Daily Development for
Monday, January 3, 2003

by: Patrick A. Randolph, Jr.
Professor of Law, UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

ESCROW; DUTY OF AGENT; DISCLOSURE:  Escrow Agent Has No Duty to Tell Buyer
That Property Does Not Fit Description in Contract.

Denaxas v. Sandstong Court of Bellevue, L.L.C., 63 P.3d 125 (Wash. 2003)

This decision reverses a court of appeals decision that had imposed a duty
on the agent to disclose that the property being purchased was less property than that
which the seller had contracted to deliver.

The original error, apparently, derived from an error by the
broker.  Sellers listed their property with broker and told him that they owned two lots and part of a third.  Another agent in the same
brokerage produced buyer.  The court does not describe the brokerage agency
relationship.  It appears that the court views the brokerage as representing both parties
through its two agents. The agent operating as the buyer's broker erroneously wrote up the contract with a legal
description, obtained from an online database, that described three full
lots.  The contract was then sent to the title company, which also performed escrow and closing services.

Every other document used in the transaction contained the correct
information.  Seller got a survey, which showed the correct lots and square footage, but claimed that he forwarded it directly to his architect without reading it.   A site plan the architect had approved at the City also had the correct information.  Allegedly the exact size of the property was not evident from physical inspection.  (In another part of the opinion, the court finds that the architect's knowledge of the square footage should be imputed to the buyer, and denied defenses to the foreclosure based upon buyer's ignorance of the true facts.)

The title company distributed a preliminary report showing the correct
legal description of the property owned by the buyer that it was willing to insure, and the title company's escrow agent drafted the deed, purchase money deed of trust, and other closing documents from that description.

The escrow instructions contained boiler plate language stating that buyer
and seller had examined and approved the documents.

Eight months after closing, the buyer discovered the discrepancy, which
substantially reduced the square footage of the property, and attempted to renegotiate a reduction in the principal of the purchase money mortgage.  They refused.  He defaulted.  They
foreclosed.  In the foreclosure, seller brought in the escrow on a claim for negligence and breach of fiduciary duty.

The Court of Appeals, reversing summary judgment for the escrow company,
had found that the failure to disclose the discrepancy between the agreement and the closing
documents was both a breach of fiduciary duty and a breach of the duty of care; but the
Washington Supreme Court disagreed.  The court stated that the escrow agents duties and limitations are "defined . . . by his instructions," and that there was nothing in the instructions stating that there was a duty to compare the documents and look for discrepancies.

The court distinguished an earlier Washington case in which a lawyer,
acting as escrowee, made changes in the closing documents after he had shown them to the
parties.  The lawyer/escrow was found liable for failing to disclose those changes.  But the court concluded that the principles in that case did not apply where the escrow agent does not alter documents sent to it, but rather simply processes documents provided by the parties.

The court also rejected the notion that the escrow agent, because it
drafted purchase money the deed of trust,  was engaged in the practice of law and should be held to the standard of a practicing lawyer.  The court's comments here are worth noting:

      ". . . Purchaser does not allege that the Title Company's preparation
of these documents
      did not meet the standard of care for an attorney.  Instead,
purchaser complains that the
      Title Company did not alert Purchaser of the incorrect legal
description in the Agreement,
      which was drafted by Purchaser's real estate agent [sic].  This
Purchaser [sic]insists, is
      not the practice of law.  The Title Company should not be held to the
standard of care of
      an attorney for conduct that is not alleged to be the practice of law."

Note:  The court does not explain its comment above that the Purchaser was
insisting that the drafting of the deed of trust was not the practice of law.  This may be a
misstatement.  In any event, most jurisdictions now conclude that a title company's use of a
standard form purchase money mortgage form that the title company is expected to insure is not the practice of law.  This might not be the case if the party preparing the deed of trust was an independent escrow company.

Reporter's Comment: The editor got the basic information for this case from
Bush Nielsen's excellent Title Insurance Law Newsletter.  Bush's comment is: "This
decision properly closes a wide loophole, and places the responsibility for due diligence back on the real estate buyer."

Editor's Comment 1: Of course, the buyer should bear a burden of due
diligence.  The buyer's lawyer, if he had one, should have picked out this issue.  Query: Would it be malpractice if the buyer's lawyer missed this issue?  The editor thinks that the answer is yes, depending upon the level of responsibility the lawyer had for processing the documents.  Even if the lawyer didn't draft the deed and purchase money mortgage, the lawyer responsible for overseeing the closing ought to verify that the property description in the deed matches that in the contract.  We all catch that one.  Wouldn't we?

Editor's Comment 2: But the editor continues to bothered by the tone of the
case - which suggests that the escrow agent has no responsibility to call the parties'
attention even to the most glaring irregularities - even when the agent has actual knowledge of them and even when the agent is aware that the parties did not intend these irregularities.  These latter facts may not have been present in this case, so the editor isn't necessarily criticizing the outcome, but isn't it the
fact that the agent's duties do go beyond simply following the
instructions?  Doesn't any professional have some responsibility to avoid obvious harm to those relying upon the professional's services, even when there are no instructions to that effect?

Editor's Comment 3: It is not that unusual for the deed description to be
different from that set forth in the contract.  Post-contract surveys often lead to changes in the property to be sold, and sometimes title companies or surveyors develop alternate descriptions even when the property hasn't changed.  It's not the escrow agent's responsibility to study the description in each case to
be certain that nothing has changed.  But if the agent has actual awareness that there's been a significant change in the property to be sold, and that this change was not
the result of bargaining by the parties, but an apparent error, wouldn't we all expect the agent to let us know?

In short, the editor concurs that the escrow has no duty to seek and find
errors in the documents prepared by others.  But where the escrow agent has
actual knowledge of these errrors, can the agent proceed to close a deal
that the escrow knows is not the one the parties intended?

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