Houston attorney Roy Elizondo has been living a nightmare for the past five years, ever since he fell victim to a fraudulent check scam that has been hitting lawyers all over the nation.
He remembers the exact moment the stressful ordeal started. He and two lawyer friends were preparing to play a round of golf back in September 2014, when an employee from Elizondo’s bank called to say a $496,850 cashier’s check from a client, which he had deposited into his Interest on Lawyers’ Trust Account, or IOLTA, had a problem with its signature authorization. After Elizondo called the bank that issued the cashier’s check, he learned the document was counterfeit.
The horror was that the day before, Elizondo had wired nearly $400,000 from that fake check to a Japanese bank account. The transaction left his account with a six-figure overdraft.
“My stomach flipped at that point. I was so overwhelmed,” said Elizondo, who practices personal injury and first-party insurance law. “I was like, ‘Oh, shit! This is a huge loss.’”
In the five years since then, Elizondo has been embroiled in a dispute with Cadence Bank, where he kept his IOLTA account, over who is liable for the lost funds, which the bank has been demanding for Elizondo to repay. Representing himself pro se in the trial court and on appeal, he won a 2-1 ruling in Houston’s First Court of Appeals on Thursday, which decided that the loss was Cadence’s fault.
The court found a bank employee had done the wire transfer without verifying that the cashier’s check had cleared and that the funds were available for transfer. It ruled the bank’s failure breached a wire transfer agreement between the bank and Elizondo.
“These cases are going on all over the country,” said Elizondo. “Courts are divided all over the country. I’d say the majority of cases, especially in New York, find in favor of the banks.”
The scams are so common that the New York City Bar issued an ethics opinion to explain lawyers’ ethical duties after an IOLTA scam. The opinion said since 2009, email scams have swindled lawyers of $70 million.
“One experienced ring obtained $29 million over a two-year period from seventy lawyers in the United States and Canada,” said the opinion, which added that banks often sue lawyers to recover lost funds, which can raise serious ethical issues, since money in IOLTA accounts really belongs to clients.
For many years, the State Bar of Texas has been warning lawyers about similar fraudulent check scams, which are increasing in sophistication. Since 2013 when the bar started publishing warnings on its website, attorneys have reported these scams 12 times, most recently in March.
Det. George Schilter of the Webster Police Department’s Criminal Investigations Division, who is an attorney and has handled many fraudulent check scam cases, said that the IOLTA scam has been hitting attorneys across the country in tremendous volume.
“The only thing that lawyers can do to protect themselves is to make absolutely sure that if they take in money for which they are expected to make a pay out,” Schilter said. “Give those sources of the income sufficient chance to clear.”
Elizondo said that his firm is often targeted by scammers, but their schemes are obvious and easy to spot. This one was different–the scam was very sophisticated. Elizondo said he went through everything the scammer sent him and it looked legitimate. The supposed client had a plethora of documentation, and he believes they hacked email accounts from real companies, which had real websites. They used common legalese and knew the right things to say to convince him to act quickly.
“You’re not dealing with your average, common scam artist,” he said. “I didn’t think anything of it when I deposited the check.”
The majority opinion in Cadence Bank v. Elizondo explains the background of the case.
“Elizondo fell victim to a sophisticated check-fraud scam,” wrote Justice Laura Carter Higley, joined by Justice Sarah Beth Landau.
A supposed international client emailed Elizondo for representation “in a run-of-the-mill collection action,” and he took the case. The client said the supposed debtor had settled and would mail a cashier’s check for Elizondo to deposit into his IOLTA account. The client then told him to wire the funds to someone in Japan.
“The client emphasized that time was of the essence, explaining that the dispute with the debtor had disrupted its cash-flow and caused it to fall into arrears with various entities with which it did business, including the holder of the Japanese bank account,” the opinion said.
The wire transfer went through, and then the very next day, the fake check was dishonored and returned to Cadence Bank unpaid. Cadence charged back the full amount of the check. This resulted in a negative balance of $398,980 in Elizondo’s IOLTA account.
“Cadence demanded that Elizondo repay the overdrawn funds. Elizondo refused,” the opinion said.
In November 2014, Cadence sued Elizondo, claiming he breached his deposit agreement, which authorized the bank to charge back the funds, and that when he deposited the fake check, he breached his warranty that signatures on the check were authentic and authorized.
Elizondo countered that the wire transfer form was a valid contract that required the funds to be wired from a verified collected balance, and Cadence breached the agreement by wiring the funds from an unpaid check, which had caused the overdraft.
The trial court sided with Elizondo by issuing a take-nothing judgment, and Cadence appealed.
The First Court ruled that Elizondo did breach his warranties by depositing the fake check, but that the wire transfer agreement had a material term that said it was the bank’s duty to transfer the funds from a verified collected balance, meaning the funds were actually collected, not just provisional. Cadence breached that agreement.
“If a customer spends provisional funds based on the bank’s misrepresentation regarding the status of the check settlement process, and the bank then charges back those funds, thereby causing an overdraft, the customer may assert common law defenses to the bank’s right to recover the overdraft,” the opinion said.
Justice Evelyn Keyes wrote a dissenting opinion that said the majority’s ruling went against established banking laws in the Uniform Commercial Code. Keyes wrote that the wire transfer form wasn’t a separate and superseding agreement in which the bank made a false representation that overrode the bank’s right to charge back the funds to Elizondo.
William “Pat” Huttenbach of Hirsch & Westheimer in Houston, who represented Cadence, declined to comment.