231 W. Scott v. Lakeside Bank
2017 IL App (1st) 161131
| Ill. App. Ct. | 2017Background
- 231 W. Scott, LLC (owned/managed by David and Mark Ransburg) obtained a construction loan for a renovation; Lakeside was lender, JLL (Lewis) was general contractor, MJG was inspecting architect, and Greater Illinois Title Company (GIT) was escrowee charged with disbursing loan draws.
- The Escrow Agreement required certain documents (owner’s sworn statement, contractor’s sworn statement, inspector/architect report certifying work) before disbursement, but used permissive language giving GIT a right to verify statements and contained disclaimers that GIT did not insure completion or quality of work.
- The renovation stalled and was poorly performed; plaintiffs alleged substantial damages after foreclosure; plaintiff LLC sued multiple defendants and tried a bench trial on its breach-of-fiduciary-duty claim against GIT.
- Plaintiffs’ expert (a construction consultant) testified that industry custom permitted escrowee verification and on-site inspection when “red flags” exist (gaps between draws, missing approvals, resubmitted draws); GIT’s industry expert testified title companies do not inspect sites and lack the means/authority to verify work quality.
- The trial court found GIT breached its fiduciary duty by failing to make inquiries or at least an “informal viewing” around the seventh draw given project delays and problems and entered judgment against GIT; GIT appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether GIT waived the right to argue scope of fiduciary duty on appeal | GIT failed to raise the issue in summary judgment and thus waived it | GIT argued it preserved the issue and appealed the final judgment (motion in limine ruling included in appeal) | No waiver — appeal considered (issue preserved) |
| Whether an escrowee’s fiduciary duty includes an obligation to verify/inspect contractor work before disbursing funds | LLC: fiduciary duties arise from relationship and may extend beyond contract; GIT should have investigated given red flags | GIT: duty is defined by escrow instructions; agreement gave only a permissive right to verify and disclaimed liability for quality/completion; no contractual obligation to inspect | Held for GIT — scope of escrowee’s fiduciary duty is defined by the Escrow Agreement; no duty to inspect where agreement does not require it |
| Whether missing/misfiled approvals or other “red flags” converted GIT’s permissive verification right into a mandatory duty | LLC: gaps and missing approvals put GIT on notice and required inquiry/inspection | GIT: files elsewhere (Lakeside/MJG) contained approvals; permissive language and disclaimers control; industry practice does not impose inspection duty | Court declined to weigh the red flags substantively because agreement controlled; red flags did not impose a duty |
| Whether any breach by GIT (if found) proximately caused LLC’s damages | (alternative) LLC argued breach caused losses | GIT argued causation lacking and other defendants responsible | Court did not decide because reversal on duty issue made causation analysis unnecessary |
Key Cases Cited
- Haudrich v. Howmedica, 169 Ill.2d 525 (discussing waiver of issues not raised below)
- Fantino v. Lenders Title & Guaranty Co., 303 Ill. App. 3d 204 (Ill. App. 1999) (escrowee did not breach fiduciary duty by failing to inspect where escrow agreement did not require inspections)
- International Capital Corp. v. Moyer, 347 Ill. App. 3d 116 (Ill. App. 2004) (escrowee owes fiduciary duty to both depositor and beneficiary and must act according to escrow instructions)
- Columbia Homes, Inc. v. Sirois, 115 Ill. App. 3d 651 (Ill. App. 1983) (escrowee must deliver only when escrow conditions are satisfied)
- McBride v. Commercial Bank of Champaign, 101 Ill. App. 3d 760 (Ill. App. 1981) (escrowee faced peril when obeying one principal and disregarding another)
- Toro Petroleum Corp. v. Newell, 33 Ill. App. 3d 223 (Ill. App. 1975) (escrowee’s disbursement breached fiduciary duty where instructions required joint written direction)
- Professional Executive Center v. La Salle Nat’l Bank, 211 Ill. App. 3d 368 (Ill. App. 1991) (contractual use of “may” is permissive; “shall” is mandatory)