Steven Edelman v. Belco Title & Escrow, L.L.C.
2014 U.S. App. LEXIS 7824
7th Cir.2014Background
- Three lenders (Edelman, Furman, Jeffries) loaned $3 million for a Phase II real-estate loan to Caseyville; the written Loan Agreement promised them a first-priority mortgage but they received a junior mortgage instead. Meridian Bank held a preexisting $20 million senior mortgage and later foreclosed, wiping out the lenders.
- Belco Title & Escrow (Belco), created by the law firm Belsheim (which represented Caseyville), performed title work and acted as the closing/escrow agent; Belco obtained a title commitment showing Meridian’s senior mortgage.
- The plaintiffs never communicated with Belco, did not deposit their loan funds with Belco (funds went directly to Caseyville), and never saw or signed the Agency/Escrow Disbursement Agreement used at closing.
- At the April 25, 2007 closing, Belco (via a paralegal) and Belsheim signed closing documents; the Agency/Escrow Disbursement Agreement stated Belco was acting as an agent of the lending institution for purposes of the closing; Belco disbursed only the settlement-cost escrow per the HUD-1.
- Plaintiffs sued for breach of fiduciary duty against Belco (and others); summary judgment was granted for Belco by the magistrate judge, holding Belco’s duty as escrowee was limited to following escrow instructions; plaintiffs appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Belco owed fiduciary duties to the lenders as their agent for the loan | Agency/Escrow form (and Belco’s statement it acted as agent) created or admitted an agency; thus Belco owed full fiduciary duties to disclose | No agency existed: plaintiffs never manifested assent, never dealt with Belco, funds were not escrowed with Belco, and Belco’s role was limited to following escrow/closing instructions | No agency re: the loan; plaintiffs did not show assent or manifestation of agency; no fiduciary duties beyond escrow instructions |
| Whether an escrowee must seek additional instructions or disclose material info (e.g., senior mortgage) absent express instructions | Even if escrow duty is limited, that duty includes asking for instructions and disclosing material facts affecting the deal | Illinois law limits escrowee’s duty to following escrow instructions; Belco complied with HUD-1 and escrow agreement and had no duty to contact lenders who never escrowed funds | Court held Illinois law does not impose a duty on Belco to seek instructions or give extra disclosures under these facts; Belco fulfilled its obligations |
| Whether plaintiffs can treat Belco’s failure to answer the 4th amended complaint as admissions under Fed. R. Civ. P. 8(b)(6) | Belco’s failure to file an answer to the 4th amended complaint meant the allegations should be deemed admitted at summary judgment | Belco had previously answered a substantively identical complaint (the 2nd amended complaint); no prejudice resulted; courts should decide on merits | Rule 8(b)(6) did not bar Belco from defending; prior responsive pleading and lack of prejudice defeated admission argument |
| Whether escrow duties extend to parties who did not deposit funds with the escrowee | Escrowees generally owe fiduciary duties to depositors and intended beneficiaries; plaintiffs assert they were beneficiaries and thus owed duty | Plaintiffs did not deposit funds; escrowed funds were settlement costs funded by Nicholson entity, so plaintiffs were neither depositors nor beneficiaries of those escrowed monies | Plaintiffs were not depositors or beneficiaries of the escrowed funds; therefore the limited escrow duty did not make Belco liable |
Key Cases Cited
- Bescor, Inc. v. Chi. Title & Trust Co., 446 N.E.2d 1209 (Ill. App. Ct. 1983) (an escrowee’s fiduciary duty is to act according to escrow instructions)
- International Capital Corp. v. Moyer, 806 N.E.2d 1166 (Ill. App. Ct. 2004) (escrowees have been found to owe duties to depositors and beneficiaries of escrows)
- Neade v. Portes, 739 N.E.2d 496 (Ill. 2000) (elements to prove breach of fiduciary duty: duty, breach, proximate cause, and damages)
- Moehling v. W. E. O’Neil Constr. Co., 170 N.E.2d 100 (Ill. 1960) (agents occupy a position of trust and must disclose material facts affecting the transaction)
- Khan v. BDO Seidman, LLP, 948 N.E.2d 132 (Ill. App. Ct. 2011) (agency establishes a fiduciary relationship as a matter of law)
- Wargel v. First Nat’l Bank of Harrisburg, 460 N.E.2d 331 (Ill. App. Ct. 1984) (existence of fiduciary duty is a question of law when facts are undisputed)
- Modrowski v. Pigatto, 712 F.3d 1166 (7th Cir. 2013) (failure to file an answer to an amended complaint can lead to admissions when no responsive pleading was ever filed)
- Conley v. Gibson, 355 U.S. 41 (1957) (pleading rules aim to facilitate decision on the merits, not to trap parties on technicalities)
- Isby v. Clark, 100 F.3d 502 (7th Cir. 1996) (district court did not abuse discretion by declining default judgment where failure to plead caused no prejudice)
- Ellis v. DHL Express Inc., 633 F.3d 522 (7th Cir. 2011) (standard of review for summary judgment is de novo)