Houston lawyer Bill Luyties represents a small Chicago law firm that does no business in Texas — other than when it unwittingly attempted to deposit a huge counterfeit check drawn off an account in the Lone Star State as part of a bank scam.
And Luyties recently convinced Houston’s First Court of Appeals that the mere act of depositing a phony check is not enough reason to allow a bank to sue the Illinois law firm in a Texas court. And that ruling will be a great relief to other out-of-state law firms who get used by crooks in illegal Texas financial schemes, he said.
“It has great ramifications for any lawyer who gets paid by a client in another location,” said Luyties, a member in Houston’s Lorance & Thompson, of the First Court’s recent decision.
The background to the court’s decision in Jay Zabel & Associates v. Compass Bank is as follows, according to the opinion: Jay Zabel & Associates is a six-lawyer law firm that specializes in tax law and real estate transactions. In 2015 the firm agreed to represent what it thought was Sinochem, a Chinese company, in the international sale of a dredger to Clune Construction, a Chicago company.
A check for $385,966.76 was delivered to Zabel by UPC parcel for purchase of the heavy machinery. And the return address on the check’s parcel listed Clune’s Chicago address. But the face of the check identified its maker as M/I Title escrow in Houston which had a Compass Bank account. Zabel endorsed the check to its Chicago bank and deposited the money in its client trust fund.
After the funds were deposited, Shi Dai, a person purporting to be a Sinochem representative, instructed Zabel to wire the funds outside of the United States to two foreign accounts. After the money left Zabel’s account, the law firm received a call from a representative of M/I Title informing them that the $385.966.76 check was counterfeit.
Zabel reported the bank scam to the FBI and the Chicago police. M/I Title also reported the fraud to Compass.
Compass Bank later sued Zabel in a Houston state district court alleging the law firm had deposited a counterfeit check that it was never entitled to in violation of the Texas Uniform Commercial Code. The petition also noted that the check was drawn on a bank account located in Texas, which established jurisdiction for the state court to hear the dispute.
However, Zabel filed a special appearance in the case and argued that the Texas court lacked personal jurisdiction to hear the bank’s claim against the law firm. It claimed it had never done business in Texas, except for a couple of tax and real estate cases for clients who’d moved there. And the law firm argued its only substantial contact with the state was depositing a check drawn off a Texas account and it never purposefully availed itself of Texas law in its courts.
Under its long-arm statute, Texas courts’ personal jurisdiction extend as far as the U.S. Constitution will allow, but a defendant must have established minimum contacts with the forum state such as doing business within its borders to be sued in its courts.
A trial court later signed an order denying Zabel’s special appearance and its arguments, a ruling the law firm appealed to the First Court.
The bank argued on appeal that Zabel’s decision to deposit the check despite numerous red flags resulted in money being drawn from a Texas account and also availed itself of the state’s court jurisdiction. But Zabel argued that Texas had no real connection to the transaction and it was merely happenstance that the check sent to the law firm was from a Texas account.
In her June 29 decision, Justice Laura Carter Higley noted that Zabel did not purposefully select M/I Title or its Texas bank account as the target of the scam, nor did Zabel otherwise assist in making the counterfeit check, rather those acts were committed by Dai and his cohorts.
“However, all of these alleged acts and omissions occurred in Illinois and cannot serve as the basis for personal jurisdiction in Texas, thus it does not have the requisite minimum contacts with Texas to be subject to specific personal jurisdiction in this forum,” Higley wrote, reversing and remanding the case back to the trial court. “We hold that the trial court erred when it denied Zabel’s special appearance.”
Luyties was pleased with the decision. While the appellate ruling doesn’t prevent Compass from refiling its case against Zabel in Illinois, at least his client won’t have to litigate the case in a foreign state, he said.
“That was my client’s concern,” Luyties said. “They didn’t want to be litigating in Texas, which is a state they really have no contact with.”
William P. Huttenbach, an attorney with Houston’s Hirsch & Westheimer who represented Compass on appeal, did not return a call for comment.
Luyties said his client’s firm is so small it doesn’t advertise even for its services. That fact made it even harder to prove that the law firm had any intention of doing business in Texas.
“That was one of the issues that the court picked up on. They don’t advertise in Texas and they don’t even have a website where someone could just look them up,” he said. “I felt sorry for them because it was a pretty elaborate scam they got sucked up in. I could see it happened to other folks and have seen it happen to other folks.”