Check Fraud : What you need to know

Recently, I settled a case against a bank because it paid on my client's checks which were forged by an employee of my client. No sooner had I settled that case, when a new case with nearly identical facts arrived on my desk. These cases can be financially devastating. Both clients are small businesses where people tend to handle multiple roles and trust runs high between owner and employees.

The scheme set out in the Uniform Commercial Code is a complicated one. There are a number of applicable statutes and who has to prove what shifts depending on the facts. The best thing an owner to can do is to take some simple steps when managing bank accounts to prevent embezzlement in the first place.

1. Review and reconcile your statements every single month as soon as possible after the statement arrives. Check fraud is controlled by state law. Most, if not all, states have adopted the Uniform Commercial Code which as its name implies creates a model code. Therefore, the law is relatively consistent from state to state. Section 4-406 requires an account holder to promptly review statements and notify the bank within 30 days after the statement is sent about any irregularities in the statement. Irregularities would include unauthorized checks, other unauthorized withdrawals, or math errors. If you do not notify the bank within 30 days after you receive your statement, then you will have a difficult time recovering the funds from any forged check and any check subsequently forged by the same person. There are, of course, exceptions to the rule, but the burden shifts to the bank to demonstrate that the bank negligently paid the items and that it paid them in bad faith.
2. If someone besides the owner reviews and balances the statements monthly, the owner should review the statements him or herself every single month.
   
3. Keep your checks, rubber stamps and other account supplies in a locked cabinet which is located in an area other than the responsible employee's office. An account holder can be precluded from recovery if he or she contributes to the fraud by its negligent behavior. This concept is found in the UCC at 3-406.
   
4. Take care in hiring employees. Consider running background checks to determine if there is any criminal misconduct in the job candidate. Check references and be sure to determine the connection between the candidate and the individual providing the reference. Is it a relative? Someone who loaned the candidate money? Just as one must check the source of information provided on the internet because some people have agendas, you must do the same when you check references.
   
5. Maintain a good relationship with your local bank officer. In both of my cases, the embezzler was discovered because the local bank branch called to tell the owner that the business was going to bounce a check.

Despite all the precautions, check fraud may occur. However, if you are vigilant in reviewing the statements and reconciliation, you will be more likely to discover the problem early. Not only will this minimize your financial loss, but it will mazimize your chances of recovering from the bank for paying on an unauthorized check.

Seven Things to Know About the Security Deposit Law

I receive a lot of calls from clients with questions about security deposits that their landlord has taken. The security deposit law in Massachusetts is not overly complex, it just requires precision. Here are some things that both landlords and tenants should know about the rules regarding security deposits on residential properties.

1. A landlord may not take more than one month's rent as a security deposit. For example, if the tenant's rent is $1,000 per month, the landlord may not ask the tenant for the $1,000 and then an additional security deposit, for example, the keeping of a pet. If the tenant has a pet and the landlord wants to take extra security because of the pet, then landlord needs to either raise the rent, prohibit pets or take the risk that the $1,000 is enough.
2. When a landlord takes a security deposit, he or she must give the tenant a receipt for the security deposit.
3. The landlord must deposit the security deposit in an account which is beyond the reach of the landlord's creditors within the Commonwealth of Massachusetts. The Landlord must provide the tenant with a receipt showing the bank, the account number, the amount and date of deposit of your funds.
4. If the Landlord does not handle this procedure properly (i.e., the depositing and providing a receipt), the tenant is entitled to its return on demand. The failure to do so will subject the landlord to paying three times the security deposit plus the tenant's reasonable attorneys fees. It does not matter that the landlord did not mishandle the security deposit on purpose.
   
5. The Landlord must also provide the tenant with a Statement of Condition. It is very important that the tenant list all problems with the apartment. If it is not listed, the tenant can be held responsible for that damage at the end of the lease.
   
6. If a tenant stays in the apartment more than 12 months, on the 13th month, the tenant is entitled to receive the interest that the security deposit has earned over the past year. In the alternative, a landlord can instruct the tenant to deduct the interest from the 13th month rent check.
7. The landlord must return the security deposit within 30 days after the end of the tenancy. If the landlord wishes to deduct anything from the security deposit, he or she must provide the tenant with receipts or estimates for the cost of the repair and sign an accounting under the pains and penalties of perjury. The failure to follow this procedure exactly entitles tenants to multiple damages, plus attorneys fees.

The good part for the tenant is that if the landlord does not follow the rules, the tenant can hire a lawyer and recover the attorneys fees.

As for landlords, if the procedure is followed correctly, a security deposit can be a valuable tool to retain funds for a tenant who does not take care of the rental unit. However, if you are a landlord and you have not maintained a security deposit according to the statute, be prepared to return it upon demand. The failure to return the security deposit on demand if it has been mishandled will only result in the payment of three times the security deposit and your tenant's legal fees. Before you take a security deposit, consult the law and/or a lawyer. It is very important that this is done correctly.

Why Do People Ignore Lawsuits?

I have two clients who called after having judgments entered against them. Both were defendants in their respective cases. Neither defended the lawsuits for two completely different reasons, but nonetheless, each hired me to file a motion for relief from judgment. In other words, I must file a motion and ask the judge to remove the judgment and let these cases go forward on their merits. Each client has a good defense to the merits of the claims asserted by the plaintiff. But, because neither fought the lawsuit when it was active, they now must argue to the court that the court should reopen the case and that they should be given a chance to defend.

I have another client on the other side of the fence. The defendant ignored my clients offers to settle. She would have settled her claim initially for less than $1,000. Now, she has a judgment against the defendant for nearly $100,00 and accruing interest at a healthy one percent per month.

I counsel my clients regularly not to ignore lawsuits or even letters that arrive return receipt request. While it may not be pleasant to receive a demand letter or a lawsuit accusing you of all sorts of nasty stuff, ignoring it, will not make it go away! Ignoring it will only lead to liens on your house, garnishment of wages or the auctioning of your property.

Most of the time, people do not sue out of the blue. In all likelihood the dispute has been brewing for some time. While every case is different, often the best time to resolve the matter is prior to the lawsuit being filed. If you are served with a lawsuit or a demand letter, read it, respond to it, and resolve it if possible. Put emotion and pride aside and look at the case from all sides. Contact a lawyer, if you don't feel you can take a step back from the case. I frequently counsel my clients that settling a case, even though it is distasteful, is the right decision.

Whatever you decide to do, do not ignore it. I promise you. It will not go away by itself.

"Possession is Nine Points of the Law"

Lord Mansfield said it more than 225 years ago. What does it mean? The expression has changed over time to possession is nine-tenths of the law. Does that make any more sense? If you steal something from the store, you do not acquire ownership.

There have been a variety of interpretations. Some have interpreted it to mean it is every advantage a person can have short of actual right. Others have said that to succeed on a case, you have to have these nine things: (1) a good deal of money; (2) a good deal of patience; (3) a good cause; (4) a good lawyer; (5) a good counsel; (6) good witnesses; (7) a good jury; (8) a good judge; and (9) good luck.

In general, I agree with those nine points. When clients call me about a potential case, I always tell them that litigation is expensive and slow. I review the merits of the case with them and advise them about the merits of their position. You do need to have good witnesses to support your case, a favorable jury and some luck never hurts. A good judge in Massachusetts can sometimes be part of that luck, since judges in Massachusetts state court rotate, so you never know who you will be before on a particular day.

I'll be blogging about various legal issues and I hope that you will think that I provide good counsel and am a good lawyer after you have read some posts.