Daily Development for
Tuesday, August 25, 1998

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

ESCROW; LIABILITY FOR RECORDING: A title company’s duties are to those with whom it has a contractual relationship, and the scope of that duty is limited by the terms of the contract.

Luce v. State Title Agency, Inc., 950 P.2d 159 (Ariz. App. Div. 1 1997).

Owners of certain property transferred title to a limited partnership in which they had a 70% interest. General partners had general business control over the partnership affairs, but consent of limited partners was necessary in order for the partnership to encumber this property.

The general partners in fact gave a mortgage to a third party without the knowledge or consent of the limited partners. There is no evidence that the partnership received any money or other benefit on account of this mortgage.

Later, the third party lender sent the mortgage to a title company as a preliminary step toward seeking lender’s title insurance. In its forwarding letter, the lender asked the title company to record the mortgage, which the title company did. In connection with its review of the matter, the title company reviewed the partnership agreement and the court assumes that it knew that the consent of the limited partners was required and that it had received no evidence of such consent. The title insurer was never called upon to insure the lender’s interest.

The limited partners brought a quiet title action and in connection with that action sued the title company for damages incurred as a consequence of the recording of the instrument. The trial court granted the title company summary judgment on this claim, and the court of appeals here affirmed.

The limited partners argued that the insurer, as a prfessional, had a duty to protect them from foreseeable harm and that it breached this duty by negligently recording the deed of trust. But the court pointed out that generally,a title company's duties are to those with whom it has a contractual relationship, and the scope of duty is limited by the terms of the contract. The court conceded that Arizona indeed had imposed some duties on title companies acting as escrow agents that “have, to a limited extent . . . extended beyond the terms of their contracts.” In fact, Arizona has several cases that impose duties on escrow companies to disclose apparent evidence of fraud in escrows that they are conducting. Berry v. McLeod, 124 Ariz. 346, 352, 604 P.2d 610, 616 (1979). Burkons v. Ticor Title Ins. Co. of Cal., 168 Ariz. 345, 35253, 813 P.2d 710, 71718 (1991) See also Tibor Nagy, Jr., Note, Escrowees' Duty to Disclose Fraud: An Expansion of the Limited Agency Doctrine, 22 Ariz. L.Rev. 1146 (1980). In those cases, however, the court pointed out, a “relevant contractual relationship” existed. In the present case, the insurer had no contractual relationship to anyone regarding the deed of trust it gratuitously recorded.

Further, the court stated, “even if a contractual relationship did exist regarding the recordation, the question still comes down to ‘whether the professional had a duty to protect foreseeable third parties from harm.’" Some cases had recognized a duty, even absent a contract relationship, where a party has certain status that puts it in a position to foresee harm and to control it. In these cases, if the party is a professional, it may be required to share with the primary wrongdoer the consequences of injury to others. But the court held that the title company had no control over the general partner's operation of the partnership, and no special status or relationship regarding either the general partners or the limited partners.

The court had its greatest difficult distinguishing Seeley v. Seymour, 190 Cal.App.3d 844, 237 Cal.Rptr. 282 (1987). There, the California Court of Appeal held that a title insurance company could be liable for negligently recording an invalid document. The court here held, however, that the facts in Seeley differed significantly from those in the instant case. The recorded instrument in Seeley was void on its face. Additionally, the Seeley title company had a contract with the county recorder's office that required the title company to review documents to ensure their validity prior to recording. No such contract existed in the instant case.

Comment 1: A dissenting judge pointed out that the distinctions that the court argued exist between this case and the prior Arizona and California cases are not relevant, and that the policy determinations made in those cases that parties rendering professional services have a duty to prevent foreseeable undue injury to others resulting from such services are valid policies that should have controlled here.

The editor agrees with the dissenting judge that it is difficult to reconcile the outcome here with the precedent cases.

Comment 2: The question remains, however, whether the precedent cases were right. What good is achieved by imposing a duty of care on escrow agents to protect non-contracting foresseable plaintiffs? Does this good outweigh the considerable burden of forcing every escrow agent and title company to suspect fraud in every transaction? The editor was critical of the Arizona precedent cases when they were first decided, and welcomes this case limiting the reach of the earlier precedent. The editor, however, would prefer that the limitation be based upon principled analysis, rather than somewhat disingenuous distinctions that blur the common law lines.

Once principles of liability have been developed in this area, it remains to be seen whether there are certain limited circumstances in which it makes sense to clothe an escrow officer as a traffic cop.

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 16, 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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