PAYER BEWARE California Court Confirms Risk of Fraud Falls on the Party Best Positioned to Prevent It By Jason Resnick, Senior Vice President and General Counsel
A recent California appellate decision should serve as a wake-up call for employers and anyone involved in legal settlements or commercial transactions involving electronic funds transfers. In Thomas v. Corbyn Restaurants Development Corp. (Cal. Ct. App., May 27, 2025), the Fourth District Court of Appeal addressed a novel question under California law: When settlement funds are misdirected due to fraudulent wire instructions sent by an imposter, who bears the loss? The answer: The party in the best position to prevent the fraud. The Spoofing Scam The case arose from a personal injury settlement for $475,000. After the parties signed a settlement agreement directing payment to the plaintiff’s attorney’s client trust account, a third-party fraudster, impersonating the plaintiff’s legal assistant, sent fake emails to defense counsel requesting a wire transfer instead of a check. The fraudulent email provided altered wiring instructions that subtly differed from the instructions in the settlement agreement. Defense counsel accepted the instructions and wired the funds to the fraudulent account. Days later, an email from a spoofed version of defense counsel’s email account further intended to delay discovery of the fraud by plaintiff’s attorney, claiming that a check would be mailed soon. It wasn’t until a month later that the fraud was discovered. By then, the imposter and the funds were long gone. Trial Court and Appeal: Risk Falls on Defendants When the plaintiff demanded a replacement payment, the defendants refused, arguing that they had already paid. The plaintiff moved to enforce the settlement agreement. The trial court granted the motion, finding that several “red flags” should have alerted the defendants’ counsel to the fraud, and that the plaintiff bore no comparative fault. The Court of Appeal affirmed, adopting a rule grounded in federal case law and Uniform Commercial Code principles: in cases of impersonation fraud, the loss should be allocated to the party in the best position to prevent it. The appellate court cited several factors that supported the trial court’s decision: • The wiring instructions deviated from the original settlement terms (wrong payee, method of payment and missing client reference).
• Defense counsel failed to verify the change using reliable, independent contact information. • The spoofed email domain and inconsistent phone numbers should have raised suspicion. • Rather than confirm the instructions directly with known counsel, defense counsel relied on the imposter’s contact information and delegated the verification task to accounting staff. The court concluded that while both parties were victims of a sophisticated scam, only the defendants ignored obvious warning signs. Even though neither law firm’s systems appeared to be breached, the defendants failed to exercise ordinary care in executing the payment. Key Takeaways 1. Never rely on unverified payment changes: Requests to change payment methods or bank details should always be verified using contact information from an independent, trusted source—not from the request itself. 2. Scrutinize red flags: Watch for subtle changes in email addresses, duplicate emails, altered contact details, typos and inconsistent language. These signs often signal spoofing. 3. Use secure, pre-established protocols: Formalize settlement payment procedures in writing and resist any deviation without multi-level verification. 4. Train staff: Educate staff to recognize social engineering tactics and escalation triggers. 5. Document your diligence: Courts will look at whether a party exercised ordinary care. Retain clear records of verification steps taken before disbursing large payments. Why This Case Matters Thomas v. Corbyn is the first published California decision to address allocation of risk in wire fraud settlement scams. It aligns with a growing body of federal law placing the burden on the party best able to detect and stop fraudulent payments. With cyber scams increasingly targeting legal and financial transactions, the decision provides timely and practical guidance: When it comes to wiring money, caution is not optional.
6 Western Grower & Shipper | www.wga.com July | August 2025
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