Daily Development for Wednesday, August 2, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

ESCROWS; DUTY OF CARE: In the absence of a contractual or other relationship beyond the usual escrow arrangement, it is not the function of an escrow agent to monitor, steward, or salvage the business relationship of the principals; it is the principals' own responsibility to create, conduct, and communicate with one another about their fundamental business and contractual dealings.

Bowles v. Key Title Company, 986 P.2d 1236 (Or. App. 1999).

Plaintiff was interested in obtaining an option on a small piece of land that was a useful accessway to a larger development parcel that plaintiff was in the process of obtaining. An employee of the plaintiff prepared a letter of intent stating that, for $500 consideration, the land owners would grant plaintiff an option to purchase their property. The letter contained the term that the plaintiff would deliver a formal agreement and the $500 consideration to the defendant escrow company within 15 days after optionors signed the letter of intent.

The plaintiff transmitted the letter to the landowners, who signed it, and turned it over to their broker for carrying out the deal. The broker delayed a week in doing anything, and then asked the defendant escrow agent to prepare the necessary formal option agreement. The defendant refused to prepare the agreement, stating that this would constitute the practice of law, but indicated that it would fill in the blanks in a standard form agreement if it received the necessary information from the parties. At trial, there was a dispute as to how long it took the broker to provide the necessary information, and whether the broker provided the information before the two weeks had run following the optionor's execution of the contract. But it was clear that when two weeks had run there was no formal option contract prepared and the optionee had not been told to provide the $500 into escrow or to sign a formal agreement.

Two weeks after the optionor signed the letter agreement, optionier appeared at the defendant escrow agency on a Friday and asked to receive the $500 and to execute the final agreement. There was no agreement to be signed and, of course, no $500. The escrow agent attempted to reach both plaintiff and the real estate agent by telephone, but could reach no one in authority. The optionors announced that the conditions in the letter of intent had not been satisfied and that the deal was off. They then executed a memorandum stating that the contract had not been satisfied and that they did not intend to perform, and departed.

The escrow agent informed the real estate broker of these facts on the following Monday, and the real estate agent (agent for the optionors, remember) directed the escrow agent at that time to fill out the form and send it to plaintiff with a request that plaintiff sign it and provide the $500, which plaintiff did. But the escrow agent never informed the plaintiff that the optionors had taken the position that the deal was off. Despite efforts by the escrow agent and the broker, the optionors never responded to any requests to come into the escrow office and revive the deal. The escrow agent never told the plaintiff that the option remained unexecuted and that the $500 remained undistributed.

About eight months later, the plaintiff, allegedly still unaware that the option agreement had been rejected by the optionor, proceeded to negotiate the sale of the entire development project, including the option to another. When it was later discovered that the option was no longer available, plaintiff was forced to reduce the sale price, and thereafter sued the escrow for negligence. (There is no mention of any claim against the broker, whose inaction during the critical week following optionor's execution of the intent letter appeared to lead to the problem.)

The theory of negligence was that the escrow company had a duty to notify the plaintiffs immediately that the optionor had repudiated the agreement.

The court held that the escrow agent did not act negligently or breach its contract with real property purchaser by failing to inform purchaser that vendor decided "the deal was off" when vendor did not receive, within 15 days of executing purchaser's letter of intent, its $500 consideration for granting the purchase option, as required by the intent letter. In the absence of a contractual or other relationship beyond the usual escrow arrangement, it is not the function of an escrow agent to monitor, steward, or salvage the business relationship of the principals; it is the principals' own responsibility to create, conduct, and communicate with one another about their fundamental business and contractual dealings.

The court commented that the plaintiff's own employee had determined that the deal would be structured in the way it was with no "back end" and with a wide open acceptance opportunity by the optionors and no notice provisions back to the plaintiff. The escrow agent merely followed directions provided to it, and was not negligent in doing so.

Comment 1: The editor agrees. Indeed, the editor is pleased that the opinion demonstrates an understanding on the part of the court that courts ought not to intervene in the commercial marketplace participants ought to stand or fall on the strength of their own agreements. Perhaps there was some liability on the part of the real estate agent, but even there additional fault lay with the plaintiff in permitting the optionor's agent to play such a critical role in the deal without any monitoring by the plaintiff. The real mistake on the part of the plaintiffs was not employing competent counsel. It got what it deserved.

Comment 2: The editor, of course, would expect to hear from an escrow officer if a proposed deal had not closed for eight months. This would be a matter of courtesy. The court suggests that perhaps the escrow agent had some duty not to communicate the original statements of the sellers, in light of the apparent attempt of their broker to revive the deal. But still, eight months later, it would have been a nice gesture for the escrow agent to remind the plaintiffs that the $500 had not been collected. Nevertheless, not all "nice things to do" ought to be viewed as legal responsibilities.

Editor's Aside: The editor is particularly gratified that the opinion was written by Chief Judge Mary Diets of the Oregon Court of Appeals, who, in her youth, was known as "The Boomer" for her devastating tennis service, which the editor personally experienced on more than one occasion when she and he were junior lawyers in the Oregon Attorney General's office.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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