Court Opinion

ID: 9915446
Source: CourtListenerOpinion
Date Created: 2024-01-05 16:01:59.716646+00
Date Added: 2024-06-11T13:14:09.905722
License: Public Domain

REL: January 5, 2024

Notice: This opinion is subject to formal revision before publication in the advance sheets of Southern Reporter.
Readers are requested to notify the Reporter of Decisions, Alabama Appellate Courts, 300 Dexter Avenue,
Montgomery, Alabama 36104-3741 ((334) 229-0650), of any typographical or other errors, in order that corrections
may be made before the opinion is published in Southern Reporter.

 ALABAMA COURT OF CIVIL APPEALS
                               OCTOBER TERM, 2023-2024
                                _________________________

                                         CL-2023-0260
                                   _________________________

     Mile High, LLC, Pate Holdings, Inc., and Luther S. Pate IV

                                                      v.

                                    Flying M Aviation, Inc.

                        Appeal from Jefferson Circuit Court
                                  (CV-21-903098)

MOORE, Judge.

        Mile High, LLC, Pate Holdings, Inc., and Luther S. Pate IV

(referred to collectively as "Pate") appeal from a judgment entered by the

Jefferson Circuit Court enforcing a $50,000 settlement agreement that

Pate had reached with Flying M Aviation, Inc. ("FMA"). The circuit court

determined that an impostor had defrauded Pate by causing it to wire
CL-2023-0260

the settlement proceeds to the impostor's bank account but concluded

that Pate still must pay the proceeds to FMA. We affirm the circuit

court's judgment.

                               Background

     FMA commenced a civil action against Pate seeking damages for an

alleged breach of contract. The parties negotiated a settlement of the

case that required Pate to pay FMA $50,000. On July 12, 2022, at 12:59

p.m., Lee Gresham, FMA's counsel, sent Linda Peacock, Pate's counsel, a

message through his e-mail account directing Pate to wire the settlement

proceeds to an account at SouthPoint Bank in Atlanta, Georgia. Peacock

did not receive that e-mail; instead, five hours later, Peacock received an

e-mail, ostensibly from Gresham's e-mail account, directing that the

settlement proceeds be wired to an account at Chase Bank. On July 14,

2022, Pate wired the settlement proceeds to the Chase Bank account.

     An impostor defrauded Pate by "spoofing" Gresham's e-mail

account, i.e., by creating a second e-mail account that appeared identical

to Gresham's e-mail account and sending Peacock wiring instructions to

an account owned or controlled by the impostor. After discovering the

fraud, Pate disputed that it still owed FMA the settlement proceeds. On

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August 9, 2022, FMA filed a motion to enforce the settlement agreement,

and Pate responded to that motion on September 7, 2022, and November

15, 2022. On February 1, 2023, the circuit court entered a judgment

enforcing the settlement agreement. The circuit court ordered Pate to

tender the settlement proceeds to FMA within 30 days. On February 27,

2023, Pate filed a postjudgment motion to "alter, amend, or reconsider"

the judgment, which the circuit court granted in part by amending its

findings of fact and denied in part by maintaining its original conclusion

and enforcing the settlement agreement. Pate timely filed its notice of

appeal to this court on April 27, 2023.

                                  Issue

     In the final judgment, the circuit court determined that this case

presented an issue of first impression for this jurisdiction regarding who

should bear the loss when the fraudulent conduct of a third party causes

a party to breach a contract. In its judgment, the circuit court cited two

unpublished opinions from other jurisdictions -- Parmer v. United Bank,

Inc., (No. 20-0013, Dec. 7, 2020) (W. Va. 2020) (not reported in South

Eastern Reporter), and Arrow Truck Sales, Inc. v. Top Quality Truck &

Equip., Inc., (No. 8:14-cv-2052-T-30TGW, Aug. 18, 2015) (M.D. Fla. 2015)

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(not reported in Federal Supplement) -- in applying the "impostor rule"

to conclude that the party who was in the best position to prevent the

fraud by exercising reasonable care should bear the loss. Pate does not

argue that the circuit court erred in concluding that the impostor rule

should govern the dispute. Pate argues only that the circuit court erred

in determining that Pate was in the best position to prevent the fraud in

this case. Pate asks this court to review the evidence presented to the

circuit court, to determine that FMA was in the best position to prevent

the fraud, and to reverse the judgment requiring Pate to tender the

settlement proceeds to FMA.

                           Standard of Review

     Ordinarily, this court cannot reweigh the evidence before a trial

court to make a factual finding; however, when a trial court enters a

judgment enforcing a settlement agreement based on documentary

evidence alone, this court reviews the evidence de novo. See Phillips v.

Knight, 559 So. 2d 564, 567 (Ala. 1990). In this case, the circuit court did

not receive any oral testimony; the circuit court considered only the

exhibits and affidavits attached to the motion to enforce the settlement

agreement and the response to that motion. Accordingly, this court will

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review that evidence and make its own independent determination as to

the facts.

                                  Facts

      The exhibits attached to the motion to enforce the settlement

agreement show that Gresham communicated with Peacock about the

settlement in a single e-mail chain ("the e-mail chain"). After the parties

had agreed to the terms of the settlement, Peacock sent an e-mail to

Gresham in the e-mail chain inquiring as to how the settlement proceeds

should be delivered to FMA. Gresham responded within the e-mail chain,

indicating that the funds should be wired and that wiring instructions

would follow once FMA executed the settlement agreement.             FMA

executed the settlement agreement on July 12, 2022. At 12:59 p.m. on

July 12, 2022, Gresham sent an e-mail to Peacock, in the e-mail chain,

with the wiring instructions. Peacock never received that e-mail. Five

hours later, Peacock received from the imposter account a standalone e-

mail, which was not a part of the e-mail chain, containing the fraudulent

wiring instructions.

      The fraudulent e-mail appeared identical in form to the e-mails that

had been sent by Gresham in the e-mail chain, using the same e-mail

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account identifiers employed by Gresham.              The wiring instructions

directed Pate to wire the funds to a Chase Bank account located in

Houston, Texas, and designated the beneficiary as the Birmingham law

firm that employs Gresham. Tavis Turner, an information-technology

specialist who works at that law firm, stated in his affidavit that the

fraudulent   wiring    instructions       contained    resolution   and   font

discrepancies, but those discrepancies do not appear obvious to this court.

Based solely on the appearance of the e-mail and the wiring instructions,

Peacock had no reason to believe that the e-mail and wiring instructions

were inauthentic.

     Pate did nothing to verify the wiring instructions. Peacock did not

request that Gresham or anyone else at FMA verify the wiring

instructions. Peacock forwarded the fraudulent wiring instructions to

Daphne Brooks, Pate's bookkeeper, who also did not verify those

instructions. On July 14, 2022, Brooks instructed Pate's bank, Synovus

Bank, to wire the settlement proceeds to the Chase Bank account.

Synovus Bank did not contact FMA or Gresham to verify the wiring

instructions. Synovus Bank transferred the proceeds to the designated

Chase Bank account at 1:04 p.m. on July 14, 2022.

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     At 1:29 p.m. on July 14, 2022, Gresham received an e-mail,

ostensibly from Peacock, stating: "The payment is (sic) been processed

awaiting final approval.    We will send confirmation as soon as the

payment goes out." On July 19, 2022, Gresham received another e-mail,

ostensibly from Peacock, stating: "Just an update we are still working on

getting final approval, and we should get that in a day or two. Thank you

for your patience." On July 25, 2022, Gresham received a third e-mail,

ostensibly from Peacock, stating: "Just an update that a wire transfer

was initiated by our accountant on Friday but was sent to the wrong

information. Please be patient while we fix this issue." Those e-mails

were apparently sent by the impostor as part of the scheme, to delay

detection of the fraud.

     On July 26, 2022, Gresham checked with his law firm's bookkeeper

and discovered that the settlement proceeds still had not been received

by SouthPoint Bank.        Gresham telephoned Brooks to discuss the

whereabouts of the settlement proceeds. In their conversation, Gresham

informed Brooks that he had discovered that his e-mail account had been

"spoofed" because other attorneys had informed him that they had

received e-mails that did not sound like they had come from him. After

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that telephone call, Gresham sent Brooks a follow-up e-mail containing

the correct wiring instructions.   That e-mail was the first time that

anyone associated with Pate had seen those wiring instructions. Brooks

responded that she would contact Synovus Bank "and see what we can

do to retrieve our $50K that was sent using the wiring instructions from

your spoofed email." All attempts to rescind the wire transfer of the

settlement proceeds to Chase Bank were unsuccessful.

     Also on July 26, 2022, Brooks contacted an information-technology-

support company to investigate Peacock's e-mail account. The company

could not locate the original e-mail containing the correct wiring

instructions and determined that it had never been delivered.       The

company also determined that Peacock's e-mail account had not been

compromised and that any problem must have originated with

Gresham's e-mail account that had been compromised. In her affidavit,

Peacock expressed her belief that the original e-mail had been

intercepted by the impostor who had had access to Gresham's computer

system.

     In late July and early August 2022, Gresham sent several e-mails

requesting that Pate pay the settlement proceeds to FMA.        Having

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received no response to those e-mails, on August 24, 2022, Gresham

contacted Turner, who investigated the matter and determined that the

fraudulent e-mail had not originated from Gresham's e-mail account but

had been sent from an e-mail account that had been created on July 7,

2022, by an unknown third party. Turner submitted an affidavit stating

that neither the firm's server nor the e-mail account maintained by

Gresham had been compromised.          Turner did not explain why the

original e-mail containing the correct wiring instructions had not been

delivered to Peacock.

     On August 25, 2022, Peacock sent Gresham an e-mail in which she

indicated that Pate would not pay FMA the settlement proceeds. Peacock

stated that, because Gresham had failed to inform Pate that his e-mail

account had been spoofed, Pate had had no reason to suspect the

authenticity of the fraudulent e-mail. Peacock explained that, based on

those circumstances, the payment to the impostor account had satisfied

Pate's contractual obligation under the law, citing Bile v. RREMC, LLC,

(No. 3:15cv051, Aug. 24, 2016) (E.D. Va. 2016) (not reported in Federal

Supplement). Peacock maintained that FMA should be held responsible

for the loss.   FMA denied any responsibility for the loss because, it

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argued, Gresham had sent the correct wiring instructions and the

"spoofing" of his e-mail account was beyond his control.

                                Analysis

     Like the circuit court, we determine that Pate was clearly

defrauded. Pate reasonably relied on the fraudulent e-mail sent by the

impostor when it sent the wire transfer because the impostor had

somehow prevented Pate from receiving the correct wiring instructions

and Pate could not have detected the fraud based on the alleged

discrepancies in the wiring instructions and the mere fact that the

instructions came in a standalone e-mail separate from the e-mail chain

between Gresham and Peacock. FMA was also defrauded. FMA has yet

to receive the $50,000 in settlement proceeds due under the terms of the

settlement agreement because Pate was misled into sending the proceeds

to the wrong bank account. FMA did not participate in the fraud, but it

is a victim of the fraud.

     Pate did not receive conflicting wiring instructions, as was the case

in Arrow Truck Sales, Inc., supra. Nevertheless, we conclude that Pate

was in the better position to have prevented the fraud. Even conceding

that a reasonable person would not have detected the signs that the e-

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mail and wiring instructions were fraudulent, it remains that Pate was

wiring a large sum of money as settlement proceeds.              Under the

circumstances, Pate should have verified the wiring instructions before

executing the wire transfer, which it easily could have done. Because

Pate did not contact Gresham or anyone else at FMA to verify the wire-

transfer instructions, FMA was completely unaware of the fraudulent

wiring instructions before the wire transfer was executed; therefore,

FMA could not have prevented it from occurring.

     Pate contends that the security of FMA's counsel's computer system

had been breached in a sophisticated hacking scheme and that Gresham

"became aware that the account had been hacked, or in his words,

'spoofed,' but did not alert [Pate] to that fact until twelve (12) days after

the wire transfer was sent." Pate's brief, p. 20. However, the evidence in

the record indicates that no one hacked into Gresham's e-mail account to

send the fraudulent e-mail; instead, the fraudulent e-mail was sent from

a separate e-mail account that had been created by an imposter on July

7, 2022, to appear identical to Gresham's e-mail account. Pate presented

no evidence indicating that FMA's counsel was aware of that "spoofing"

in time to prevent the fraud. In the July 26, 2022, telephone call with

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Brooks, Gresham acknowledged that his e-mail account had been

"spoofed," but Pate did not produce any evidence as to when Gresham

came to that realization. The evidence shows that the impostor created

the "spoof" e-mail account on July 7, 2022, and that, at some point

thereafter, the impostor sent fraudulent e-mails out to other attorneys.

To prove its contention, Pate would have had to establish that those e-

mails were sent, and that Gresham discovered the "spoofing," before July

14, 2022. The record does not contain any such evidence, and we cannot

infer that it exists.

      Under the "imposter rule," the party who was in the best position

to prevent the fraud by exercising reasonable care suffers the loss. See

Arrow Truck Sales, Inc., supra (citing U.C.C. § 3-404(d); 1 State Sec.

Check Cashing, Inc. v. American Gen. Fin. Servs., 409 Md. 81, 972 A.2d

882 (Md. Ct. App. 2009)). We recognize that, in this case, it would have

been difficult for either party to have discovered the fraud before it was

completed, but we conclude that, based on the particular facts of this

case, Pate was in the best position to prevent the fraud by exercising

      1Alabama
             has enacted the same provision in its version of the
Uniform Commercial Code. See Ala. Code 1975, § 7-3-404(d).
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reasonable care to verify the wiring instructions before executing the

wire transfer. The circuit court did not err in granting the motion to

enforce the settlement agreement and in ordering Pate to tender the

settlement proceeds to FMA.

     The judgment of the circuit court is affirmed.

     AFFIRMED.

     Thompson, P.J., and Hanson, J., concur.

     Edwards and Fridy, JJ., concur in the result, without opinions.

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