam. Let’s assume Humongo Steel banks with Bank of America. FC writes a fraudulent check to the attorney on Humongo Steel’s Bank of America account, and the attorney deposits it into his Citibank account. Citibank’s computer asks Bank of America’s computer, "is there sufficient money in Humongo Steel’s account to cover a $300,000 check?" Bank of America’s computer answers "yes" and credits the money to Citibank. This all takes place the same day the check is deposited, but banking regulations date back to a time when the checks had to be physically transported around the country, so the Feds allow Citibank to hold those funds for ten days. Citibank takes the full ten days so it can play the float. After the ten days, Citibank happily reports to the attorney that the funds have cleared and shows the $300,000 in his account.
But there is another step in the process. The check written on Humongo Steel’s account sits in the bank until the next time statements are sent out. If the check hits the bank right after statements were mailed, that check could sit there 29 days. Assuming Humongo Steel has not opted for checkless statements, the check is eventually stuffed into Humongo Steel’s account statement and mailed. The mailroom gets the statement and passes it along to accounting. Accounting goes to reconcile the account and finds the fraudulent $300,000 check. Humongo Steel has up to 30 days to report that fraudulent check. When it does, the bank has Humongo Steel sign a statement swearing to the fraud, and Bank of America then gets its $300,000 back from Citibank, who gets is back from attorney.
Did you do the math? The bank told the attorney the funds had cleared after just ten days, but it can take 59 days or more to know if funds have really cleared. Richard Howell, Jr. is suing Citibank, claiming it was negligent in reporting the funds had cleared, but he is going to lose. By law an account holder has 30 days to report a discrepancy in an account statement. The attorney should have known better.
Lesson for all businesses:
I’m reminded of teaching my young son about stranger danger. I told him not to get in the car with a stranger. I told him the stranger might temp him with candy, or a toy, or ask for help finding a lost puppy. One day my wife and I both got delayed, so we sent a stranger (to him) to pick him up. I told our friend that if he was resistant, tell him to go talk to the people in the office, who I had put on notice of the situation. He got in our friend’s car without hesitation or question, and when I later asked him why he did that despite all my warnings about stranger danger, he said, "I knew it was okay because she didn’t offer me candy or a toy, or ask for help finding a missing puppy."
The scam might not take the precise form just discussed, but if it involves you cutting a check or wiring funds from a deposited check, it might be a variation. Don’t do it. You now know that it can take two months for a check to truly clear. Even a cashier’s check can be bogus.
Following Wage Laws is Cheaper than Trying to Beat Them
Television networks and production companies behind some of the biggest names in reality programming - including "The Bachelor" and "Trading Spouses" - agreed on Wednesday to pay $4 million to writers and editors who claimed in a lawsuit they routinely worked 12-hour days or longer without overtime pay or meal breaks.
The settlement, three years in the making, covers an estimated 400 reality show employees who worked on programs for FOX, ABC, CBS, Turner Broadcasting System and the WB Broadcasting Network, among others. The nonunion workers, known as "story development employees," claimed supervisors made them turn in blank time cards or fill out their hours weeks in advance and always doled out the same weekly pay regardless of hours worked.
Lessons for all businesses:
Following the law ends up being cheaper than trying to bend it. We get calls every week involving businesses that were caught trying to game the overtime and wage rules. All I can do is shake my head when I hear the imaginative way the employer thought they would beat the labor laws as to overtime and wages. In one case, a retailer created an entry level "intern" position for new salespeople, paying them just $200 per week for full time work. The employer was certain that because these were not "real" employees, the wage laws didn't apply and they could be paid less than minimum wage. In another case, an elder care company thought it could pay its night shift employees for just eight hours even though they were working 12-hour shifts by telling them they should sleep four out of the 12 hours. These creative approaches often work in the short term because there are always people willing to work for less than the law requires. But that same employee will suddenly turn very strict on the law, right about the time he or she is fired. Then the company ends up paying all the past wages and overtime (up to three years!) plus heavy penalties and attorney fees.
Always Apply the Smell Test to Your Business Practices
When will financial institutions get it? We spanked Bank of America for a quarter million dollars after it closed our client’s checking account without notice, causing a dozen checks to bounce. With no consideration of the ethics of such a move, Bank of America simply claimed (unsuccessfully) it had the right to do what it did. Now Chase Bank USA ("Chase") is being sued for doing something equally sleazy, and also claims it has the right to act as it did, customer relations be damned.
Plaintiff Timothy Hauk opened a Chase credit card account and received a Cardmember Agreement ("CMA"). After Hauk had maintained his Chase account for about sixteen months, Chase sent him a balance transfer offer ("BTO") in October. The BTO offered Hauk a promotional fixed annual percentage rate (APR) of 4.99% for any balances he transferred to his Chase account. It also incorporated the terms of the CMA and indicated that Chase could impose an increased rate ("Non-Preferred APR") in lieu of the promotional rate if Hauk made a late payment to Chase or any of his other creditors, the obvious implication being that Hauk would receive the low rate unless and until he made a late payment after accepting the offer. Hauk transferred a $10,200 balance with another creditor to his Chase account, thereby accepting the BTO. When Hauk received his October statement, he found that Chase had applied a Non-Preferred APR of 28.74% on the transferred balance. Why? Because Chase ran a credit check and found that Hauk’s mortgage company reported that a mortgage payment had been one day late three months before Hauk accepted the BTO. Hauk’s attorneys brought a class action for violations of California’s Unfair Competition Law ("UCL") and False Advertising Law ("FAL").
Counsel for Chase argued with a straight face that Chase had the right to do this, because if they had known of the late payment, they would have never extended the BTO to Hauk. Since he was not eligible under Chase’s own rules, Chase was free to stick it to him, Chase argued. Incredibly, the District Court Judge agreed, and granted Chase’s motion for summary judgment, claiming that Chase’s disclosure defeated those claims.
Fortunately, on appeal common sense prevailed. The Ninth Circuit Court of Appeals properly recognized that under the FAL, the standard is simply "whether the public is likely to be deceived." If the FAL was violated, then the UCL would follow. The appellate court reversed the summary judgment as to the FAL and UCL causes of action.
Lessons for all businesses:
Don’t do something just because you are convinced you have the legal right to do so, if it doesn’t pass the smell test. Some day you may find yourself in front of a jury, and jurors have a very keen sense of smell. And as a corollary, always remember that the biggest shortcoming of attorneys is that they think too much like attorneys and often lose sight of common sense. In our prior case against Bank of America and this case against Chase, I have no doubt that the attorneys told the bank officers, from the day they received the demand letter to the day their appeal was denied, that the law was on their side. But they should never have listened, because it was obvious that no jury would tolerate what the bank had done.
When Trademark Infringement Isn't
In what has caused some concern in certain sections of the legal community1, on November 5, 2008 the 9th Circuit Court of Appeals set forth another ruling on how to assess whether 1st Amendment protection is afforded to what is otherwise trademark infringement.2 Beginning in 1997 the 9th Circuit adopted a likelihood of confusion test in making the determination in a case that involved use of Dr. Seuss trademarks in a parody of O.J. Simpson.3 Five years later in Mattel v. MCA Records4 the Court was faced with a uniquely different set of facts, and ruled that use of the "Barbie" trademark for the catchy song "Barbie Girl" was constitutionally protected because the expressive interest in commenting on Barbie outweighed any likelihood of confusion posed by the use of the trademark.5
Finally, in E.S.S. Entertainment 2000 Inc. v. Rockstar Videos Inc.6 the Court held that use of trademarks in an expressive work is permissible unless it has no artistic relevance to the underlying work or the use explicitly misleads as to the source or content of a work. Dr. Seuss and its progeny have led to the obvious question: What test applies? In an abundance of caution, all three approaches must be considered. Although E.S.S. proceeded Mattel and Dr. Seuss, it would not be unlogical to apply the various tests in a staggered approach similar to the following.
First, parties would like to address the extent to which use of the trademark bears artistic relevance to the source. As highlighted by Mr. Lee of the L.A. Daily Journal, considering that in E.S.S. the issue revolved around the use of a strip club’s trademarked name in the video game Grand Theft Auto for no apparent purpose other than to make a reference to it, this prong should be easily satisfied.7
The second issue to be argued would be the extent to which use of trademark by the proponent causes a likelihood of confusion, followed by a balancing of the two competing issues in a manner consistent with Mattel. This approach, though simple and redundant, would ensure that the parties duly consider all major aspects of each of the 9th Circuit’s rulings, leaving them prepared for the certain scrutiny they will face from the Court.
1. Mark S. Lee, The 9th Circuit’s Doublespeak, L.A. Daily Journal 5 (Dec. 2, 2008).
2. See E.S.S. Entertainment 2000 Inc. v. Rock Star Videos Inc., 2008 WL4791705 (9th Cir. Nov. 5, 2008).
3. Dr. Seuss Enterprises, LP v. Penguin Books USA Inc., 109 F.3d 1394 (9th Cir. 1997).
4. 296 F.3d 894 (9th Cir. 2002).
5. Id.
6. E.S.S., Supra, n. 2.
7. Lee, Supra, n. 1 at ¶10.
Small Businesses At Risk of Being Liable for Their LLC's Debts & Obligations
I just scored a big victory on behalf of a client in Los Angeles Superior Court, and it reminded me to remind you of the importance of observing business formalities with your corporations and LLCs.
In the late 90s, my client had loaned about $200,000 to an acquaintance (we’ll call her Lauren), for use in a business Lauren was forming with a business partner. Lauren and her partner took the money and formed an LLC, but never paid back a dime of the loan. Of course, to keep the matter challenging for me, the loan agreement was entirely verbal. Thus, I not only had to prove an oral agreement, I had to deal with the statute of limitation problem from this decade old debt.
The LLC was defunct, so a judgment against that entity would have been worthless. In any event, it had always been my client’s understanding that these were personal loans to the individuals, not to the company.
I tried the case to a jury, and I called the defendants as my first witnesses, even before my own client, because I anticipated that they would acknowledge the debt (and thereby avoid all those problems of proving the oral agreement), but would try to push it off to the LLC. They testified as expected, and I was then able to show through the testimony of my client why the debts that they had just admitted to were in reality personal debts. The total judgment awarded by the jury and court exceeded a million dollars.
The Defendants, in their minds, may well have intended that the debts be company debts, but they did not observe the necessary formalities. They may have thought they hit the jackpot when they found someone willing to loan them $200,000 with no documentation, but that contributed to their own downfall. If these had been real company debts, then we would expect to see the usual formalities such as promissory notes issued by the company, and company minutes reflecting the terms of the loans. Most LLCs operate in a small business fashion and as a result run a high risk of inadvertently losing their liability shield under what is known as the Alter Ego Doctrine. The Alter Ego Doctrine is generally based on the idea that the member(s) of the LLC have acted as one and the same in a manner that works a fraud or injustice on another, and therefore should share the same liabilities. In determining whether the individual members are personally liable for the debts and obligations of the LLC under this doctrine the courts consider several factors, the most significant of which is failure to follow organizational formalities.
A failure to follow formalities has been seen to include improperly organizing an LLC, not timely filing required forms or paying required fees and taxes, not having a continuous presence in the home state, and not having a designated agent to receive legal documents. There are a few specific activities that commonly cause problems under the "failure to follow organizational formalities" factor: (1) Commingling of Assets; and (2) Failing to Keep Company Records.
A simple and common example of commingling and failing to keep records is where a member uses LLC funds or assets for personal use without documenting the transaction, and with no proof of authorization under the LLC’s articles. The lack of any formal procedure in the expenditure will make plain to any deciding judge that the LLC was no more than a name, and at all times the member and the business were one and the same entity.
These issues are of particular concern for the small business oriented LLC because they tend to operate on more limited budgets, have less management personnel, and, as a result of the primary focus being profits, generally have less time to ensure the LLC is complying with nuanced and complicated business laws. While the best answer to avoid the above mentioned pitfalls is of course what the small business person would most love to avoid, the high risk of inadvertently putting all personal assets at stake requires that they bite the bullet and consult with a business planning attorney. While doing so may serve a frustrating cost, it must be remembered that the above mentioned concerns are only a few of the many an LLC member must be wary of. In the end, the business person’s choice on whether to forgo professional consultation will most likely make the difference between walking away from any future financial disaster, or bringing it home.
Take Privacy in Your Own Hands
You may recall reading of the case of Judge Kline from the Orange County Superior Court. A hacker hacked his computer, found child pornography and alerted police. The issue raised by the case was whether this illegally obtained information could be used to prosecute Kline, given that there was a connection between the hacker and police by way of certain watchdog groups.
Privacy is a fundamental interest that society has long championed in the United States, and it is that reverence that has caused some to react negatively to a recent 9th Circuit holding that seemingly abridged the constitutionally protected right.1 In the unpublished decision of U.S. v. Kline2, the 9th Circuit held that a Canadian hacker who had used Internet "watchdog" groups to communicate with law-enforcement personnel in furtherance of obtaining evidence of child pornography, was not an agent of the state sufficient to raise constitutional protections.
It appears that the reason the court so held was because the hacker was not in direct communication via the Internet "watchdog" group with the law enforcement agency he ultimately provided the incriminating evidence to; the Irvine Police Department of Orange County, California. The Court was not persuaded that communications with and knowledge of the intrusive investigation techniques by some government bodies was sufficient to make the hacker an agent of the state with respect to the Irvine Police Department. Rather, the Court indicated that in order to find the hacker an agent of the state the Irvine Police must have known or should have known of the hackers activities prior to the search, and further must have acquiesced in some manner to thereto.
How one interprets the effects of the holding will largely depend on their own disposition. Should one be of the inclination that constitutional rights must be guarded with fire and sword, it may be disturbing that law enforcement could passively affiliate themselves with Internet watchdog groups in order to circumvent the 4th Amendment’s protections. Or, one could also consider that there has yet to be a level of social involvement paralleling that in ousting child-predators. When the holding is viewed in that light, the likelihood that law enforcement would have such vigorous intermediaries to work with on other criminal matters becomes increasingly slim, and the holdings impact on privacy rights abroad lessens accordingly.
Regardless of one’s position on the issue, Kline highlights the need for intensive discovery in ascertaining precisely where incriminating evidence came from, how it was obtained, and who participated in acquiring it. Moreover, even though Kline was not selected for publication, it dually reminds of the need to have secure computer storage regardless of criminal or civil settings, for the 9th Circuit has clearly demonstrated an inclination to find in favor of admissibility where the connection between the government and the actor is particularly tangential.
1. See Sagi Schwartzberg, Hacking Away at The 4th Amendment, L.A. Daily Journal 4 (Dec. 2, 2008).
2. U.S. v. Kline, 112 Fed.Appx. 562 (9th Cir. 2004) (not selected for publication).
Biegel v. Norberg -- Chilling On-Line Reviews?
Yelp is based in San Francisco and is viewed there as a favored son for some reason. When someone dares to challenge Yelp or its postings, many of our Northern California neighbors get exercised. I received several calls from media outlets over the past couple of days, seeking comment on the case of Steven Biegel v. Christopher Norberg, an Internet defamation case involving Yelp.com.
The simple facts are these. Norberg was treated by Biegel, a Chiropractor. Norberg was told the treatment would cost a certain amount if he was paying for it out of his own pocket, but his insurance company was allegedly billed at a much higher rate. Although a common practice, since health care providers and insurance companies are free to enter into whatever arrangements they please, this apparently bothered Norberg, so he posted a review on Yelp.com, giving Biegel just one star and questioning the honesty of his billing practices. When Biegel complained about the review, Norberg replaced it with a new entry, accusing Biegel of attempting to harass him into silence. Biegel then responded by suing Norberg for defamation. The trial is set for March 2009.
Note that Yelp is not being sued, only the person that actually posted the allegedly defamatory statements. Nonetheless, many are bothered by such a lawsuit, concerned that it will have a chilling effect on the willingness of people to post their views on sites such as Yelp.com and Citysearch.com. Some have suggested to me that just as the website is immune from liability for anything said by visitors, that immunity should be extended to the visitors as well.
I fought at the forefront of cases involving the Communications Decency Act, which shields website operators from liability for the comments of others, because that limitation makes infinite sense. We would not have open forums and dialog on the Internet if the website operators had to fact check every comment posted.
But on the issue of whether those who post the comments should be protected, I find myself cast as the curmudgeon, seeking to stifle freedom of speech. Here is how the San Francisco Chronicle quoted me:
“Sites that are seemingly well intended are turning into wastelands of defamatory and unspecified allegations,” said Aaron Morris, a partner with Morris & Stone LLP in Orange County who is not involved in the case. “There needs to be some sort of blowback against unfettered speech. People should be able to go on and say, ‘That’s not a true statement about me, and I need to be able to attack this.’ “
If everyone played nice, review sites would not be a problem. But they don’t. Suits against those who post defamatory statements won’t chill free speech, but they will chill defamatory speech, and that’s a good thing. You see, those seemingly helpful reviews you are reading on line are being gamed big time, and there must be a means to fight back. I receive calls every day from businesses that are being falsely trashed by competitors. In one case it was discovered that a company had employed a full time defamer (my designation, not theirs), whose job was to spend all day every day, creating false identities in order to post false reviews, blogs and websites about competitors. I’d love to say that it will all come out in the wash -- that a good business will receive enough good reviews to override the false statements -- but that is not the case. Whereas a legitimate reviewer will post their remarks and go about their business, these professional defamers utilize SEO methods to move the defamatory blogs and websites to the top of the heap. Honest reviews don’t stand a chance against the bogus ones.
So what about the Norbergs of the world, who just want to post their comments without fear of legal action? Yes, the target of the criticism can file an action, but he will pay a heavy price if the posting was not defamatory. The poster can first respond with a simple anti-SLAPP motion, which stops everything including discovery and allows the court to determine whether the speech was protected and whether the plaintiff has a chance of prevailing. If the motion is granted, the plaintiff pays all of the poster’s attorney fees. He’ll then come to me, and we’ll file a SLAPP BACK action, suing the prior plaintiff for malicious prosecution, winning the poster millions of dollars (individual results may vary). Now who is chilled?
[Update] After all the attention this case received, the ending, like so many cases, was rather anti-climatic. The parties settled and the offending post was replaced by a new conciliatory post by Norberg.
