Lawsuit against Escrow Agent’s Negligence, Constructive Fraud Law Elements Defense Lawyer
Definition.
An escrow holder has a duty to exercise ordinary skill and diligence in his employment and if he acts negligently, he is liable for any loss proximately occasioned by his negligence. An escrow holder also bears a fiduciary relationship to each party. He must comply strictly with the instructions of the principals; if he disburses the property of his principals in violation of his instructions or otherwise breaches that duty, he is liable to the injured parties for breach of contract. (Kangarlou v. Progressive Title Co., Inc. (2005) 128 Cal.App4th 1174, 1179; Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 7 Cal.4th 705, 711.)
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Element 1: Escrow
An escrow is any transaction where one person, for the purpose of effecting the sale, transfer, encumbering, or leasing of real or personal property to another person, delivers any written instrument, money, evidence of title, or other thing of value to a third person (the escrow agent) to be held by the agent until the happening of a specified event, when it is then delivered by the agent to a grantee, grantor, promisee, promisor, obligee, obligor, or any agent or employee of any of the latter. (Cal. Fin. Code, § 17003; Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 7 Cal.4th 705, 711.)
Oral escrow instructions were adequate to support a negligence cause of action against a title company and an escrow agent for failure to perform escrow instructions. California Financial Code sections 17403.2 and 17403.3, which require escrow instructions to be in writing, are intended to prevent escrow agents from accepting easily altered written instructions containing blanks, not to abrogate the principles of contract and agency law which allow for binding oral agreements. (Zang v. Northwestern Title Co. (1982) 135 Cal.App.3d 159, 168 [oral escrow instructions directing title company and escrow agent to obtain a deed of trust imposed a duty on them to obtain such a deed].)
Element 2: Fiduciary or Special Relationship (for Constructive Fraud)
An essential element in a cause of action for constructive fraud is a fiduciary or special relationship between the parties. (Peterson Dev. Co. v. Torrey Pines Bank (1991) 233 Cal.App.3d 103, 116.)
An escrow holder is the limited agent and fiduciary of all parties to an escrow. The agency is limited because the escrow agent only represents his principals insofar as he carries out the escrow instructions. (Cal. Fin. Code, § 17005.5.)
An escrow agent is the agent of the parties to the escrow rather than a trustee and does not have the powers or obligations of a true trustee. The escrow holder’s agency is limited to faithful compliance with the instructions. (Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 7 Cal.4th 705, 711; Hannon v. Western Title Ins. Co. (1989) 211 Cal.App.3d 1122, 1128-29.)
If the escrow instructions have been fully complied with, the escrow holder becomes the agent of the seller with respect to the money. When escrow is ready to close in accordance with instructions, the escrow agent has a strict duty to close it by delivering or recording instruments and paying the money in accordance with the instructions. (Virtanen v. O’Connell (2006) 140 Cal.App.4th 688; Gordon v. D & G Escrow Corp. (1975) 48 Cal.App.3d 616, 622 [escrow company breached duty to husband by distributing entire proceeds of sale to wife, rather than to husband and wife, both of whom were sellers].)
To ensure the proper performance of escrow duties, an escrow agent generally should not be a party to the escrow transaction. (Peterson Dev. Co. v. Torrey Pines Bank (1991) 233 Cal.App.3d 103, 118; Roberts v. Carter & Potruch (1956) 140 Cal.App.2d 370, 373.)
Duty to Disclose Information:
The escrow instructions constitute the full measure of obligations assumed by the escrow holder and owing to the parties. The escrow agent does not have a general agent’s duty of disclosure and does not need to give the parties information which he or she has but which he or she is not required to give according to the escrow instructions. (Cunningham v. Security Title Ins. Co. (1966) 241 Cal.App.2d 626, 630-631; Mefford v. Security Title Ins. Co. (1962) 199 Cal.App.2d 578, 585.)
An escrow holder does not have a fiduciary duty to go beyond the escrow instructions and notify a party of any suspicious fact or circumstance unrelated to the specific escrow instructions which has come to his or her attention before or during the escrow which could conceivably affect such party. (Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App.2d 160, 161-62 [escrow agent did not have fiduciary duty to disclose to purchasers of real property certain allegedly fraudulent actions of other party to transaction].)
An escrow agent with an interest in the transaction is obligated to disclose that interest before becoming an escrow agent for the parties. (Peterson Dev. Co. v. Torrey Pines Bank (1991) 233 Cal.App.3d 103, 118.)
Banks/Lenders:
When banks and similar lending institutions perform escrow functions, they are exempted from the coverage of California Financial Code section 17000 et seq., which regulate escrow matters such as licensing, bonding, crimes, and civil penalties. (Peterson Dev. Co. v. Torrey Pines Bank (1991) 233 Cal.App.3d 103, 117.)
A bank had no fiduciary duty as escrow agent to its borrower, even though the bank prepared an “escrow statement” in connection with a construction loan and processed all loan papers, because the relationship between the bank and the borrower was a typical, arm’s length, normal commercial banking transaction. No third party was ever involved in the transaction, nor did the bank ever hold itself out to be a neutral, objective, disinterested conduit for the parties’ exchange of documents and money. (Peterson Dev. Co. v. Torrey Pines Bank (1991) 233 Cal.App.3d 103, 118.)
Sub-Escrow Agent:
The duties of a sub-escrow agent are even more limited than those of an escrow agent when engaged only to perform rudimentary escrow functions such as payout of funds, and recordation of documents. (Siegel v. Fidelity National Title Ins. Co. (1996) 46 Cal.App.4th 1181, 1194 [sub-escrow agent had no fiduciary duty to purchaser to search records or transmit information regarding title].)
Element 3: Justifiable Reliance (for Constructive Fraud)
Constructive fraud arises from a breach of duty by one in a confidential or fiduciary relationship to another that induces a justifiable reliance by the latter to his prejudice. (Wasmann v. Seidenberg (1988) 202 Cal.App.3d 752, 757.)
Except in rare cases where the undisputed facts leave no room for a reasonable difference of opinion, the issue of plaintiff’s reasonable or justifiable reliance on the constructive fraud ordinarily is a question of fact. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.)
The nature of the confidential or fiduciary relationship entitles the plaintiff to rely on the fiduciary and awareness of facts that would ordinarily call for investigation does not arouse suspicion. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240; Lee v. Escrow Consultants, Inc. (1989) 210 Cal.App.3d 915, 921.)
Although generally in a fiduciary relationship a duty to investigate may arise if the plaintiff becomes aware of facts that would make a reasonable person suspicious, where the fiduciary relationship was limited to the defendant carrying out the escrow instructions, the plaintiff’s duty to inquire was also limited. (Lee v. Escrow Consultants, Inc. (1989) 210 Cal.App.3d 915, 921 [plaintiff was entitled to assume, without any duty of inquiry, that defendant escrow officer was properly carrying out escrow instructions].)
Element 4: Negligence or Breach of Fiduciary Duty
An escrow agent is liable if he breaches his fiduciary duty or fails to exercise reasonable skill and diligence in carrying out the escrow instructions. (Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 7 Cal.4th 705, 711.)
Negligence:
An escrow holder is liable for any title defect that he creates by his negligent performance of escrow instructions. (Cunningham v. Security Title Ins. Co. (1966) 241 Cal.App.2d 626, 629.)
An escrow agent is not liable for his failure to do something which is not required by the terms of the escrow or for a loss incurred while following the escrow instructions. (Hannon v. Western Title Ins. Co. (1989) 211 Cal.App.3d 1122, 1128 [an escrow holder has no duty to deposit funds in an interest-bearing account, absent an escrow instruction to do so].)
A cause of action for negligence existed in a divorce settlement where the wife’s attorney, acting as escrow holder, allowed the husband’s grant deed to be recorded before obtaining the wife’s money in direct violation of the terms of a letter from the husband’s attorney authorizing recordation of the deed only upon obtaining the wife’s money in accordance with the settlement agreement. (Wasmann v. Seidenberg (1988) 202 Cal.App.3d 752, 756-57.)
Breach of Fiduciary Duty:
Constructive fraud exists when there is a breach of duty by someone who gains an advantage by misleading another to his prejudice, even in the absence of actual fraudulent intent, because such conduct has all the actual consequences and all the legal effects of actual fraud. (Cal. Civ. Code, § 1573.)
A cause of action for constructive fraud existed in a divorce settlement where the wife’s attorney, acting as escrow holder, allowed the husband’s grant deed to be recorded before obtaining the wife’s money, in direct violation of written instructions from the husband’s attorney, and did not disclose this fact despite repeated inquiries from the husband’s attorney. (Wasmann v. Seidenberg (1988) 202 Cal.App.3d 752, 756-57.)
An escrow agent breached a duty owed to buyers of real property by failing to inform them that the land was subject to a reservation of mineral rights and by altering the deed of trust after the buyers had signed it so that the buyers were prevented from learning of the reservation until after they had purchased the property. (Garton v. Title Ins. & Trust Co. (1980) 106 Cal.App.3d 365, 381-82.)
An escrow agent is obligated to take corrective steps before following questionable escrow instructions if a conflict or apparent error appears in the instructions. (Kirk Corp. v. First American Title Co. (1990) 220 Cal.App.3d 785, 807 [escrow agent had no duty to investigate or take corrective steps where there was no confusion or conflict with previous instructions because she never received subsequent letter instructing her to draft and record assignment and subordination of lease].)
Element 5: Resulting Damage
An escrow agent’s failure to perform his duties with reasonable care must be a substantial factor in the collapse of the escrow and plaintiff’s damages in order to establish a legally sufficient showing of causation. (Bruckman v. Parliament Escrow Corp. (1987) 190 Cal.App.3d 1051, 1064.)
An escrow agent’s failure to perform his duties with reasonable care must be a substantial factor in the collapse of the escrow and plaintiff’s damages in order to establish a legally sufficient showing of causation. (Bruckman v. Parliament Escrow Corp. (1987) 190 Cal.App.3d 1051, 1064 [escrow agent’s negligence in mailing title report to parties one day before escrow was to close, failing to get return receipt as required in escrow instructions, and failing to request that buyer deposit necessary funds, was a substantial factor in collapse of escrow].)
Remedies
Compensatory Damages
Home seller was entitled to damages for loss of real estate commission as an actual loss beyond the amount of her security. (Romo v. Stewart Title of California (1995) 35 Cal.App.4th 1609, 1619 [home seller was entitled to damages for loss of real estate commission as an actual loss beyond the amount of her security].)
Punitive Damages
The defendant’s acts must be “reprehensible, fraudulent or in blatant violation of law or policy.” Mere carelessness or ignorance of the defendant does not suffice. (Flyer’s Body Shop Profit Sharing Plan v. Ticor Title Ins. Co. (1986) 185 Cal.App.3d 1149, 1152 [title company’s failure to obtain investor’s signature on escrow instructions and disbursement of investor’s funds for unauthorized loan was a breach of duty but did not warrant imposition of punitive damages].)
Attorney’s Fees Not Available
No attorney’s fees in actions for fraud where defendant is a fiduciary. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1241.)
Statute of Limitations
Negligence of Escrow Agent:
The statute of limitations for negligence of an escrow agent is four years for claims based on a written instrument. (Cal. Civ. Proc. Code, § 337(1); Bruckman v. Parliament Escrow Corp. (1987) 190 Cal.App.3d 1051, 1058 [four-year statute applied to action based on escrow agent’s negligent performance of an implied obligation arising out of written escrow instructions].) For claims based on an oral agreement, the statute of limitations is two years. (Cal. Civ. Proc. Code, § 339(1).)
If the escrow instructions are in writing and the escrow holder accepts them or prepares or offers to perform them, and the buyer and seller accept the offer, an action for failure to comply with the instructions is on a written contract. The contract may be “in writing” for purposes of the statute of limitations even though it was accepted orally or by an act other than signing. (Amen v. Merced County Title Co. (1962) 58 Cal.2d 528, 532 [four-year statute applied to breach of contract action against escrow agent even though escrow holder did not sign escrow agreement].)
Even if plaintiff’s action is not based on a written contract, the statute does not begin to run until the plaintiff knew or should have known the facts that constituted the breach of the defendant’s duty. (Amen v. Merced County Title Co. (1962) 58 Cal.2d 528, 534.)
Constructive Fraud:
Where the gravamen of the complaint is that defendant’s acts constituted actual or constructive fraud, the applicable statute of limitations is the California Code of Civil Procedure section 338, subdivision (d) three-year limitations period, governing fraud even though the cause of action is designated by the plaintiff as a claim for breach of fiduciary duty.” (Thomson v. Canyon (2011) 198 Cal.App.4th 594, 607.)
A constructive fraud claim was barred by the statute of limitations where the borrower did not file its complaint until more than three years after it received notice that the bank would not provide permanent financing. (Peterson Dev. Co. v. Torrey Pines Bank (1991) 233 Cal.App.3d 103, 20 [no tolling of statute because no “delayed discovery” of the fraud].)
The “delayed discovery” rule applied to an action against an escrow agent for fraud, breach of contract and other claims where plaintiff was not sufficiently suspicious to ask the escrow holder whether it had improperly disbursed funds placed in escrow. (Lee v. Escrow Consultants, Inc. (1989) 210 Cal.App.3d 915, 921-22 [claim brought six years after improper withdrawal of funds due to allegedly forged escrow amendment was not barred by three-year statute of limitations].)
To be sure, section 340.6, subdivision (a), exempts claims of ‘actual fraud’ from its limitations period – but the exemption does not extend to claims of constructive fraud. (Austin v. Medicis (2018) 21 Cal.App.5th 577, 587.)
Breach of fiduciary duty not amounting to fraud or constructive fraud is subject to the four-year “catch-all statute” of California Code of Civil Procedure section 343. Fraud is subject to the three-year statute of limitations under California Code of Civil Procedure section 338. However, a breach of a fiduciary duty usually constitutes constructive fraud. (William L. Lyon & Associates, Inc. v. Superior Court (2012) 204 Cal.App.4th 1294, 1312, 1313.) “The statute of limitations for breach of fiduciary duty is three years or four years, depending on whether the breach is fraudulent or nonfraudulent.” (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1479.)
Affirmative Defenses
Exculpatory Clause
Exculpatory clause relieved escrow agent from liability for ordinary negligence in failing to record chattel mortgage. (Simmons v. Bank of America Nat’l Trust & Sav. Asso. (1958) 159 Cal.App.2d 566, 570 ; Rooz v. Kimmel (1997) 55 Cal.App.4th 573, 586-87 [hold harmless clause relieved title company from its own active negligence in recording a deed of trust strictly as an accommodator, where company was not acting in any title or escrow capacity]; but see Akin v. Business Title Corp. (1968) 264 Cal.App.2d 153, 156-59 [escrow agent was liable for recording mortgage in wrong county despite exculpatory clause purporting to relieve escrow agent from liability for ordinary negligence because an “escrow company performs an important public service” which “affects the public interest” and has “a decisive advantage of bargaining strength against a member of the public who seeks its services.”].)