(309) 740-4033 tom@collateralbase.com
How To Stop Check Kiting Scams

How To Stop Check Kiting Scams

How To Stop Check Kiting Scams

How To Stop Check Skitting ScamsCheck kiting is one of the many ways your financial securities can be violated.

 

It constitutes a type of bank fraud very popular in the early 2000’s, that was in its majority shut down by a regulation called check 21 act. 

Even though not as common as it used to be, check kiting is still present in many fraudulent transactions. Here we explain to you everything there is to know about this illegal procedure 

 

Definition of Check Kiting

Check kiting is the fraudulent procedure of deliberately issuing  a check for which there is not sufficient money to pay the stated amount.

The scheme usually involves several checking accounts at different banks. In effect, a bank deposits accessible money into an account while waiting for cash to be processed from an account at another bank when in actuality the other account holds no money.

Check kiting is always intentional. Those engaged in kiting have a detailed understanding of the bank’s timing, and will take advantage of it to withdraw cash just before the bank discovers that there is something wrong,  keeping ahead of the funds-clearing mechanism.

Check kiting schemes have resulted in multi-million dollar losses.

Elements to Check Kiting:

  • Having checking account A, and checking how to stop check skiting scamsaccount B from different banks,
  • Writing a check from checking account A, for which there is not sufficient cash in the payer’s account.
  • Deposit the fraudulent check in checking account B.
  • Withdraw the funds from checking account B.

 

Examples of Suspicious Circumstances That could lead to check kiting

 

This examples have been provided by regulatory agencies to help the identification of suspicious transactions that may indicate check kiting:

  •  Several accounts with similar names, owned or controlled by the same individual
  •  Regular or excessive drawings against uncollected funds
  •  Frequent daily negative ending balances or overdrafts
  •  Deposits of large checks drawn on nonlocal banks or foreign banks
  •  Frequent, large deposits drawn on the same institution
  • A large number of check deposits each day
  • A large proportion of cash in an account that has not yet cleared the paying bank
  • Deposits being made through multiple bank branches
  •  A low average daily balance in relation to deposit activity
  •  A low collected funds balance in relation to the book balance
  •  A volume of activity or large debits and credits inappropriate in relation to the nature of the business

Is check kiting the same as playing the float.

 

You may have heard of the expression playing the float, and don’t worry it’s not the same as check kiting.

Float refers to the amount of time it takes for money to move from one account to another. Meaning, Playing the float is the process of writing a check with no bank balance covering it, expecting the fund to be in the bank when the check clears.

In the past, it was easier to play the float, because the period of time between when a check was written by the payer and when the funds were transferred to the payee was longer. The Check 21 law had the practical effect of shortening that opportunity.

There is a fine line between playing the float and actual check kiting. Check kiting is the illegal act of knowingly writing a check from a bank account without sufficient funds and depositing it into another bank account. While playing the float is taking advantage of the funds-clearing time period to have to receive the sufficient funds to cover the check.

Check kiting is a fraud, playing the float is not. Playing the float doesn’t result in harsh penalties, while check kiting does.

 

Check 21 Act

 

Check 21 law, is a federal law to combat check kiting that became effective on October 28, 2004.

The Check Clearing for the 21st Century Act, or Check 21, is designed to enable banks to handle more checks electronically, instead of moving the original paper checks from the bank where the checks are deposited to the bank that pays them, making check processing faster and waymore efficient.

Check 21 act may seem like a very subtle and expected change, but its consequences are enormous.

It meant that not only could banks exchange the images between themselves, customers could deposit an image instead of a paper check as well.

Since its passing, the services have evolved exponentially, and the necessary computer hardware has improved and become less expensive and more available for all americans.

More importantly, Check 21 has allowed us to receive and have access to our funds sooner.

 

How to prevent Check Kiting

 

The entity harmed by check kiting is mostly the bank that has allowed funds to be withdrawn from the new checking account without first waiting for funds to arrive.

Banks fight  this by not allowing funds to be withdrawn from an account until a certain number of days have passed, by which time the lack of funds in the payer’s account will have been discovered.

But any individual could be subject to check kiting, as well. Here are some tips to prevent becoming a victim of check kiting:

1 . Only accept checks for the exact amount owed to you.

  • If a customer offers you a check for more than the amount they owe, then asks you to give them cash for the difference, and you accept and then the check is returned by the bank, you can become a participant in a check-kiting scheme unintentionally .
  • For online transactions a check kiter might send you payment, then inform you that they “accidentally” overpaid you. They’ll ask for you to pay the difference by wiring transfer or cash.

 

2. Wait until the check clears to refund the overpayment.

  • If someone overpays you with a check and wants a refund, tell them that you’ll gladly do it after the check clears.
  • Refuse to pay any refund until the check no longer says “pending” in your bank account.

 

3. Look into checks that clear your bank account out of sequence.

  • Checks out of sequence might indicate that someone has stolen a checkbook and is using your bank account for a check-kiting scheme.
  • Checks out of sequence could also indicate that someone has ordered checks on the account starting at a different number than the ones you’re currently using.

 

4. Restrict access to company checks if you’re a business owner.

  •  A check kiter can use your company checks for its check-kiting scheme without your knowledge
  • Keep all blank checks in a locked safe with restricted access.

How To Stop Check Skitting ScamsPenalties to Check kiting

Penalties for check kiting always vary depending on the case, but millions of dollars cases can end with sentences of more than 10 years in prison and enormous  fines. Smaller or first-time infractions can result in harsh penalties.

 

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

    REACH US BY EMAIL


    Agriculture Bankruptcy & Marshalling of Assets

    Agriculture Bankruptcy & Marshalling of Assets

    marshaling equitable doctrine

    General marshaling principles.

    The equitable doctrine of marshaling rests upon the principle that a creditor having two funds to satisfy his debt should not be permitted to arbitrarily prejudice a junior creditor who may resort to only one of the funds. Meyer v. U.S., 375 U.S. 233, 236, 84 S.Ct. 318, 11 L.Ed.2d 293 (1963)

    Bankruptcy and Ag Financing Issues

    The greatest challenge to any secured transaction arises when a borrower files a proceeding under the Bankruptcy Code. Originally enacted in 1986, Chapter 12 of the Bankruptcy Code provides a procedure by which family farmers, as defined by the Code (see 11 U.S.C. §101(18)), can restructure debt. A permanent extension of Chapter 12 was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub.L. No. 109-8, 119 Stat. 23. See Terrell Lee Sharp and Bentley J. Bender, Ch. 7, Chapter 12 Bankruptcy Tips and Procedures, CONSUMER BANKRUPTCY PRACTICE (IICLE®, 2011, Supp. 2013).  In 2019, the Family Farmer Relief Act (H.R. 2336) raised the debt limits on Chapter 12 to dramatically expand its application for farmers with debts totally $10 million, up from the previous $4.4 million.

          Whenever a dispute arises in a bankruptcy case as to the lien rights of a lender, an adversary proceeding will be filed to determine the validity, priority, or extent of a lien under Rule 7001(2) of the Federal Rules of Bankruptcy Procedure. Regardless of whether the adversary proceeding is brought by the lender, the debtor, or the trustee, the adversary proceeding provides the vehicle by which all legal and equitable theories may be tested. See, e.g., Illini Bank v. Clark (In re Snyder), 436 B.R. 81 (Bankr. C.D.Ill. 2010).

    Problem Ag Loan

    the equitable doctrine of marshaling

    At issue in Illini Bank was whether the equitable doctrine of marshaling should be applied to the benefit of Tri Ag, Inc., the holder of a junior lien against certain crop proceeds held by the Chapter 12 trustee. Illini Bank, as the assignee of the senior lienholder, wanted the funds for itself and opposed marshaling. In the debtors’ Chapter 12 petition and schedules, Mr. Snyder listed himself as a farmer and Mrs. Snyder listed herself as retired. However, the schedules for real property and personal property listed them as jointly owned.

          Tri Ag’s debt of $123,342 was the oldest. In February 2006, only Mr. Snyder signed a security agreement covering all crops grown on real estate farmers in bankruptcylocated in Logan and Mason Counties. To perfect that security interest, a UCC financing statement naming him as the sole debtor was filed on April 7, 2006.

          Unfortunately for Tri Ag, AG-LAND loaned money to the debtors and, on February 27, 2006, filed a UCC financing statement naming both as debtors. AG-LAND was owed $130,897.05. Thus, AG-LAND had the prior security interest in all growing and harvested crops. In 2007, both debtors borrowed money from Illini Bank and granted it a security interest in crops, machinery, and equipment, among other property. After the bankruptcy case was filed, Illini Bank purchased AG-LAND’s position and thereby leapfrogged from third to first priority on the crop lien. Tri Ag and Illini Bank filed cross-motions for summary judgment on the issue of marshaling an application of the total crop proceeds of $100,520.88.

          The first issue the court decided was that the direct and circumstantial evidence supported the conclusion that Mrs. Snyder owned half of the crop proceeds. Consequently, because she failed to sign the Tri Ag security agreement, Tri Ag acquired and held a lien on only one half of the proceeds.

          Next, the court rejected Illini Bank’s argument that the doctrine of marshaling should fail. Instead, the court held that marshaling could be applied to protect the one-half interest held by Tri Ag. The court noted that if AG-LAND had not sold its claim to the bank, AG-LAND, because it held a first priority lien on crop proceeds and on machinery equipment, would have been substantially oversecured. As a result, Illini Bank took the assigned claims subject to the marshaling rights of Tri-Ag.

    Thomas Howard

    Thomas Howard

    Real Estate Lawyer

    Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

    Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
    R. Martindale

    Need A Business Lawyer?

    Call our law offices with your legal questions for help on:

    1. real estate contracts
    2. business contract disputes
    3. Shareholder litigation
    4. cannabis business
    5. fraud actions
    6. mechanic's liens

     

      REACH US BY EMAIL


      Justifiable or Reasonable Reliance Under Section 523 of the Bankruptcy Code

      Justifiable or Reasonable Reliance Under Section 523 of the Bankruptcy Code

      Exception to Discharge Section 523 of the Bankruptcy Code

      Reasonable Reliance Section 523 Bankruptcy

      Sometimes a debtor is less than honest, that’s when you bring an adversary action in bankruptcy

      Was your reliance justifiable  or reasonable when lending money to a dishonest debtor that. later ends up in bankruptcy. Collateral Base Attorney Tom Howard recently helped our client win a $1.8 million dollar verdict in a bankruptcy case out of the Central District of Illinois. The case, liura v. Brady (In re Brady), concerned several novel issues of law, including the standard for “justifiable” or “reasonable” reliance under §523(a)(2) of the Bankruptcy Code.

      Exceptions to Bankruptcy Discharge under Section 523 –

      Bankruptcy discharge is the value most debtors that petition for relief under the Bankruptcy Code are after.  The discharge of their debts can wipe away thousands or millions of dollars of debt holding down a debtor in order to give him or her a fresh start.  But not all debtors are honest but unlucky – some are lying about their debts, which is why you can file an action to except certain debts, usually obtained fraudulently, from discharge. Section § 523(a)(2) of the Code is the authority for such adversary proceedings, which provides, in relevant part:

      • (a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
      • (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
      • (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
      • (B) use of a statement in writing—
      • (i) that is materially false;
      • (ii) respecting the debtor’s or an insider’s financial condition;
      • (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
      • (iv) that the debtor caused to be made or published with intent to deceive[.]
      • 11 U.S.C. § 523(a)(2)(A), (B).

      Pliura v. Brady – Justifiable or Reasonable Reliance under Section 523

      The case concerns the Chapter 7 Bankruptcy of Bob Brady (Debtor), a prominent home builder in Central Illinois. After earning his MBA and spending several years in banking, Bob Brady joined Brady Homes, the family business. Brady Homes has built over 1,500 homes in the Bloomington/Normal area, and has also built and managed apartments and condominiums. The Debtor also participated in several other real estate businesses, including Pinehurst Development (Pinehurst) and Brew of Illinois, LLC (Brew). In other words, the Debtor was a very experienced and sophisticated real estate professional, and knew all about holding and transferring title of property.

      As our Central Illinois readers might know, the Debtor is the brother of State Senator Bill Brady. At the time of the loan, Senator Brady was running for Governor of Illinois as the Republican Party nominee (he went on to narrowly lose the race to incumbent Governor Pat Quinn). Bob Brady needed the loan to pay subcontractors, who were threatening to file liens and go public with the Bradys’ ongoing financial woes. Naturally, this would have been embarrassing for Senator Brady’s campaign.

      In 2010, Dr. Thomas Pliura (a lawyer and a physician) and his wife loaned Brady and his brother $1,000,000 at an interest rate of 6%. The note was accompanied by a Security Agreement, giving the Creditors security in several properties own by Brady and identifying each property, including the address and tax identification number. The Security Agreement stated that the Bradys were the “sole, legal and equitable owners” of the properties. In the interest of Brady’s political ambitions, Dr. Pliura agreed not to record a mortgage against the properties which secured the $1,000,000 Note. He simply relied on the promises and written representations of the Brady Brothers, whom he had known for twenty years.

      In fact, all of the properties were owned by Pinehurst and Brew, not by Brady and his brother. Additionally, all of the properties were encumbered by mortgages to Busey Bank. The properties had actually been cross-collateralized to other loans, and the Bradys were underwater on their various loans by approximately $3 million dollars.

      The Bradys made one payment to Dr. Pliura- a check that bounced. They never tendered any additional payments. Dr. Pliura retained an attorney to look into collecting on the Note, and discovered that the Properties were not owned by Brady, and were further encumbered to Busey Bank. Soon, Brady filed for bankruptcy, and Dr. Pliura filed his lawsuit.

      Section 523: Two Ways to Recover

      Normally in bankruptcy, a debtor’s outstanding debts are discharged, and creditors have their rights to collect curtailed or outright eliminated. Under Section 523 of the Bankruptcy Code, there are a few ways to prevent this, or have a debt declared “non-dischargeable.” Section 523(a)(2) again provides:

      (a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or

      1328(b) of this title does not discharge an individual debtor from any

      debt—

      . . .

      (2) for money, property, services, or an extension, renewal, or

      refinancing of credit, to the extent obtained by—

      (A) false pretenses, a false representation, or actual fraud,

      other than a statement respecting the debtor’s or an insider’s

      financial condition;

      (B) use of a statement in writing—

      (i) that is materially false;

      (ii) respecting the debtor’s or an insider’s financial

      condition;

      (iii) on which the creditor to whom the debtor is liable for

      such money, property, services, or credit reasonably

      relied; and

      (iv) that the debtor caused to be made or published with

      intent to deceive[.]

      • Under 523(a)(2)(A), the Pliuras had to show “(1) the Debtor made a false representation or omission; (2) the Debtor knew the misrepresentation was false or made the representation with reckless disregard for the truth; (3) the Debtor made the misrepresentation with intent to deceive; and (4) they justifiably relied on the misrepresentation in making the loan.”
      • In contrast, under 523(a)(2)(B) the Pliuras were required to prove that the Debtor submitted to them, as part of their loan transaction, a written statement “(1) that was materially false; (2) that included information respecting the Debtor’s financial condition; (3) that they reasonably relied on in extending the loan; and (4) that the Debtor made or published with intent to deceive.”

      The two sections have previously been held to be mutually exclusive. Under the recent Supreme Court case of Lamar, Archer & Cofrin, LLP v. Appling, the reasonable reliance bankruptcyCourt found that “a statement about a single asset” could be a “statement respecting a debtor’s financial condition.” That is, if the Bradys made a statement about a single one of their assets, the Pliuras would be in Section 523(a)(2)(B) and the “reasonable reliance” standard. The Court briefly addressed this issue, and found that Brady had made written representations about his financial condition, so the Pliuras would have to recover under 523(a)(2)(B).

      Was There Reasonable Reliance?

      There was no real dispute that Brady knowingly made materially false statements about his ownership of the Properties, and that the money was, in fact, owed to the Pliuras. There was a mountain of evidence that Brady knowingly and intentionally deceived Pliura to induce him to make the loan. But the bigger question was: did Dr. Pliura reasonably rely on Brady’s representations?

      The Court began its analysis by noting that usually, reasonable reliance is determined based on the lender’s lending standards. However, “[h]ere, of course, the Pliuras are not traditional lenders and have no standard practices or any relation to the lending industry; it would be unfair and inappropriate to evaluate their reliance as though they were commercial bankers.” As the court further explained, while “reasonable reliance does not generally require creditors to conduct an investigation prior to entering into agreements with prospective debtors[.]” In re Morris, 223 F.3d 548, 554 (7th Cir. 2000). But, at the same time, creditors cannot ignore “obvious red flags.” Harris N.A. v. Gunsteen (In re Gunsteen), 487 B.R. 887, 902 (Bankr. N.D. Ill. 2013).

      The Court looked at the various statements made by parties to the Note. However, at the end of the day, it was not just that the parties has discussed ownership of the properties, but that “Dr. Pliura put the information they were relying on in writing, and the Debtor signed that writing.” It was unrebutted that Brady read the representations in the Note at closing, and did not raise any objections at the time. The court also relied on Dr. Pliura’s personal relationship with the Bradys in assessing his reliance. “He knew that William Brady was a state senator and a candidate for governor and, apparently, he held Sen. Brady in high regard. He knew the Bradys as successful businessmen in the community, and, despite also knowing of their current financial distress and urgent need to borrow money, he had no reason to think that any of the Bradys, including the Debtor, would look him in the eye and lie.”

      This case provides significant guidance for creditors who are proceeding under 523(a)(2)(B). Even sophisticated individuals can be misled and lied to by people they know and trust. This case clarifies that for debtors who are betrayed by people close to them, the law is still on their side.

      The full opinion of the Court is available here.

      David Silvers

      David Silvers

      Regulatory Lawyer

      Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

      Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
      R. Martindale

      Need A Business Lawyer?

      Call our law offices with your legal questions for help on:

      1. real estate contracts
      2. business contract disputes
      3. Shareholder litigation
      4. cannabis business
      5. fraud actions
      6. mechanic's liens

       

        REACH US BY EMAIL


        Filing Financing Statements and Determining Priority

        Filing Financing Statements and Determining Priority

        Determining Priority

        Determining Priority in Perfected Security Interests

        Who’s on first? This question decides what creditor gets paid, and what becomes an unsecured creditor whose best option is to recover pennies on the dollar for the money loaned to a business that purportedly had collateral. Priority to collateral needs determination to see who can seize it in satisfaction of its indebtedness to the business. 

        How and Where to File UCC Financing Statements

         

        As a general rule, in all secured transactions involving a security agreement executed by the debtor, the debtor authorizes the secured party to file a financing statement describing the collateral. See 810 ILCS 5/9-509(a)(1).  A financing statement perfects the lien in the collateral securing the transaction, often a loan to a business.

        The financing statement is filed with the Secretary of State’s office in which the collateral is located, or the lien arose because some collateral is mobile. In addition, Article 9 provides that a person holding an agricultural lien that arises by operation of law and requires no written agreement may file a financing statement without consent provided the financing statement covers “only collateral in which the person holds an agricultural lien.” 810 ILCS 5/9-509(a)(2).

        UCC Financing Statement Filing

        Problem Ag Loan

        UCC Financing Statement Illinois Example

        UCC Financing Statement Illinois

        A UCC 1 in Illinois is common knowledge for commercial bankers and you can find a copy of the fillable PDF form LINKED HERE.

        Description of Collateral for Perfection of UCC Lien

        The financing statement does not need to include the legal description of leased real estate as a condition of perfection. Article 9 only requires this description only for “as-extracted collateral or timber to be cut.” 810 ILCS 5/9-502(b). “As-extracted collateral” means oil, gas, or other minerals that are subject to a security interest that is created by a debtor having an interest in the minerals before extraction and attaches to the minerals as extracted. 810 ILCS 5/9-102(a)(6). However, a legal description may be appropriate as an indication of “the collateral covered by the financing statement.” 810 ILCS 5/9-502(a)(3). One example is the landlord’s lien on crops growing on specific acreage. When the debtor is a tenant farmer that does not have a record interest in the real estate, counsel also must provide the name of the record owner. 810 ILCS 5/9-502(b)(4).

        With a few exceptions, all financing statements are required to be filed in the office of the Secretary of State. 810 ILCS 5/9-501(a). The law governing perfection of priority of security interests is generally determined by the location of the debtor. 810 ILCS 5/9-301. For agricultural liens, the law governing priority is the local law of the jurisdiction where the farm products are located. 810 ILCS 5/9-302.

        The debtor’s location depends on how the debtor is conducting the farm business. When a debtor is an individual, he or she is located at the individual’s principal residence. When the debtor is a non-registered organization, such as a general partnership, it is located at its place of business or its chief executive office if it has more than one place of business. 810 ILCS 5/9-307(b). However, when the debtor is an organization that is organized under state law, like a corporation or a limited liability company, it is located in the state where it is registered. 810 ILCS 5/9-307(e). The failure to file in the proper jurisdiction or to otherwise fail to satisfy the specific requirements for completing and filing the financing statement can be fatal. See, e.g., Duesterhaus Fertilizer, Inc. v. Capital Crossing Bank (In re Duesterhaus Fertilizer, Inc.), 347 B.R. 646 (Bankr. C.D.Ill. 2006).

        Priorities: Which Agricultural Lien Wins?

        In a conflict between security interests and agricultural liens in the same collateral, priority generally dates from the earlier of the time the filing covering the collateral is first made or the security interest or agricultural lien is first perfected. See 810 ILCS 5/9-322, 5/9-338.

        A perfected security interest in growing crops has a priority over a conflicting interest of the owner or the mortgagee of the real property on which such crops are grown. 810 ILCS 5/9-334(i)(1)(A). The same priority applies between an assignee of a beneficial interest in an Illinois land trust and the holder of a perfected security interest in crops. See 810 ILCS 5/9-334(i)(1)(B). Lenders financing farm real estate that also want to maintain priority in crops must comply with Article 9 of the Uniform Commercial Code.

        Problem Ag Loan

        Thomas Howard

        Thomas Howard

        Real Estate Lawyer

        Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

        Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
        R. Martindale

        Need A Business Lawyer?

        Call our law offices with your legal questions for help on:

        1. real estate contracts
        2. business contract disputes
        3. Shareholder litigation
        4. cannabis business
        5. fraud actions
        6. mechanic's liens

         

          REACH US BY EMAIL