A municipal utility that got scammed by someone who posed as a contractor is not entitled to withhold payment from the actual contractor to avoid having to pay twice for the same services, the Third District Court of Appeal ruled August 26 in TransAmerican Power Poles Inc. v. Sacramento Municipal Utility District.
TransAmerican Power Poles had a contract with the Sacramento Municipal Utility District (SMUD) for the supply of steel poles and related products. Before the Texas-based company was paid for some invoices, an unknown third party used emails to pose as TransAmerican employees and trick SMUD into transferring $248,885 to a bank account that did not belong to TransAmerican.
“A document seeking to change the bank and account number for payments by electronic funds transfer appeared to have been sent from TransAmerican’s controller and administrative director, but that officer did not send the document,” the court wrote. “SMUD was unable to recover the wired funds once the fraud was discovered, and it refused to pay TransAmerican for the amount that had been paid.”
TransAmerican sued for breach of contract and won at the trial court level. On appeal, SMUD contended, among other things, that it made payment to TransAmerican’s ostensible agent; one of the emails referenced in the scammer’s correspondence was legitimate, so the company knowingly had inadequate cybersecurity and thus was to blame for the scam’s success; and requiring the utility to pay TransAmerican after it already paid the imposter would be a gift of public funds.
The scammer used an email address very similar to the TransAmerican project manager’s actual address, and SMUD’s procurement specialist did not notice the difference (an “s” added to the company’s domain name). In the emails to the procurement specialist, the scammer also used the true email address of another TransAmerican employee to make it appear as though that employee was part of the email chain.
The procurement specialist notified SMUD’s senior accountant that a request to change the company’s bank account information seemed “sketchy,” and the accountant agreed that it was “really weird.” Despite the red flags, SMUD sent funds to the scammer and was unable to have the transfer reversed after the fraud was discovered.
Rejecting SMUD’s argument regarding a gift of public funds, the court wrote: “TransAmerican delivered, and SMUD accepted, the steel poles and related items described in invoice Nos. 31064 and 31382 pursuant to the parties’ contract. SMUD does not contend it did not have to pay for the products or that they were not used for a public purpose. Paying TransAmerican for the products would not be a gift of public funds.”