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Escrow Case Analysis

Although one would hope that facts such as these never repeat themselves, and the case will never be cited as directly applicable precedent; nevertheless, the case is valuable as the first published Wisconsin case discussing the duties of escrow agents toward third parties.

Unfortunately, the analysis conflates two separate theories of liability: breach of fiduciary duty; and common law negligence.

Consider the following case discussed by the court, Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co., 41 P.3d 548 (Cal.2002).

The court cites the case for the two following propositions: an 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’”; and “an escrow holder owes no duty of care to a nonparty to the escrow; recognizing fraud exception to the limited duty to merely follow parties’ instructions.”

However, the plaintiff in Summit Financial alleged both breach of fiduciary duty and negligence. The holdings which the court of appeals in the case at bar cites are both contained in the California court’s discussion of fiduciary duty. 41 F.3d at 551-554.

In the case at bar, Black did not allege breach of fiduciary duty; she alleged only negligence.

The California Supreme Court held that summary judgment was properly granted to the escrow agent on this claim, as well as the breach of fiduciary duty claim.

However, the relevant portion of the decision reads as follows: “the threshold question in an action for negligence is whether the defendant owed the plaintiff a duty to use care, and the ‘recognition of a duty to manage business affairs so as to prevent purely economic loss to third parties in their financial transactions is the exception, not the rule in negligence law’ (citations omitted).”

The court then proceeded to apply a six-factor test from the case of Biakanja v. Irving, 320 P.2d 16 (Cal.1958), that governs exceptions to the above rule under California law.

Thus, while the Summit Financial case does support the court’s ultimate holding — summary judgment was proper — the court of appeals relies on an irrelevant portion of the decision and ignores that part of the discussion that is on point.

The questions that should have been considered in the case at bar are (1) whether, like California, our state negligence law does not recognize “a duty to manage one’s business affairs so as to prevent purely economic loss to third parties in their financial transactions,” and (2) if there is no general duty, whether this case is an exception, for which there should be a duty.

The law in Wisconsin would appear to impose a duty. In Stephenson v. Universal Metrics, Inc., 2002 WI 30, 251 Wis.2d 171, 641 N.W.2d 158, 163, the court stated the law regarding duty as follows: “In determining whether a duty exists, Wisconsin follows the approach of the dissent in the well-known Palsgraf decision.

Under that approach, every person owes a duty to the world at large to refrain from conduct that could cause foreseeable harm to others, even though the identity of the person harmed has not been established at the time of the conduct. A person is negligent when he or she fails to exercise ‘ordinary care’ — the amount of care which a reasonable person would use under similar circumstances. Thus, when determining the existence of a duty, the primary question we ask is not whether the defendant has a duty to take (or refrain from) certain actions, but whether the defendant’s actions (or lack thereof) were consistent with the general duty to exercise a reasonable degree of care under the circumstances (cites omitted).”

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Had the court applied this standard, it is difficult to imagine how it could have found that no duty was owed.

It could certainly be argued that, by signing the quitclaim deed without first determining how much money she would receive from the escrow, Black’s negligence far outweighed that of the escrow agent.

It could also be argued that, as a matter of public policy, an escrow agent is entitled to a “safe harbor” from negligence actions if it distributes money exactly as instructed by the grantor.

However, the holding of the court — that no duty exists on the escrow holder’s part to even exercise ordinary care — appears to be contrary to long-established negligence law in Wisconsin.

– David Ziemer

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David Ziemer can be reached by email.

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