The ever-increasing rise in real estate wire fraud has had a significant impact on buyers, sellers, and the rest of the real estate industry. That impact stretches far beyond the fraud itself, with courts delving into the legal liability various parties have to the victims of these crimes.
Tom Cronkright, executive chairman of CertifID and CEO of Sun Title, and the team at CertifID examined more than 100 real estate wire fraud cases from the last few years and came away with three significant insights.
In an interview with The Legal Description, Cronkright said he found one of the findings very surprising — the number of cases being filed against financial institutions that were somehow involved in the transfer of funds to an improper account. He noted in most of those cases, courts relied upon Uniform Commercial Code (UCC) Article 4A to establish a safe harbor for these institutions.
“It’s almost an all-inclusive framework where financial institutions are really responsible for one thing,” he said. “As long as they have either physical or digital proof that the account holder was the one initiating the wire, they have no responsibility for the end point, and banks receiving funds owe almost no duty to the sender if they happen to land in a scammer’s account.”
He said this is true even in cases where the bank had been notified of the fraud.
“The key take away is, don’t look for your bank to acknowledge they have a legal requirement to protect you or your customer from wire fraud, or even respond if they’re notified that a fraud took place,” Cronkright said, noting that financial institutions have been doing more proactive things to protect customers but on a voluntary, not legally required, basis. These steps, such as using artificial intelligence (AI) and machine learning to look at normal behavior and accounts, are helpful, but are not tantamount to a legal requirement.
Another key takeaway from the research was an affirmation of what CertifID’s first white paper on the topic showed, that if a real estate or title professional is seeking to file a claim with an E&O provider, cyber carrier, fidelity bond issuer, or social engineering or cybercrime endorsement issuer, the courts will apply the “four corners rule” to determine whether a claim is covered.
“The four corners rule is a well-established legal principle that says, ‘If two parties entered into a written agreement, such agreement cannot be contracted by oral or implied terms,’” Cronkright said. “If you have the coverage and you satisfy all of the conditions present and things you need to do to avail yourself of the claim, then you’re good. If you don’t, you can expect the claim to be denied.
“That’s a very cold and clinical analysis of the terms of the insuring policy,” he continued. “When you read the court cases on the issue, if there was a requirement for the insured to verify an outgoing wire via a call back on an independently verified number, and unfortunately, the insured did not do that, or if it was not documented properly, coverage will likely be denied – completely.”
Cronkright said in cases brought by a consumer who’s funds were diverted to a fraudulent bank account, courts have found “there doesn’t have to be a formal escrow agreement for a court to impute a fiduciary duty on a title company because it is soliciting for and receiving funds, thereby placing them in a fiduciary role based on course of performance and not express contract between the title company and the consumer.”
“The question that’s unresolved is what is the extent of this fiduciary duty,” he said. “You’ll see cases [that go] either way. Some had a fact pattern where the judge would say, ‘We don’t believe there was a duty.’ By contrast, other courts appear to have an honest wrestling with who bears this responsibility because in nearly every single case, the judges point out that the proximate cause of wire fraud is the cyber scammer and not the consumer or real estate professionals involved.”
Cronkright noted that in the absence of the scammer as part of the litigation, the courts are evaluating whether an elevated standard of care should be imputed on the part of the professionals representing the consumer.
This analysis includes questions such as: “Who is in the best position to notify the customer of the wire fraud threat?” he said. “Was there an opportunity to educate the consumer on what success looks like for the safe transfer of their funds for closing? Were they aware of what to do if something looks suspicious? I don’t think that’s a tall glass of water to ask somebody to take on in a transaction. But it’s not legal precedent yet. Courts have struggled comparing real estate wire fraud to other forms of liability and loss in order to draw upon precedent or well-established principles of law. That leaves us with the risk that escrow companies and title agencies may have an implied fiduciary duty through course of performance if they receive and disburse funds for a real estate closing even in the absence of a written escrow agreement.”
Cronkright highlighted three cases. The first was Hoffman v. Atlas Title, where, the report noted, “Atlas Title, despite past breaches, sent unencrypted wire instructions, leading to interception and a loss of $289,772.19 for plaintiffs Hoffman and McMahon. The court dismissed breach of contract, due to the absence of a material contract, but allowed negligence and breach of fiduciary duty claims to proceed.”
The report noted the court confirmed this to be a ‘novel’ pattern with no clearly defined case precedent and held that escrow agreements don’t have to be formal. It stated, “Even if there wasn’t an implied contract, there was at least an implied duty for professional services or fiduciary duty — for which the economic loss rule is not going to prohibit plaintiffs from seeking damages in tort. Tacit understanding and implied-in-fact contracts may proceed on counts of negligence, fraud, and breach of fiduciary duty.”
He also discussed Helms v Hanover Insurance, where the report noted a mishap in a buyer cash-to-close real estate transaction led to a couple wiring $120,000 to fraudsters. They then sued their broker and real estate agent for negligence.
“Seeking defense from Hanover Insurance, the agent’s E&O policy claims were flat-out denied, based on the terms of the insuring agreement. The agent’s E&O insurance was never designed to cover wire fraud, containing unambiguous ‘fund misappropriation and fraudulent transfer policy’ exclusions, causing the agent’s bankruptcy,” the report stated. It highlighted the following quote from the court’s decision, “The 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 last case he highlighted from the report was Fragale v. Wells Fargo, where the plaintiff transferred $166,054.96 to a fraudulent account after receiving an email from someone claiming to be the title company. The plaintiff argued that Wells Fargo should be liable and enforce identity verification for significant withdrawals.
The report noted that the court disagreed, “deeming such a duty was overly burdensome for banks. They also emphasized that the absence of a relationship between the bank and Fragale, along with extensive regulations of the banking industry, made it inappropriate to impose a new common law duty on the bank to protect against wire fraud. Consequently, the plaintiff faced blowback, with the court suggesting they could have taken preventative measures to avoid harm.”
In light of the findings of the report, Cronkright suggested companies take the following measures to protect themselves from this risk: review their insurance policies to fully understand what they are and are not insured for; create or update their incident response plan that includes a close relationship with their financial institution and law enforcement for wire recalls; update policies and procedures to ensure compliance with insurance coverage requirements and standards of care; and add additional layers of security to protect these scams from happening.
“Our findings underscore one simple truth – we need to prevent wire fraud from happening in the first place,” he said. “This is opaque legal landscape and that is bad for business. If the lines of legal liability are not clear, that often times results in protracted litigation and costly settlements. That’s the challenge we have as many of these cases are either settled quickly or dismissed on summary judgment so the industries that are pulled into litigation cannot benefit from the legal precedent necessary to navigate their businesses and customer relationships fully. My biggest concern for the title industry is the amount of self-insured risk that is being absorbed but cannot be priced into the transaction. This seems like scenario where an ounce of prevention may equate to a ton of cure.”