By Joshua J. Borger
Partner, Gates Eisenhart Dawson
California real estate transactions are constantly the subject of hacking scams (i.e., wire fraud) due to our real estate prices. The inevitable purpose is to divert funds intended for escrow into a fake bank account. This article provides tips by a litigation attorney for agents and brokers to avoid liability for cybertheft.
In June 2016, the California Association of Realtors issued a new form entitled, “Wire Fraud Advisory” due to the drastic increase in wire transfer fraud targeting real estate transactions. Yet, as a fiduciary, a well-meaning agent or broker may be inclined to help their client close escrow by facilitating the transfer of the down payment. For example, the broker may confirm that wire instructions from escrow are correct. However, an inevitable problem arises when the instructions that the broker confirm are, in fact, the fake instructions.
A strikingly similar situation arose recently in a federal district court case in Kansas. In Bain v. Platinum Realty, LLC, the buyers sought to purchase a house. The buyers had their bank wire the purchase funds to a bank account that they thought was the sellers’ account. Unfortunately, it was actually some unknown criminal’s account who unlawfully entered the transaction by using fake email accounts that appeared to be similar to accounts used in the transaction. The buyers wired the money based on wiring instructions that were attached to an email account purportedly from the seller’s broker’s account. Having lost their money, the buyers sued the seller’s real estate agent and her employer claiming that an unknown criminal hacker intercepted an email from the title company to the real estate agent that contained the actual wiring instructions, altered the instructions to redirect the funds, created an email address similar to the title company, and sent the new fake wiring instructions to the agent, who then forwarded them to one of the buyers.
In an attempt to prevail shy of trial, the agent argued based on a California case that negligent misrepresentation—that is, a representation made without a reasonable basis for believing it to be true–requires a “positive assertion,” not an implied assertion. As argued, the agent forwarding an email was not sufficient. The court denied the motion, holding that Kansas law differed from California law.
The district court conducted a jury trial based on one of the buyer’s claims for negligent misrepresentation against the broker and her employer. The jury found against the broker and the employer.
Would it really have turned out differently under California law? It is true that in California a negligent misrepresentation requires an affirmative statement. However, agents and brokers are fiduciaries to their clients. As fiduciaries, their clients are entitled to rely upon the information given to them. Thus, the agent or broker who—albeit inadvertently—forwards the fake email to their client without confirming it breaches the fiduciary duty to use reasonable care.
At the same time, the agent/broker would have nullified the warnings in the “Wire Fraud Advisory.” It is unlikely that a court would allow a broker to avoid liability for its own actions based on a prior advisory. Such a holding would contradict the right of the client to rely upon his fiduciary’s representations.
On the other hand, a broker does not owe a fiduciary duty to anyone but his client. Yet, he may be liable to someone other than his client if he represents that the fake email is valid without reasonable grounds for doing so. But, the broker likely would not be liable for negligent misrepresentation for merely serving as a conduit for the hackers (i.e., forwarding the email without confirming that it’s valid) because negligent misrepresentation has to be based on an affirmative statement; it cannot be implied.
The lesson from the Bain case is for agents and brokers to require that the clients work directly with escrow. Although you are well intentioned, do not serve as an intermediary. Otherwise, you may be doing more harm than good to both you and your client.
Interested in learning more? Come to Joshua’s class at SCCAOR on June 18th. He will be teaching “Duties and Liabilities of Brokers and Agents to the Client: 101”. Click here for more information.