Friday, September 28, 2018

Wire Transfer Fraud V2


In February 2016 Jerry Bain was looking to purchase investment real estate. Kathryn Sylvia Coleman and her broker, Platinum Realty, LLC, represented the seller. When the deal was ready to close, Jerry alleges that Coleman instructed him to wire almost $200,000 in closing proceeds.

Jerry followed the instructions furnished to him.

Unfortunately, however, the amount wired was sent to the wrong account, with the result that Jerry lost it all. It appears that a hacker gained knowledge of the pending transaction, and inserted wire transfer account data that dumped the funds directly into the control of the hacker instead of the title company.

Jerry sued Coleman and Platinum Realty to recover the amounts lost, claiming that they were negligent in their misrepresentation of the bank account data to him. The jury agreed, and found that Coleman and Platinum were 85% responsible for Jerry’s loss. Jerry was responsible for the balance.

Accordingly, the Court entered Judgment against Coleman and Platinum for $167,000. Defendants then filed a Motion with the Court claiming that the evidence is insufficient to support the jury’s finding of negligent misrepresentation.

The first test of negligent misrepresentation is a failure to exercise reasonable care or competence in obtaining or communicating the false information. Platinum and Coleman responded by claiming that Coleman did not send the email with the false data, inducing Jerry to wire funds to a third-party criminal’s account.

Coleman admitted that she had received the fake wiring instructions and attempted to forward them to Jerry. That email from Coleman to Jerry, however, was sent not to Jerry’s correct email address, but instead was sent to a very similar address from which Coleman had received a prior communication.

Presumably the hacker had created the similar address. And regardless, Jerry received the email with the hacker’s account number a few minutes after Coleman sent it.

To be sure he was wiring funds properly, Jerry then called Coleman, who confirmed by phone that the funds must be wired prior to closing. And so the funds were wired . . . to the hacker.

Once Coleman conceded that she did not confirm that she had sent correct wire instructions or that she had the responsibility to make sure the instructions were correct, the jury could safely conclude that Coleman failed to act with reasonable care.

And from there it was no stretch to impose liability upon Coleman and Platinum Realty for innocently participating in wire transfer fraud. See Jerry Bain v. Platinum Realty, LLC and Kathryn Sylvia Coleman; US District Court; District of Kansas; Case 16-2326-JWL; June 25, 2018; https://casetext.com/case/bain-v-platinum-realty-llc-1.

Lessons Learned / Questions Asked:

1.      Neither Coleman nor Platinum Realty represented Jerry Bain. And yet the Court still imposed liability on both without a fiduciary duty analysis.

2.      This Court is telegraphing the message that brokers and agents must exercise extreme caution not only with their principals, but also with other parties in their transactions.

3.      There’s at least one more point worthy of mention (besides the obvious which is that every email from a broker or agent to every party in every deal should state “We don’t send wire transfer information; contact the wire recipient to verify data before you send funds” or similar) – note that the jury found Jerry only 15% responsible for wiring funds to the wrong party. And this is after testimony that Jerry was an experienced commercial real estate investor. And that evidently Jerry never called the title agent to verify.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888

Thursday, August 30, 2018

Bankruptcy Fraud



Full disclosure: I don’t know much about bankruptcy fraud. I know that bankruptcy courts have the authority to find that some debts are non-dischargeable. And in that event, filing the bankruptcy may not be the answer the debtor is seeking.

Regardless of my lack of knowledge, it’s a topic that is worth exploring. A recent case will illustrate the point.

In 2004 Humberto Saenz Jr. entered into a Franchise Agreement with Pizza Patron in south Texas. The Franchise Agreement prohibited Saenz from transferring franchises without the consent of the franchisor.

Saenz formed Estrella Ventures, LLC, for the purpose of operating four Pizza Patron restaurants. He financed his accounts receivable, inventory, equipment, furniture and fixtures with the International Bank of Commerce and a $480,000 loan. Sales must have been good, as the debt was reduced to $336,000 in five years

In 2009 Jose Maria Gomez approached Saenz to purchase one store. Gomez and Saenz reached a deal for Gomez to acquire the Rio Grande City Pizza Patron franchise for $350,000, just enough to pay off the IBC debt. Neither Gomez nor Saenz obtained written consent to the transfer from Pizza Patron.

Saenz furnished sales reports, tax returns and income statements to Gomez. Gomez used them to substantiate the purchase price, and predict future revenues and expenses.

Due to health concerns, Gomez closed the store in 2011. Saenz reopened it under the Pizza Patron name.

Gomez, unhappy with a $70,000 loss and believing that Saenz made material wrongful misrepresentations to Gomez which induced Gomez to purchase the store, sued Saenz for fraud. Saenz countered by filing a Chapter 7 bankruptcy petition. The lawsuit was dispatched to bankruptcy court, where the court found for Gomez, entered judgment for $412,000 against Saenz, and determined that since the claim was based in fraud a discharge in bankruptcy would not serve to avoid the judgment.

In other words, the underlying purpose of the Chapter 7 bankruptcy filing – to duck the claim of Gomez – would not succeed and Gomez would still be able to collect monies owed to him even after the bankruptcy was concluded.

Saenz appealed.

The United States Court of Appeals looked at the evidence presented and determined that Saenz “lied frequently whenever it suited him.” Income Statements furnished by Saenz were false; discrepancies in accounting procedures and royalty payments were “problematic and unacceptable.”

The bankruptcy court had the right to weigh the credibility of both Gomez and Saenz, and determine that Saenz’s fraudulent conduct induced Gomez to make business decisions. And that substantial losses were incurred.

Fraud claims are not dischargeable in bankruptcy. Gomez wins. Saenz loses. Gomez may now continue to extract the amount owing to him from Saenz regardless of Saenz’s Chapter 7 bankruptcy proceeding.

See Humberto Saenz v. Jose Maria Gomez; No 17-41004; United States Court of Appeals of Texas, 5th Circuit, August 7, 2018: https://www.law.com/texaslawyer/almID/1534478158TX1741004/.    

Lessons Learned / Questions Asked:

1.      Fraud claims are not dischargeable in bankruptcy.

2.      Independent due diligence and analysis is critical not only in real estate deals, but also in general business transactions. Complete trust in one party’s statements without verification can yield money losses and litigation.

3.      There’s an unreported piece to this case. Although Gomez ultimately prevailed in our legal system – did he really? He likely spent an exorbitant amount in legal fees to obtain a Judgment. And now what? Our Texas homestead and other debtor-exemption laws are still available to Saenz. What happens if Saenz uses those laws to his benefit and doesn’t pay Gomez – then who won?

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC

Wednesday, August 1, 2018

Commercial Lease Security Deposits


Our Texas Courts rarely give us insight into the interpretation of commercial lease security deposits laws. Until recently. New guidance awaits.

In August 2010 ProLogis Texas II leased real property in Sugar Land, Texas, to Daryl Flood Logistics. Daryl Flood assigned the lease to FP Stores in 2013, who, in turn, subleased part of it to Tramontina US in 2014.

I intuitively like Tramontina; they have an interesting spiced, citrus-glazed short rib recipe on their website: https://www.tramontina-usa.com/recipes/spiced-citrus-glazed-short-ribs. Ok so that was a minor digression and possibly reflects my ADD. I’ll take another pill now . . .

Tramontina paid FP a $50,000 sublease security deposit. The sublease required FP to refund the deposit, less proper deductions, within 60 days after Tramontina vacated.

The Master Lease between ProLogis and FP Stores terminated March 8, 2015, so by operation of law – the sublease also terminated. FP vacated but Tramontina stayed, as the direct tenant of ProLogis.

A week after termination Tramontina sent a letter to FP with Tramontina’s new forwarding address and demand to return the deposit within the time allowed by Texas law. Regardless, more than two months elapsed without either a return of the deposit or tender of an accounting that would provide for deposit offsets.

Tramontina sued FP for the refund of its security deposit, which by law is required to be returned within 60 days if a shorter time is not otherwise provided in the sublease. See Texas Property Code 93.011: https://statutes.capitol.texas.gov/Docs/PR/htm/PR.93.htm. That same law states that a landlord can be liable for triple damages if the monies are not timely returned, or otherwise a written description of damages and itemization of charges is not timely furnished.

The trial court agreed with Tramontina’s position and awarded Tramontina $150,100 ($50,000 times three, plus $100 statutory damages – exactly as stipulated in the Texas Property Code) and $25,000 in attorney’s fees.

FP appealed.

The Court of Appeals found – surprise to no one – virtually no cases on point in Texas regarding commercial leases although we have had this law for 29 years. So the Court reviewed parallel Texas statutes that are relevant to residential security deposits.

In doing so, the Court decided that the landlord must prove its good faith to avoid liability for treble damages. Good faith, the Court determined, is “honesty in fact in the conduct or transaction concerned” and that the landlord did not intend to deprive the tenant of its rights or of a lawfully due refund.

From there, it was a short stretch to determine that FP had presented at least some evidence that it had intended to act in good faith.

Judgment for Tramontina is reversed; the case is returned to trial court for a do-over. See FP Stores, Inc. v. Tramontina US, Inc.; No 01-16-00031-CV; Court of Appeals of Texas, Houston (1st District), December 29, 2016: https://caselaw.findlaw.com/tx-court-of-appeals/1763335.html.    

Lessons Learned / Questions Asked:

1.                  This landlord was not found responsible for triple damages. But in doing so, it had to defend a lawsuit in trial court, appeal to the Texas Court of Appeals, and if the litigation was not settled, endure yet another trial back in the district court of Fort Bend County. What do you think this landlord spent in attorney’s fees - $100k? To save $50k?

2.                  While there is honor in defending your position, there is also a substantial cost in doing so. My assumption is that FP would have been *far ahead if it would have timely complied with Texas laws and the Sublease terms.

3.                  In my experience, the landlords that are most at risk are the ones that do not routinely engage in commercial real estate leasing. They don’t know the laws; they don’t have appropriate accounting procedures for deposit return. Brokers can help rookie landlords and tenants by tracking the termination dates of leases and subleases, and then making all parties aware that the security deposits must be timely processed.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888