SUMMIT FINANCIAL HOLDINGS, LTD., Plaintiff and Respondent, v. CONTINENTAL LAWYERS TITLE COMPANY, Defendant and Appellant.
No. S097344
Supreme Court of California
Mar. 7, 2002
27 Cal. 4th 705
May 15, 2002
BROWN, J.
Wolf, Rifkin & Shapiro and Marc E. Rohatiner for Defendant and Appellant.
Billet, Kaplan & Dawley and Terry S. Kaplan for California Land Title Association as Amicus Curiae on behalf of Defendant and Appellant.
Stephan, Oringher, Richman & Theodora, Harry W. R. Chamberlain II, Robert M. Dato; Robie & Matthai, Edith M. Matthai and Pamela E. Dunn for American Insurance Association and Association of Southern California Defense Counsel as Amici Curiae on behalf of Defendant and Appellant.
Doumani & Grandon, Grandon & Associates, Robert M. Grandon; Callahan & Blaine and Jim P. Mahacek for Plaintiff and Respondent.
BROWN, J.—The question presented by this case is whether an escrow holder owes a duty of care to a nonparty to the escrow based on an
The complicated factual background of this case will be presented more fully below, but in brief, the question presented arises under the following circumstances: Dr. John Furnish, the maker of a promissory note secured by a deed of trust on real property in Corona Del Mar, refinanced his secured obligations by obtaining a new loan from a new lender, a portion of the proceeds of which was to pay the earlier note in full. Defendant Continental Lawyers Title Company (CLTC) provided escrow services for the refinance transaction and was instructed by the parties to the escrow to pay the note by issuing a check to Talbert Financial (Talbert). CLTC followed that instruction on closing of the refinance transaction. In this lawsuit, plaintiff Summit Financial Holdings, Ltd. (Summit) sued CLTC for negligence. Summit contended that in the refinance transaction CLTC should have paid the note by issuing a check to Summit rather than Talbert because CLTC knew Talbert had assigned its rights in the note and deed of trust to Summit. Neither the assignor, Talbert, nor the assignee, Summit, was party to the escrow. Nevertheless, the trial court, relying on Kirby v. Palos Verdes Escrow Co. (1986) 183 Cal.App.3d 57 [227 Cal.Rptr. 785] (Kirby), concluded that CLTC owed a duty of care to Summit, and that CLTC breached that duty because CLTC, with knowledge of the assignment from Talbert to Summit, paid Talbert rather than Summit. The trial court awarded judgment to Summit against CLTC for negligence, but the Court of Appeal reversed, holding that CLTC owed no duty of care to Summit.
We agree with the Court of Appeal and affirm its judgment.
I. FACTUAL AND PROCEDURAL BACKGROUND*
A. The Loan
In August 1994 Furnish borrowed $425,000 from Talbert, and signed the note payable to Talbert. The note was secured by the deed of trust on the property. Both the note and the payment book given to Furnish required him
At the same time the deed of trust was recorded, a document entitled “Assignment of Deed of Trust” was recorded that assigned the beneficial interest under the note and deed of trust from Talbert to Summit. However, neither Talbert nor Summit gave Furnish notice of the assignment, as[, according to Furnish, was] required by
B. The Refinance
In September 1995 Furnish obtained a new loan from Dundrel Securities (Dundrel) that was used in part to pay the note. Furnish and Dundrel employed Beverly Hills Escrow (BHE) to handle the refinancing transaction, and CLTC acted as an escrow holder in connection with issuing the title insurance for the new deed of trust securing the new note payable to Dundrel. [Neither Talbert nor Summit was a party to the BHE escrow or the CLTC escrow.]
CLTC prepared a preliminary title report noting (at item 6) that the property was encumbered by a deed of trust securing the Talbert note, and that an assignment of the note and deed of trust from Talbert to Summit had been recorded. BHE thereafter obtained a note payoff demand from Talbert specifying the outstanding balance to be paid to Talbert to fully pay the note. On September 8, 1995, BHE forwarded Talbert‘s payoff demand to CLTC and identified it as the “Demand for item 6 on the Preliminary Title Report.”
On close of the refinancing transaction, CLTC paid Talbert from funds deposited with CLTC by Dundrel in accordance with the payoff demand and BHE‘s instructions. Summit did not receive these funds from Talbert.
C. The Legal Proceedings
In February 1997 Furnish filed for protection under chapter 11 of the United States Bankruptcy Code (11 U.S.C.), and in April 1997 the bankruptcy court entered an order for sale of the property free and clear of all liens. The order directed that the proceeds of the sale be used to pay the amounts owed the first trust deed holder, Dundrel, and amounts owed to another secured creditor, and that any purported liens on the property held
In July 1997 Furnish moved in the bankruptcy court for an order disallowing Summit‘s lien claim on the remaining proceeds from the sale of the property. Furnish argued the amount he paid Talbert in 1995 in the refinance transaction fully extinguished Furnish‘s obligations under the note. He established that he never received notice of the assignment of the deed of trust [and contended that notice was] required by
In this proceeding, Summit sought recovery from CLTC of the note payment CLTC made to Talbert, contending that CLTC was negligent by making the note payment to Talbert rather than to Summit. The trial court concluded Kirby was controlling and that CLTC owed a duty of care to Summit. The trial court further found that CLTC was negligent [and] breached its duty of care to Summit, and [that] CLTC‘s negligence was a proximate cause of Summit‘s injury. Accordingly, the trial court entered judgment for damages in favor of Summit against CLTC.4
[The Court of Appeal reversed on the ground that Summit, being a stranger to the escrow, was not owed a duty of care by CLTC.]
*We adopt the Court of Appeal‘s statement of the factual and procedural background as part I of our opinion. No party petitioned for rehearing to suggest that the Court of Appeal omitted or misstated any material fact. (Cal. Rules of Court, rule 29(b)(2).) Brackets enclosing material (other than parallel citations) denote insertions or additions by this court.
“An escrow involves the deposit of documents and/or money with a third party to be delivered on the occurrence of some condition.” (3 Miller & Starr, Cal. Real Estate (3d ed. 1989) § 6:1, pp. 2-3 (rev. 9/00); see
In delimiting the scope of an escrow holder‘s fiduciary duties, then, we start from the principle that “[a]n escrow holder must comply strictly with the instructions of the parties. [Citations.]” (Amen, supra, 58 Cal.2d at p. 531.) On the other hand, an escrow holder “has no general duty to police the affairs of its depositors“; rather, an escrow holder‘s obligations are “limited to faithful compliance with [the depositors‘] instructions.” (Claussen v. First American Title Guaranty Co. (1986) 186 Cal.App.3d 429, 435-436 [230 Cal.Rptr. 749]; see, e.g., Vournas, supra, 73 Cal.App.4th at p. 674; Romo v. Stewart Title of California (1995) 35 Cal.App.4th 1609, 1618, fn. 9 [42 Cal.Rptr.2d 414]; Schaefer, supra, 104 Cal.App.3d at pp. 77-78; Axley v. Transamerica Title Ins. Co. (1978) 88 Cal.App.3d 1, 9 [151 Cal.Rptr. 570].) Absent clear evidence of fraud, an escrow holder‘s obligations are limited to compliance with the parties’ instructions. (Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App.2d 160, 162 [70 Cal.Rptr. 378]; 3 Miller & Starr, Cal. Real Estate, supra, § 6:26, p. 68.) Here, even though the escrow holder, CLTC, was aware of the assignment from Talbert to Summit, there is no evidence CLTC was aware of any collusion or fraud in the fund disbursement that would have adversely affected any party to the escrow.
However, because CLTC knew Talbert had assigned its rights in the note and deed of trust to Summit, Summit contends CLTC breached both a fiduciary duty and a tort duty to Summit by paying Talbert. We conclude neither contention has merit.
In contending that the escrow holder here, CLTC, owed a duty of care to Summit, even though neither Talbert nor Summit were parties to the escrow, Summit relies upon Kirby, supra, 183 Cal.App.3d 57. In Kirby, the Pierces opened an escrow with Palos Verdes Escrow Company, Inc. (Palos Verdes), for the purchase of certain real property. While awaiting permanent financing from the Small Business Administration (SBA), the Pierces took out a short-term loan from Universal Financial (Universal), which loan was secured by a second deed of trust on the property. Universal then assigned the note and the deed of trust to the Kirbys, and the assignment was recorded. After funds from the SBA were deposited into escrow, Universal made a demand on Palos Verdes for payment of the Pierces’ note, and the Pierces orally authorized payment. Because one of its officers had reviewed the title insurance policy on the property before forwarding it to the Pierces, Palos Verdes had constructive notice of Universal‘s assignment to the Kirbys. Nevertheless, Palos Verdes made the payment to Universal. When the Kirbys demanded payment from Universal and Universal failed to pay them, the Kirbys filed suit against Palos Verdes on the theory it performed its escrow duties negligently by paying Universal rather than the Kirbys. The Kirbys prevailed in the trial court, and the Court of Appeal affirmed. (Kirby, at pp. 60-61.)
Kirby began its analysis by reviewing the familiar principles recited above. (Kirby, supra, 183 Cal.App.3d at pp. 64-65.) However, after acknowledging that the agency created by an escrow is limited to the obligation to carry out the instructions of the parties to the escrow, and that an escrow holder is liable to the parties insofar as it fails to carry out the instructions it has contracted to perform, Kirby held that Palos Verdes was liable to the Kirbys, who were strangers to the escrow, precisely because it did carry out the instructions of a party—the Pierces. The rationale Kirby gave for this anomalous conclusion was that “[r]eceipt of notice of the assignment was equivalent to the receipt of new escrow instructions regarding the party to be paid. (Builders’ Control Service of No. Cal., Inc. v. North American Title Guar. Co. (1962) 205 Cal.App.2d 68, 74 [22 Cal.Rptr. 712].) Such ‘new’ instructions conflicted with the Pierces’ verbal instructions to pay Universal. This conflict should have alerted defendant to a potential problem in paying Universal rather than the Kirbys, and vice versa. As the escrow holder faced with conflicting instructions, Palos Verdes had the duty to delay payment of escrow funds until such time as the proper payee was identified. [Citation.]” (Kirby, at pp. 65-66.)
As the Court of Appeal in the present case observed, Kirby appears to be the only California case that holds an escrow holder can be liable to
In Builders’ Control Service, a lender agreed to fund an owner-builder‘s construction of homes, and to ensure that the loan funds would actually be used to pay the construction costs, the lender deposited the funds with the plaintiff fund control agent. The parties to the loan also agreed that the owner-builder would assign the proceeds from the sale of the newly constructed homes to the fund control agent as an additional source of funds to pay the construction costs. The defendant title company acted as an escrow holder for the proceeds of the home sales, and, because it had received a copy of the assignment and had recorded it, the title company knew that the owner-builder had assigned the proceeds of the sales to the fund control agent. Nevertheless, the title company assertedly made deductions from the sales proceeds in violation of the terms of the assignment. (Builders’ Control Service of No. Cal., Inc. v. North American Title Guar. Co., supra, 205 Cal.App.2d at pp. 70-72 (Builders’ Control Service).) In Builders’ Control Service, then, the question was whether the defendant title company, acting in its capacity as an escrow holder and knowing that its principal had assigned the sales proceeds held by it, was liable to the plaintiff fund control agent for violating the terms of the assignment.
As the Court of Appeal in the present case correctly observed: “Although the Builders’ Control Service court concluded the escrow holder was obligated to disburse the funds to the owner-builder‘s assignee, the principles it applied have no application to whether an escrow holder owes duties to a nonparty based on an assignment made by [one] stranger to the escrow to [another] stranger to the escrow. The Builders’ Control Service court first noted that when a home sale escrow closed, the escrow holder held the sales proceeds as agent for the owner-builder principal. The Builders’ Control Service court then cited
We agree with the Court of Appeal here that ”Kirby misread Builders’ Control Service. Builders’ Control Service holds only that an agent‘s knowledge of an assignment by its principal obligates the agent to honor the principal‘s assignment [fn. omitted]; Kirby transformed that obligation, which is founded in the law of agency, into a duty owed to honor contracts made by creditors of the principal even though the escrow holder had no agency relationship with the creditor [fn. omitted].” The Builders’ Control Service court did say that “receipt of notice [of an assignment] is tantamount to new instructions.” (Builders’ Control Service, supra, 205 Cal.App.2d at p. 74.) However, under the facts of that case, the statement meant no more than that a party to an escrow may issue new instructions to the escrow holder in the form of an assignment. As the Court of Appeal here observed: ”Kirby‘s citation to Builders’ Control Service as holding that receipt of notice of the assignment was equivalent to the receipt of new escrow instructions regarding the party to be paid demonstrates Kirby‘s misreading of Builders’ Control Service. In the context of Builders’ Control Service, the agent‘s receipt of notice of the assignment could be deemed the equivalent of a new instruction regarding the party to be paid because the assignment was made by the owner-builder, a party to the escrow entitled to give instructions to the escrow holder. However, Kirby transmuted that agency concept into a holding that transactions by strangers to an escrow can supersede and amend the instructions given by the parties to the escrow. Nothing in Builders’ Control Service supports that remarkable conclusion.”5
For the reasons stated, Kirby v. Palos Verdes Escrow Co., supra, 183 Cal.App.3d 57, is disapproved insofar as it is inconsistent with the views expressed herein.
In the alternative, relying upon
In Biakanja v. Irving (1958) 49 Cal.2d 647, 650 [320 P.2d 16, 65 A.L.R.2d 1358], we stated: “The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant‘s conduct and the injury suffered, the moral blame attached to the defendant‘s conduct, and the policy of preventing future harm. [Citations.]”
Applying the six-factor Biakanja test to the facts of this case, the Court of Appeal concluded there was no reason to depart from “the general rule that an escrow holder incurs no liability for failing to do something not required by the terms of the escrow or for a loss caused by following the escrow instructions. (Axley v. Transamerica Title Ins. Co., supra, 88 Cal.App.3d at p. 9).” We find the analysis of the Court of Appeal persuasive. “First, the transaction CLTC undertook was not intended to affect or benefit Summit. CLTC was engaged by Dundrel and Furnish to assist them in closing a loan transaction between Dundrel and Furnish, and any impact that transaction may have had on Summit was collateral to the primary purpose of the escrow. Second, although the certainty of injury element is satisfied because the evidence supports the conclusion that Summit did not receive the funds paid to Talbert, the foreseeability of harm element does not support a duty because there is no suggestion CLTC could have foreseen that
CONCLUSION
We decline to adopt a rule that would, by subjecting an escrow holder to conflicting obligations, undermine a valuable business procedure, and we therefore affirm the judgment of the Court of Appeal.
George, C. J., Kennard, J., Baxter, J., Werdegar, J., Chin, J., Moreno, J., concurred.
WERDEGAR, J., Concurring.—I join the majority in concluding that defendant Continental Lawyers Title Company (CLTC) owed no duty, as a fiduciary or under the law of negligence, to make the loan payoff to plaintiff Summit Financial Holdings, Ltd. (Summit), rather than to the original lender, Talbert Financial (Talbert). I have signed the majority opinion because I understand its holding as limited to this and similar fact situations and, in particular, as not deciding whether an escrow holder might breach its fiduciary duty to a party to the escrow by paying off, pursuant to instructions, an original lender who had assigned and transferred the note and deed of trust to another.
Under
In short, a borrower subjected to double payment of a loan because the escrow agent paid the wrong party might be able to recover from the escrow agent in the amount of the payment or other damages, even if the escrow agent was only following its instructions. In the present case, however, we need not face this question, as here a federal bankruptcy court and the appellate court below held the payment to Talbert extinguished the borrower‘s debt, and the parties no longer dispute that point.
Also properly left unaddressed in the majority opinion is Summit‘s perfunctory claim that CLTC is liable for violating
I concur in the majority opinion, which correctly resolves the narrow question presented by the parties to this case.
Moreno, J., concurred.
Respondent‘s petition for a rehearing was denied May 15, 2002, and the opinion was modified to read as printed above.