Cautionary tale: Defrauded law firm loses insurance suit

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A Boston law firm’s business policy did not cover losses stemming from its processing of a fake cashier’s check that it received from a “new client” who had retained the firm under a false identity, a U.S. District Court judge has ruled in dismissing a lawsuit against the insurance carrier.

Banking attorneys note that law firms should be particularly careful when accepting cashier’s checks.

Wells Fargo notified Brooks & DeRensis on Nov. 4, 2021, that the bank had dishonored a cashier’s check for nearly $90,000 that the law firm had deposited into its IOLTA account just days earlier.

The firm had accepted the check as settlement of an employment matter brought by a new client claiming to be “Brian Rodriguez.” The firm promptly wired $88,385 of the deposited amount to the bank account of the client, but it turned out later that the “client” was using a false identity.

The law firm’s insurance carrier, Twin Cities Fire Insurance Co., denied coverage of losses stemming from the fraudulent check. Brooks & DeRensis sued Twin Cities in U.S. District Court to establish its entitlement to coverage, asserting claims for breach of contract and violation of G.L.c. 93A.

Judge Denise J. Casper granted the insurance carrier’s motion to dismiss the law firm’s suit in a Sept. 19 ruling.

First, Casper concluded that the cashier’s check at issue was neither “made or drawn by” nor “drawn upon” the law firm for purposes of falling within the scope of the policy’s standard forgery coverage.

“Taking the factual allegations in the complaint as true, B&D received a forged cashier’s check from a third-party purporting to be Rodriguez’s employer,” Casper wrote. “As a cashier’s check, it was purportedly made or drawn by and drawn upon Wells Fargo, N.A. B&D was the payee or the bearer in this circumstance, not the maker, drawer or drawee.”

While Casper found coverage existed under an endorsement providing “Counterfeit Currency and Money Orders Coverage,” the judge went on to conclude the insurance contract’s “false pretenses” exclusion applied.

“This exclusion addresses a scenario where the insured willingly transfers funds to a third-party based on some false representation or receipt of a false check,” Casper wrote.

The 12-page decision is Brooks & DeRensis, P.C. v. Twin Cities Fire Insurance Co..

Lawyers beware

Nina E. Kallen, an insurance coverage litigator in Roslindale, said she has had colleagues who have been taken in by similar scams. That includes lawyers who thought they were taking adequate precautions.

“The worst-case scenario involved a lawyer who had deposited a check into their IOLTA account, called their bank to make sure it had cleared, transferred funds after being told by the bank the check had cleared — only to find out several days later that the check in fact had been dishonored,” she said.

Kallen said she thought Casper made the correct call in analyzing the language of the policy.

“She looked at each and every grant of coverage, determined whether coverage was triggered under any of them, found based on caselaw that one of the definitions [on the coverage question]was ambiguous and had to be interpreted in favor of the policyholder — which is absolutely correct — and then found that an exclusion applied,” Kallen said.

But Kallen said there was an issue the judge did not squarely address.

“There is a question of whether the exclusion made the coverage illusory,” Kallen said. “It is important to remember that, if there is a grant of coverage, you can’t have an exclusion which excludes the entire grant of coverage in the policy.”

Geoffrey W. Millsom, a banking industry attorney who practices in Boston and Providence, said he agreed with the decision on the merits.

“Judge Casper was correct in analyzing the instruments and policy language in determining the check didn’t fall within the policy language,” Millsom said, adding that he tends to blame the victimized law firms in such cases.

“[Brooks & DeRensis] blew past all the red flags and the warning signs,” Millsom said. “I’m not surprised that insurance companies write their policies so that, when people fall for these scams, they’re not liable.”

Millsom said law firms should be particularly cautious when handling cashier’s checks presented to them.

“They’re very easy to duplicate using a laser printer and some sort of graphic design software,” Millsom said. “These cashier’s checks take up to two weeks to wind their way through the banks, so if they’re fraudulent there’s a lag time for the fraudsters to get the money and spirit it away offshore.”

The false pretenses exclusion in the Twin Cities policy dictated the result in the case, according to David L. Evans, a business litigator in Boston.

“Generally, forgery deals with situations where somebody has control or custody of your checkbook, forges names, and the check is issued,” Evans said. “The problem here is the fraudulent check wasn’t drawn on the account of the law firm.”

Evans has a simple piece of advice for law firms.

“The best path is simply to wait until the check you are relying on clears unequivocally,” Evans said. “These scams are only successful [when the perpetrators] play the timing issue. They want you to send them funds before their bogus check is dishonored.”

Twin Cities’ attorney, Christopher P. Flanagan, said his client had no comment on the matter. Stephen J. Brooks, who represented his law firm in the action, did not respond to a request for comment.=

Flim-flam man

According to court records, in fall 2021 someone calling himself Richard Rodriguez engaged the firm to represent him in recovering what he claimed he was owed under the terms of a severance agreement with his former employer.

After retaining the firm, Rodriguez purportedly emailed the employer, threatening suit if he was not paid what he was owed. Within a week, Brooks & DeRensis received from the employer what appeared to be a Wells Fargo cashier’s check payable to the firm in the amount of $89,960.

On Oct. 28, 2021, the law firm deposited the check into its IOLTA account with Cambridge Trust. On Nov. 3, in accordance with instructions from Rodriguez, the firm directed Cambridge Trust to wire transfer $88,385 to the client’s Citibank account in New York. The following day, the firm received notice that Wells Fargo had dishonored the $89,960 cashier’s check as being an “Altered/Fictitious item.”

Brooks & DeRensis submitted a claim under its business owner’s insurance policy issued by Twin Cities. According to the firm, its losses fell within the scope of property coverage for losses due to “forged or altered instruments” and “counterfeit currency and money orders.”

Twin Cities denied the claim, asserting that the law firm’s losses did not come within the terms of the policy’s forgery coverage. The insurer also took the position that there was no coverage under the policy’s provisions for counterfeit currency and money orders. As a last line of defense, the insurer invoked a “false pretenses” exclusion in its policy.

The law firm responded by filing suit.=

Devil’s in the details

Addressing Twin Cities’ motion to dismiss, Casper first looked to the policy’s forgery coverage, which provided “up to $25,000 in any one occurrence as a Limit of Insurance to cover loss from forgery of covered instruments, money orders, credit cards, and counterfeit money.”

The forgery coverage specifically modified pertinent property coverage to provide “Forged or Altered Instruments Coverage” (FAIC) and “Counterfeit Currency and Money Orders Coverage” (CCMOC).

The FAIC provided coverage for “forgery or alteration” of checks, drafts, promissory notes and similar written promises but only when “[m]ade or drawn by or drawn upon you,” “[m]ade or drawn by one acting as your agent,” or “purported to have been so made or drawn.”

Casper concluded that, under the plain language of the FAIC, coverage did not arise given that Brooks & DeRensis alleged in its complaint that it had received a forged cashier’s check from a third party purporting to be Rodriguez’s employer.

Casper next turned to forgery coverage under the CCMOC clause, which defined covered property as including “money orders.” The money orders included counterfeit money orders “that are not paid upon presentation,” as well as counterfeit currency.

The law firm contended that the clause was ambiguous in terms of whether a cashier’s check fell within the policy’s definition for a money order. According to the firm, applicable Massachusetts law required construing such ambiguity in favor of the insured.

Casper noted that a “handful” of courts have determined that in certain contexts money orders should be treated like cashier’s checks because both are instruments that are not subject to cancellation by the purchaser and must be honored by the issuer upon presentment.

“On the other hand, courts that have confronted the issue of whether an insurance policy provision referring to ‘money orders’ also covers cashier’s checks have construed such policy language to exclude cashier’s checks,” the judge wrote.

Casper assumed, without deciding, that the fraudulent cashier’s check at issue in the case was covered by the CCMOC in the law firm’s policy.

However, she proceeded to conclude that, even assuming coverage under the CCMOC, the policy’s false pretenses exclusion precluded coverage of Brooks & DeRensis’ loss.

The exclusion stated that Twin Cities would not pay for loss or damage caused by or resulting from “false pretense,” defined as the “[v]oluntary parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false pretense.”

As interpreted by other courts, the exclusion “addresses a scenario where the insured willingly transfers funds to a third-party based on some false representation or receipt of a false check,” Casper wrote.

She concluded that the law firm’s loss clearly fell within the scope of the exclusion. Further, she rejected the firm’s contention that other language in the policy limited the false pretenses exclusion to physical loss or physical damage.

“The Court notes that other jurisdictions have found ambiguity where an exclusion contained in one endorsement conflicts with coverage provided by another endorsement,” Casper wrote. “Here, however, there is no irreconcilable conflict between the False Pretenses Exclusion and any provision granting coverage.”