Escrow Fraud Cases Overview-CH2-TF

Escrow Fraud Cases: Key Takeaways

• Hoffman v. Atlas Title (2023, Ohio): Escrow agent's email system was hacked two months prior to closing. Compromised agent sent fraudulent wire instructions. Buyer relied on spoofed email, appearing legitimate, with correct logo and formatting. Buyer contacted person in spoofed email to confirm wire instructions. Agent's closing statement and wire instructions sent unencrypted, intercepted by buyer's spam filter. Funds transferred fraudulently. Agent investigated the breach but dismissed it based on their technology provider's conclusion that no information was stolen, failing to adhere to proper wire instruction procedures, customer notification, and warnings about wire fraud, and a prior data breach. Court found agent lacked adequate compliance program and did not follow ALTA best practices; agent settled. One week before closing, buyer and realtor had multiple legitimate communications regarding closing instructions. Expert testimony identified the agent's failures: no safe procedures for wire instructions, no customer notification, no warnings. The duty to warn of a prior data breach was explicitly argued in this case, though its necessity as a standard remains questionable. Agent should have promptly informed the buyer the wire was not received within 24 hours.

• West Virginia Malpractice Suit (2020): Law firm acted as closing agent. Buyer relied on spoofed email from realtor, compromised, to wire almost $270,000 to a fraudulent account. Law firm communicated only through the realtor. Spoof email occurred five days before closing. Scam involved a $5,000 early closing discount. Closing instructions conveyed through encrypted email to the realtor, but realtor printed, scanned, and sent unencrypted instructions to the buyer. Buyer questioned the new wiring instructions; However, did not contact law firm or realtor before authorizing transfer. Law firm lacked a wire fraud disclaimer. Buyer failed to provide evidence that the law firm "knew" of underwriting bulletins warning of phishing schemes. Court found no breach of duty. Buyer reached a settlement with the realtor. Duty to confirm emails directly or via separate channels instead of relying on a third-party (go-between) was a key point.

• Nevada Escrow Fraud Case (2019): Buyer received spoofed email from a different email address; instead of calling, wired funds; agent did not directly contact buyer to confirm or to take steps to ensure legitimacy. Buyer tried to confirm wire instructions but it was not taken. Buyer sued for negligence and breach of fiduciary duty. Court granted summary judgment in favor of the agent; no duty to verify wire transfers. Escrow and title agents in Nevada are separate entities, potentially affecting liability. The case highlights a critical aspect; if, despite evidence of possible fraud, the agency does not investigate or take appropriate measures.

• South Dakota Title Company Case: Title company sent wire instructions (without warnings) to buyer. Fraudster later took over communication, altered instructions. Buyer sued, claiming insufficient wire fraud protocols and lack of warning. Insufficient security practices, including lack of multi-factor authentication. Court allowed negligence claim to proceed to trial. Buyer emailed the closing agent about wiring the remaining funds (almost $660,000) after the deposit one month later, but the agent's email was compromised, allowing the fraudster to intercept and alter those instructions. Buyer wired the remaining funds to a fraudulent account and only received $100,000 back.

• Maryland Realtor Case (2023): Buyer received spoofed emails from a compromised realtor; included a "large print" fraud warning. Realtor had insufficient security measures. Buyer sued multiple parties, alleging negligence, breach of fiduciary duty, and breach of contract. Expert testimony established realtor's lack of security and no direct contact with buyer for wire confirmation. Court held in favor of realtor through summary judgment; Judge decided for the realtor. Closing agent reached a settlement.

Major Legal Points

• Duty to Warn: Courts stress professional responsibility of escrow/closing agents to warn customers about wire transfer scams, including advising clients whether to contact their office and how to independently verify wiring instructions.

• Security Measures: Proper security protocols (e.g., multi-factor authentication, secure emails and encryption) are crucial. Adequate policies and procedures must be in place, and followed. Adherence to ALTA best practices is a possible standard.

• Communication and Verification: Direct communication and verification of wire instructions are critical.

• Causation: Agent's actions must be directly linked to the harm suffered.

• Settlement: Lawsuits are expensive; settlement is sometimes cost-effective.

• Evidence and Expert Testimony: Cases can turn on evidence and expert testimonies.

• Contractual and Ethical Duties: Agents have contractual duties to underwriters and ethical duties to follow underwriting guidelines and contact clients directly for confirmations, instead of relying on a third party.

• Knowledge, Investigation, and Warning: Courts consider whether an agent knew of warnings/bulletins about wire transfer fraud, whether the agent investigated apparent fraud, and what steps were in place to warn clients of any potential fraud. Even if warnings are included, they may not always be sufficient.

• Separate Entities (Nevada): Escrow and title agents can be separate entities in Nevada, potentially affecting their responsibilities..

• Duty of a go-between (Realtor/Closing Agent): Whether a realtor has a duty to warn buyers of possible fraud depends on the facts. A party had a duty to directly communicate with the buyer; Go-between communications may not be enough.

• Warnings and Communications: There may be liability if warnings for wire fraud were not sufficient or clear enough, not timely, or not provided adequately(size, visibility, clarity).

• Independent Verification: Buyers/clients must independently verify emails/instructions, and the escrow/closing agent must take steps to verify them in addition to a client’s own efforts to verify as well.

• Information Privacy and Security: Escrow fraud can relate to breach of duty to protect private information of a client.

• Prompt Warning: A prompt warning to a customer about missing funds is crucial to avoid liability.

• Duty to Investigate: When presented with suspicious facts, investigate and ask questions to prevent fraud.

• Cost of Litigation Lawsuit defense is very expensive and very time-consuming. Attorney's fees may not be awarded, even if the defense is successful.

• Read Underwriting Bulletins and Policies Failure to follow or review policies, procedures, or underwriting guidelines can be a contributing factor.

Explore key takeaways from recent escrow fraud cases, including Hoffman v. Atlas Title and a notable malpractice suit in West Virginia. Discover how compromised communication led to financial losses and the lessons learned about compliance and best practices in the industry.