Patel v. Gannaway

• Decision Date: 18 January 1984
• Docket Number: No. 83-1143,83-1143
• Citation: 726 F.2d 382
• Parties: Bhagnanji D. PATEL and Jyotiben B. Patel, his wife, Appellants, v. James B. GANNAWAY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 382

726 F.2d 382

Bhagnanji D. PATEL and Jyotiben B. Patel, his wife, Appellants, v. James B. GANNAWAY, Appellee.

No. 83-1143.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 12, 1983.

Decided Jan. 18, 1984.

James M. Moody, Little Rock, Ark., for appellee.

Samuel A. Perroni, Perroni & Rauls, P.A., Little Rock, Ark., for appellants.

Before HEANEY, ROSS and JOHN R. GIBSON, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

Bhagnanji D. and Jyotiben B. Patel's attempted purchase of a leasehold interest in a Lonoke, Arkansas motel resulted in the loss of their $40,000.00 down payment. Their loss occurred when the local bank foreclosed on the property because the seller, Billy Ray Canterberry, defaulted on a series of promissory notes. Bhagnanji Patel had deposited an unendorsed check for $25,729.54, representing part of the $40,000.00 down payment, with appellee James B. Gannaway. The Patels claim that Gannaway's acceptance of the check and other circumstances of their dealings created in Gannaway a fiduciary duty as an escrow agent to prevent their loss. The district court ¹ held that no escrow arrangement was created, that no fiduciary duty arose, and that Gannaway's actions were not the proximate cause of the Patels' loss. We affirm the judgment of the district court.

We cite the following facts as found by the district court. The Patels do not claim that these findings are clearly erroneous. See Fed.R.Civ.P. 52(a).

Appellant Bhagnanji Patel began negotiations with Billy Ray Canterberry to purchase the Southern Manor Motel in Lonoke, Arkansas. Patel and Canterberry executed a written Offer and Acceptance prepared by the Little Rock Abstract Company. This document made specific reference to Canterberry's indebtedness to the First State Bank of Lonoke, and the bank's security interest in the motel was a matter of record. ² As required by the agreement, Patel deposited a check for $25,729.54 with the Abstract Company. This amount was to be applied to the $40,000.00 down payment due at closing.

The Abstract Company was subsequently dismissed as the closing agent. Canterberry then retained James B. Gannaway, an attorney, to represent him in the sale. On October 11, 1979, Patel, Canterberry and Gannaway met in Gannaway's office. Two documents were executed. The first incorporated by reference the terms of the Abstract Company's Offer and Acceptance, with the single revision that Patel was to deposit "the sum of $25,729.54 in escrow with James B. Gannaway ...." The second incorporated and modified certain terms in the Offer and Acceptance, and again stated that a check for $25,729.54 would be "deposited in escrow with James B. Gannaway ...." Later that same day, Patel recovered from the Abstract Company his $25,729.54 in the form of a check from the Abstract Company payable to him. Patel then returned to Gannaway's office and delivered to him the unendorsed check. In return, Patel received a handwritten receipt from Gannaway stating that

I have received this date an unindorsed check from Little Rock Abstract Company to Bhagnanji D. Patel in the amount of $25,729.54, being check No. 2622, to be held by me in escrow to be delivered to Billy R. Canterberry at time of closing of sale of Southern Manor Motel and Restaurant, Lonoke, Arkansas.

/s/ James B. Gannaway

James B. Gannaway

Approximately one month later, Patel hired attorney Richard Berry. Berry reviewed the documents prepared by Gannaway and redrafted an agreement which was signed by Patel and Canterberry at the November 20, 1979 closing. This document made the following provision for the $25,729.54 check held by Gannaway:

(A) BUYERS will pay SELLERS the sum of $40,000.00 upon closing, and may include as a part of this down payment a check in the amount of $25,729.54 presently held in escrow by SELLERS' attorneys. Such check will be endorsed by BUYERS at the time of closing.

The agreement also required Canterberry to provide title insurance.

At the closing, Gannaway represented Canterberry and Berry represented Patel. Berry informed Patel that Canterberry's proffered commitment for title insurance was inadequate, but Patel indicated his desire to proceed with the sale despite this shortcoming. Following the execution of the documents, Gannaway delivered the $25,729.54 check to Berry and Patel for endorsement. Patel later delivered a second check for $14,270.46, representing the balance of the $40,000.00 down payment, directly to Canterberry. Within six months of the closing, the bank had commenced foreclosure proceedings against the property. A decree of foreclosure was issued on May 22, 1980.

The Patels claim that these events, the use of the term "escrow" in the documents prepared by Gannaway, and other representations established Gannaway, as a matter of law, as an escrow agent. Accordingly, the Patels assert that he owed a fiduciary duty to them which he breached in delivering the funds to Canterberry. The district court concluded that Bhagnanji Patel's failure to endorse the $25,729.54 check at the time of delivery to Gannaway meant that Patel retained control over it. It thus held that no escrow arrangement existed because the check had not passed irrevocably to Gannaway. It further concluded that Gannaway's actions were not the proximate cause of the Patels' loss since they were fully apprised of the lack of title insurance and the extent of the bank's interest in the property.

Appellants correctly state that an escrow agent "becomes agent of both buyer and seller and this agency creates a fiduciary relationship." Red Lobster Inns v. Lawyers Title Ins. Corp., 492 F.Supp. 933, 941 (E.D.Ark.1980), modified, 656 F.2d 381 (1981) (citing Collins v. Heitman, 225 Ark. 666, 284 S.W.2d 628 (1956)). However, preceding a determination of whether Gannaway's actions were a breach of a fiduciary duty, we need to address the threshold issue of whether an escrow relationship existed among the Patels, Gannaway, and Canterberry.

As held by the district court, it is clear that one requirement essential under Arkansas law to establish an escrow arrangement was not satisfied. This requirement is that

[t]o constitute an instrument an [sic] escrow it is absolutely necessary that the deposit of it should be irrevocable--"that is, that when the instrument is placed in the hands of the depositary it should be intended to pass beyond the control of the grantor for all time, and that he should actually lose the...