Texas Supreme Court Highlights Two Key Takeaways for Texas Banks about Contractual Liability for Email Wire Transfer Scams
To avoid contractual liability for their customer’s wire fraud losses caused by phishing email scams, banks should understand two things from the Texas Supreme Court’s recent opinion in Cadence Bank, N.A. v. Elizondo: (1) generally, the deposit agreement and the UCC govern the customer relationship; and (2) administrative wire transfer request forms will not likely modify those rights and obligations.
In light of the opinion, Banks should revisit their wire transfer request forms to help ensure that the holding in Cadence Bank will apply. Let’s take a closer look at what the Court said and why.
The facts were unfortunately common. An unknown person emailed Elizondo (a lawyer) asking for debt collection help. When Elizondo agreed, his “client” informed that the debt had been settled. Elizondo only need deposit a cashier’s check in his Cadence trust account and forward the settlement funds to a Japanese bank account. The “client” urged haste because he had bills to pay. This was a scam. Elizondo deposited the cashier’s check, received a notice of provisionally deposited funds, and waited a day to request the wire. A day later the drawing bank dishonored the cashier’s check. Elizondo’s account became overdrawn when Cadence reversed the provisional deposit under the deposit agreement and the Texas UCC. He refused to pay the deficit.
Cadence sued Elizondo for breach of the deposit agreement and breach of warranty under Texas UCC § 4.207 (governing Transfer Warranties by a bank customer). Elizondo countersued for breach of a contract, fraud, and misrepresentation. Elizondo asserted that the bank’s damages were its own fault because it breached a superseding contract formed by the wire transfer request form to transfer only funds from a “verified” or “collected balance,” which would not include provisionally credited funds. The wire transfer form contained an instruction to Cadence’s employees that “Before signing off, be sure you ‘know your customer’ and have verified the collected balance and documented any exception approvals.” Cadence moved for summary judgment on its claims; Elizondo counter moved only on his contract claim. The trial court denied the bank’s motion, granted Elizondo’s, and awarded no damages to the bank. In a split decision, the court of appeals affirmed.
The parties clashed over the meaning of “collected balance,” but the Texas Supreme Court reversed, finding instead that the wire transfer form had not created any contract between Cadence and Elizondo let alone one that superseded Elizondo’s obligations under the deposit agreement and Section 4.207.
The court focused on the elements of contract creation, particularly that a contract must be sufficiently definite to indicate the parties’ intent to be bound. The wire transfer request had “all the indicia of a form” used to “facilitate Cadence’s internal processing” of wire transfers. The court rejected Elizondo’s argument that the words “Collected Balance/Cash” and “Employee Who Verified Collected Balance” on the form imposed a new contractual duty on Cadence.” Otherwise, any administrative form could override the UCC’s default rules.
With this insight from the Texas Supreme Court and to minimize their potential exposure to losses from these types of scams, banks should review their wire transfer forms for any language that could be considered more than indicia of an internal administrative form.