Fraud Targets Business...Law Firm

That firm is mine, Minor & Brown, and I’m not talking the spammy stuff everyone gets. This was sophisticated, carefully planned, big bucks ($250,000) crime. It didn’t work, and the story of what happened and why it didn’t work could be helpful to your business, and certainly should be helpful to other law firms, as this scam was designed to take advantage of the way law firms handle dispute resolutions and debt collections.

Business law firms are often asked to help resolve disputes between companies. Sometimes a contract is in dispute; sometimes the only dispute is that one company is too slow to pay the other. Often the final settlement involves the debtor company sending its payment to the lawyer for the creditor company, who then forwards it on to her client. Why? Because it allows the creditor lawyer to take her fee out of the funds. We like to be paid, too.

Today’s lawyers have learned to quickly recognize and ignore junk requests, impersonal, typo-ridden and grammatically challenged, but legitimate business disputes need attention, and, especially in this economy, lawyers are eager to establish new client relationships. So, when the first well-written, professional correspondence from a British business having trouble collecting an account from a Colorado customer, hit the desk of my litigation partner, it seemed worth checking out.

Are you sure you know it?

Both companies, debtor and creditor, had detailed, up-to-date websites describing businesses of substance. A telephone call to the British firm requesting our services was made, the facts of the case confirmed, and the underlying contact between the Colorado and British companies obtained. We sent the British firm our engagement letter, which they promptly signed and returned. Hurray, we had a new client who likely would need more legal help over time. Actually, it is our firm that would have needed legal help, if our procedures had not prevented us from falling completely for the scam.

This is where the fraud ratchets up. Our client contacts us with news that the threat of litigation has worked, their customer has agreed to send a settlement payment to our firm. Sure, enough, in a few days a cashier’s check payable to Minor & Brown for the requested amount--$250,220--arrives. We deposit the check in our trust account (where lawyers park money that doesn’t belong to the firm) and email the news to our client. Their response is that they are pleased, but a recent development had created a cash-flow crunch for them; instead of mailing them a check for the amount less our fee, could we wire it to them? Some firms might; in fact, a number of law firms apparently have done just that. You want to be helpful to your new client; you’ve got a cashier’s check—a check guaranteed by a known bank--in hand, what’s the risk?

We did not wire the funds, and it was a good thing, too, because the cashier’s check was phony. The bank was real, the Colorado company was real (though its identity was hijacked in this scheme), but our “client” and the cashier’s check sent to us purportedly by the Colorado company were both fakes. If we had sent our “client” the money, my firm would lost about $250,000.

I always say that a business deal can never close before the guest of honor arrives. The guest of honor is the money. Only when the money is collected and in the account, is the deal done. Given the many permutations this and other scams can take, the best defense of honest business is to wait for the money. You want a wire out? I need a wire in. You want a check? I need the incoming check to be collected first.

At some point, you know and trust the other party so well that you are certain that there is no fraud, then what? Since I’ve also written (and stand by), Why You Should Do Business on a Handshake you may be surprised by my advice, and the policy of our firm. When your company is being asked to send a material sum in reliance on the receipt of other money, it is simply good, smart business to make sure there is no room for surprises--fraudulent, accidental or otherwise.

Have the whole picture first.

Major Change in Colorado Noncompetition Law

A covenant not to compete should be signed before the employee starts work for the business; if signed after employment begins, the company must give the employee something of value in exchange for the agreement. That has been standard legal advice in Colorado for as long as I’ve practiced, but not anymore.

In a decision issued May 31, 2011, the Colorado Supreme Court ruled that “at-will” employees do not have to be given any special payment (“consideration” in legalese) for a noncompetition agreement that is signed after employment begins. For at-will employees, every day is a new beginning.

I’m an at-will employee and probably you are too because most Colorado employees are at-will. At-will simply means that there is no employment agreement between employee and employer, and either can end the relationship at any time. (There are many rules that complicate the termination of an at-will employee. These rules don’t impact the logic of the court’s decision in this case, however it’s wise to double-check with your lawyer before you fire an at-will worker.)

All contracts require an exchange of consideration before they are enforceable. Law students are taught that a “mere peppercorn” is enough—meaning that courts don’t get into the adequacy of the consideration; they just want to make sure that some consideration exists.

Not doing something that you are legally entitled to do—forbearance—is legal consideration, the Colorado Supreme Court tells us. Since an at-will employer can terminate an at-will employee at anytime, not terminating the employee in exchange for the employee signing a “no compete” is at least a mere peppercorn.

More than enough.

The Dread Pirate Roberts, from the film The Princess Bride, gives us an extreme example of forbearance and at-will employment:

Goodnight, Westley. Good work. Sleep well. I'll most likely kill you in the morning.

Westley was not killed, and, in fact, eventually succeeded his employer as owner of the Dread Pirate Roberts franchise himself, but that’s another story.

Also another story, or post, are other rules that apply to noncompetition agreements, both statutes and court decisions, to restrict their use to key employees and business owners, and limit their application with a balancing act of time, geography and scope. If that sounds intimidating, don’t let it get to you, for as many people who have told me that noncompetes are unenforceable in Colorado, there are many more human-owned businesses that have used them successfully to protect their companies.

I Screw-Up, You Pay. Risk Allocation in Contracts.

A customer leaves your flower shop, slips on ice your landlord failed to clear from the parking lot, and sues your landlord for her injuries. Your landlord then sues you under the lease to reimburse him for whatever he has to pay your injured customer. Outrageous? Indemnification injustice? No, it’s risk allocation by contract, and it’s allowed, to an extent, under Colorado law.

Any resemblance between my daughters and any party in this case is purely coincidental. 

Leases, consulting agreements, service contracts, and business purchase agreements are but a few examples of business relationships in which it is common for the legal document to shift liability from the one who screwed-up to the other who did nothing wrong. Before anyone gets too worked up about “fairness”, let me ask if you carry liability insurance. We do the same thing with liability insurance. For a fee, my insurance company agrees to cover the damages caused by my mistakes.

Risk allocation is not limited to insurance policies, as the Colorado Supreme Court recently confirmed in the slip-and-fall case that opens this post. In that case, the lease was “clear and unequivocal”--the tenant agreed to indemnify (reimburse) the landlord against damages suffered the tenant’s customers, even if the damages were caused by the landlord’s own negligence. With that provision in place, a tenant is sort of an insurance company for a landlord, but instead of receiving a premium paid by the landlord, the tenant has the benefit of a lease rate that is arguably less than what would be charged if the landlord alone carried that risk.

Not all risks can be allocated, however. Colorado law is equally clear that agreements to indemnify a person against their own intentional or willful wrong acts are against public policy and not enforceable. Harm caused by the landlord’s gross negligence or intentional torts was an exception to the indemnification required under the lease in this slip-and-fall case. Thus, even if the flower shop owner was shocked by the risk allocation that is permitted by law, clearly the landlord had anticipated and planned for it, which is what you should do.

Before signing any contract, consider how it shifts risks. As long as you don’t cross the line into intentional or willful acts, a clearly written allocation of risk should be enforceable. That could work for you or against you. It’s better to think it out and negotiate it upfront than it is to fight about it later.

I should note, in closing, that under this lease, the tenant’s only right when confronted by the landlord’s failure to clear the ice was to do it herself and deduct the cost from her rent. Query, however, if several complaints to the landlord about the ice might have shifted the question from simple negligence to possible gross negligence, which would have been solely the landlord’s problem.