Q: My down payment was stolen in a email/internet/wire scam before the closing – what can I do?
A: Act quickly! Notify the FBI, call the fraud division of your bank and the recipient bank, get legal counsel!
The basic scam works like this. The scammer obtains confidential information related to the real estate transaction by hacking into the e-mail account of one of the parties and uses that information to direct the home-buyer to wire the down payment to a bogus account where the money quickly disappears.
Frequently, the scammers gain access to the e-mail systems though phishing ploys, using emails that sound or look almost identical. For instance, an e-mail may come from @aoi.com instead of @aol.com. Another ploy may be to use an e-mail @somelawfirmname.mail.com instead of @somelawfirmname.com.
The first thing that the home-buyer should do is immediately contact the FBI and the banks requesting that action be taken to freeze the funds! If the funds are not recovered, the scammed home-buyer is not necessarily out in the cold.
The law firm conducting the closing and its employees owe a duty to exercise ordinary care, which includes warning the home-buyer about fraudulent wire schemes if the law firm’s e-mail system was compromised or hacked.
One court considering liability in a similar situation looked to Article 3 of the Uniform Commercial Code (UCC) which by its terms governs negotiable instruments provides persuasive authority in areas of law which it does not directly govern, namely in wire transactions. See Bile v. Rremc, LLC, 2016 U.S. Dist. LEXIS 113874, Civil action No. 3:15cv051 (E.D. Va. Aug. 24, 2016), citing Old Stone Bank v. Tycon I Bldg. Ltd. P’ship, 946 F2d 271, 273 Cir. 1991).
Section 3-404 and 3-406 addressing third party fraud, interjects the principle that a party whose failure to take ordinary care substantially contributes to the loss must be the party to bear that loss. Section 3-406’s ordinary care is based upon the circumstances of the particular case. The court in Bile v. Rremc, LLC stated “the U.C.C. requires “ordinary care” by participants in financial transactions; the participant who fails to exercise ordinary care is liable for any losses to which his lack of ordinary care substantially contributes.”
UCC § 3-406 (as adopted by many states), provides helpful guidance regarding situations where an impostor causes an individual to make a payment in good faith. Code § 3-406(a) provides that:
(a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.
The comments to UCC § 3-406 further provide that “[n]o attempt is made to define particular conduct that will constitute ‘failure to exercise ordinary care [that] substantially contributes to an alteration’” and that “the question is left to the court or the jury for decision in the light of the circumstances in the particular case including reasonable commercial standards that may apply.” UCC § 3-103(a)(7) of the Code defines “Ordinary Care” as the “observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged.”
The spoofed and unauthorized e-mail is analogous to an altered instrument or forged signature on an instrument directing payment via wire to the wrong account.
If the failure of the law firm to exercise ordinary care substantially contributed to the alteration or forgery and caused the home-buyer to honor the order to pay in good faith, while the law firm possessed actual knowledge that an individual(s) had hacked and compromised the email system of the law firm gaining access to the confidential information that could be used to send authentic looking e-mails but did not take effective steps to ensure the security of the forthcoming transaction or to effectively place the home-buyer on notice of this fraudulent activity.
The rule of UCC Code Section 3-312 is instructive where the home-buyer acted on the apparent authority of an individual with the proper identification and knowledge of the confidential terms of the closing or settlement agreement.
You need experienced counsel. You should contact a lawyer with the law firm of Thomas H. Roberts & Associates, P.C. today.
Thomas H. Roberts, Esq.
Thomas H. Roberts & Associates, P.C.
105 S 1st Street
Richmond, Virginia 23219
(804) 783-2105 fax
The materials are prepared for information purposes only. The materials are not legal advice. You should not act upon the information without seeking the advice of an attorney. Nothing herein creates an attorney-client relationship.