Login | March 05, 2021

Law firm escapes liability for phishing scam victimization

Technology for Lawyers

Published: February 19, 2021

In a very narrow ruling, the West Virginia Supreme Court of Appeals (the state’s highest court) ruled in favor of a law firm that was involved in a phishing scam that cost a client over a quarter-million dollars. (Otto and Otto v. Catrow Law PLLC, No. 19-0361, September 2020 Term).
This is a cautionary tale that turned out well for the firm, at least to some extent because they followed the precautions under Model Rule 1.1. The law firm seemed to do everything right, and that is probably what saved them in this case.
The Ottos wanted to move to West Virginia, and deposited $266,000 in the real estate trust account of the Catrow Law Firm for a real estate transaction. Catrow had, itself, been contracted for the real estate sale legal work by a real estate agent who worked for a broker.
The law firm did what it was supposed to do. It encrypted every email and followed every precaution. However, not everyone in the deal did such. The real estate agent did not encrypt the emails that included instructions for transferring the funds. You can guess what happened next.
In a classic phishing scheme, scammers intercepted the non-encrypted email and began communicating with the scammers, thinking that the scammers were the real estate agent. There were never any direct communication between the law firm and the plaintiffs—all such communications went through the real estate agent.
When payoff time came, the money was wired to the scammers’ account. The money was never recovered. Everyone got sued. Everyone settled except the law firm.
The plaintiffs could not sure the law firm for violating ethical standards, because they didn’t. Instead, they sued under several “should have known” theories. However, plaintiffs never did produce the documents that might have proved or tended to prove that the firm should have known anything, or that they should have taken reasonable precautions that they did not take. The high court didn’t speculate on what their decision might have been had the plaintiffs been able to produce such documents, which makes this a very narrow holding on the law—and also a very close one, having been decided 3-2 in favor of the firm.
The precedent of this case is probably not strong, IMO, but the firm both skated responsibility and followed the rules. So that’s a win all-around.