A Bank Violates Its Trust

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November 1, 2017 · Posted in Commentary 
By Les Zador

Some months back I sent out a newsletter about one of my ongoing cases.  My client was another personal injury lawyer, and his bank that helped itself to money in his attorney-client trust account to cover itself for money it (mistakenly) claimed that my client owed the bank in his personal capacity.   It was an interesting case then, and it became a more interesting case once I had the opportunity to take the deposition of a couple of the bank’s employees who had been involved in the decision to invade my client’s attorney-client trust account to cover what even the bank knew was, at best, a personal debt.  The case finally settled, but on terms that must remain confidential.  I am, however, at liberty, to discuss the facts of the case, which are interesting even for the interesting times in which we live.

The facts:  I will start by recapping some of the facts as I had explained them in  2015.  In a nutshell, what happened was this:  back in 2012, the bank’s fraud alert department called my client, who is an attorney, and told him that somebody had cashed a check for $40,000 drawn against his personal business account, and the transaction looked suspicious to the bank.  My client thanked the bank for having alerted him and told the fraud investigator that the $40,000 transaction was, indeed, bogus, and not to honor the check that had been presented by a former dishonest employee, who had obviously pilfered the check from my client’s checkbook.  The bank agreed; but since the bogus check had already been honored, the bank could only reverse the credit for the $40,000 it had previously given the fraudster back to my client’s account.  The bank also recommended to him that he close his two accounts with the bank–the aforementioned personal business account and also his attorney-client trust account–and open new personal business and attorney-client trust accounts with the bank to short circuit the possibility of any future pilfered checks being cashed.  As per the bank’s suggestion, my client closed his two old accounts and opened a new personal business account and a new attorney-client trust account.  During the following month, however, the bank cashed the $40,000 check drawn on my client’s old personal business account against moneys in his new attorney-client trust account.  (Presumably, the bank would have rather cashed the $40,000 check that had been drawn against his old business account against my client’s new business account; but since the new business account didn’t have enough money in it, the bank went after the only other account that could cover the $40,000, i.e. the new attorney-client trust account.)  Although the bank says otherwise, the reality as my client experienced it is that the bank did not let him know it had withdrawn the money from his new attorney-client trust account; and he found out about it for the first time when checks he had written against the new attorney-client trust account started bouncing.  The bank also notified the California Bar Association that checks written against the new attorney-client trust account were being returned for insufficient funds, prompting a State Bar investigation.

The two accounts:   At this point, you’re probably thinking that the bank did him wrong; and, if so, you’re right.  A personal business account and an attorney-client trust account are as different as Mercury is from Neptune.  The old personal business account was the one out of which my client conducted his business, i.e. his law practice.  He paid his rent and expenses of running his office out of the old personal business account.  An attorney-client trust account is the account into which money coming into the law office that belongs in whole or in part to others is deposited.  “Others” included mostly his personal injury clients together with their medical providers, who were owed money to be paid from case settlement proceeds.  The way an attorney-client trust account typically works is as follows:  the insurance company will send a settlement check, and that check is deposited into the attorney-client trust account.  Once the check clears, the attorney will then make distributions of the check proceeds as per his agreement with his or her client.  That agreement invariably provides that any doctors holding liens will be paid first.  A doctor holding a lien is one who has agreed to postpone receipt of payment of his medical fees until such time as the case shall have settled.   Then the attorney is reimbursed for any and all costs that he might have advanced–such as court filing fees, service of legal process, deposition costs and fees, expert witness fees, etc.  Then the attorney takes his fee, which is usually a third to forty percent of the settlement amount, though that percentage is always negotiable.  What’s left over is paid to the client.  Usually, the bulk of what’s in the attorney-client trust account belongs to the aforementioned “others.”  To the extent the attorney can claim a portion of what’s in the attorney-client trust account, the money is not his to spend until the attorney shall have deposited it into his own account.  In other words, he’s not allowed to pay his bills using money as to which he has claim as long as it remains in the attorney-client trust account.  That money is only his to do whatever with only once it’s sitting in his own account(s).  If the attorney pays any of his or her business expenses out of his or her attorney-client trust account, then that attorney can get into major trouble with the State Bar, which considers that activity as “co-mingling.”

Putting aside for the moment the issue of the bank’s having no right to cash the check against ANY account of my client when the bank had been specifically told not to cash the check and had agreed not to cash a check that it knew to have been bogus, i.e. not legitimate because it was unauthorized, the bank had absolutely NO RIGHT to cash a personal business check against moneys being held in a trust account.  Even supposing that the bank had the right to the money–which it did not–“[t]he bank’s right of offset . . . exists only if the depositor is indebted to the bank in the same capacity as he holds the account.  Thus, a bank may not ‘apply the trust funds to a personal indebtedness . . . .”  Allegations in a lawsuit that a bank caused disbursements to be made from trust accounts for the purpose of satisfying personal obligations states a claim for conversion against the bank based on charges against trust accounts for obligations that the depositor owes personally.  Conversion takes place when one converts personal property belonging to another to oneself without the owner’s permission.   “The rule is that when the funds are trust funds and the bank knows or has knowledge of facts sufficient to put it on inquiry that the funds are held by the depositor in trust, the bank may not, as against the holder of the account, apply those funds to the depositor’s individual indebtedness to the bank.  ‘The principle is by no means new or novel, having been promulgated with the Ten Commandments when it was said, “Thou shalt not steal.”‘”  (Chang v. Redding Bank of Commerce (1994) 29 Cal.App.4th 673, 682.)  

The bank we sued acted properly when it directed my client to close his old accounts, wisely when it suggested that he open new accounts, but notoriously in raiding his new attorney-client trust account.

One hand obviously didn’t know what the other was doing:  So why on earth did the bank, after telling my client his funds would be protected, go back on its word and help itself to money that didn’t even belong to my client, but rather to his own personal injury clients and their treating physicians?  Obviously a mistake was made by someone, but who?  And why did that mistake result in the bank’s doing what it absolutely did not have the right to do?

The answer is that when the wrongdoer came into the bank’s branch with the $40,000 check, the branch gave this person–whom it knew and had done business with for many years and did not suspect of being dishonest–instant credit and allowed him to immediately withdraw $30,000 from that $40,000 in the form of cashier’s checks.  This is contrary to what is commonly done in these types of situations where a bank will hold a large check for at least a day so that it can at least make a routine investigation that everything is OK with the large check.  In the branch’s favor, however, was the fact that the wrongdoer had been my client’s employee for many years, a fact known to the branch personnel, and that he had over the course of many years routinely cashed checks.  Furthermore, the $40,000 check had been drawn using the same stamp bearing my client’s signature that had been used for the hundreds and hundreds of checks with respect to which there had never been a problem.  Furthermore, my client had signed an indemnity and hold harmless agreement with respect to the signature stamp by the terms of which he had agreed not to make a claim against the bank if it relied, however mistakenly, on a signature that was made using the stamp.

While the facts would support that both the teller who took the check from the wrongdoer and the supervisor who authorized the immediate withdrawal of the $30,000 had no reason to know either that my client had fired the wrongdoer a week before for acts of dishonesty that had only recently come to his attention or that the stamped signature on the $40,000 check had not been authorized, it is also the case, however, that the a diligent manager would at least have done a modicum of checking and become aware that the bogus $40,000 check was: a) numbered way out of sequence, b) had been typed instead of hand-written unlike all of the other checks that had been drawn from the account (which had been hand-written), and c) the $40,000 check was not only unusually but also unrealistically large for a check to one of my client’s employees.

And so, waxing biblically, it came to pass that, unknown to the persons who had been responsible for giving the wrongdoer instant credit, the check was automatically flagged for irregularities by the bank’s computers and then brought to the attention of the Fraud Department AFTER the check had been honored at the branch and the $30,000 immediately thereafter paid to the wrongdoer.

What’s the bank going to do given the fact that one hand obviously didn’t know what the other hand was doing?   Given that the bank felt, perhaps not entirely unreasonably, that it would have been a moral outrage for it to have been stuck with the $30,000 loss when my client should have guarded his signature stamp better and been more discerning in his choice of employees, the bank decided that, no matter what had been told to my client about his money being protected if he were to open up new accounts, its reversal of the $40,000 in favor of my client should once again be reversed, so that the bank might pay itself back the $30,000 it had previously allowed the wrongdoer by way of the instant credit with the other $10,000 going back to the wrongdoer.  In order to justify what it intended to do, the bank put an “investigator” on the job, whose objective it was, ostensibly, to decide whether either my client or the fraudster was in the right with respect to the $40,000.  In going after the $40,000 in the new attorney-client trust account, the bank claimed it had every right to do what it did, as it was merely exercising its RIGHT OF OFFSET as provided for in its agreements with the bank customer.

To hardly anyone’s great surprise, the “investigator” came down on the side of the fraudster and related at the time of his deposition that: a) his decision was based partly on the “fact” that the fraudster had cooperated completely with the bank (might have been true), while b) my client had refused to discuss the matter with the investigator (not at all true), thus c) betraying a lack of honesty (what a load).  Again, it hardly came as a shock to anyone in the room when the “investigator” admitted that his goal from the outset was to get the money back for the bank and to color his “investigation” accordingly.

What the Assistant Manager had to say:   She acknowledged at her deposition that a trust account differs from a business account in that the trust account is made up of funds that don’t belong to the client, while a business account is for the client’s money.  She also acknowledged that the bank’s own agreements with its customers acknowledge this fact and that at least some of those agreements state quite clearly that a bank may not exercise its RIGHT OF OFFSET against a trust account.

What the Bank’s Expert had to say:    The bank had to overcome the law as stated in the CHANG case.  In a nutshell the rule is this:   Banks admittedly have the right of offset.  Meaning that when a bank customer owes the money because of an overdraft or because a check bounces with respect to which the bank had precipitously given credit, the bank doesn’t have to eat the loss but can go after one or more of the customer’s OTHER accounts with the bank to make up for the loss.  If, however, the bank goes after a trust account with respect to which its customer is the trustee to make up for a shortage caused the customer, then the bank is culpable of theft, pure and simple.  The bank can’t invade a trust account because the money in that account isn’t money that belongs to the customer but rather money that he’s holding in trust for somebody else.  That’s the way trust accounts work; and an attorney-client trust account is just another example of a trust account with the attorney acting as the trustee for the clients and, in my client’s case, medical providers who are entitled to the funds.  The bank, thus, would have had NO right to invade the attorney-client trust account even if my client had given it permission to do so.  My client could not give the bank permission to do something which my client himself had no right to do.  Since he couldn’t invade his attorney-client trust account and treat the money as his own, he couldn’t give anyone else permission to do what he himself could not do.

So how did the bank look to get around this hard and fast and common sense rule?  By doing what any defendant does when it’s in a jam, i.e. doing its best to confuse the trier of fact by having an “expert” authoritatively spout pedantic nonsense.  In this case, the bank’s expert took the position that the bank wasn’t really invading the attorney-client trust account.  No, all it really did was reverse the credit that it had given my client and get the money back to its rightful owner . . . the fraudster (and from whom it immediately withdrew the $30,000 with respect to which it had previously given him the instant credit).  Of course, the bank never referred to the fraudster as “the fraudster.”  To the bank, he had to be the “party in the right” in order that the bank might feel justified in getting its $30,000 back . . . which, of course, was what the case was really all about and of paramount importance to the bank, which had at that time and still has a net worth that’s measured only in the tens of billions.

No, all the bank really did, according to its banking expert, was reverse the credit that it had given my client and get the money back to its rightful owner . . . .  Yeah, sure.  But in order to get the money back to the fraudster, the bank had to invade the attorney-client trust account, didn’t it?   And so we’re really back to square one, aren’t we?

    If you pay an expert enough, he/she will say anything:     The above is really all I’m going to say about the bank case, except for this little tidbit:  Not long after the wrongdoer stole the money from my client, the culprit must have had an epiphany of some sort, which led to his committing suicide.  After we sued the bank, the bank counter-sued against the wrongdoer’s estate.  The fact that there was nothing to be gotten out of the estate didn’t seem to bother the bank at all.  After all, when there’s someone you can sue, you just go ahead and do it regardless of the practical considerations involved.   

    An attorney representing a plaintiff in a personal injury case who wants to claim catastrophic injuries when such injuries never happened will likely be able to find a medical expert–very often the treating physician who realizes he/she will only be paid if the case resolves in favor of the plaintiff/patient will testify that a person who has had a successful recovery from exaggerated injuries has lifelong residuals, i.e. will never make anything resembling a complete recovery but will have deficits lifelong.

And an attorney hired by an insurance company will really be out looking after the interests of the insurance company ahead of those of his client, who is the person responsible for the accident.  That attorney will be able to find himself/herself a medical expert who will be fully capable of giving testimony to the effect that someone who is truly injured on the verge of death or hospitalization will start running marathons any day now.

It seems to me that you pay SOME people enough money, they’ll do anything.

Les T. Zador, Atty. at Law

15760 Ventura Blvd., Suite 700


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