Daily Development for Tuesday, November 18, 2003 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu ESCROWS; CLOSING AGENTS; IMPUTED RESPONSBILITY: Simple fact that a closing official acts as an agent of a third party lender in dealing with escrow documents does not make lender equitably subordinate to equitable vendor's lien when agent closes the transaction without receiving all of the down payment from buyer. Sunnyside Feedyard v. Metropolitan Life Insurance Company, 106 S.W.3d 169 (Tex. Ct. App 2003). Sunnyside sold a feedyard operation to Wacross, Inc. Wacross borrowed a portion of the money for the feedyard purchase from Metropolitan. The transaction was closed with a closing agent, and during the closing process, Sunnyside executed a warranty deed to the property. In a transaction technique the editor believes is unique to Texas, the lender, through the escrow, directed that the funds be paid directly to the seller in exchange for an assignment of the seller's vendor's lien note, which the Bank's deed of trust then securedddn17.03. The editor believes that this device is used to establish priority over mechanic's liens, which have Constitutional status in Texas, but stands ready to be corrected by Texas practitioners. In fact, the closing agent closed the deal without receiving all the sale proceeds from the buyer. The deed presented to the seller included an acknowledgment that it had received all the monies, and it of course executed it in escrow. The deed was to be delivered, presumably, contingent upon the agent's receipt of all the money from the buyer. Thus, the deed was delivered and recorded, the deed of trust to the lender recorded, and the lender's money paid over to the seller. After the closing, Sunnyside discovered that it didn't get all the money it expected and filed suit against Metropolitan and many others to establish its vendor's lien for the unpaid monies. In this part of the case, Sunnyside claimed that its vendors lien was superior to the lien securing Metropolitan's note. The court held that, although equitable subordination is appropriate when the holder of a superior lien has acted inequitably toward another lienholder, Sunnyside here had failed to cite authority or produce evidence for any of the specific legal doctrines on which it relies to classify Metropolitan's conduct as inequitable. It refused to impute the closing agent's conduct to Metropolitan, noting that it was beyond the instructions provided by Metropolitan. Further, although the seller had a role to play in the selection of the escrow officer, Metropolitan did not, and the court further noted that the officer was an agent of the seller to the same degree that it was an agent of Metropolitan. Comment: Really not much surprising here, since the lender, Metropolitan, had virtually no say in the selection of the escrow officer, the officer was also an agent of the seller, and the agent's defalcations were beyond the scope of the instructions provided by Metropolitan. What the editor does find interesting is the combination of two vendor's liens here, one with the seller and one with the mortgagee. There was no express agreement to subordinate one to the other. Of course the vendor assigned its lien to the mortgagee, but only conditional on full payment, which did not occur. An interesting equitable puzzle. It is likely that the competing equities on this particular score were not resolved in the instant decision, which seemed to focus more upon the question of whether the lender had some responsibility for the escrow agent's actions. But there is still another question to be resolved. Maybe we'll hear more on this one later. Readers are encouraged to respond to or criticize this posting. Items reported on DIRT and in the ABA publications related to it are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data provided and opinions expressed by the DIRT editor the sole responsibility of the DIRT editor and are in no sense the publication of the ABA. 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