In our previous blog post, we briefly discussed Burkons v. Ticor Title Ins. Co. of California, 168 Ariz. 345, 813 P.2d 710 (1991), a case which addresses the fiduciary duties of escrow agents.  In this post, we explore Burkons more in depth.  It involves an intricate set of facts, illustrating just how complex escrow liability can be.  

In Burkons, an unsophisticated seller brought an action against the escrow agent for breach of fiduciary duty and bad faith breach of contract.  The Burkons sale was one in a series of arguably fraudulent “cash back to buyer” sales which were closed at many escrow offices in Arizona, including those of Ticor Title, who was the escrow agent in this case.  The transaction involved the sale of real property, with the bulk of the sales price to be carried by the seller and secured by the property sold.  The seller agreed to subordinate the purchase money loan to a new loan the buyer was to obtain.  The seller provided a letter of intent that set forth construction plans for the property, but it contained no contractual obligation to use the senior loan funds in any particular manner.

The escrow agent did not disclose the source of the down payment to the seller.  Pursuant to the subordination agreement, the escrow agent recorded the lien securing the loan used for the down payment first, senior to the deed of trust securing payment to the seller.  The result was that when the buyer defaulted on both notes, the seller’s position was under-secured because the value of the unimproved parcel was less than the combined liens against the property.  In other words, the property was “overencumbered.”  Ticor Title had internal documents stating that overencumbered sales in which the buyer received money out of escrow could be vehicles for fraud.

The plaintiff alleged that Ticor breached its contract and its fiduciary duty by not disclosing how the new loan proceeds were to be used and by recording the carryback lien in a second position.  Id. at 353.  The plaintiff further alleged that the title company should have known that the buyer was defrauding the plaintiff and should have disclosed the fraud.  Ultimately, the Arizona Supreme Court held that material issues of fact existed that precluded the entry of summary judgment and sent the case back to the trial court for further proceedings.  

Duty to Disclose Fraud:  The Court rejected the title company’s suggestion that there was no duty to disclose unless the escrow agent actually knows that a fraud is being perpetrated.  The Court stated that, “Although not required to investigate, when the agent is aware of facts and circumstances that a reasonable escrow agent would perceive ‘as evidence of fraud,’ then there is a duty to disclose.  Id.

Expansive Duty to Follow Escrow Instructions:  Arguably, the Burkons court took a rather broad approach, looking beyond the escrow agent’s duty to comply with the escrow instructions themselves.  The court construed the escrow instructions as encompassing various other documents deposited into escrow such as the purchase contract, the subordination agreement, and the letter of intent.  Id. at 352.  The court pointed out that an “escrow agent must be cognizant not only of the escrow instructions but of the provisions contained in the documents deposited in escrow.”  Id.  When the escrow documents contain a “significant variance,” the agent has a duty to obtain clarification before proceeding.  Id.  Because the court found that the escrow documents examined altogether were unclear as to how the loan proceeds were to be used and what lien position the seller was to obtain, the court ruled that Ticor should have obtained clarification and may have breached the escrow instructions by not doing so.

Recently, however, in an unpublished decision the Arizona Court of Appeals interpreted escrow agent’s duty more narrowly.  In Touch Stone AZ-Central Properties, LLC v. Title Management Agency of Arizona, No. 1 CA- CV 12-0614, 2014 WL 1778356 (Ct.App.Div.1, May 1, 2014), Title Management was hired by the plaintiffs to act as escrow agent for the sale of commercial property it was purchasing.  It was discovered after the close of escrow that the property was encumbered by a deed of trust.  In examining the escrow agent’s duty, the Court stated that “the fact that Title Management knew that the parties intended a lien-free transfer did not transform Title Management from an escrow agent into a title investigator, guarantor, or insurer.  Nothing in the escrow contracts provided or even suggested that Title Management assumed responsibility for ensuring that no title defects existed.”  Id. at ¶ 9.  The Court concluded that, “Consistent with its duties as a fiduciary, Title Management performed precisely the duties required of it in the escrow contracts.”  Id.  Relying on Burkons, the Court recognized that Title Management assumed some obligations beyond the express terms of the escrow contracts.   Id. at ¶ 10.  For example, it was required to disclose any substantial title defects of which it had knowledge.  Id.  However, the Court found that Title Management was not required to search for fraud or title defects.  Id.

Given the potential complexity of cases involving escrow liability and their factual complexity, it is critical to find out the scope of your rights and responsibilities whether you are the title company or the consumer.  If you have questions about this or other legal issues, we welcome you to contact us at the Chernoff Law Firm.