Business Law Attorney

Prosper Florida, Inc. v. Spicy World of USA, Inc.: Who Bears the Loss When Payment for Goods is Fraudulently Redirected in a Payment Scam?

robindBanking, Business

In Prosper Florida, Inc. v. Spicy World of USA, Inc., a Texas appellate court was presented with the question: “Who should bear the loss between a buyer and seller of goods when someone fraudulently misdirects payment for the goods to an unauthorized party?”

The Court found that the Uniform Commercial Code does not provide an answer under these circumstances, and, reaching back over 200 years to England’s common law, held that the rule is: “He who trusts most, where one of two innocent persons is to suffer, shall lose most.”

In this article, we will look at how the Texas Court of Appeals arrived at this decision, including:

  • When the UCC provides a remedy for nonpayment for goods or services,
  • When the common law must apply instead of the UCC’s provisions, and
  • Who bears the loss when a business’s security is compromised and they suffer a loss from fake invoices, fake emails, or phishing scams.

Who Bears the Loss When a Buyer Pays the Wrong Person in a Payment Scam?

In Prosper Florida, Inc. v. Spicy World of USA, Inc., Prosper Florida sold Spicy World two bulk shipments of black pepper.

In the first shipment, Spicy World paid $9300 for 3000 pounds of pepper – paid with a check that they mailed to Prosper Florida. For the second shipment, Spicy World was to pay $16,500 for an additional 6000 pounds of pepper.

When Spicy World received a series of emails from Prosper Florida’s manager requesting that they wire the payment to a bank in the UK, Spicy World’s representative called Prosper Florida’s manager to find out why.

The two individuals had met in person before, Spicy World’s representative knew Prosper Florida’s representative’s voice, and, according to uncontradicted testimony by Spicy World’s representative, Prosper Florida’s representative confirmed that all was well and the payment should be wired to the UK bank because they having issues with their bank in Florida.

When Prosper Florida filed suit against Spicy World because Prosper Florida never received the payment, the trial court found that:

  • The email accounts for both companies had been compromised by a third party – who may or may not have been Prosper Florida’s manager who did not testify at the trial and was terminated by Prosper Florida,
  • Spicy World’s representative spoke to Prosper Florida’s manager who confirmed the payment should go to the UK bank, and this testimony was uncontradicted at trial,
  • The UCC does not apply to a situation where a payment is fraudulently redirected, and
  • Prosper Florida must bear the loss, because, although the evidence did not establish that Prosper Florida’s employee was the bad actor, it did establish that Prosper Florida was more at fault for the incident.

The Uniform Commercial Code Provides a Remedy for Nonpayment

Prosper Florida argued that the case was simple – they delivered the goods, Spicy World did not pay, and so Prosper Florida was entitled to recover the price of the goods ”under Section 2.709 of the Uniform Commercial Code, which authorizes a suit to recover the price and incidental damages when a buyer ‘fails to pay the price.’ Tex. Bus. & Com. Code § 2.709.”

The Court disagreed, however, because the UCC does not apply to situations where payments are fraudulently misdirected:

On its face, Section 2.709 does not address the circumstances before us. In relevant part, the statute merely states the obvious: a buyer must pay for the goods it accepts, and the seller may sue for the price when the buyer fails to pay the price as it becomes due. Tex. Bus. Com. Code § 2.709(a)(1); see also id. § 2.301 (buyer’s obligation “is to accept and pay in accordance with the contract”); id. § 2.607(a) (“The buyer must pay at the contract rate for any goods accepted.”).

But Section 2.709 does not purport to allocate losses between a seller and buyer of goods caused when someone fraudulently misdirects payment for the goods to an unauthorized party. And consistent with its official comments, we should not extend Section 2.709’s reach beyond its express terms.

Because the UCC does not apply, the Court found that we must look to the common law for the answer.

The Common Law Rule Applies When Payment is Fraudulently Redirected in a Payment Scam

The Court of Appeals found that the trial court reached the correct result by analyzing who was most at fault for the fraudulent payment:

We likewise are persuaded that the correct rule is that any loss resulting from fraudulently misdirected payments should be placed on whichever party to the contract the factfinder finds to be most at fault for the misdirection. This rule comports with Texas common law, which generally holds that when allocating a loss between two parties resulting from another’s fraud, the loss should fall on the one who enabled the fraud to happen.

The Court found that this has been the rule in Texas since our state adopted the English common law in the 1800s, citing an 1846 Texas case, Kesler v. Zimmerschitte, 1 Tex. 50, 56 (1846) (stating that “he who trusts most, where one of two innocent persons is to suffer, shall lose most”) and a 1787 case from England, Lickbarrow v. Mason (1787) 2 T.R. 63, 70 (Ashhurst, J.) (“We may lay it down as a broad general principle, that, wherever one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss must sustain it”).

The result?

  • The Court of Appeals affirmed the judgment denying Prosper Florida’s claim – because Spicy World’s representative testified that he called Prosper Florida to confirm the unusual payment instructions, and this was uncontradicted at trial, Prosper Florida cannot recover the contract price, but
  • They reversed the trial court’s award of $55,594.50 in attorney fees to Spicy World, because, although Section 38.001(8) allows a person who prevails on a contract claim to recover attorney’s fees, it does not allow a person who defeats a contract claim to recover attorney’s fees, and
  • They dismissed Prosper Florida’s challenge to a discovery sanction of $1000 against Prosper Florida’s lawyer because the lawyer was not a party to the action and they had no jurisdiction over the matter.

This case highlights a few important issues for Texas businesses:

First, every business must be vigilant and expect phishing scams, invoice scams, email scams, and other payment scams. Business executives and employees should receive training on how to recognize the most common types of scams and should take care to 1) confirm all payment details and 2) stop payments and investigate when something seems out of the ordinary.

Second – the UCC does not provide a remedy for every wrong. It only applies to circumstances that are expressly listed in the code, and, when the UCC does not provide a remedy, the common law will apply.

Please feel free to contact one of our Murray Lobb attorneys to obtain our legal advice regarding breach of contract disputes and the Uniform Commercial Code. We also remain available to help you with all your general construction law, business, corporate, and estate planning needs.