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Court of Appeal:
Defendants Fooled by Fraudster Must Pay Settlement Again
In Case of First Impression, Opinion Says Party in Best Position to Prevent Scheme Will Bear Risk of Loss When Imposter Prompts Wiring of Proceeds to Wrong Account
By Kimber Cooley, associate editor
Div. One of the Fourth District Court of Appeal held yesterday that defendants in a lawsuit were properly ordered to pay what was owed under a settlement agreement—even though they had already wired the full $475,000 in proceeds to what turned out to be a scammer pretending to be the plaintiff—finding that their counsel ignored several “red flags” and the side in the best position to prevent the fraud will bear the risk of loss under these circumstances.
Noting the lack of California authority on the topic of which party will bear the risk when an imposter causes one party to a settlement to wire proceeds to the fraudulent operator, the court said that the trial court properly applied persuasive federal case law borrowing a concept from the Uniform Commercial Code (“UCC”).
The borrowed concept is the so-called “Imposter Rule” found in §3-404(d), which provides that “ if a person paying [an] instrument” that was issued to imposter “fails to exercise ordinary care in paying…and that failure substantially contributes to loss resulting from payment…, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.”
California has adopted the UCC and the imposter rule outlined in §3-404(d).
In an opinion, authored by Justice David M. Rubin and joined in by Acting Presiding Justice Truc T. Do and Justice Jose S. Castillo, the court acknowledged that §3-404 does not apply by its terms to wire transfers but said:
“We are persuaded by the federal decisions…that we should also anchor our analysis to the imposter rule when considering who should bear the risk of loss from a fraudulently induced wire transfer. Accordingly, we hold that the risk of loss from an imposter’s fraudulent diversion of a wire transfer shall be borne by the party in the best position to prevent the fraud. In making this factual determination, trial courts must consider the extent to which each party exercised ordinary care with respect to preventing the fraud and may apportion the loss accordingly.”
Rubin remarked that then-San Diego Superior Court Judge Robert P. Dahlquist (now employed by Judicate West) did not err in attributing fault exclusively to the defendants, noting that “several red flags should have alerted defendants to the fraud, and that there were none that should have alerted plaintiff.”
Complaint Filed
The dispute arose after plaintiff Brian Thomas agreed to settle claims, following mediation, against defendants Corbyn Restaurant Development Corp. and two of its employees, Nicole Nocentino, and Jaime Lee Masters, for $475,000.
Daniel Fallon of the Orange County firm Tyson & Mendes, LLP, was the defendants’ counsel and the Tustin-based Law Offices of Chambers & Noronha represented Thomas. According to the settlement agreement, the defendants were to issue payment to “Chambers and Noronha Client Trust Account for the benefit (‘FBO’) Brian Thomas.”
A follow-up email from Janette Mattson, the office administrator for Chambers & Noronha, directed Fallon to “[p]lease make the check payable to our client and the Chambers & Noronha Client Trust Account.”
About a week later, an email purporting to be from Mattson, but deviating from her authentic address by two letters, asked Fallon if the settlement funds could be sent electronically to the firm rather than by check. The signature on the email displayed Mattson’s correct email address but listed an invalid phone number.
Fallon responded the following day, asking for wire transfer instructions and a valid phone number to discuss details. The impostor responded with a number to call the supposed “Head of Finance” for the firm and wire instructions to an account named “Chambers & Noronha APC” at “Citi Bank” in Los Angeles.
After communicating with the purported head of finance, accounting personnel from Tyson & Mendes transferred the funds. The imposter, in what the court credited as “an effort aimed at delaying the Chambers & Noronha firm from suspecting a scam occurred,” emailed the plaintiff’s counsel, pretending to be Fallon, saying the check was to go out within the week.
About a month after the parties discovered the fraud, Thomas applied ex parte for an order enforcing the settlement agreement, which Dahlquist granted.
Federal Jurisprudence
Rubin cited federal jurisprudence, including the 2023 U.S District Court for the Central District of California case of Ostrich International Company Ltd v. Michael A. Edwards Group International Inc. He explained:
“In determining which party was best positioned to prevent the fraud, courts have considered a variety of ‘red flags,’ including: the extent to which each party secured its computer system or whether the system had been breached before; whether a party was aware that its transaction was being targeted, and, if so, whether that party disclosed the targeting to the other party in the transaction, or to the court; whether either party failed to scrutinize spoofed email addresses or overlooked typographical errors or duplicative information; and whether the payor called to confirm wire instructions, particularly when they conflicted with prior payment arrangements or new payment instructions changed material information like names and addresses.”
Applying these considerations, the jurist opined that “[c]ontrary to Defendants’ assertion, there were red flags that should have alerted their counsel to the fraudulent scheme,” noting the wiring instructions conflicted with the payment procedure established in the settlement agreement and earlier correspondence concerning a check payment, the inoperable phone number, and the false email address containing two deviations in spelling from the correct one.
He also said that “the fact the imposter carelessly sent two identical requests for wire instructions within a matter of minutes is akin to typographical errors that courts have deemed significant in shifting the risk of loss.”
System Review
The defendants argue that Dahlquist erred by failing to consider Thomas’ contribution to the success of the fraud, pointing to evidence offered that Tyson & Mendes had conducted a review of its computer system and did not find any breach that would have given access to information about the settlement.
Rejecting this contention, Rubin wrote that the “[d]efendants’ primary theory for shifting the blame to Plaintiff’s counsel relies largely on a series of logical leaps” and reasoned:
“[T]he fact the fraudulent scheme was perpetrated using only spoofed email addresses suggests it could have been accomplished without compromising either side’s computer system. Theoretically, to perpetrate the fraud the imposter needed to know only the fact of the settlement and the identities of the players involved. This information could have been obtained in many ways other than breaching either party’s computer system—for example, by overhearing a conversation in a public place or by reading documents carelessly left about. The record simply does not support Defendants’ assertion that the fraud must have been perpetrated by means of breaching either side’s computer system.”
He added:
“Even if the record did support this inference, it would not require the trial court to apportion any of the loss to Plaintiff. Several courts have shifted the entire risk of loss to a payor who ignored red flags even after a payee’s email system was compromised.”
Allowed Fraudulent Scheme
Turning to an assertion that plaintiff’s counsel “allowed the fraudster to string him along for nearly two months” by allegedly relying on the fraudulent emails indicating that the check was forthcoming, Rubin commented:
“This evidence was before the trial court, which could have reasonably discounted the evidence because the imposter first contacted Plaintiff’s counsel only after Defendants’ counsel wired $475,000 to the wrong bank account. Moreover, Defendants presented no evidence to the trial court showing that Plaintiff’s counsel’s conduct contributed to the fraud’s success.”
The justice commented:
“At the push of a button, money moves around the world almost instantly. Criminals have likewise invented new ways to exploit these advancements—making the ability to remotely and rapidly transfer significant amounts of money now come with a risk that a criminal will exploit the convenience of remoteness by impersonating a party to the transaction and diverting the funds, often irretrievably….The antidote to these innovative fraudulent schemes may involve sophisticated encryption and digital safeguards…, or it may sometimes be as old-fashioned and simple as picking up the phone and calling opposing counsel at a verified phone number, or meeting face-to-face to confirm the identity of one’s counterpart and the validity of the transaction details. Either way, this case demonstrates that parties to modern, high-tech financial transactions must remain vigilant in ensuring they are dealing with their authentic peer. Failing to do so may be at their own financial peril.”
The case is Thomas v. Corbyn Restaurant Development Corp., 2025 S.O.S. 1389.
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