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
prandolph@cctr.umkc.edu
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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