Wire Fraud Liability – Real Estate Tales From the Courtroom

 

In a recent Arizona Court of Appeals case a buyer sued the escrow company for wiring the buyer’s $79,000 in closing funds to a wire fraud imposter.  The transaction failed to closed escrow and the buyer’s funds were never recovered. 

The Facts Alleged in the Case

The buyer contracted with the sellers to purchase a Subway restaurant franchise. The purchase contract set forth escrow instructions and included both buyer’s and seller’s contact information. The buyer deposited a portion of the purchase price with the escrow company. 

After escrow was opened, an imposter hacked the buyer’s email account. After the hack, the imposter created an email address that matched the seller’s email address except for an inconspicuous “rn” where the seller’s correct email address had an “m.”

The night before close of escrow, the imposter and the buyer emailed each other, discussing the purchase without including the escrow company in the email chain.  The next morning, the imposter emailed wiring instructions to the escrow company, copying the buyer on the email. Neither the buyer nor the escrow company noticed the slightly different email address used by the imposter. In response, the buyer emailed the escrow company instructing them to wire $79,000 from the escrow account.

Noting that the name on the bank account provided in the email was different than the seller’s name, the escrow company responded to the buyer and the imposter questioning the wiring instructions. The imposter replied to both and stated: “yes, that is the name on the account I want the money to be wired. Its [sic] our company account and you can send in the wire there.”

The escrow company emailed the buyer for clarification on the amount to be wired and the buyer again confirmed.

Without phoning the sellers to verify the wiring instructions, the escrow company wired the funds and emailed confirmation of the wire transfer to the buyer and the imposter.  The sellers never received the funds, the sale did not go through, and the funds were never recovered.

Apportionment of Fault

At the trial, the court instructed the jury on apportionment of fault and directed the jury to determine “the relative degrees of fault” as percentages for the buyer, the escrow company, and the imposter.  Arizona law requires juries to “consider the fault of all persons who contributed to [an] alleged injury . . . regardless of whether the person was, or could have been, named as a party to the suit.” A.R.S. § 12-2506(B).  This statute requires only that a jury consider fault; it does not obligate a jury to assign a percentage of fault to every person it considers.

The Court’s Decision

The jury apportioned one hundred percent of the fault to the escrow company and the superior court awarded the buyer in damages in the amount lost in the wire fraud of $79,000, plus interest and attorney’s fees. The Arizona Court of Appeals affirmed the superior court’s rulings with the  exception of the amount of attorney’s fees awarded to buyer, which were slightly reduced. 

Case Lessons:

·        Use the Buyer Attachment of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract to warn buyers about wire transfer fraud and advise them to always confirm wiring instructions independently prior to wiring any money. 

 ·         Advise the buyer that if they receive a request for contact information or other emails during the transaction to make sure that the emails are from the escrow agent, seller, or agent, as applicable - not a third party attempting to perpetrate wire fraud.

 ·         Consider providing the buyers with the Wire Transfer Fraud Advisory.

 ·         Consider adding a warning under your signature line such as:  “IMPORTANT NOTICE: Never trust wiring instructions sent via email. Always independently confirm wiring instructions in person or via a telephone call to a trusted and verified phone number. Never wire money without double-checking that the wiring instructions are correct.”

 Mago v. Arizona Escrow & Financial Corporation

No. 1 CA-CV 22-0270

Filed 3-30-2023

NOTICE: NOT FOR OFFICIAL PUBLICATION

UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE

 K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  4/7/23

A Contract Series – Part 9: The Arizona REALTORS® Residential Resale Purchase Contract - Additional Terms and Conditions & Seller Acceptance

 

This is Part 9 and the final article of a series discussing the major provisions in each section of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract (10/22) (“Contract”).  The previous articles in this series can be located at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

The Additional Terms and Conditions Section of the Contract may start with a page of blank lines but contains a variety of important provisions of which all parties should be aware. 

ADDITIONAL TERMS AND CONDITIONS SECTION

Blank Lines

The blank lines may be utilized for adding terms into the Contract that are not addressed in the boilerplate.  For example, you can add personal clauses, office clauses, or system clauses.

 ·         If you are writing a contingency or clause that is not a standard Arizona REALTORS® or broker clause, consider having your broker or manager review the language before submitting the offer or counteroffer to ensure that the contingency or clause is clear and addresses all concerns.   

 ·         Contingency clauses are a common source of ambiguity.  At a minimum, a contingency clause should specify the terms of the contingency, the exact time in which the contingency must be fulfilled, and the rights and obligations of the parties if the contingency is not met. The following are some important considerations when drafting a contingency.  

o   What is the contingency?

o   For whose benefit?

o   When must the contingency be satisfied?

o   How is the contingency satisfied?

o   What happens if the contingency is not satisfied?

Risk of Loss

If there is any loss or damage to the home prior to COE or possession, whichever is earlier, by reason of fire, vandalism, flood, earthquake, or act of God, the risk of loss is on the seller, provided, however, that if the cost of repairing the loss or damage exceeds 10% of the purchase price, either seller or buyer may cancel the contract.

 ·         If there is a fire in the home and the cost to repair the damage is less than 10% of the purchase price, the seller has the obligation to repair the damage and disclose the damage and repairs to the buyer.  The buyer would then have five days to give notice of disapproval. 

·          ·         If the cost of repair exceeds 10%, either seller or buyer may cancel the Contract. 

Permission

Buyer and seller grant broker(s) permission to advise the public of the Contract.

 Arizona Law

The Contract is governed by Arizona law and any legal action relating to the contract is to take place in Arizona.

 Time is of the Essence

The parties acknowledge that time is of the essence in the performance of the contractual obligations.  

 ·         Despite the importance of the COE date in the Contract, time may not be regarded by the courts as being of the essence for COE without the time is of the essence clause.

 ·         The courts have determined that time should be considered of the essence in a contract when:

1. There is an express recital in the contract, that time is of the essence. 
2. Where, from the nature of the transaction or fluctuations in the value or from the terms of the agreement, the treatment of time as a nonessential will produce a hardship and delay by one party in completing or in complying with a term would necessarily subject the other party to serious injury or loss.
3. There is an express notice, given by a party who is not in default to the other party who is in default, requiring the contract to be performed within a reasonable stated time.

 Compensation

The seller and buyer acknowledge that the broker(s) will be compensated for their services as previously agreed by separate written agreement(s), which shall be delivered by the brokers to the escrow company for payment at COE, if not previously paid. If the seller is obligated to pay the broker(s), the contract constitutes an irrevocable assignment of the compensation owed to the broker to be paid from the seller’s pro­ceeds at COE. If the buyer is obligated to pay broker(s), payment is to be collected from the buyer as a condition of COE.

 ·         Broker compensation should not be addressed in the Contract. 

Copies and Counterparts

A fully executed facsimile or electronic copy of the entire Contract is to be treated as an original contract. The contract and any other related documents may be executed by facsimile or other electronic means and in any number of counterparts, however copies may be signed. All counterparts are deemed to constitute one instrument, and each counterpart is deemed an original, except that the Lead-based Paint Disclosure Statement may not be signed in counterpart.

 ·         The MLS lead-based paint disclosure form available when an MLS listing is printed allows the lead-based paint disclosure to be made to the buyer before contract acceptance but does not satisfy the requirement for having signatures of all parties on the lead-based paint disclosure form in the files of both brokers.

 ·         The EPA has indicated that it is permissible to have these electronic disclosures signed in counterpart (signatures on separate completed lead-based paint disclosure forms) provided that both the listing broker and the buyer’s broker retain copies of the lead-based paint disclosure forms containing signatures of all parties.

 Days

All references to days are calendar days. A day begins at 12:00 a.m. and ends at 11:59 p.m.

·         A party has until 11:59 p.m. to perform an act that is required by the Contract to be performed by a specific day – even if it is not feasible for the party to do so. 

Calculating Time Periods

This provision explains how time periods in the contract are to be calculated. The day of the act or event from which the time period begins to run is not included (i.e., the date of contract acceptance), and the last day of the time period is included. The provision explicitly states that contract acceptance occurs on the date that the signed contract (and any incorporated counter offer) is delivered to and received by the appropriate broker.

Acts that must be performed three days prior to the COE Date must be performed three full days prior; for example, if the COE Date is Friday, the act must be performed by 11:59 p.m. on Monday.

 

• If Contract acceptance occurred on Monday. The day of the act or event from which the time period begins to run is not included, so day one is Tuesday. The last day to perform any acts required to be accomplished within five days after acceptance should be completed by Saturday at 11:59 p.m.

 

• If the cure period notice was sent at 5 p.m. on Monday, the three-day cure period expires at 11:59 Thursday night. This time period is calculated as follows: 

 

o   the day of the act or event from which the time period begins to run is not included, in this example, Monday. Therefore, Tuesday is day one, Wednesday is day two and Thursday is day three. 

 

o   The last day of the time period is included, in the example above, Thursday. Therefore, the non-complying party would be in breach at 12 a.m. on Friday.

 Entire Agreement

The contract, addenda and attachments constitute the entire agreement, supersede any other written or oral agreements and can be modified only by a signed writing. The failure to initial any page of the contract does not affect its validity or terms.

Subsequent Offers

The buyer acknowledges that the seller has the right to accept subsequent offers until COE. However, any subsequent offer accepted must be a backup offer contingent on the cancellation of the contract.

Cancellation

A party who wishes to exercise any right of cancellation allowed in the contract may cancel the contract by delivering a notice stating the reason for cancellation to the other party or to the escrow company. Cancellation becomes effective immediately upon delivery of the cancellation notice.

·         Brokers are often faced with a transaction in which one party has breached the purchase contract and the non-breaching party is threatening cancellation. Although there is a remedy for every breach of contract, the remedy is not always cancellation. The remedy may be limited to compensation for financial losses.

·         To justify cancellation, the breach generally must relate to a vital provision of the contract (a material term); the breach cannot relate simply to an incidental or minor contract provision.

 ·         A party threatening cancellation of a contract over the objections of the other party should be referred to legal counsel for advice.

Notice

Unless otherwise provided, (i.e., for delivery of the title commitment, acceptance or cancellation), delivery of all notices and documentation required or permitted in the contract must be in writing, addressed as indicated in the referenced sections (Section 8q and Section 9a, which provide the identity and contact information for the brokers and salespersons involved in the transaction) and are deemed delivered and received when:

 

(i)                 hand-delivered;

(ii)              sent via facsimile transmission;

(iii)            sent via electronic mail, if e-mail addresses are provided; or

(iv)             sent by recognized overnight courier service.

Therefore, the broker must check the office, fax and e-mail provided in the notice sections daily.

·         The notice is deemed received even if the notice is not picked up from the office, the fax machine is out of paper, or the e-mail is not opened. 

Release of Broker(s)

The parties expressly release, hold harmless and indemnify the broker(s) from liability and responsibility for the listed items relating to the premises as well as the price and terms of sale and return on investment.

 ·         This provision emphasizes to the buyer the importance of conducting their due diligence investigation and inspection of the premises utilizing the appropriate professionals.

 ·         A hold harmless clause is enforceable under certain circumstances. Such a clause will be given effect by the courts when it represents “an intentional relinquishment of a known right.” Further, there must be no public policy impediment to the limitation and the parties must “bargain” for the limitation.

 ·         The provision in the Contract should not be considered against public policy, the seller’s and the buyer’s initials evidence that the provision was discussed, and the language clearly helps to clarify the broker’s role in the transaction. Therefore, although this provision will likely be strictly construed against the brokers in a transaction, the provision should be given effect according to its terms. 

Terms of Acceptance

Contract acceptance occurs and the offer becomes a binding contract when acceptance is signed by the seller, and a signed copy delivered in person, by mail, facsimile or electronically and received by the specified broker by the specified time and date. 

 Broker on Behalf of Buyer

The broker and salesperson contact information are included in this paragraph for addressing the notice to the buyer, for agency confirmation and for earnest money receipt. All notices must be sent to the salesperson indicated unless otherwise provided.

 ·         An additional line has been provided in the event a buyer is represented by more than one agent. This typically occurs when the agents are members of a team. 

 Agency Confirmation

The agency relationship of the broker writing the offer is confirmed in this section.

 ·         Both agency confirmations (buyer and seller) are contained on the same page so that any inconsistencies will be obvious.

 SELLER ACCEPTANCE SECTION

Broker on Behalf of Seller

The listing broker’s information is contained in this section. All notices to the seller must be sent to the salesperson indicated unless otherwise provided.

 ·         An additional line has been provided in the event a Seller is represented by more than one agent, again for example, when the agents are members of a team.

Agency Confirmation

The agency relationship of the listing broker is confirmed in this section.

Seller Receipt of Copy

The seller acknowledges receipt of a copy of the contract and grants permission to the broker to deliver a copy to the buyer.

Counter Offer

If a counter offer is attached, the seller must sign and deliver both the offer set forth in the contract form and the counter offer.

 ·         If there is a conflict between the offer and the counter offer, the provisions of the counter offer are controlling.

 Offer Rejected by Seller

If the offer is rejected, the seller should initial and date this provision.

 ·         Many complaints against real estate licensees involve allegations that an offer was not submitted to the seller or not submitted to the seller in a timely manner. As a result, a box was added to the contract to prompt the seller to acknowledge that an offer was submitted and rejected on the date specified.

 ·         The seller’s initials evidence that both the listing broker and the buyer’s broker complied with the Commissioner’s Rule, R4-28-802(B), which requires a broker to promptly submit all offers to the broker’s client. 

 CONCLUSION

While no contract form is perfect, the Arizona REALTORS® Contract is designed to make transactions proceed more smoothly, set forth the obligations of the parties with specificity, and reduce liability for the parties and the brokers. Further, the advantages of a standardized resale purchase contract for both the brokers and the parties involved cannot be overstated.

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book – Arizona Real Estate: A Professional’s Guide to Law and Practice (3^rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  5/12/23

A Contract Series – Part 8 The Arizona REALTORS® Residential Resale Purchase Contract A Series – Remedies Section

 

This is Part 8 of a series of articles discussing the major provisions in each of the sections of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract (10/22) (“Contract”). 

The previous articles in this series can be located at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

The Remedies Section of the Contract contains provisions that most people hope they will never have to utilize.  However, if there is a potential breach of contract, it is important to understand each party’s rights and obligations.  If there is a breach of contract, the rights and remedies are set forth in this section of the Contract, however if there is a breach, the broker should be notified and the parties should generally be referred to independent legal counsel. 

 REMEDIES SECTION

Cure Period

A party is given an opportunity to cure a noncompliance or potential breach of the contract. If a party fails to comply with any provision of the Contract, the other party must deliver a notice to the non-complying party specifying the non-compliance before declaring a breach. If the non-compliance is not cured within three days after delivery of the notice (cure period), the failure to comply may be declared to be a breach of contract.

 ·      The Arizona REALTORS® Cure Period Notice form is available to assist the parties with delivering notice of a potential breach. 

 ·         The Cure Period applies when a party does or does not do something that would have otherwise been an immediate breach of contract. The cure notice provides an opportunity to fix a problem before it becomes a breach, so it is an excellent risk management provision. 

 

o   A breach of contract is the failure to perform a contractual duty, or in other words, a broken promise.

 

o   There are no automatic breaches in the Contract. The Cure Period Notice is always a prerequisite to declaring a breach of contract.

o   There are situations where the Cure Period Notice could delay COE.  For example, if, on the day of COE, the buyer discovers that the seller has failed to complete an agreed upon repair or a party fails to perform on the COE date.    

·         The cure period does not apply to a contingency.

 

o   A contingency is an event that must occur before a party is obligated to perform their obligations set forth in the Contract. A contingency is a condition, not a promise. If a contingency does not occur, the party’s obligation to perform the contract never arises, so the failure to perform a contingency is not a breach. If a contingency does not occur, the Contract is unenforceable.

 

o   For example, the cure period does not apply to the loan contingency.  The Contract is contingent upon the buyer obtaining loan approval without conditions, in other words qualifying for a loan, by the COE Date. If the buyer in good faith fails to obtain loan approval, or qualify for a loan, by the COE Date, the buyer’s obligation to perform the Contract never arises. In such a case, the Contract is unenforceable the next day, and the buyer is automatically entitled to the return of the earnest money without further action by either party.

·         The Cure Period was included in the Contract for a variety of reasons, including:

o   Dealing with all failures to comply with the terms of the Contract in a uniform manner and prompting compliance.

o   Eliminating the question of whether a breach has been waived -- because an action or inaction is not a breach until the non-complying party is given notice and an opportunity to perform.

o   Bolstering the enforcement of the time is of the essence clause and the ability to cancel the Contract for a breach.

Breach

As discussed above, if after receiving the notice of noncompliance the party does not perform the specified obligation, the non-complying party may be declared in breach of contract. In that event, the non-breaching party may pursue all legal remedies, subject to the Alternative Dispute Resolution obligations set forth in the Contract.

 ·         The remedies for a breach of contract may include forfeiture of the earnest money (liquidated damages), actual damages (money to remedy the breach), forfeiture of the Contract (cancellation), or specific performance (forcing the breaching party to perform).

·         In the event of buyer’s breach, the seller may accept the earnest money as the sole right to damages.

 ·         In the event of buyer’s breach arising from the failure to deliver the notice of the inability to obtain loan approval or the inability to obtain loan approval due to the waiver of the appraisal contingency, the seller agrees to accept the earnest money as the sole right to damages.

This provision also states the obvious: an unfulfilled contingency is not a breach of contract.

Finally, the parties expressly agree that the failure of any party to comply with the terms and conditions of Section 1d to allow COE to occur on the COE Date, if not cured after a Cure Period notice is delivered pursuant to Section 7a, will constitute a material breach of the Contract, rendering the Contract subject to cancellation.

Alternative Dispute Resolution (ADR) – Mediation and Arbitration

The buyer and seller agree to mediate any dispute or claim arising out of or relating to the Contract, and all mediation costs will be paid equally. If mediation does not resolve the dispute, the unresolved dispute must be submitted to binding arbitration unless either party opts out within 30 days after the conclusion of the mediation conference by notice to the other. If a party opts out of arbitration, either party has the right to resort to court action.

 ·         The parties may utilize the Arizona REALTORS® Buyer-Seller Dispute program to initiate mediation or arbitration.   Buyer-Seller Disputes | Arizona Association of REALTORS® (aaronline.com)

 ·         Mediation is a process in which the parties meet with an impartial person who helps to resolve the dispute informally and confidentially. Agreeing to mediate does not mean that the parties are agreeing to settle, but simply means the parties are trying to resolve a dispute without going to court. The parties do not give up any right to pursue other legal remedies if mediation is not successful.

 ·          Arbitration is a process that is similar to court litigation but is generally quicker and more cost effective. Pursuant to the Contract, if mediation does not resolve the dispute, the unresolved dispute must be submitted to binding arbitration, unless either party opts out within 30 days after the conclusion of the mediation conference by written notice to the other.

Exclusions from ADR

The following matters are excluded from the requirement for mediation and arbitration:

 

(i)                 any action brought in the Small Claims Division of an Arizona Justice Court (up to $3,500);

 

o   In Small Claims Court the case will be heard by either a judge or hearing officer, who then makes a decision that is final.  https://www.azcourts.gov/selfservicecenter/Small-Claims

 

(ii)              judicial or nonjudicial foreclosure or other action or proceeding to enforce a deed of trust, mortgage, or agreement for sale;

 

(iii)            an unlawful entry or detainer action;

 

(iv)             the filing or enforcement of a mechanics lien; or

 

(v)       any matter that is within the jurisdiction of a probate court.

 

The filing of a judicial action to record a lis pendens or order of attachment, receivership, injunction, or other provisional remedies is not a waiver of the obligation to submit the claim to alternative dispute resolution, or a breach of the duty to mediate or arbitrate.

 

Attorneys’ Fees and Costs

The prevailing party in any dispute is entitled to an award of their reasonable attorneys’ fees and costs.

 

Conclusion

Most real estate transactions are completed without dispute. However, there are times when a buyer or seller refuses to comply with the Contract and perform a contractual duty, such as a refusal to close escrow or to make agreed upon repairs.  Although you cannot give legal advice (unless you are also an attorney and authorized to act in that capacity), it is important to know the options so you can point your client in the right direction. 

 Next Article – Additional Terms and Conditions & Seller Acceptance

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  4/23/23