Unreported / Non-Citable
Background
Progressive Laboratories (Texas) and Living Fuel (Florida) had an ongoing commercial relationship in which Living Fuel ordered nutritional supplements. The parties followed a consistent pattern: Living Fuel submitted purchase orders at agreed prices, paid a 50% deposit, and remitted final payment within 30 days of receiving an invoice. Over time, Living Fuel failed to tender final payment on two orders for “Super Green” products, leaving an unpaid balance of $130,159.35.
In October 2022, Living Fuel placed a separate order for 5,000 units of “Super Berry Ultimate” for $162,500 and paid the 50% deposit of $81,250. In November, an individual who had hacked into a Progressive Laboratories employee’s email sent fraudulent payment instructions to Living Fuel’s General Manager. Living Fuel paid the imposter the full $130,159.35 owed for Super Green. Progressive Laboratories responded by delivering only $12,073.75 worth of Super Berry products and refusing to complete that order until the Super Green invoices were paid.
Progressive Laboratories sued for breach of contract. Living Fuel countered with claims for breach of the Super Berry contract and negligence, alleging Progressive Laboratories failed to maintain secure email. After the case was removed to federal court, Living Fuel abandoned its counterclaims by failing to replead them following an amended complaint. The district court held a bench trial and awarded Progressive Laboratories $60,983.10 in damages.
The Court’s Holding
The Fifth Circuit affirmed on all issues. On Living Fuel’s counterclaims, the court applied Texas UCC § 3.404(d), which allocates liability in payment fraud cases to the party that fails to exercise ordinary care if that failure contributes to the loss. The court held that Living Fuel was in a better position to prevent the fraud. The fraudulent email contained typographical errors and oddly phrased language, and the payment instructions differed materially from previous practice—the imposter demanded a wire to an out-of-state “hedge fund” account rather than the physical checks Progressive Laboratories had always accepted. Living Fuel failed to exercise reasonable care in processing the payment.
Regarding Progressive Laboratories’ argument that the parties had formed an “installment contract,” the court disagreed. Under Texas law, an installment contract requires that the parties contemplate delivery of goods in separate lots to be separately accepted. Each purchase order here specified a definite quantity and did not reference or depend on future transactions. The court emphasized that the parties’ mere expectation of future dealings does not create an installment contract, and when contractual language is unambiguous, course of dealing need not be considered.
The district court’s damage award of $60,983.10 represented the full Super Green contract price ($130,159.35) reduced by the amount Living Fuel had paid under the Super Berry contract that was retained by Progressive Laboratories ($69,176.25). The court affirmed that Living Fuel had not breached the Super Berry contract itself.
Key Takeaways
- Commercial parties receiving wire transfer requests must exercise ordinary care and red flags—unusual email characteristics, typographical errors, and deviations from established payment practices—trigger a duty of heightened scrutiny.
- Under UCC § 3.404(d), liability for payment fraud shifts to the recipient when the recipient fails to exercise ordinary care, even if the payor was the initial victim of the hacking.
- Multiple separate purchase orders with defined quantities and prices are treated as independent transactions, not an installment contract, regardless of the parties’ expectation of future business.
- Contractual language controls interpretation; course of dealing is not invoked to override clear, unambiguous terms.
Why It Matters
This decision clarifies liability allocation in business-to-business wire fraud scenarios. It places an affirmative duty on commercial entities to scrutinize payment instructions for inconsistencies and red flags, particularly when those instructions deviate from established practice. Companies cannot simply rely on ostensibly legitimate communications; they must verify changes in payment method, scrutinize email quality, and confirm unusual requests through independent channels. The ruling reflects modern concerns about email compromise and imposter fraud while assigning responsibility based on practical capacity to prevent loss.
For contract drafting, the opinion reinforces that separate purchase orders create independent obligations unless the parties explicitly contemplate staged deliveries or contingent performance. Parties seeking installment arrangements must be explicit in their documentation rather than relying on a pattern of repeat orders. The decision also illustrates the court’s reluctance to infer contractual relationships from course of dealing when the written terms are plain.