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Escrow agent lacks duty

What the court held

Case: Black v. Metro Title, Inc., No. 2005AP1423.

Issue: Does an escrow agent owe a duty to an incidental beneficiary?

Holdings: No. An escrow agent is an agent and fiduciary of only the parties to the escrow.

Counsel: Brad L.F. Hoeschen, Milwaukee, for appellant; John G. Goller, Milwaukee, for respondent.

An escrow agent has no duty toward incidental beneficiaries, the Wisconsin Court of Appeals held on Feb. 15.

When Victoria and Gunnard Black got divorced, they owned a home, and the marital settlement agreement and judgment provided as follows:

“Upon the sale of the property, the remaining mortgage and all costs and expenses shall be paid off and the resulting balance shall be split between the Petitioner [Victoria] and Respondent [Gunnard] as follows: fourteen thousand one hundred dollars ($14,100) will be given to the Petitioner and then the remainder will be split equally between the Petitioner and the Respondent.”

In 2001, Victoria took part in a transaction where she was to sell her interest in the property to Gunnard, and First State Mortgage was to refinance the property. The equity at that time was approximately $96,200. Metro Title, Inc., acted as the closing and escrow agent for the transaction.

According to the complaint, Victoria executed a quitclaim deed, transferring her interest in the property to Gunnard. However, she was then informed by Metro’s agent that she would only be receiving the $14,100 portion of the settlement and not her half of the equity.

Victoria then refused to sign the real estate transfer tax return and left with that unexecuted return. However, Metro drafted a new return, and had Gunnard sign as both grantor and grantee.

Gunnard later sold the home for $125,000, but there was less than $10,000 in equity at that time. According to the court, Gunnard “squandered” the proceeds from the refinancing.

Victoria then brought suit against Metro, alleging negligence, but Waukesha County Circuit Court Judge Mark Gempeler granted summary judgment to Metro. Victoria appealed, but the court of appeals affirmed in a decision by Judge Richard S. Brown.

The court held that an escrow agent has no duty toward incidental beneficiaries to an escrow, and Victoria was only an incidental beneficiary.

Reviewing case law from other jurisdictions, the court found that, in order for a duty to exist, the plaintiff must be a party to the escrow contract.

The court acknowledged exceptions — where a third party is the victim of fraud on the part of the escrow agent, or where the agent engages in self-dealing or has a conflict of interest. However, the court found that none of the exceptions apply to Victoria.

The court held, “Absent those facts, we must fall back on the general rule that an escrow holder’s obligations are limited to compliance with the parties’ instructions.”

Quoting Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co., 41 P.3d 548, 552 (Cal. 2002), the court wrote, “the escrow holder has ‘“no general duty to police the affairs of its depositors”; rather, an escrow holder’s obligations are “limited to faithful compliance with [the depositors’] instructions.”’”

The court also cited Summit Financial Holdings, for the proposition that an escrow holder owes no duty of care to a nonparty to the escrow.

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Case Analysis

Turning to the merits of the summary judgment motion, the court found that the undisputed evidence showed that the only parties to the escrow were First State Mortgage Corporation, Metro and Gunnard. In addition, the closing instructions given to Metro did not require or permit it to pay Victoria half of the equity in the home.

The court found, “Victoria’s counteraffidavit does nothing to dispel this assertion of the facts. At the most, she tells how she was present at the closing and thus was a party to the ‘transaction.’ But being present at the transaction in contemplation of a payout does not make her a party to the agency agreement, and that is the key ingredient missing from her summary judgment papers.”

The court added, “On this appeal, we deem the sole issue to be whether there is a cause of action for negligence and a duty on the part of Metro to disclose to Victoria that its instructions did not include giving her half of the equity. We have held that there was no such duty.”

Accordingly, despite acknowledging that the court suspects “Vi
ctoria got snookered,” it affirmed the grant of summary judgment to Metro.

Click here for Case Analysis.

David Ziemer can be reached by email.

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