In a narrow ruling last month by a sharply-divided West Virginia high court, a law firm escaped liability for failing to prevent a phishing/spoofing scheme that resulted in more than $266,000 in closing funds being wired to scammers, after they impersonated plaintiffs’ real estate agent. The opinion is part of the developing law on lawyer liability for cyber-scams.
Diverted e-mails spell trouble
Plaintiffs wanted to relocate to West Virginia and contracted with a real estate agent, who worked for a broker. A cash deal was made for a house, and Catrow Law was retained to handle the closing.
Leading up to the closing, Catrow sent settlement fund wiring instructions to the real estate agent via encrypted email, identifying the account name where the purchase money was to be transferred as “Catrow Law Real Estate Trust Account,” with account and routing numbers for an account at a West Virginia bank.
The agent printed out the wiring instructions, scanned them, and sent them to the plaintiffs via unencrypted email. After that, things went seriously wrong.
An email purportedly from the real estate agent to plaintiffs started a series of emails that actually went back and forth between the plaintiffs and scammers. The plaintiffs didn’t notice that every time they replied to the emails, their replies went to firstname.lastname@example.org rather than email@example.com.
It was undisputed that Catrow wasn’t part of the fraudulent email chain; in fact, the firm only communicated with the plaintiffs through the real estate agent.
The day before the closing, the scammers sent new wiring instructions to plaintiffs, directing the funds to a bank in Albany, New York and a different account name, account number and routing number (rather than the Catrow firm’s).
The plaintiffs obediently wired the cash to the scammers’ account. Next day, at the closing, a Catrow lawyer notified the parties that the funds hadn’t been received in the Catrow escrow account, and it became apparent that plaintiffs had been victimized. The scammers were never identified, and the funds were never recovered.
Sympathy for plaintiffs… but no breach of duty
Plaintiffs sued everyone involved, and after the real estate agent and broker settled, only the Catrow firm was left in the suit. The trial court granted the firm’s motion for summary judgment, holding that plaintiffs failed to raise any material fact issue on the issue of duty.
On a narrow 3-2 vote, the justices of West Virginia’s high court agreed. (The Mountain State does not have an intermediate court of appeals.) While the majority said it sympathized with the plaintiffs, it ruled that they “were unable to establish that [the law firm] breached any duty owed to them.”
Plaintiffs had proffered a Maryland lawyer as an expert witness to testify that the law firm departed from the standard of care by not making personal contact with the plaintiffs to confirm the closing instructions, and by not ensuring that the emails between the real estate agent and the plaintiffs were secure. The court, however, upheld the exclusion of plaintiffs’ expert because he disclaimed any ability to opine based on West Virginia law.
The plaintiffs also argued that the firm had a duty to warn them about the prevalence of wire fraud schemes and to caution them to not take any action before confirming that wiring instructions were legitimate. This duty arose, plaintiffs asserted, because the firm was a title agency and knew of the danger of phishing scams based on alert bulletins that its title company had sent to the firm.
The court’s majority rejected this argument, pointing to plaintiffs’ failure to adduce in opposition to summary judgment any evidence that the Catrow firm had actually received any such warning bulletins. Without such evidence, the court ruled, plaintiffs failed to raise an issue of material fact.
In a footnote, however, the court cautioned that it was not determining whether receiving the scam warning bulletins would have raised the duty that plaintiffs were arguing for. And the court did not consider whether there could be any other source of duty that could give rise to liability on the law firm’s part.
While the law firm here escaped liability, scams that bump up against your legal work are dangerous. On different facts or different reasoning, malpractice theories of recovery can’t be ruled out. As a 2015 New York City Bar Association ethics opinion has noted, banks have also sued lawyers for lost funds caused by counterfeit checks, and some insurers have refused to indemnify scammed lawyers.
We’ve posted before here and here about the ethical duty of competence as it relates to technology. Model Rule 1.1 includes a comment pointing to a duty of technological competence; three-quarters of U.S. jurisdictions have now incorporated that comment into their rules. And of course, the ethics rules can be considered by courts as defining the standard of care in a malpractice suit. (Model Rules, Scope, § 20.)
All this gives plenty of reasons to redouble your efforts to avoid cyber-scams. Here are some tips on protecting yourself, including the need to watch for phishing.