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Defensive banking tips for the law office

Los Angeles Business Journal, August 2, 2004 by Diane Baxa

Managing an office today requires a good defensive strategy--thoroughly vetting potential employees to avoid future personnel problems, instituting segregation of duties to limit the possibility that employees will embezzle, incorporating tight online security measures to protect against hackers. But one aspect of firm management often is overlooked when legal administrators are planning their next defensive move--banking.

Following is a summary of some of the key laws that could affect the way your firm conducts its banking business, including tips on how to protect your firm from some common banking mistakes.

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Retainer agreements: The structure of your retainer agreements can facilitate--or hamper--opening deposit accounts and depositing checks. If appropriate, make sure your retainer agreements give you the power to endorse and deposit checks payable to your client (whether payable to the client alone or payable to both the attorney and client). Without this, banks may require the client's signature to be guaranteed by his or her bank (which could be a problem if the client does not have an account) or that the client be present when the check is deposited.

Depositing checks into your trust account and "collected" funds: When a check is" deposited, your bank must get the money from the bank of the person who issued the check. Until it actually collects, your bank may allow you to use the "uncollected" funds. While you can write checks against those funds, you do so at your own risk. If the deposited check is paid, no problem. If returned unpaid, potential problem.

If you have paid out funds on a check later returned unpaid, you are out of trust--you used one client's funds to pay another client. If the returned check creates an overdraft, your bank must report you to the State Bar, and the State Bar may sanction you.

To avoid these problems, explain to clients that you will not be able to issue a check against the deposited funds for a week (for local checks) or two (for checks out of the area). You may want to try to verify that a check has been finally paid. Contact the bank on which an item is drawn to confirm receipt and payment.

Accord & Satisfaction ("Paid in Full" Checks): Before 1993 you could take a check marked "paid in full" which actually was for less than the amount due, strike the restrictive language, cash the check, and preserve your rights to collect the balance. Now, with few exceptions, under Commercial Code [section] 3311, if you cash a check which says "paid in full" and the debt is disputed, payment really is in full. You can't recover the balance, even if you could prove more is owed. Don't cash "paid in full" checks unless you are prepared to accept the sum as payment in full.

Death/Incompetence of Bank Customer: After a bank customer has died or been declared incompetent, a bank is not liable for paying checks against that person's account until the bank has been given official notification of death or adjudication of incompetence and has a reasonable opportunity to act upon it. A bank may pay checks up to 10 days after the date of death unless it is ordered to stop payment by a person claiming an interest in the account. (Commercial Code [section] 4405)

Postdated Checks: Banks may pay early unless the customer gives it notice of postdating. Most banks have a form for this notice. Such notice generally is effective for six months. (Commercial Code [section] 4401)

Staledated Checks: There is no legal obligation to pay checks more than six months old, but a bank may pay staledated checks "in good faith." Never assume an "old" check won't be paid, simply because it is old. (Commercial Code [section] 4404)

Stop Payment Order (on your check): Any signatory on an account has the right to stop payment on a check issued against the account, regardless of which authorized signer signed the check. A stop payment is genera y effective for 14 clays if it's an oral order, six months if confirmed in writing. Some banks allow "permanent" stop payments. If the bank pays a check after a stop payment has been issued, the accountholder must prove loss. A stop payment does not prevent a "holder in due course" from collecting on the check. (Commercial Code 4403)

Stop Payment Order on bank's "Cashier's Check" or other official check: A cashier's check is an obligation of a bank, rather than an individual. If a Cashier's Check or other bank check is lost or stolen, the purchaser or payee of the check may execute a declaration of loss and, on the 90th day after issuance of the check (or the date of the declaration of loss if more than 90 days after issuance), if the check has not been paid, the bank shall pay the amount of the check to the claimant. If the bank pays the amount of the check to the claimant, it is not liable on the instrument. So, if you're given a cashier's check that's more than 90 days old, it may not be good.

Business Services Industry

Defensive banking tips for the law office

Los Angeles Business Journal, August 2, 2004 by Diane Baxa

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