Burkons v. Ticor Title Ins. Co. of California

Citation168 Ariz. 345,813 P.2d 710
Decision Date18 June 1991
Docket NumberNo. CV-90-0292-PR,CV-90-0292-PR
PartiesEarl M. BURKONS, Plaintiff/Appellant, v. TICOR TITLE INSURANCE COMPANY OF CALIFORNIA, a California corporation, Defendant/Appellee.
CourtSupreme Court of Arizona
OPINION

FELDMAN, Vice Chief Justice.

Ticor Title Insurance Company of California (Ticor) petitioned us to review a court of appeals' opinion, claiming that the court had improperly expanded the duties and obligations of an escrow agent, creating obligations not previously imposed by law. See Burkons v. Ticor Title Ins. Co., 165 Ariz. 299, 798 P.2d 1308 (Ct.App.1989). Because the facts raised important legal questions concerning the obligations of escrow agents doing business in this state, we granted review on all issues. See Rule 23, Ariz.R.Civ.App.P., 17B A.R.S. Having permitted briefing by various amici, who submitted the views of the industry on the issues presented by the case (Rule 16, Ariz.R.Civ.App.P., 17B A.R.S.), and having heard oral argument, we conclude that we agree with the disposition made by the court of appeals and reverse the judgment of the trial court. We have jurisdiction under A.R.S. § 12-120.24 and article 6, § 5(3) of the Arizona Constitution.

FACTS

This case, and two others consolidated for argument, 1 arise from a series of seven transactions in which an entity known as Pyramid I (Pyramid) purchased various parcels of real estate from different sellers. There are some factual differences between the three cases before us, but the essential outlines of Pyramid's scheme are the same for each and evidently for all seven of the transactions.

A. General Scheme

In each case, Pyramid contracted to purchase real property from an unsophisticated seller for a low down payment and agreed to secure the balance of the purchase price with a note secured by a deed of trust. In each case, the seller agreed to subordinate the purchase money deed of trust to a loan that Pyramid was to obtain. For summary judgment purposes, we must assume that the seller was led to believe the loan would be used to finance construction on the property being sold. Although Pyramid supplied the seller with a letter of intent describing the construction it contemplated financing, the letter avoided any express commitment to use the loan proceeds for that purpose.

Pyramid, indeed, obtained a loan on each parcel, usually for at least fifty percent of the total sale price of the property, and, in each instance, the seller's deed of trust was subordinated and priority given to the lien of the buyer's lender. No construction was ever commenced. 2 The buyer defaulted on each note and deed of trust sometime after closing and walked away from its obligations. This left the seller's purchase money obligations in second position.

The construction loan was actually used to finance the down payment. Worse, the escrow agent disbursed the remainder of each loan to the buyer without restriction, and the money presumably wound up in the buyer's pocket. In at least six of these transactions, including the three before us, Ticor was the escrow agent. The transaction in this case was the third in the series.

B. Facts of This Case

Burkons owned a parcel of property near Northern Avenue and Black Canyon Freeway in Phoenix. His brother-in-law, Arthur Schnitzer, held a power of attorney authorizing him to sell the property on Burkons' behalf. Schnitzer completed the transaction but died before he could testify. The record on review 3 reveals that in 1983, Schnitzer agreed to sell the property to Pyramid, a joint venture composed of Mark Masias, Dr. Dennis Noss, and Domenico Spano. The purchase price was to be $135,000, of which Pyramid was to pay less than twenty percent at close of escrow, with the balance of $110,000 to be evidenced by a promissory note from Pyramid to Burkons. The note was to be secured by a deed of trust. The purchase contract contained a handwritten provision that stated: "escrow to contain subordination agreement drawn up by buyer's attorney on form acceptable to title company. Escrow to contain letter of intent as to amounts and use...." The parties supplemented the contract to provide that the buyer "may not place another lien of any type against this property without written permission from the seller."

Ticor was named escrow agent, and its escrow officer, Joyce Yancy, prepared escrow instructions based on the purchase contract. The escrow instructions were signed by the parties and provided that the purchase money note would be secured by "first lien deed of trust." The instructions also provided that the seller was to "accept and approve in writing a subordination agreement, letters of intent with financial statement." In fact, Pyramid prepared such a letter of intent, which read:

To Whom it May Concern:

Rev. Domenico Spano and Dr. Dennis B. Noss formed a joint venture to construct a medical complex on the project mentioned. We, therefore, intend to start construction as soon as approval is met.

We have contracted for the property to be carefully master planned by ... and hope our site plan is ready by December 1, 1983.

Because of our building methods, subordination will be minimal, approximately fifty percent of the selling price.

Reading this closely, one finds great promise of a medical center but no express promise to build one. As it turned out, Pyramid borrowed $67,000 from Tower Acceptance and Services Corp. (Tower). The subordination agreement prepared by Pyramid and signed by Burkons expressly incorporated the letter of intent quoted above. Ticor filled in the blanks of the signed subordination agreement with the specifics of the Tower loan and the Burkons purchase money lien.

The Tower loan was closed at another title company, which remitted to Ticor $46,705.69 out of the $67,000 Tower obligation and retained the $20,000 plus difference for commissions, loan fees, and prepaid interest. Of the funds received by Ticor, $24,000 was used by Pyramid for the down payment at closing. 4 Ticor paid the remainder of approximately $22,000 to Pyramid at the close of escrow. Ticor then recorded the lien documents in the following order: the Tower deed of trust, the Burkons deed of trust, the subordination agreement, and the letter of intent. Thus, Burkons argues, as far as the county recorder's records showed, the Burkons deed of trust was junior to Tower's, both because of the order of recording the liens and the fact that the subordination agreement was recorded. Ticor did not inform Burkons of the source of Pyramid's down payment or the fact that the property was to be "over-encumbered." 5

Pyramid did not improve the property and defaulted on its payments to Burkons. The record does not reveal whether Burkons has collected anything on Pyramid's note or taken any action to foreclose his purchase money deed of trust. Sixteen months after close of escrow, Burkons did bring this action against Ticor, asserting five counts for relief. These are:

Count 1: Breach of contract for recording the deeds of trust and the subordination agreement in such a manner as to subordinate Burkons' lien to anything other than a construction loan; count 2: breach of duty for failure to follow the instructions in the escrow agreement; count 3: breach of fiduciary duty for failure to disclose known fraud; count 4: liability for bad faith breach of contract; count 5: damages for emotional and mental distress.

The trial court dismissed the bad faith count for failure to state a claim and granted summary judgment to Ticor on the remaining counts, awarding it $35,000 in attorney's fees. A divided court of appeals reversed on all counts and awarded fees on appeal to Burkons. Burkons, 165 Ariz. at 313, 798 P.2d at 1322. We granted Ticor's petition for review.

DISCUSSION

Ticor presents six issues that fall into four categories. The first deals with the interpretation of the agreement between the parties, specifically whether the parties intended to subordinate Burkons' lien if the buyer's loan was not to be used to improve the property. The second deals with Burkons' assertion that an escrow agent has a duty to disclose fraud. The third with the bad faith issue, and the fourth with attorney's fees. We address those issues in turn.

A. The Contract

In the first two counts of the complaint, Burkons alleged that Ticor had breached the escrow instructions and its fiduciary duty as an escrow agent in two ways. The first is based on Burkons' view that the agreements with Pyramid only allowed subordination to a construction loan. By recording the documents as it did, Burkons contends, Ticor effectively subordinated his lien to a loan that was not used for construction, thus breaching both the escrow instructions and its obligation to carry out the intent of the parties as stated in their contract.

The court of appeals held that when the documents were read together, "no trier of fact could reach any other reasonable interpretation than that Burkons signed the subordination agreement because he believed that Pyramid intended to construct improvements on the purchased land with loan proceeds obtained from Tower." Burkons, 165 Ariz. at 305, 798 P.2d at 1314. Thus, the majority concluded, Pyramid breached the contract by using the Tower loan for the down payment and by pocketing the rest of the loan proceeds, and, by permitting this, Ticor breached the escrow agent's duty to...

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