Beau Townsend Ford Lincoln v. Don Hinds Ford

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 18a0587n.06
Case No. 17-4177
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
Nov 27, 2018
BEAU TOWNSEND FORD LINCOLN, ) DEBORAH S. HUNT, Clerk
INC., )
)
Plaintiff-Appellee, ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
v. ) THE SOUTHERN DISTRICT OF
) OHIO
DON HINDS FORD, INC., )
)
Defendant-Appellant. )
BEFORE: SILER and KETHLEDGE, Circuit Judges; OLIVER, District Judge.
SILER, Circuit Judge. Don Hinds Ford agreed to purchase twenty Ford Explorers from
Beau Townsend Ford for about $736,225. When it came time to close the deal, Beau Townsend’s
commercial sales manager asked, via email, that Don Hinds pay via wire transfer to an out-of-state
bank. Don Hinds agreed, wired the money, and picked up the Explorers.
Just one problem—a hacker had infiltrated the email account of the Beau Townsend
manager and sent Don Hinds fraudulent wiring instructions. Although Don Hinds thought it had
paid Beau Townsend for the Explorers, it had actually wired the $736,225 to the hacker, who
 Hon. Solomon Oliver, Jr., United States District Judge for the Northern District of Ohio,
sitting by designation.
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
quickly drained the bank account and made off with the money. This case is about who must bear
that loss.
The district court granted summary judgment in Beau Townsend’s favor, holding that it
was entitled to receive payment for the Explorers and that Don Hinds must pay again. That
decision was erroneous, as the district court failed to adequately analyze this complex issue. We
therefore REVERSE and REMAND.
I.
Beau Townsend Ford Lincoln, Inc., a Ford dealership located in Vandalia, Ohio, offered
to sell seventy-five excess Ford Explorers to other dealers. Beau Townsend’s commercial sales
manager, Jeff Columbro, contacted John Colglazier, the commercial account manager at Don
Hinds Ford, Inc., a dealership in Fishers, Indiana. Columbro and Colglazier were acquainted and
had previously worked together on dealer trades, as had their dealerships. Past dealer trades
between Beau Townsend and Don Hinds had been for one or two vehicles at a time, and the
purchaser had typically paid with a check at the time of delivery.
This deal, however, was much bigger. On September 25, Colglazier received an email
from Columbro (jcolumbro@btford.com) asking if Don Hinds would be interested in purchasing
some of the Explorers. Colglazier (jcolglazier@donhindsford.com) responded that same day, and
after a flurry of emails, Don Hinds agreed to buy twenty Explorers. Columbro testified that
Colglazier called him on the afternoon of September 25 to confirm the deal, and during the call
the two agreed Don Hinds would pay by check. Colglazier, however, testified he did not recall
ever speaking with Columbro on the phone regarding the Explorer deal, and all their
correspondence occurred via email. In any event, the parties’ September 25 communications
concluded with Columbro’s promising to send Colglazier invoices for the Explorers the next day.
-2-
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
Four days later, Columbro had still not sent the invoices, so Colglazier sent a follow-up
email. This email (and the remainder of the emails Columbro received from Colglazier) came
from a different email address (jcolglazier.donhindsford@gmail.com). However, the text of the
emails Columbro received from Colglazier were authored by Colglazier.
Columbro responded to Colglazier’s inquiry, saying that he would send the invoices once
the Explorers moved “from fleet to stock.” After Columbro sent half of the invoices, Colglazier
replied stating that Don Hinds intended to pay for the vehicles with a check. Aside from the
disputed telephone call mentioned earlier, this was the first time the parties discussed the method
of payment. Colglazier received an email in reply, purportedly from Columbro, rejecting Don
Hinds’s offer to pay by check: “Due to some tax related procedures we will prefer a wire transfer,
let me know when you need wiring instructions?”
Later that day, Colglazier received wiring instructions, again purportedly from Columbro,
instructing Don Hinds to wire the money to a Bank of America in Missouri City, Texas, into the
account of “K.B. Key Logistics LLC.” The wire instructions stated, “Please follow the Standard
Settlement Instructions below to remit payment to Beau Townsend Inc. and its subsidiaries,” and
contained the line “K.B. KEY LOGISTICS LLC d.b.a BEAU TOWNSEND FORD.” Colglazier
testified that he did not think Columbro’s request for a wire transfer was unusual since this was a
high-dollar trade involving a large number of vehicles.
The next day, September 30, Columbro sent Colglazier the remaining ten invoices. This
allowed the parties to calculate the final sales price of $736,225.40. Colglazier responded that
Don Hinds would send drivers to start picking up the Explorers on October 5.
On October 2, Colglazier emailed Columbro, copying Don Hinds’ office manager, Alicia
Robinson. Colglazier asked if Columbro could review Colglazier’s paperwork to see if everything
-3-
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
was in order, and asked Robinson to transfer the money on October 5. Colglazier received a reply
email purportedly from Columbro, stating that Colglazier’s paperwork was in order. That email
contained another copy of the wiring instructions. Colglazier forwarded the instructions to
Robinson so she could arrange the payments.
Beginning on October 5 and continuing the next two days, drivers from Don Hinds picked
up the Explorers from Beau Townsend. Due to daily transfer limits at Don Hinds’ bank and the
size of the transaction, Robinson wired the money in three installments, also beginning on October
5. Each time, Robinson sent a wire transfer confirmation to Columbro, and she received emails
purportedly from Columbro that Beau Townsend had received the money. By October 7, Beau
Townsend had wired over $736,000, and it had possession of the twenty Explorers, titles in hand.
Everything seemed fine.
Unfortunately, however, some of the emails Colglazier had received from Columbro were
not actually from Columbro. Rather, they were sent by a hacker who had infiltrated Columbro’s
email account as early as August 3.1
Beau Townsend used a third-party email service called FuseMail. FuseMail allows users
to set up “rules” for how certain messages will be handled. Those rules can, for instance,
automatically forward emails from a specified sender to a different email address. They can also
automatically send emails affected by the rule to a different folder, such as the deleted items folder.
After gaining access to Columbro’s email, the hacker set up rules for how emails from certain
senders, including Colglazier, would be handled in Columbro’s FuseMail account. From
September 28 onward, two things automatically happened when Columbro received an email from
1
The parties do not discuss the identity or location of the hacker. However, the district
court pointed out that Google records indicate the “jcolglazier.donhindsford@gmail.com” account
was created by a user in Nigeria.
-4-
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
someone at Don Hinds: (1) the email was diverted to Columbro’s deleted items folder, and (2) the
email was forwarded to jcolglazier.donhindsford@gmail.com, a Gmail account the hacker created
on September 28.
This setup enabled the hacker to perpetrate the scam. With access to Columbro’s FuseMail
account, the hacker could send emails to Colglazier from Columbro’s official Beau Townsend
Ford email address (jcolumbro@btford.com). Those emails appeared to Colglazier as if Columbro
had sent them. Any emails from Don Hinds to Columbro were automatically diverted to
Columbro’s deleted items folder, where Columbro was unlikely to see them. But the Don Hinds
emails were also forwarded to the Gmail account the hacker had created. The hacker then had the
ability to forward the Don Hinds messages back to Columbro, where they would appear in his
inbox. Although those messages arrived from a different email address than the first messages
Columbro received from Colglazier—jcolglazier.donhindsford@gmail.com rather than
jcolglazier@donhindsford.com—Columbro never noticed this switch because the messages still
appeared as if they were sent by “John Colglazier” in Columbro’s Microsoft Outlook email system.
Thus, the hacker could filter the messages from Don Hinds to Columbro, allowing Columbro to
see only the messages the hacker wanted him to see.
The parties’ initial negotiations regarding the Explorer deal were conducted between
Columbro and Colglazier. Once talk turned to payment, the hacker stepped in. Posing as
Columbro, the hacker asked Don Hinds to pay via wire transfer and sent Colglazier the wire
instructions. The hacker filtered out any messages from Don Hinds that would have tipped off
Beau Townsend to the scheme. And once the wire transfers were complete, the hacker emptied
the bank account and vanished.
-5-
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
Around the same time, Bill Estes Ford, located in Indianapolis, agreed to buy six Explorers
for about $220,000, and received wire instructions purportedly from Columbro on October 9.
These instructions differed from those received by Beau Townsend. Officials at Bill Estes became
suspicious and contacted Beau Townsend. Columbro, who was away from the office, said he had
not sent the wiring instructions. Columbro then called John Wanamaker, Beau Townsend’s IT
manager. Wanamaker asked Columbro to change his email password. He also contacted FuseMail
to alert them that one of Beau Townsend’s email accounts might have been compromised.
On Tuesday, October 13, Columbro received a call from a business contact, asking why he
had not responded to her emails. Columbro said he had not received any such emails. He then
called Wanamaker, who discovered that the emails Columbro had not seen were in Columbro’s
deleted-items folder. This prompted Wanamaker—for the first time—to look at the settings in
Columbro’s email account. Wanamaker discovered that the aforementioned “rules” had been set
up to divert some emails into Columbro’s deleted items folder, and to forward those emails to the
fraudulent Gmail account.
Later that day, Columbro called Colglazier to ask when Beau Townsend could expect a
check for the twenty Explorers. Colglazier told Columbro that Don Hinds had already wired the
funds, in line with the instructions received via email. Beau Townsend requested that Don Hinds
return the Explorers. Don Hinds refused.
Beau Townsend sued Don Hinds for (1) breach of contract, (2) conversion, and (3) unjust
enrichment, constructive trust, and disgorgement. Following discovery, the parties filed cross-
motions for summary judgment.
-6-
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
The district court granted summary judgment in Beau Townsend’s favor. The court
observed:
[B]oth parties were negligent in their business practices. . . . Beau Townsend Ford
should have maintained a more secure email system and taken quicker action upon
learning that it might have been compromised. Don Hinds should have ascertained
that an actual agent of Beau Townsend was requesting that it send money by wire
transfer.
Nevertheless, the court held that Don Hinds breached the parties’ agreement because “Beau
Townsend Ford has not received any funds from Don Hinds Ford, or [] the funds wired to Missouri
City, Texas on behalf of Don Hinds Ford.” The court rejected Don Hinds’ arguments that it was
a good-faith purchaser for value and that equitable estoppel applied, and awarded Beau Townsend
the $736,225.40 it requested. This appeal followed.2
II.
We review a district court’s grant of summary judgment de novo, “construing the evidence
and drawing all reasonable inferences in favor of the nonmoving party.” Rocheleau v. Elder Living
Constr., LLC, 814 F.3d 398, 400 (6th Cir. 2016) (citation omitted). All agree Ohio law governs
this diversity action, so we apply the substantive law of Ohio, as interpreted by the Supreme Court
of Ohio. Ramsey v. Penn Mut. Life Ins. Co., 787 F.3d 813, 822 n.5 (6th Cir. 2015).
III.
A.
This case could be evaluated, in our estimation, in at least two distinct ways: under contract
law or under agency law. Under contract principles, Ohio’s codification of the Uniform
Commercial Code (UCC) governs this case, as one involving the sale of goods. AirBorn Elecs.,
2
The court also held that Beau Townsend’s equitable claims were duplicative of its
contract claim. Because Beau Townsend prevailed on its contract claim, the district court granted
summary judgment in Don Hinds’ favor on Beau Townsend’s equitable claims. Only the contract
claim is at issue in this appeal.
-7-
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
Inc. v. Magnum Energy Sols., LLC, 82 N.E.3d 504, 509 (Ohio Ct. App. 2017). Additionally, we
may look to an applicable Restatement (here, the Restatement of Contracts) for guidance “when
there is no controlling state law on point when the state has indicated . . . that it considers the
Restatements to be persuasive authority.” Garrison v. Jervis B. Well Co., 583 F.2d 258, 262 n.6
(6th Cir. 1978); see, e.g., Reilley v. Richards, 632 N.E.2d 507, 509 (Ohio 1994) (relying on
Restatement of Contracts). Breach of contract in Ohio requires: “(1) a binding contract or
agreement was formed; (2) the nonbreaching party performed its contractual obligations; (3) the
other party failed to fulfill its contractual obligations without legal excuse; and (4) the
nonbreaching party suffered damages as a result of the breach.” Carbone v. Nueva Constr. Grp.,
L.L.C., 83 N.E.3d 375, 380 (Ohio Ct. App. 2017) (cleaned up).
The ultimate question here is which party should bear the $736,225 loss attributable to the
scheme perpetrated by an unidentified third-party fraudster. Beau Townsend sees this case as a
simple one—it delivered the twenty Explorers, but never received payment from Don Hinds.
According to Beau Townsend, Don Hinds did not satisfy its obligation to pay for the Explorers by
wiring the money to the Bank of America account in Texas, because Beau Townsend never
received that money. Therefore, Beau Townsend says, Don Hinds still owes Beau Townsend
$736,225.
Don Hinds, meanwhile, argues that it was only obligated to follow the payment instructions
it received from Beau Townsend, and not to ensure the payment made it to Beau Townsend.
Because Don Hinds followed those instructions, and because it reasonably believed those
instructions came from Beau Townsend, Don Hinds says it fulfilled its duties under the contract.
-8-
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
On the one hand, this case could turn upon a basic principle of contract law: mutual
mistake. See Raffles v. Wichelhaus, 2 H. & C. 906, 159 Eng. Rep. 375 (Ex. 1864).3 In the contract
setting, “[a] mistake is a belief that is not in accord with the facts.” Restatement (Second) of
Contracts § 151 (1981). Here, both parties held the mistaken belief that they had agreed on a
method of payment. Colglazier had emailed Columbro saying Don Hinds intended to pay with a
check, as they had in the past. Due to the hacker’s deception, Columbro never saw any emails that
would have caused him to second-guess Colglazier’s assertion, and on October 13, he asked
Colglazier when Beau Townsend could expect a check. Likewise, after the hacker posing as
Columbro told Colglazier that Beau Townsend would prefer a wire transfer and sent instructions,
Colglazier complied. Each party thought its own belief regarding payment was correct, and neither
party knew the other was mistaken.4
Normally, “[w]here a mistake of both parties . . . as to a basic assumption on which the
contract was made has a material effect on the agreed exchange of performances, the contract is
voidable by the adversely affected party unless he bears the risk of the mistake.” Id. § 152(1). “A
party bears the risk of a mistake when (a) the risk is allocated to him by agreement of the parties,
3
Raffles v. Wichelhaus is the classic English case where two parties contracted for a
shipment of cotton to be delivered from Bombay aboard a ship called the Peerless. The parties
did not know, however, that there were in fact two ships called the Peerless, one departing in
October, and the other in December. The buyers refused to accept or pay for the cotton delivered
by the December Peerless, saying they had intended to buy cotton from the October Peerless. The
court found that the existence of the two identically-named ships created a latent ambiguity in the
contract. Because the buyer meant the October Peerless and the seller the December Peerless, and
neither party had reason to know the meaning the other had assigned, the court held there was no
mutual assent, and thus no binding contract.
4
Columbro claims that Colglazier promised to pay by check during a phone call on
September 25. However, Colglazier claims that all his deal-making with Columbro (and the
hacker posing as Columbro) occurred via email. This is a disputed question of fact, and at the
summary judgment stage, the court must accept Colglazier’s account as true. Crag v. Bridges
Bros. Trucking, LLC, 823 F.3d 382, 387 (6th Cir. 2016) (citing Anderson, 477 U.S. at 255).
-9-
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
or (b) he . . . treats his limited knowledge as sufficient, or (c) . . . it is reasonable in the
circumstances to [allocate the risk to a party].” Id. § 154.
Reilley provides a good example. There, a buyer purchased a piece of real estate, upon
which he planned to build his family home. Reilley, 632 N.E.2d at 509. After signing the contract,
the buyer discovered the property lay within a floodplain, and a city ordinance prohibited building
any structure in such an area. Id. Neither the seller nor the buyer knew the property was in a
floodplain at the time of contracting. Id. The Ohio Supreme Court held that “the lack of
knowledge that a significant portion of the lot is located in a floodway is a mistake of fact of both
parties that goes to the character of the property such that it severely frustrates the appellant’s
ability to build a home on the property.” Id. It allowed the buyer to rescind the contract because
“a mutual mistake existed as to the character of the property which is material to the subject matter
of the contract and the appellant was not negligent in failing to discover the mistake.” Id. at 354.
In this case, however, rescission is impractical at best, impossible at worst, and can never
make the parties whole. Rescission would presumably involve the return of the Explorers to Beau
Townsend. In that scenario, Don Hinds would still be out $736,225. Beau Townsend would also
be worse off than when it started, since the Explorers’ value will have depreciated. Moreover, the
parties do not say whether Don Hinds resold the Explorers. If so, the buyers of those vehicles are
likely good-faith purchasers for value, and the court cannot compel the buyers to return the vehicles
to Beau Townsend. See Ohio Rev. Code § 1302.44(A).
So if rescission isn’t an option, how should the loss be allocated? As noted earlier, in the
case of a mutual mistake, the Restatement permits the court to allocate the risk of loss to a party
when “it is reasonable in the circumstances to do so.” Restatement (Second) of Contracts § 154(c).
And Reilley suggests that the negligence (or lack thereof) of the parties should play at least some
- 10 -
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
role in allocating the risk. There, the court pointed out “that appellant, an unsophisticated buyer,
was not negligent in failing to discover that the lot was in a designated floodplain.” Reilley, 632
N.E.2d at 509. The property inspection had not revealed this information, and the buyer “could
not have discovered[] the floodplain by looking at the property.” Id. Presumably, had the buyer
failed to conduct an inspection or ignored obvious signs that the property was within a floodplain,
the court would have allocated the risk of loss to the buyer rather than allowing rescission. See
also Marshall v. Beach, 758 N.E.2d 247, 251 (Ohio Ct. App. 2001) (“[I]t is well established in
Ohio that relief for a unilateral mistake of material fact will not be provided where such mistake is
the result of the negligence of the party seeking relief.”).
The two factually similar cases cited by the parties also support the notion that the loss
should be borne by the party best able to avoid it. Arrow Truck Sales, Inc. v. Top Quality Truck
& Equipment, Inc. involved the sale of twelve trucks. No. 8:14-cv-2052-T-30TGW, 2015 WL
4936272, at *1 (M.D. Fla. Aug. 18, 2015). Joe Gelfo, a salesman for Top Quality, and Nick
Lombardo, an assistant manager for Arrow, negotiated via email and eventually agreed that Arrow
would purchase the trucks for $570,000. Id. Gelfo emailed Lombardo several documents,
including copies of the truck titles and wiring instructions for payment. Id. Gelfo and Lombardo
had previously done business together, and the wiring instructions were identical to the ones Gelfo
had provided Lombardo in the past. Id.During the parties’ negotiations, third-party fraudsters hacked into the email accounts of
both Gelfo and Lombardo. Id. at *3. They also created new email accounts that appeared nearly
identical to Gelfo and Lombardo’s accounts. Id. Eventually, the hacker used Gelfo’s account to
send Lombardo an email with “updated” wiring instructions, different from the ones he had
previously received in this transaction and others. Id. The updated instructions specified an out-
- 11 -
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
of-state bank and a different beneficiary, though Top Quality was still listed on the document. Id.
Arrow followed the “updated” instructions and unknowingly wired the $570,000 to the hacker. Id.
at *4. Top Quality never received the money and refused to deliver the trucks to Arrow. Id. Arrow
filed suit, asserting (as relevant here) that Top Quality breached its contract with Arrow by failing
to deliver the trucks and, by failing to use reasonable security measures to protect its email
accounts, negligently caused Arrow to wire $570,000 to the wrong account. Id. at *5.
Following a bench trial, the district court granted judgment in favor of Top Quality. The
court held that Arrow, not Top Quality, breached the contract because Arrow never provided
payment; therefore, Top Quality was not obligated to deliver the trucks. Id. As to negligence, the
court found that “neither Gelfo nor Lombardo was negligent in the manner that they maintained
their e-mail accounts. They were both victims of a sophisticated third-party fraudster . . . .” Id. at
*4. But the court also found that “Lombardo had more opportunity and was in the better position
to discover the fraudulent behavior based on the timing of the e-mails and the fact that the
fraudulent wiring instructions involved . . . different account information from all of the previous
wiring instructions.” Id. “[A]t the very least,” the court said, “the change in wiring instructions
and conflicting e-mails should have prompted Lombardo to confirm the information with Gelfo
prior to wiring any funds.” Id. Because Lombardo failed to “exercise[] reasonable care after
receiving conflicting e-mails containing conflicting wire instructions,” the court held that “Arrow
should suffer the loss associated with the fraud.” Id. at *6.
In Bile v. RREMC, LLC, No. 3:15cv051, 2016 WL 4487864 (E.D. Va. Aug. 24, 2016), the
plaintiff, Amangoua Bile, won a $63,000 settlement in an employment discrimination suit. Id. at
*1. A few days after reaching the settlement, Bile’s counsel, Uduak Ubom, received an email
purportedly from Bile, asking that the settlement funds be wired to a Barclay’s account in London.
- 12 -
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
Id. at *3. Ubom called Bile, who told Ubom that she had not sent the email. Id. Ubom deleted
the email and did not notify LeClairRyan, P.C., the firm representing the defendants, that someone
had attempted to divert the settlement. Id.
Two days later, Ubom and Olaolowaposi Oshinowo, an attorney at LeClairRyan, agreed
over the phone that LeClairRyan would send Bile a check for the settlement funds to his residence.
Id. at *4. Ubom emailed Bile’s home address to Oshinowo following their conversation. Id. Later
that day, however, Oshinowo received another email, purportedly from Ubom, asking that the
settlement funds be wired to the Barclay’s account. Id. Oshinowo believed this email came from
Ubom because it was sent from his email address and used syntax consistent with the emails
Oshinowo had previously received from Ubom. Id. LeClairRyan followed the wire instructions
and transferred the money to the Barclay’s account. Id. at *5. Eventually, the parties discovered
that the wire instructions were sent by a hacker who had infiltrated Ubom’s email account. Id.
LeClairRyan refused to send another payment, and the parties filed cross-motions to enforce the
settlement agreement.
Following a bench trial, the district court ruled in the defendants’ favor. Recognizing there
was “no case law precisely on point,” the court looked to “common law contract principles and . .
. Article 3 of the U.C.C.” to conclude that the defendants “substantially performed under the
Settlement Agreement.” Id. at *6. In particular, the court found persuasive the UCC’s rules
regarding fraud in the transfer of negotiable instruments. Typically, “if a payor issues an
instrument but fails to deliver the instrument to the payee’s possession, then the payor is still liable
on the underlying obligation.” Id. at *8 (citing UCC § 3-420 & cmt. 1). However, under UCC §§
3-404 and 3-406, which address third-party fraud in negotiable instruments, “a party whose failure
to take ordinary care results in loss must be the party to bear that loss,” and “a blameless party is
- 13 -
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
entitled to rely on reasonable representations, even when those reasonable representations are
made by fraudsters.”5 Id. at *8.
Applying those general principles, the court concluded “Ubom[] failed to use ordinary care
under the circumstances[, and t]hat failure substantially contributed to the $63,000.00 loss.” Id. at
*11. “Two days before the fraud was perpetrated on LeClairRyan, both Ubom and Bile were
aware that an unidentified third party had targeted the settlement funds for diversion to a Barclay’s
bank account that had nothing to do with Bile”; still, they did not warn LeClairRyan that the
settlement had been targeted by a third-party fraudster. Id. If LeClairRyan had been aware of this
suspicious activity, the court found it “self-evident” the firm would not have initiated the wire
transfer. Id. In contrast, the court found LeClairRyan “exercise[d] ordinary care” in carrying out
its end of the transaction. Id. at *12. The court held the defendants were entitled to enforce the
settlement agreement without paying a second settlement because Ubom’s failure to alert opposing
counsel to the fraud “substantially contributed” to the loss. Id. at *13.
Arrow and Bile illustrate the principle that losses attributable to fraud should be borne by
the party in the best position to prevent the fraud. Arrow, 2015 WL 4936272, at *6; Bile, 2016
WL 4487864, at *13. So too here. The district court erred by taking an overly simplistic view of
this case. The court observed that, “[i]f there is a policy implicit in the UCC’s rules for the
5
UCC § 3-404 governs cases where an imposter has induced someone to issue a check.
The section states that, if the imposter “induces the issuer” to issue a check “by impersonating the
payee,” then “an indorsement of the instrument by any person in the name of the payee is effective
. . . in favor of a person who, in good faith, pays the instrument[.]” UCC § 3-404(a); Ohio Rev.
Code § 1303.44(A). The section adds, however, that whoever bears the loss could recover from
the person paying the check if that person “fail[ed] to exercise ordinary care . . . that substantially
contributes to [the] loss.” Ohio Rev. Code § 1303.44(D). Likewise, § 3-406 states that, “[a] person
whose failure to exercise ordinary care substantially contributes to . . . the making of a forged
signature on an instrument is precluded from asserting [that] forgery against a person who, in good
faith, pays the instrument[.]” See also Ohio Rev. Code § 1303.49(A).
- 14 -
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
allocation of losses due to fraud, it surely is that the loss be placed on the party in the best position
to prevent it.” Further, the court declared that “both parties were negligent in their business
practices.” Nevertheless, the court awarded summary judgment to Beau Townsend simply
“[b]ecause Don Hinds Ford has not conveyed the contractual purchase price to Beau Townsend
Ford.” In so holding, the court ignored the authority it cited, as well as record evidence suggesting
Beau Townsend was at least partially responsible for its own losses. Here, if principles taken from
UCC Article 3 are applied, the court would have to determine whether either Beau Townsend’s or
Don Hinds’ failure to exercise ordinary care contributed to the hacker’s success, and would then
have to apportion the loss according to their comparative fault.
B.
Agency law also provides useful guideposts here. For questions of agency law, the Ohio
Supreme Court has consulted the Restatement (Third) of Agency. See, e.g., Auer v. Paliath, 17
N.E.3d 561, 566 (Ohio 2014); Cincinnati Golf Mgt., Inc. v. Testa, 971 N.E.2d 929, 934-35 (Ohio
2012). According to the Restatement, if a person “carelessly caused [the] belief” that “an actor
has authority as an agent,” the person “is subject to liability to a third party who justifiably is
induced to make a detrimental change in position because the transaction is believed to be on the
person’s account.” Restatement (Third) of Agency § 2.05. This is true even if the person did not
make “a manifestation that [the] actor has authority as an agent.” Id. The Restatement explains
that this doctrine, which it calls “agency by estoppel,” “encompasses definitions of ‘ostensible
authority’ that hold a principal accountable for an appearance of authority arising solely from the
principal’s failure to use ordinary care.” Id. cmt. b.
The Restatement cites an Ohio Court of Appeals case, Luken v. Buckeye Parking Corporation,
68 N.E.2d 217 (Ohio Ct. App. 1945). Id. reporter’s notes, cmt. d. In Luken, a company operated a
parking lot in Cincinnati. 68 N.E.2d at 217-18. Although the company typically hired an attendant to
- 15 -
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
man the lot, it was unable to staff the lot one day. Id. at 218. The company closed the lot for the day
and blocked the entrance with a log. Id. That same day, a seventeen-year-old boy began posing as the
attendant. Id. No one at the company knew that the boy was there, let alone pretending to be the lot
attendant. Id. Soon thereafter, Ms. Luken, who had used the lot for two years, sought to park her car.
Id. As the court described it, “she found nothing different from [the lot’s] appearance on previous
occasions.” Id. The lot’s sign was up; the entrance was open; cars were parked there; and a young
man, “with what appeared to be parking tickets in his hand,” approached Ms. Luken. Id. She thought
the boy was the parking attendant, so she left her keys with him. Id. After she left the lot, the boy took
her car for a joyride and crashed it. Id. She sued the company for negligence. See id. at 220.
The Ohio Court of Appeals described the company’s failure to secure the parking lot and
characterized the boy as “an imposter [who] took advantage of the situation to enter the place and
transact business as though he were authorized.” Id. at 219. The court determined that the
company’s omissions estopped it from “deny[ing] that the imposter was its duly authorized agent.”
Id. at 220. The company could be liable, the court held, if a “customer who was justified in relying
. . . did rely on the appearance of authority.” Id. The court added, however, that the customer
could be justified in relying on the appearance of authority only if she did so in good faith and
exercised reasonable care. Id. Ultimately, the court concluded that “[t]his situation raised issues
for submission to the jury.” Id.
Here, the application of the Restatement and Luken suggest that, if Beau Townsend had
failed to exercise ordinary care in maintaining its email server, thus allowing the hacker to pose as
Columbro, then Beau Townsend could be liable for Don Hinds’s reasonable reliance on the
hacker’s emails. In addition, any potential liability would be reduced if Don Hinds also failed to
exercise reasonable care.
- 16 -
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
Ohio cases decided after Luken, however, have not consistently applied this doctrine.
Some cases suggest that a party’s failure to exercise ordinary care is insufficient to establish agency
by estoppel. These cases instead required that the alleged principal have had knowledge of the
ostensible agent or have acted to “hold out” the third party as an agent. See, e.g., Comer v. Risko,
833 N.E.2d 712, 715 (Ohio 2005); Mid-America Tire, Inc. v. PTZ Trading Ltd., 768 N.E.2d 619,
643 (Ohio 2002). But Luken has never been overruled, and the majority of modern Ohio cases
applying agency by estoppel have involved hospitals, which present different issues of liability
compared to general commercial cases. E.g., Comer, 833 N.E.2d at 715; Harris v. Mt. Sinai Med.
Ctr., 876 N.E.2d 1201, 1208-09 (Ohio 2007); Clark v. Sw. Hosp. & Family Health Ctr., 628 N.E.2d
46, 48 (Ohio 1994). Thus, it is unclear whether Luken still governs a case like this.
C.
Given the amount of business transacted online, the assignment of liability in a case like
this is important. Indeed, both parties acknowledge that they regularly sell cars by email. The
district court did not adequately analyze the issue. Instead, the court begged the question,
concluding (without citing legal authority) that “[i]t was not Beau Townsend that instructed Don
Hinds to send funds to ‘K.B. KEY LOGISTICS, L.L.C.’ in Missouri City, Texas.”
The district court aptly observed that “[b]oth parties would each have the Court find that
the other was in the best position to avoid the misfortune that occurred in this case.” Beau
Townsend, pointing to the suspicious nature of the wire instructions, says Don Hinds could have
prevented the loss; Don Hinds, pointing to the fact that Beau Townsend’s email was hacked, says
the same about Beau Townsend. And both parties support their respective arguments with record
evidence suggesting the other party was at fault.
- 17 -
Case No. 17-4177, Beau Townsend Ford Lincoln Inc. v. Don Hinds Ford Inc.
No court can resolve these factual disputes at the summary judgment stage. Anderson, 477
U.S. at 255. Rather, the district court must hold a trial to decide whether and to what degree each
party is responsible for the $730,000 loss in this case. Indeed, this was the approach taken by the
courts in Arrow and Bile, both of which were decided after a bench trial. UCC Article 3, upon
which both the Arrow and Bile courts relied, also suggests this question should be left to a
factfinder: “No attempt is made to define particular conduct that will constitute ‘failure to exercise
ordinary care . . . .’ Rather, ‘ordinary care’ is defined . . . in general terms. The question is left to
the court or the jury for decision in light of the circumstances in the particular case . . . .” UCC
§ 3-406 cmt. 1.
Although the district court’s error is understandable given the dearth of authority in this
area, it is error nonetheless. To decide this case, the factfinder must determine which party “was
in the best position to prevent the fraud.” Arrow, 2015 WL 4936272, at *6. To answer that
question, there must necessarily be findings of fact. And to make findings of fact, the district court
must hold a trial.
REVERSED and REMANDED.
- 18 -