Alabama appellate court determines who is responsible for loss due to fraudulent wire transfer instructions

In this episode of Decision Dive, Balch’s Jason Tompkins, Chair of Balch & Bingham’s Issues & Appeals Practice, is joined by Conrad Anderson IV, partner in the firm’s Litigation Practice, to explore the Alabama Court of Civil Appeals’ new decision determining who was responsible for loss due to fraudulent wire transfer instructions.

The Court held that the party sending the funds was “in the best position to prevent the fraud” by calling to verify the accuracy of the wiring instructions, and therefore had to pay twice. 

As we dive into the Mile High, LLC v. Flying M Aviation, Inc.  decision, Jason and Conrad discuss the case, the factors considered in determining responsibility, and best practices for businesses to protect themselves. 

Decision Dive: 

Hosted by Balch & Bingham’s Jason Tompkins, Decision Dive is a video series exploring the impact of new, key appellate rulings from the United States Courts of Appeals for the Fifth and Eleventh Circuits, and decisions from State Supreme Courts across the Southeast and Texas.  Jason will be joined by guests from across the firm’s footprint to discuss how the new decisions impact companies moving forward. 

Jason is a partner in the firm’s Birmingham office and Chair of Balch’s Issues & Appeals Practice.

Transcript:

Jason: Welcome to Balch's Decision Dive, where we explore new appellate rulings and what they change moving forward. I'm Jason Tompkins, Chair of Balch's Issues and Appeals practice, and today we'll be discussing the Alabama Court of Civil Appeals recent decision in Mile High, LLC v. Flying M Aviation. Joining me today is Conrad Anderson, a partner in litigation practice. Conrad, before we dive into the facts of this decision, who is this important to? What people does this impact?

Conrad: Well, really this particular case dealt with attorneys sending wiring instructions to transmit settlement funds. But really the takeaway from the decision is going to apply to anyone in any business that engages in wire transactions.

Jason: So let's talk about the facts a little bit. It's not exactly as exciting as Ocean's 11 stealing money from a casino, but it's about as close as we get in practicing law, right?

Conrad: That's very true, yes.

Jason: So here, Flying M sued Mile High for a breach of contract, and they ultimately settled and Mile High had to pay Flying M $50,000.

Conrad: That's right.

Jason: Flying M's attorney sent Mile High's attorney wiring instructions, but she never received those. Instead, a few hours later, she received an email that looked like it was from Flying M's attorney with different wiring instructions. And she sent the money.

Conrad: That's right.

Jason: Only then did they discovered that Flying M's attorney's account had been spoofed and the money went somewhere else to an imposter. Is that right?

Conrad: That's right. And they tried to get the money back once they ultimately discovered that it had been sent to the wrong account. But as usually happens in these scenarios, the money was long gone.

Jason: And so this dispute then on appeal, arose because Flying M moved to enforce the settlement agreement, whereas Mile High said, we complied because we sent the money and it's not our fault that it went to the wrong account.

Conrad: That's right. Mile High said, we complied. We sent the money, and Flying M said you didn't comply because we didn't receive the money.

Jason: And what did the court on appeal say?

Conrad: Well, the court for the first time, applied what's called the Imposter Rule under the UCC. And really looking at the facts of this case said, it's very unfortunate, the court was sympathetic to both parties and their counsel. They recognized that the fraudulent instructions would've been hard to detect, and like I say, were sympathetic towards both sides, but said at the end of the day, somebody's got to bear the loss. And so they said, under the imposter rule, which party was in the best position to prevent the loss?

Jason: Everyone's a victim here as you just indicated. Both Flying M because it was its attorney's account that was spoofed, and of course Mile High because they received what looked like a legitimate email and paid money to someone other than the intended party. But what factors weighed in favor of Mile High being in the better position?

Conrad: Well, at the end of the day, what the court really hung its hat on, was the fact that Mile High did nothing to verify these wiring instructions before sending the funds. They did not contact Flying M's counsel to confirm that the wiring instructions that they had received were correct. When the attorney sent the wiring instructions to the client to transmit the funds, the client's bookkeeper did not contact Flying M to verify the instructions, nor did they contact the bank to verify that they were expecting to receive these funds. And if anybody in that process had made a call, then it would've been flagged before the funds were sent.

Jason: Conrad, settlements like this happen every day. The vast majority of litigation now settles before trial. What can attorney's parties do to protect themselves from ending up in a situation like Mile High did here?

Conrad: Well, number one at the top of the list is verify. Verify the wiring instructions. You've heard the adage "Trust, but verify." Trust shouldn't enter the equation. You have to verify. That's contacting the other party that is sending you the wire instructions to make sure that what they just sent is correct. And by contact, meaning pick up the phone and talk to the actual person that you've been communicating with. Not send another email. Because these imposters, these fraudsters are very smart. And then also contact the receiving bank to confirm that they're expecting to receive this wire transfer for the proper account holder.

Like I said, and this goes to number two, these fraudsters are very smart. In this case, not only did they send fraudulent wiring instructions in a separate email, they also intercepted the actual email from the attorney for the party that was to be receiving the funds. He had sent an email with the correct wiring instructions and the other party's attorney never received that email. And in fact, the imposter used a fake email account to send multiple emails to the party's attorneys saying that we're still working on this wire. We expect it to go through within the next couple of days, in order to prevent the fraud from being detected. So you really have to be on guard. This is extremely common these days, and you've got to really pay attention to the details.

Jason: For better or worse, email is now the way that we all do business and we've all received the emails promising us an inheritance from our long-lost South American relative. And we know that's a scam. But this case is a good reminder that not all scams are so obvious and it may appear to be a legitimate email with someone you've been corresponding with for months.

Conrad: That's right, and the old adage still rings true. Pick up the phone.

Jason: Conrad, thank you for giving us these tips today on how to protect ourselves.

Conrad: Glad to do it.

Jason: Thank you for joining us for Balch's Decision Dive. I'm Jason Tompkins and this is Conrad Anderson. And we'll see you next time there's an important appellate decision.