Tom Cronkright summarizes an analysis of liability in growing incidents of wire fraud in real estate transactions. He emphasizes the critical role of closing agents and attorneys in implementing robust security measures and the limitations of current legal frameworks in addressing modern fraud challenges.
Cybercriminals have taken aim at U.S. real estate transactions at an alarming rate. Data from the FBI reports a surge in losses from business email compromise within real estate, reaching $446 million.
Due to the multiple parties involved and the high financial stakes, real estate remains a prime target for bad actors attempting to divert closing funds. The public MLS information provides insights into active deals and the historically high median sale price of homes offers an enticing opportunity for scammers seeking to steal money that is exchanged during the home buying and selling process. At this point, most real estate professionals have experienced an actual or attempted fraud in a transaction.
Posing as sellers, title agencies, and lenders, scammers trick victims into wiring funds to fraudulent accounts. In one year’s time, CertifID’s Fraud Recovery Services fielded 463 requests for help from victims of wire fraud, with median losses per incident totaling $70,000 for seller impersonation, $72,000 for fraudulent down payment instructions, and $257,000 for fake mortgage payoff instructions.
Given the substantial losses and increasing sophistication of these scams, effective risk management requires a careful examination of the legal theories underpinning the question: Who bears the liability when wire fraud occurs in real estate transactions?
To provide clarity, we analyzed numerous recent wire fraud cases, exploring common threads in current court opinions, case precedents, and material issues of fact.
As the shift from paper-based to electronic money transfers accelerates, a pivotal question arises: Are banks legally obligated to implement enhanced security measures to shield consumers from wire fraud?
Uniform Commercial Code (UCC) Article 4A, adopted in various forms across all states, governs electronic funds transfers executed by financial institutions, corporations, high-net-worth individuals, and payment processors.
Article 4A delineates the rights and responsibilities of senders and recipients in electronic transfers. However, it does not adequately address contemporary issues such as social engineering, where individuals are deceived into voluntarily transferring funds to fraudsters. Notably, Article 4A lacks mandates for account name matching and comprehensive vetting of new accounts beyond basic “know your customer” (KYC) protocols. Furthermore, it imposes no requirements to monitor or report suspicious activities or unusual behaviors associated with accounts.
Judicial decisions consistently favor banks in interpreting Article 4A. In Tracy v. PNC Bank, the court held that banks are not obligated to match names on accounts and need only adhere to their account holder agreements to avoid liability.
The inadequacy of the current regulatory framework to protect real estate and title companies from bank account misuse and fraud is vividly illustrated in Approved Mortgage v. Truist. After a security breach in Approved Mortgage’s computer network, fraudulent mortgage payoff statements were used in two refinance transactions, diverting funds to accounts at Truist Bank that were unrelated to the intended mortgage servicer. Approved Mortgage sued Truist for negligence, citing violations of the Indiana Uniform Commercial Code and common law negligence, alleging that Truist failed to implement adequate security procedures to detect suspicious account activity.
The court granted summary judgment in favor of Truist on all counts, asserting: “Our recognition of the common law negligence action, asserted by the plaintiff in his individual capacity, would contravene the essential objective of UCC Article 4A.” This ruling underscores that Article 4A is designed to establish clear and definitive guidelines for banks in executing electronic transfers on behalf of customers without the threat of negligence liability.
For expanded duties to be imposed on banks to curb the wire fraud epidemic, such obligations should be legislated and regulated rather than judicially imposed. While state and federal courts clearly delineate banks’ responsibilities to consumers under Article 4A, ambiguity persists regarding what constitutes “reasonable security measures” necessary to protect consumers from fraud.
In Fragale v. Wells Fargo, a homebuyer fell victim to a buyer-side scam where closing funds were diverted to a thief’s Wells Fargo account and promptly withdrawn. The court ruled in favor of Wells Fargo, stating that as a non-customer with no special relationship, Wells Fargo had no duty under Pennsylvania law to prevent unreasonable risk of harm to the wire transfer originator. The court emphasized that merely proving the foreseeability of harm was insufficient under negligence, rejecting claims that Wells Fargo should have monitored or prevented fraudulent activities through a newly opened account.
“This court declines to make banks guarantors of their clients’ trustworthiness,’’ the judge stated, reinforcing the view that banks are not required to safeguard consumers or assume liability for cyber fraud facilitated through accounts opened for illicit purposes. The court deemed such a duty overly burdensome for banks.
Similarly, in King v. Wells Fargo, the defendant invoked Chapter 93A of the Massachusetts General Laws, which sets standards for businesses to prevent unfair and deceptive practices. This includes a high standard of evidence for plaintiffs to prove wrongdoing in cases involving alleged negligence or deceptive conduct by banks. The courts concluded that the plaintiff’s loss was caused by the criminal who absconded with the funds, not by the “unfair and deceptive conduct” of Wells Fargo. According to the ruling, “A plaintiff must demonstrate that the losses sustained were the foreseeable consequence of the defendant’s deception.”
Nicklas v. Professional Assistance LLC highlighted discrepancies among states, noting: “Not all federal circuits appear certain that the lack of adequate security measures equates to an ‘unfair’ act.” The court also suggested an alternative legal approach, observing that “Some states allow recovery for failure to notify of a data breach.
Another potential counterargument to Article 4A is the “aiding and abetting” claim, pertinent in cases where the defendant is notified of suspected fraud but fails to freeze funds. In Thuney v. Lawyer’s Title of Arizona, the court stated, “Chase released the funds to fraudsters even though Chase knew about the alleged fraud. Plaintiffs have stated a plausible aiding and abetting claim.” While the claims were not dismissed outright, plaintiffs must still provide sufficient evidence to meet plausibility standards.
Our analysis indicates that UCC Article 4A provides a structured framework governing the rights and obligations of parties in electronic funds transfers. Courts have consistently upheld banks’ adherence to this framework, with no successful claims observed against banks where plaintiffs sought to extend a bank’s responsibilities beyond Article 4A. It may be time to review these established standards to address evolving challenges such as social engineering scams by requiring account name matching and enhanced monitoring of suspicious activities to better protect consumers.
In the current legal landscape, consumers who lose their life savings to wire fraud in real estate transactions frequently resort to litigation, seeking damages from the professionals they hired to safeguard their interests. The wire fraud related cases are flooding into state and federal courts, and while the proximate cause of these losses is the scammer who diverted the wire transfer and disappeared, courts are left with the unenviable position of determining and allocating legal fault among the remaining parties, all of whom are victims to some extent. The most common theories of liability include negligence, breach of fiduciary obligations, professional negligence, and breach of contract.
The complexity of these cases and the evolving standards of care are pushing courts towards favoring greater protections for consumers. These cases suggest a novel fact pattern and an evolving standard of care, indicating a trend toward imposing more stringent duties on real estate professionals.
In Hoffman v. Atlas Title, the Ohio Court of Appeals recognized the need to address the responsibility for escrow fraud, allowing claims of negligence and breach of fiduciary duty to proceed despite dismissing the breach of contract claim. This case, along with Mago v. Arizona Escrow & Financial Corp. and Bain v. Platinum Realty, highlights the evolving interpretation of fiduciary obligations in real estate transactions, permitting plaintiffs to recover financial losses under tort law due to inferred fiduciary duties from closing instructions and the receipt and disbursement of closing funds in escrow and trust accounts.
Similarly, Kenigsberg v. 51 Sky Top Partners, LLC illustrates the substantial legal and financial consequences of breaches of trust and security in real estate transactions, where seller impersonation scams led to over $1.5 million in losses and subsequent legal action when a property owner’s vacant land was sold without his knowledge or consent and the construction of a new home commenced.
Real estate professionals, including escrow, title, and real estate attorneys, are expected to exercise due diligence in managing and disbursing funds held in escrow or trust accounts. Courts generally regard these professionals as “legal custodians” in a “position of trust,” thereby elevating their fiduciary responsibilities. Notably, some rulings, such as Wheeler v. Clear Title Company Inc., suggest that no written agreement is necessary to impose this heightened negligence standard.
As plaintiffs seek to establish liability due to a breach of a duty of care, courts have highly scrutinized their expert witnesses and their ability to speak to state-specific legal standards. For example, the Oklahoma court of appeals in Cook v. McGraw Davisson Stewart LLC required expert testimony on email security standards, contrasting sharply with Arizona’s decision in the Mago case, which found these matters understandable by laypersons.
In Otto v. Catrow Law, plaintiffs faced difficulties in establishing issues of fact due to insufficient expert testimony.
While consumers share some responsibility in safely managing the transfer of their closing funds, real estate professionals must uphold a reasonable duty of care in these complex transactions. The evolving case law indicates an increasing judicial willingness to impose stringent standards on these professionals to protect consumers from wire fraud.
For more detailed case analyses and insights, visit CertifID.
When a wire fraud loss occurs, the professionals involved in the transaction often look to their insurance providers for assistance to cover actual losses or the cost of defense when litigation ensues from a third party. Unfortunately, the most common forms of insurance coverage found in errors and omissions (E&O), and fidelity and cyber policies often fail to provide the necessary protections to fully transfer the direct or indirect risk of wire fraud from the insured to the insurer. This has been underscored in recent court decisions where insurance policy language was meticulously examined and strictly enforced by the judiciary.
Insurance agents may offer assurances of coverage for wire fraud or defense costs when a client loses their life savings after falling victim to such fraud. However, the insuring agreement will ultimately govern coverage, conditions, and limits, as the “four corners rule” is clinically applied in these analyses.
In Authentic Title Services v. Greenwich Insurance, Authentic Title Services sought reimbursement after an email spoofing scam resulted in a substantial transfer of real estate loan funds to a fraudulent account. The court upheld Greenwich Insurance’s denial of coverage, stating: “for any claim… based upon or arising out of the actual or alleged theft as such coverage was not provided under the insuring agreement.”
Similarly, in Helms v. Hanover Insurance, the federal district court of Arizona affirmed this position as it stated: “The [insurance policy] exclusion’s plain language… states that no coverage is provided for claims based on or arising out of the theft, stealing, conversion, or misappropriation of funds.”
The role of the involved parties is also crucial in determining the outcome of insurance-related claims. For instance, in Star Title Partners v. Illinois Union Insurance Co., the court ruled against Star Title because Capital Mortgage Services was not classified as a “customer, client, or vendor,” thereby excluding the fraudulent communication from policy coverage.
In all reviewed cases, courts have consistently applied the “four corners rule,” strictly interpreting insurance agreements based on exclusions, conditions, or defined terms that delineate the scope of protection.
These rulings underscore the importance of thoroughly understanding the precise terms and conditions within insurance policies. Real estate professionals must recognize that while insurance agents may provide assurances, the explicit language within the insuring agreement will ultimately determine the extent of coverage, and wire fraud losses are often excluded or significantly limited in coverage leaving it a self-insured risk profile.
For more detailed case analyses and insights, visit CertifID.
With the increasing prevalence of wire fraud in the real estate industry, legal and title professionals must play a proactive role in implementing robust security measures to protect their clients and organizations from these sophisticated schemes. Effective protection against fraud requires a multi-layered approach that includes education, standardized procedures, advanced technology, detailed response planning, and comprehensive insurance coverage.
Regular training sessions for employees, clients, and partners are essential in raising awareness about wire fraud prevention methods. Staying informed about the latest tactics used by cybercriminals targeting real estate transactions is critical. Distributing educational materials that detail these schemes and providing clear safety protocols ensures that all parties understand the risks and their roles in preventing fraud. This includes employees, referral partners, and clients.
Developing and maintaining standardized operating procedures (SOPs) that address emerging threats and incorporate best practices in fraud prevention is crucial. These SOPs should be well-documented, easily accessible, and clearly communicated to all employees and internal stakeholders. Regular updates ensure they remain effective against evolving fraud tactics.
Investing in advanced verification tools to authenticate the real identity of transaction participants and banking details before processing wire transfer payments adds a vital layer of security. Implementing automated layers of security to detect and alert when suspicious activities or deviations from standard transaction processes occur enables quick responses to potential threats, enhancing the overall security framework and mitigating potential direct or indirect losses.
A comprehensive incident response plan is essential for addressing fraud when it occurs. This plan should outline specific steps to take once fraud is detected, including notifying affected parties, freezing transactions, and initiating recovery efforts. Regular simulation drills to test the effectiveness of the response plan ensure all team members are prepared to act promptly in a real fraud scenario, significantly improving recovery prospects.
Regularly reviewing insurance policies to understand their scope and identify any gaps that could leave the organization vulnerable is critical. Exploring options for first-party insurance coverage designed specifically to protect against losses from wire fraud can provide an additional safety net.
In consumer wire fraud litigation, real estate professionals must navigate the intricate complexities of large-scale transactions, extensive communications, fund movements, and the involvement of numerous licensed experts. This environment allows plaintiff attorneys to inundate defendants with exhaustive discovery, motion practice, and trial preparation.
As legal custodians, real estate professionals have a fiduciary duty to exercise due diligence in managing and disbursing funds. Courts are increasingly recognizing the heightened responsibility of these professionals to protect clients from fraud. Understanding and fulfilling these fiduciary obligations is crucial to mitigate legal risks and protect clients’ interests.
Regularly reviewing insurance policies to understand their scope and identify potential gaps is vital. Exploring first-party insurance coverage specifically designed to protect against wire fraud losses can provide an additional safety net. However, reliance on insurance should be part of a broader risk management strategy rather than the sole line of defense.
As the threat of wire fraud continues to grow, real estate professionals must adopt a proactive and comprehensive approach to security. This includes vigilance, adaptability, robust security protocols, and thorough risk management. By doing so, they can better safeguard their clients and organizations against the expensive consequences of wire fraud.
For deeper insights and a comprehensive analysis of these pivotal issues, visit CertifID to access the full report. Explore the tools and support CertifID offers to help protect your clients from wire fraud.
