Smith v. First Nat. Bank & Trust Co. of Sturgis

• Citation: 440 N.W.2d 915,177 Mich.App. 264
• Decision Date: 26 June 1989
• Docket Number: Docket No. 98043
• Parties: Hamlin A. SMITH and Amy Lou Smith, Plaintiffs-Appellants, v. FIRST NATIONAL BANK & TRUST COMPANY OF STURGIS, Defendant-Appellee, and William G. Steger and Kathryn Steger, Defendants. 177 Mich.App. 264, 440 N.W.2d 915
• Court: Court of Appeal of Michigan — District of US

Page 915

440 N.W.2d 915

Hamlin A. SMITH and Amy Lou Smith, Plaintiffs-Appellants, v. FIRST NATIONAL BANK & TRUST COMPANY OF STURGIS,

Defendant-Appellee,

and

William G. Steger and Kathryn Steger, Defendants.

Docket No. 98043.

177 Mich.App. 264, 440 N.W.2d 915

Court of Appeals of Michigan.

Submitted March 2, 1988.

Decided June 5, 1989.

Released for Publication June 26, 1989.

[177 MICHAPP 265] Weiner, Wade & Tucker by Theodore J. Tucker, Three Rivers, for plaintiffs-appellants.

Howard & Howard by Lawrence J. Murphy, Kalamazoo, for First Nat. Bank and Trust Co. of Sturgis.

[177 MICHAPP 266] Before SULLIVAN, P.J., and MacKENZIE and SCHNELZ, ^* JJ.

SCHNELZ, Judge.

Plaintiffs appeal as of right from an order granting summary disposition in favor of defendant First National Bank and Trust Company of Sturgis on Counts II and III of plaintiffs' complaint pursuant to MCR 2.116(C)(10). We reverse.

In 1982 defendants William G. Steger and Kathryn Steger sold a house located in St. Joseph County to plaintiffs for $185,000 on a land contract. Plaintiffs' down payment consisted of their summer cottage, valued at $85,000, plus $20,000 in cash. The remaining $80,000 was to be paid in monthly payments of $733 at eleven percent interest. The monthly payments were to be made until July 1, 1985, at which time a balloon payment for the remaining balance was due.

Defendants Steger had a mortgage on the home with defendant bank and designated the bank as their collection agent in paragraph (3)(k) of the land contract. Defendant bank was to apply approximately $693 of plaintiffs' land contract payment to defendants Steger's mortgage and send the remaining $40 balance to defendants Steger.

Plaintiffs initially made only the monthly installment payments of $733. Then, on or about May 1, 1983, plaintiffs made a $30,000 land contract payment, which reduced the principal owed on the land contract to $50,000. Defendant bank applied $693 of the $30,000 to defendants Steger's mortgage and remitted the remainder of plaintiffs' payment to defendants Steger. As a result, the balance due on defendants Steger's mortgage to the bank exceeded plaintiffs' land contract debt. On June 17, 1983, plaintiffs, defendants Steger and [177 MICHAPP 267] defendant bank entered into a real estate escrow agreement in conjunction with the land contract sale, designating the bank as the escrow agent to hold and deliver the warranty deed.

On July 1, 1985, plaintiffs made a final balloon payment of $42,300 and defendant bank delivered to plaintiffs the warranty deed on the home. However, defendants Steger still owed approximately $17,600 on their mortgage debt to defendant bank.

Defendants Steger refused to pay their outstanding mortgage debt. By notice dated November 19, 1985, defendant bank declared defendants Steger in default on their mortgage in the amount of $17,622.52. A mortgage sale was set for December 23, 1985.

On November 27, 1985, plaintiffs filed a complaint against both the Stegers and defendant bank seeking relief from the foreclosure proceeding. Count I of plaintiffs' complaint alleged that defendants Steger failed to deliver marketable title free and clear of the mortgage lien. In Counts II and III, plaintiffs sought a judgment against the bank in a sum equal to the unpaid mortgage balance. While the complaint could have been drafted with more clarity, we discern three potential theories of liability asserted by plaintiffs against the bank: breach of contract, negligence, and liability to plaintiffs as third-party beneficiaries of a collection agreement between the Stegers and the bank.

I

In deciding whether to grant or deny a motion for summary disposition brought under MCR 2.116(C)(10) the court is required to view the matter in a light most favorable to the nonmoving party, giving that party the benefit of reasonable [177 MICHAPP 268] doubt to find any facts in support of its assertion that an issue of fact exists. Horen v. Coleco Industries, Inc., 169 Mich.App. 725, 728, 426 N.W.2d 794 (1988). Before granting summary disposition, the court must be satisfied that it would be impossible for the claim asserted to be supported by the evidence at trial. Id. The trial court concluded that, as a matter of law, defendant bank was entitled to summary disposition on Count II because the court was unable to find a duty owed by the bank to plaintiffs. We find that the bank had certain duties to the plaintiffs arising from the real estate escrow agreement and its status as escrow agent.

The duties and liabilities imposed upon an escrow agent are those set forth in the escrow agreement. The Starboard Tack Corp. v. Meister, 103 Mich.App. 558, 562, 303 N.W.2d 38 (1981). The escrow agreement, like all contracts, is to be construed to effectuate the intent of the parties. If the agreement is ambiguous, the facts and circumstances surrounding the creation of the agreement may be considered. Id.

The real estate escrow agreement provided in pertinent part:

The ESCROW AGENT is instructed by SELLERS to deliver the Warranty Deed to PURCHASERS when the full amount of principal and interest, as specified in the LAND CONTRACT, have been paid, which shall be accomplished when the SELLERS have provided the ESCROW AGENT with a receipt showing all amounts of principal and interest have been paid. In addition, the PURCHASERS shall have complied with all of the terms and conditions of the LAND CONTRACT, including the payment of taxes, insurance and special assessments, which shall also be acknowledged by SELLERS to ESCROW AGENT.

The land contract was incorporated by reference [177 MICHAPP 269] into the escrow agreement. Paragraph 3(b) of the land contract provides that, if the seller's title is encumbered by a mortgage, the seller is obligated to keep payments on the mortgage current. Should the seller default on its mortgage, the contract allows the purchaser the right to pay on the mortgage with such payments to be credited on the land contract. The last sentence of paragraph 3(b) states:

When the amount owing hereon is reduced to that owing upon such contract or mortgage or upon any mortgage executed under either of the powers contained in this contract, a conveyance shall be made in the form above provided with a covenant by the grantee to assume and pay the same.

Under the terms of paragraph 3(b), at the time plaintiffs made the $30,000 principal payment, reducing the balance owed on the land contract to a sum less than the balance owed on the mortgage, the property should have been conveyed to the plaintiffs subject to assumption of the balance then owing on the mortgage.

We think a genuine issue of material fact exists as to whether the failure of the bank to deliver the deed to plaintiffs subject to assumption of the mortgage in accordance with paragraph 3(b), upon execution of the escrow agreement, constituted a breach of the bank's contractual duties under paragraph 2 of the escrow agreement. Under paragraph 7 of the escrow agreement, the bank is liable for acts which are contrary to the provisions of the escrow agreement, provided the bank has knowledge of the necessary facts to determine that its actions are contrary to the provisions of the escrow agreement and further provided such acts were not performed in good faith. Where, as here, [177 MICHAPP 270] the same party was acting as escrow agent, collection and disbursement agent, and was the mortgagee on the underlying mortgage, a genuine issue of fact is presented as to whether that party (the bank) had knowledge of the necessary facts to determine that its actions were contrary to the provisions of the escrow agreement and not taken in good faith.

II

Alternatively, a genuine issue of fact exists as to whether the bank's failure to deliver the deed subject to assumption of the mortgage constitutes negligence. While we agree with defendant that, as collection agent, the bank was not acting as agent for plaintiffs, as escrow agent, the bank was plaintiffs' agent.

An escrow agent is the agent of both parties to the escrow agreement. Laurentide Leasing Co. v. Schomisch, 382 Mich. 155, 161, 169 N.W.2d 322 (1969); Frankiewicz v. Konwinski, 246 Mich. 473, 477, 224 N.W. 368 (1929). The escrow agent ceases to be the agent of both parties and becomes agent only of the party in whom title to the property held in escrow vests when the property has been placed in escrow under an agreement that it is to go to that party upon the meeting of a condition and that condition is met. Edward Rose Sales Co. v. Shafer, 41 Mich.App. 105, 107, 199 N.W.2d 655 (1972). Thus, an escrow agent may be liable in tort for the negligent performance of its duties as escrow agent or breach of fiduciary responsibilities owed to its principal. See Michigan National Bank v. The Kroger Co., 619 F.Supp 1149, 1156 (E.D.Mich.1985).

Where a person assumes to and does act as the [177 MICHAPP 271] depositary in escrow, he is absolutely bound by the terms and conditions of the deposit and charged with a strict execution of the duties voluntarily assumed. He is held to strict compliance with the terms of the escrow agreement. If he violates instructions or acts negligently, he is ordinarily liable for any loss occasioned by his breach of duty. See 28 AmJur2d, Escrow, Sec. 16, p 24, and Sec. 18, p 27. [Katleman v. U.S. Communities, Inc., 197 Neb. 443, 447; 249 N.W.2d 898 (1977).]

Whether, in light of the bank's knowledge of the mortgage and the terms of the land contract, the bank's failure to deliver the warranty deed to plaintiffs upon execution of the escrow agreement or failure to seek further instructions from the plaintiffs fell short of the proper standards for the performance of its duties as an escrow agent or breached fiduciary duties owed to plaintiffs is a matter to be decided by the trier of fact.

III

The final theory of liability asserted against the bank was based on plaintiffs' asserted status as third-party...