Lee v. Title Ins. & Trust Co.

• Decision Date: 18 July 1968
• Court: California Court of Appeals Court of Appeals
• Parties: Jack W. LEE et al., Plaintiffs and Appellants, v. TITLE INSURANCE AND TRUST COMPANY et al., Defendants and Respondents. Civ. 947.

Page 378

70 Cal.Rptr. 378

264 Cal.App.2d 160

Jack W. LEE et al., Plaintiffs and Appellants, v. TITLE INSURANCE AND TRUST COMPANY et al., Defendants and Respondents.

Civ. 947.

Court of Appeal, Fifth District, California.

July 18, 1968.

Hearing Denied Oct. 23, 1968.

Lee & Hertzer by Theodore B. Lee, Stockton, for appellants.

Landells, Ripley, Gregory & Diamond by Greig A. Gowdy, San Francisco, for respondents.

GARGANO, Associate Justice.

Appellants brought this action for fraud, breach of contract, breach of trust and malpractice to recover damages resulting from a real estate transaction in which they purchased certain improved real property in Stockton, California. Respondents, Title Insurance and Trust Co. of Stockton, and its employee, John Roscelli, were the escrow holders in this transaction. Initially, respondents were named in several of the eight causes of action stated in appellants' complaint. However, respondents demurred to each cause of action and their demurrer was sustained. Afterwards, when appellants failed to amend, these causes of action were dismissed as against respondents.

Subsequently, plaintiffs filed an amended complaint stating an entirely new and separate ninth cause of action against respondents.

Respondents demurred to appellants' amended complaint and the ninth cause of action, and this time the court sustained their demurrer without leave to amend. Appellants appeal from this judgment of dismissal.

For the ninth cause of action appellants alleged: (1) Respondents knew that the $135,000 first trust deed against the real property which appellants purchased secured only a $100,000 loan but failed to notify appellants of this fact. (2) Respondents knew that the other defendants named in appellants' complaint were defrauding appellants in connection with the real estate transaction which respondents were handling in escrow but also failed to inform appellants of these facts. ¹

The only question presented here is whether respondents were under the obligation to notify appellants of the facts to which plaintiffs alluded in their complaint, assuming (as we must in the case of a demurrer) that they were aware of these facts. The gravemen of the ninth cause of action is respondents' failure 'to disclose.' Significantly, appellants neither contend or alleged that respondents misrepresented any of the facts connected with the escrow itself nor did they allege that respondents colluded with the other defendants to defraud plaintiffs or in any way participated in or were parties to the fraudulent acts attributed to these defendants. ² Moreover, they did not allege that respondents were negligent in the handling of the escrow or failed to carry out their specific escrow instructions. ³ Put abstractly, the crucial question is whether an escrow holder is under a fiduciary duty to go beyond the escrow instructions and to notify each party to the escrow of any suspicious fact or circumstance which has come to his attention before or during the life of the escrow which could conceivably affect such party even though the fact or circumstance is not related to his specific escrow instructions.

Generally speaking, an 'escrow' is a transaction in which one person, for the purpose of effecting a sale, transfer or incumbrance of real or personal property to another person, delivers any written instrument, money, evidence of title or other thing of value to a third party, the escrow holder or depository, to be held by him for ultimate transmittal to the other person upon the happening of an event or the performance of certain specified conditions (18 Cal.Jur.2d, Escrows, § 2, p. 303; Civ.Code, § 1057). Thus, according to one view, the escrow holder is not the agent of either party; he is merely a third party depository (30A C.J.S. Escrows § 8, p. 985; 28 Am.Jur.2d, Escrow, § 10, p. 15). However, an escrow holder has also been referred to as the agent of all the principals to the escrow. But even so, the agency is not considered a general one. On the contrary, it is treated as a limited agency wherein the obligations of the escrow holder to each party are strictly in accordance with the escrow instructions given by that party (Blackburn v. McCoy, 1 Cal.App.2d 648, 655, 37 P.2d 153, 18 Cal.Jur.2d Escrows, § 17, p. 330). Consequently, under both views it is generally held that no liability attaches to the escrow holder for his failure to do something not required by the terms of the escrow or for a loss incurred while obediently following his escrow instructions (Carlsen v. Security Trust & Savings Bank, 205 Cal. 302, 271 P. 104; Southall v. Security Title Ins., etc., Co., 112 Cal.App.2d 321, 246 P.2d 74; Harriman v. Tetik, 56 Cal.2d 805, 17 Cal.Rptr. 134, 366 P.2d 486; Rost v. Bryson, 118 Cal.App.2d 489, 258 P.2d 72; 30 A C.J.S. Escrows § 8, p. 992).

With these principles in mind, we conclude that the trial court correctly held that appellants' ninth cause of action against respondents did not state a cause of action and properly sustained respondents' demurrer without leave to amend. In fact, under the proposed rule, once an escrow holder received information (from whatever source) he would be forced to decide independently whether to believe the information and disclose it or disbelieve it and conceal his knowledge. If he concealed his knowledge he would risk suit. If he discloses and the information is inaccurate, he may be sued by all parties to the escrow for interfering with their contract. ⁴ Establishing a rule which would create such a dilemma and subject to the escrow holder to a high risk of litigation would damage a valuable business procedure. Manifestly...