Daily Development for
Friday, January 24, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

ESCROW; INSTRUCTIONS; TITLE CONDITION: Statement in escrow instructions that deed may be delivered when title company "is in a position to insure" seller's purchase money mortgage does not require that, as a condition of delivery, escrow agent facilitate the issuance of the insurance by arranging for recording of the deed and purchase money mortgage. Wurzl v. Holloway, 54 Cal. Rptr. 2d 512 (Cal. App. 1996).

Seller contracted to sell property to buyer, financed by a purchase money mortgage to seller for about 75% of the price. Closing was to occur through an escrow selected by buyer. Seller was suspicious of the escrow from the start, and almost terminated the escrow because he suspected irregularities, but was assured by brokers that the escrow company was OK. Ultimately, at the urging of his brokers, he agreed to go ahead only if the escrow documents were delivered to his son, an experienced real estate dealer. The documents were never sent to the son, but the escrow company closed escrow anyway, delivering the deed to the buyer and the down payment money to the seller (less the commission of the helpful brokers), but not delivering the mortgage to the seller.

As it turned out, the sellers' suspicions were well founded. The buyer in fact had set up a simultaneous escrow at the same escrow company. Under this escrow, the buyer, using a different name, borrowed a substantial amount from a local S&L secured by a first and second mortgage on the property. This escrow closed simultaneously with the first one. The escrow company apparently delivered a deed from the buyer in his original name to the buyer under his new name, and then delivered the mortgages to the S&L and disbursed the money to the buyer. Apparently the grantee himself recorded the deeds and the S&L promptly recorded the mortgages.

The sellers discovered the fraud almost immediately, and filed suit within six weeks to quiet title against the S&L's mortgages on the grounds that the deed had not been delivered validly. Thereafter, the S&L failed and passed into receivership. The trial court applied D'Oench to defeat the quiet title action.

The Court of Appeals affirmed, holding that D'Oench can be used to "protect the assets" of the failed institution in the hands of receiver even when the party against whom the doctrine is asserted had no contractual relationship with the institution. In the course of its analysis, which the editor found particularly muddy, the court appeared to reach a point of analysis requiring at least that the deed in question be viewed as "voidable" rather than "void" in order to invoke "D'Oench. This makes sense, to a degree. A "voidable" deed means that there is an equitable defense to its validity, which the court bars through invoking "D'Oench. If the deed is wholly void, however, it is hard to imagine that even D'Oench would validate the wholesale theft that would occur. A void deed is the equivalent of a forged deed. The court seems to acknowledge that federal law does not validate a forged deed against the true owner of the property.

But astute readers may wonder how the deed in this case could be viewed as "voidable" rather than "void." As to the condition that the escrow not close until the seller's son saw the documents, the court apparently concluded that this problem occurred because of the negligence of the brokers. It appearred to say that the escrow instructions, as understood by the escrow agent, did not include the condition regarding the son. Even if this was not the analysis, we must assume that there was some basis upon which the court determined that this condition was somehow waived.

Even with the waiver of the condition regarding the son's inspection, however, there is still the condition that the seller get the mortgage as well as the cash in exchange for the deed. As indicated, the mortgage was never delivered. The court's analysis (muddy - as I said) goes like this:

"The pertinent terms of the escrow agreement . . . are as follows:

"BUYER will deliver to you any instruments and/or funds required from Buyer to enable you to comply with these instructions, all of which you are authorized to use and/or deliver on or before August 20, 1990, and when you are in a positiion to obtain a OWNERS Policy of Title Insurance from Gateway Title . . . (new title policy to be delivered to lien holder) covering the [property].". . .

There was no requirement in the escrow instructions that before the deed could be `used' that escrow obtain title insurance, only that escrow was `in a position to obtain' such insurance. Otherwise, the terms had been met. The down payment, the promissory note and [mortgage] had all been placed in escrow."

If the editor properly makes out the court's reasoning, it is that there was no express requirement that anything actually be delivered to or recorded in favor of the Seller. Rather, all that the escrow had to ascertain was that the title company was prepared to insure. Once it had done that, it could deliver the deed to the buyer. The fact that the buyer had fraudulent intent with regard to the seller's mortgage was merely an equitable factor rendering the deed voidable, but not void.

The court then concludes with an analysis of a California statute embodying the equitable principle that as between two victims of fraud, the party most able to prevent the fraud should suffer the loss. The seller, by acquiescing in the escrow, empowered the delivery of the deed and was therefore more at fault than the S&L.

Comment: It seems critical to this holding that the escrow instructions authorized delivery of the deed without recording of the mortgage. As the editor suggests above, it boggles the mind to believe that these escrow instructions actually authorized the delivery of the deed without the concurrent delivery of the deed and mortgage for recording. The title insurance commitment certainly would have made delivery and recording of the deed and mortgage a condition precedent to the issuance of title insurance. Without these events, the escrow was not "in a position to obtain" and the insurer was not in a position to issue the insurance.

At least the editor's mind is boggled. One assumes that the California Court of Appeals probably is sleeping peacefully.

Drafting Tip: Many lawyers have been faced with the difficulty of drafting escrow instructions to third party escrows that restrict closing until recording is through and insurance issued. When one takes pains to phrase everything regarding these conditions just right, one is faced with massive opposition, especially from those (including brokers) eager for the money to fall into their pockets. Such parties object that the lawyer once again is picking nits and slowing down the deal. As this case makes clear, however, the phrase "when the title company is in a position to insure," in the words of the vernacular "ain't worth diddly." You must do more.

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 Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

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