What must a North Carolina settlement lawyer do to guard against wire fraud, and is the lawyer responsible when a client wires closing funds to a fraudster?

Plain-English summary

The opinion addresses a real estate settlement lawyer whose buyer client was tricked by a fraudster's spoofed email into wiring closing proceeds to a fraudulent account before the funds ever reached the lawyer's trust account. The lawyer had sent an initial letter warning about wire fraud and instructing the client to call the office to verify wiring instructions and noting the lawyer would not change instructions by email. The committee resolves five inquiries about the lawyer's duties.

Where the lawyer sent that warning letter, the lawyer did not violate the Rules. The committee grounds the analysis in the duties of competence (Rule 1.1, including comment 8's duty to keep abreast of technology risks) and communication (Rule 1.4), and in the duty to safeguard entrusted property (Rule 1.15) and supervise staff (Rule 5.3), citing 2015 FEO 6 and 2011 FEO 7. A lawyer satisfies the obligation by taking reasonable measures to learn about real-estate scams, implementing reasonable safeguards in the practice (including for staff), and adequately communicating the risks and safe transfer instructions to the client. Because the funds were never in the lawyer's possession or control, Rule 1.15 was not yet implicated, but the competence and communication duties were, and the lawyer met them.

The opinion then resolves the remaining scenarios. If the lawyer had given no warning and made no effort to educate himself or staff, that would violate the Rules, because a settlement agent has a duty to implement reasonable measures and communicate the risks. Putting the warning in generic boilerplate at the end of all emails satisfies the duty only if the lawyer specifically alerts the client to that language and directs the client to read it; the medium matters less than clear communication, and unread boilerplate is not enough. A third party's prior warning (from a realtor or lender) does not relieve the lawyer of the duty to competently represent and warn the client. Finally, the lawyer has no duty to report the theft to the State Bar's Trust Account Compliance Counsel under Rule 1.15-2(p), because the stolen funds were never in the lawyer's possession or control and so are not "entrusted property" under Rule 1.15-1(f); the committee nonetheless encourages reporting such attempts.

In practice

Under the North Carolina rules as they stood at the time of the opinion, a lawyer who serves as a real estate settlement agent must reasonably educate himself and his staff about wire-fraud scams, implement reasonable safeguards, and clearly communicate the risks and safe transfer instructions to the client, drawing on the duties of competence (Rule 1.1, cmt. 8), communication (Rule 1.4), safekeeping (Rule 1.15), and supervision (Rule 5.3). The opinion holds that a lawyer who takes these reasonable measures satisfies the professional obligation even if the client is defrauded, and that a lawyer who gives no warning and makes no effort violates the Rules.

The opinion holds that boilerplate wire-fraud language at the foot of emails counts only if the lawyer specifically directs the client to read it, and that a third party's earlier warning does not excuse the lawyer's own duty. On reporting, the opinion concludes funds stolen before reaching the lawyer's trust account are not "entrusted property" under Rule 1.15-1(f), so Rule 1.15-2(p)'s duty to report to Trust Account Compliance Counsel is not triggered, though the committee encourages voluntary reporting. The opinion follows 2011 FEO 7 in declining to set specific technical requirements, favoring education and communication that adapt to evolving risks.

Common questions

Q: Is a North Carolina settlement lawyer liable for ethics violations when a client is tricked into wiring closing funds to a scammer?

A: Not if the lawyer took reasonable steps. Opinion #1 concludes that a lawyer who warned the client about wire fraud and gave verification instructions satisfied his duties of competence and communication, even though the client was defrauded.

Q: What must a settlement lawyer actually do to meet the duty?

A: Per Opinion #1, reasonably educate himself on real-estate scams, implement reasonable safeguards in the practice (including staff), and adequately communicate the risks and clear, safe transfer instructions to the client (Rules 1.1, 1.4, 1.15, 5.3).

Q: What if the lawyer gave no warning at all?

A: That violates the Rules. Opinion #2 concludes a settlement agent has a duty to implement reasonable measures, stay educated about evolving scams, and communicate the risks to the client.

Q: Is generic wire-fraud language at the bottom of every email enough?

A: Only if the lawyer points it out. Opinion #3 concludes the lawyer must specifically alert the client to the language and direct the client to read it in full; unread boilerplate does not satisfy Rule 1.4(b).

Q: Does the lawyer have to report the theft to Trust Account Compliance Counsel?

A: No. Opinion #5 concludes the stolen funds were never in the lawyer's possession or control, so they are not "entrusted property" under Rule 1.15-1(f) and Rule 1.15-2(p) is not triggered, though reporting is encouraged.

Background and rules framework

The opinion interprets the duties of competence and communication alongside the trust-account rules. Rule 1.1 (Model Rule 1.1), with comment 8, requires keeping abreast of the benefits and risks of relevant technology. Rule 1.4 (Model Rule 1.4), including Rule 1.4(b), requires explaining a matter so the client can make informed decisions. Rule 1.15 (North Carolina's safekeeping rule) governs entrusted property, and Rule 5.3 (Model Rule 5.3) requires reasonable measures to ensure nonlawyer staff conduct is compatible with the lawyer's obligations. The reporting question turns on Rule 1.15-2(p) (duty to report misappropriated entrusted property to Trust Account Compliance Counsel) and the Rule 1.15-1(f) definition of "entrusted property" as property in the lawyer's possession or control.

The opinion relies on 2015 FEO 6 (a lawyer who takes reasonable security measures is not obligated to replace funds stolen from a trust account) and 2011 FEO 7 (affirmative duty to stay educated about online-banking security risks and to train staff), and declines to impose specific technical requirements that could create a false sense of security.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.1 / NC Rule 1.1 and cmt. 8 (competence; keeping abreast of technology risks)
• Model Rule 1.4 / NC Rule 1.4(b) (communication sufficient for informed decisions)
• NC Rule 1.15, 1.15-1(f), 1.15-2(p) (safekeeping; definition of entrusted property; duty to report misappropriation)
• Model Rule 5.3 / NC Rule 5.3 (supervision of nonlawyer assistants)

Other opinions cited:

• 2015 FEO 6: a lawyer who takes reasonable security measures need not replace funds stolen from a trust account.
• 2011 FEO 7: duty to stay educated about online-banking security risks and to train staff; no fixed technical requirements.

See also

• ABA Formal Op. 483: Lawyers' Obligations After a Data Breach
• ABA Formal Op. 477R: Securing Communication of Protected Client Information
• Colorado Bar Op. 141: Data Breach Duties

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2020-formal-ethics-opinion-5/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Facts:

Buyer in a real estate transaction retained Lawyer as settlement agent. At the outset of the representation, Lawyer sent Buyer an informational letter including instructions for wiring closing proceeds to Lawyer's trust account. Lawyer's letter includes a warning about potential wire fraud associated with the transaction, and that in order to prevent wire fraud Buyer should telephone Lawyer's office using the number listed in the letterhead before initiating the wire to verify the wiring instructions. The letter also states that Lawyer will not change wire instructions via email.

On the date of the scheduled real estate closing, Buyer telephoned Lawyer's office and left a voicemail inquiring about wiring instructions for sending closing proceeds to Lawyer's trust account. Minutes later, Buyer received an e-mail message purporting to be from Lawyer indicating that Buyer should ignore Lawyer's previous wire instructions and instead should utilize new wire instructions that were attached to the email. This e-mail was not sent by Lawyer or by anyone acting under Lawyer’s direction. The e-mail did not have an attachment, so Buyer replied to the email noting the lack of an attachment. In response, Buyer unknowingly received fraudulent wiring instructions and initiated the wire transfer of the closing proceeds to what he thought was the Lawyer's trust account but was actually to a third party's fraudulent account. When Buyer appeared at closing and inquired about Lawyer's receipt of the closing proceeds, Lawyer discovered that the funds had never been received into his trust account.

Inquiry #1:

Did Lawyer violate the Rules of Professional Conduct by failing to prevent the fraudulent wire transfer of Buyer’s proceeds?

Opinion #1:

No. Lawyer’s letter to Buyer at the outset of the representation containing a warning about the potential for wire fraud and instructions to the client to personally confirm wire transfer instructions via telephone to Lawyer’s office reasonably minimize the risks associated with the transfer of funds during a real property transaction.

Lawyers have a duty to competently represent clients and to communicate with clients concerning the representation. Rules 1.1 and 1.4. A lawyer’s duty of competency requires the lawyer to have the necessary “legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation.” Comment 8 to Rule 1.1 further states,

To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with the technology relevant to the lawyer’s practice, engage in continuing study and education, and comply with all continuing legal education requirements to which the lawyer is subject.

In addition to accepting and pursuing a client’s matter with the requisite competence, a lawyer must adequately communicate with the client about “the means by which the client’s objectives are to be accomplished” and to “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Rules 1.4(a)(2) and 1.4(b); see also Rule 1.4 [cmt. 5] (“The client should have sufficient information to participate intelligently in decisions concerning the objectives of the representation and the means by which they are to be pursued, to the extent the client is willing and able to do so.”).

Safeguarding entrusted client property is one of the most important aspects of a lawyer’s practice. In addition to complying with the requisite safeguards set out in Rule 1.15 in handling entrusted property, a lawyer must also make efforts to educate him or herself on the potential risks associated with the transfer of funds, including the risks to client funds that exist prior to a lawyer’s possession of the funds, and ensure that those involved in a particular transaction are aware of such risks. See Rules 1.1, 1.4, and 5.3; see also 2015 FEO 6. Unfortunately, scams and other attempts to divert and fraudulently acquire client funds associated with a real property transaction are ever-present, increasing, and evolving. Furthermore, these scams have been widely reported on by various outlets, including the State Bar and the news media. See generally North Carolina State Bar, Alert: Compromised Email/Wire Instructions Fraud Continues to Target North Carolina Lawyers (May 23, 2017), /news-publications/news-notices/2017/05/alert-compromised-emailwire-instructions-fraud-continues-to-target-north-carolina-lawyers/; Caroline Biggs, How To Protect Yourself From Real Estate Scams, N.Y. Times (Jan. 3, 2020), https://www.nytimes.com/2020/01/03/realestate/how-to-protect-yourself-from-real-estate-scams.html. Given the constant threat to client funds and the significant harm that can result from such fraudulent activity, a lawyer’s duty in representing clients in real property transactions necessarily requires the lawyer to be vigilant in reasonably educating him or herself on the current state of such fraudulent attempts and in communicating with clients and staff about such risks.

In 2015 FEO 6, the Ethics Committee addressed a lawyer’s professional responsibility to safeguard entrusted funds from third party interference, including theft. There, the committee determined that a lawyer who has taken reasonable care to minimize the risks to client funds by implementing reasonable security measures in compliance with the requirements of Rule 1.15 is not ethically obligated to replace funds that are stolen from the lawyer’s trust account. The committee also cited a prior ethics opinion in explaining a lawyer’s continuing obligation to educate him or herself about the relevant and evolving risks associated with the lawyer’s practice and handling of entrusted client funds (“In 2011 FEO 7 the Ethics Committee opined that a lawyer has affirmative duties to educate himself regularly as to the security risks of online banking; . . . and to ensure that all staff members who assist with the management of the trust account receive training on and abide by the security measures adopted by the firm.”).

In the present inquiry, Lawyer has not yet received entrusted property from Buyer, and thus Rule 1.15 is not yet implicated. However, Lawyer has a duty to competently represent Buyer in the real estate transaction and to “keep abreast of changes in the law and its practice, including the benefits and risks associated with the technology relevant to the lawyer’s practice[.]” Rule 1.1 [cmt. 8]. Lawyer also has a duty to adequately and effectively inform Buyer about the potential risks associated with the transfer of funds in connection with a real property transaction so that Buyer can make “informed decisions regarding the representation.” Rule 1.4(b). Similar to the situation addressed in 2015 FEO 6, a lawyer satisfies his or her professional obligation if s/he takes reasonable measures to educate him or herself on real property transaction scams; implements within the lawyer’s practice (including staff) reasonable measures to minimize the risks to client funds in accordance with the Rules of Professional Conduct; and adequately communicates to the client the risks associated with the transfer of funds in connection with a real property transaction and clear instructions on how to safely transfer funds to complete the real property transaction. Accordingly, Lawyer has fulfilled his professional responsibility with regards to Buyer and the underlying real property transaction.

Inquiry #2:

Same scenario as Inquiry #1, but Lawyer failed to send the letter at the outset of the representation containing the warning about wire fraud and the instructions for verifying wire transfer instructions at closing. Lawyer did not otherwise provide any warning to Buyer about potential wire fraud, Lawyer did not provide instructions specifically described to avoid wire fraud, and Lawyer has not made any effort to educate himself or his staff about the potential for wire fraud in connection with real property transactions conducted by Lawyer’s law office.

Does Lawyer’s failure to provide any warning to Buyer or otherwise take steps to avoid potential wire fraud violate the Rules of Professional Conduct?

Opinion #2:

Yes. As noted above, scams and other attempts to divert and fraudulently acquire client funds associated with a real property transaction are ever-present, increasing, and evolving. A lawyer serving as a settlement agent for real property transactions has a duty to implement reasonable measures to minimize the risks associated with the transfer of funds in real property transactions, including to be aware of and educated on these developments, and to communicate with his client about these risks and how the lawyer intends to avoid them. See Opinion #1.

Inquiry #3:

Same scenario as Inquiry #1, but instead of Lawyer sending a letter to Buyer at the outset of the representation containing the warning and instructions regarding wire fraud, Lawyer includes the warning and instructions as generic language at the end of all of Lawyer’s sent emails. Does this effort satisfy Lawyer’s obligation to communicate with Buyer about the risks associated with wire fraud in real property transactions?

Opinion #3:

Yes, provided Lawyer specifically alerted Buyer to the language contained in the email and directed Buyer to read the language in its entirety. The medium by which this language is communicated to Buyer is not as material as Lawyer’s clear communication of the information to Buyer. If Lawyer directs Buyer’s attention to the warning and instructions contained in an email, Lawyer has satisfied his obligation to adequately communicate with Buyer to enable Buyer to make informed decisions about the representation. Rule 1.4(b). Lawyer does not satisfy his professional responsibility by simply including the language at the end of an email without any direction to Buyer to read the language, as such language can often go overlooked and unread by the email recipient.

Similar to 2011 FEO 7’s discussion of a lawyer’s professional responsibility in using online banking, this opinion does not set forth specific requirements beyond those of education and adequate communication needed to minimize the risks associated with wire fraud. As noted in 2011 FEO 7, imposing specific requirements can “create a false sense of security in an environment where the risks are continually changing. Instead, due diligence and frequent and regular education are required.”

Inquiry #4:

Same scenario as Inquiry #1, but prior to Lawyer providing any instruction or information to Buyer, Lawyer learns that Buyer received documentation from a third party (e.g. Buyer’s realtor or Buyer’s lending institution) warning Buyer about the dangers associated with wire fraud in residential real property transactions. Must Lawyer still warn Buyer about the dangers associated with wire fraud in light of the third party’s warning/information previously provided to Buyer?

Opinion #4:

Yes. Lawyer’s knowledge that a third party provided similar warnings to Buyer does not absolve Lawyer of his professional responsibility to competently represent Buyer and communicate any relevant concerns about the transaction.

Inquiry #5:

Does Lawyer have a duty to report the theft of Buyer’s funds intended for Lawyer’s trust account to the State Bar’s Trust Account Compliance Counsel?

Opinion #5:

No. Rule 1.15-2(p) states that, “[a] lawyer who discovers or reasonably believes that entrusted property has been misappropriated or misapplied shall promptly inform the Trust Account Compliance Counsel (TACC) in the North Carolina State Bar Office of Counsel.” Rule 1.15-1(f) defines “entrusted property” as “trust funds, fiduciary funds and other property belonging to someone other than the lawyer which is in the lawyer's possession or control in connection with the performance of legal services or professional fiduciary services.” At the time of the theft, Buyer’s funds were neither in Lawyer’s possession nor in Lawyer’s control, and thus are not entrusted funds subject to the reporting requirement in Rule 1.15-2(p). However, lawyers are encouraged to report such fraudulent attempts on client funds – successful or unsuccessful – to the State Bar to make the State Bar aware of such attempts and empower the State Bar to issue appropriate alerts and/or guidance to help lawyers and clients avoid future fraudulent efforts.