The scope of an escrow agent’s legal duties and liability has expanded in Arizona over the years. This post discusses the range of potential claims against an escrow agent.
- Liability for Breach of Contract:
It is long-established law that an escrow agent’s duties are defined by the escrow agreement. See, e.g., Tucson Title Ins. Co. v. D’Ascoli, 94 Ariz. 230, 234, 383 P.2d 119, 121-22 (1963) (an escrow agent is held to strict compliance with the terms of the escrow agreement, and is liable for all damages resulting from any deviation). If an escrow agreement requires the delivery of payment and satisfactory title, and the agent fails to do so, they are potentially liable for breach of contract.
- Liability for Breach of Fiduciary Duty:
In addition to liability for breaching the escrow agreement, an escrow agent can be liable for breach of fiduciary duty. Arizona’s Supreme Court has described the relation between parties to an escrow and the escrow agent as one of trust and confidence, referring to the agent as a trustee. Berry v. McLeod, 124 Ariz. 346, 604 P.2d 610 (1979). In his fiduciary capacity, the agent must conduct the affairs with which he is entrusted with “scrupulous honesty, skill, and diligence.” Id. at 351; 604 P.2d at 615. Arizona’s common law imposes two distinct fiduciary duties on escrow agents. The first is the duty of strict compliance with the terms of the escrow agreement, and the second is the duty to disclose facts that a reasonable escrow agent would perceive as evidence of fraud being committed on a party to the escrow.
It is well-settled in Arizona that an escrow agent’s duties extend beyond the express instructions in an escrow agreement where the agent’s failure to disclose fraud will assist the perpetration of the fraud. Id. Originally, this duty to disclose only arose when the escrow agent knew that fraud was being committed on a party to the escrow. However, the Court in Burkons v. Ticor Title Ins. Co. of California, 168 Ariz. 345, 353, 813 P.2d 710, 718 (1991) extended that duty to disclose to cover what a reasonable escrow agent would perceive as evidence of fraud.
- Tort Liability for Bad Faith Breach of Contract:
Although parties have argued that tort liability exists for the bad faith breach of an escrow agreement, this theory of liability has not been particularly successful in Arizona. Ordinarily, the remedy for breach of the implied covenant of good faith and fair dealing is normal contract damages, actual economic losses. In certain limited circumstances, the breach of this implied covenant may provide the basis for imposing tort damages, such as emotional distress or punitive damages. See Burkons, 124 Ariz. at 355; Wagenseller v. Scottsdale Mem’l Hosp., 147 Ariz. 370, 388, 710 P.2d 1025, 1043 (1985). Tort damages for breach of the implied covenant of good faith and fair dealing may be available, but only where there is a “special relationship between the parties arising from elements of public interest, adhesion, and fiduciary responsibility.” Burkons, 124 Ariz. at 355. The assessment of tort damages for breach of contract is most often allowed in situations in which the rule restricting recovery to contract damages would promote breach of the contract rather than its performance. Id. In Burkons, the Court found that traditional contract damages would provide adequate compensation under the facts of that case, and that claims for tort damages were not supported.
- Negligence and Fraud
An escrow agent may also be exposed to claims of negligence and fraud. See, e.g., Baker ex rel. Hall Brake Supply, Inc. v. Stewart Title & Trust of Phoenix, Inc., 197 Ariz. 535, 5 P.3d 249 (Ct. App. 2000) disapproved of by In re Parmalat Sec. Litig., No. 04 MD 1653 (LAK), 2007 WL 5008628 (S.D.N.Y. Feb. 21, 2007). The cases generally hold that liability for these claims requires a particularly egregious set of facts—much more than a failure of an escrow agent to follow escrow instructions.
For example, in Baker, an attorney solicited plaintiffs to invest in a number of limited partnerships. With the participation of a real estate broker, accountants and title companies, he defrauded them by purchasing land under a fake name and then reselling it to the limited partnership at an inflated price. The escrow agent processed at least eight escrows that the attorney established in the name of fictitious buyers or shell entities. In one transaction, she notarized the signature of a fictitious person, and on another she assisted the lawyer in impersonating a fictitious buyer in a face to face meeting with the original seller. The Court of Appeals held that if plaintiffs can demonstrate that the escrow agent acted improperly in their transactions and that the wrongdoing fell within the scope of employment, the escrow company may be liable for the fraud and negligence claims relating to the transactions.
So, as a title company or as a consumer, what is the best way to address these potential avenues of liability? As a title company, it is important to review policies and procedures in place to ensure that they effectively minimize risk of exposure. As a consumer, it is important to know when an error by an escrow agent may lead to damages and a legal claim. From the perspective of either title company or consumer, it is critical to know the scope of your rights, duties and liabilities.
Our next blog post will examine the facts of the Burkons case in detail, demonstrating the potential complexity of escrow liability. If you have questions about these or other legal topics, do not hesitate to contact us at Chernoff Law Firm.