Summit Financial Holdings, Ltd. v. CLTC

• Decision Date: 07 March 2002
• Docket Number: No. S097344.,S097344.
• Citation: 41 P.3d 548,27 Cal.4th 705,117 Cal.Rptr.2d 541
• Court: California Supreme Court
• Parties: SUMMIT FINANCIAL HOLDINGS, LTD., Plaintiff and Respondent, v. CONTINENTAL LAWYERS TITLE COMPANY, Defendant and Appellant.

117 Cal.Rptr.2d 541

27 Cal.4th 705

41 P.3d 548

SUMMIT FINANCIAL HOLDINGS, LTD., Plaintiff and Respondent, v. CONTINENTAL LAWYERS TITLE COMPANY, Defendant and Appellant.

No. S097344.

Supreme Court of California.

March 7, 2002.

As Modified on Denial of Rehearing May 15, 2002.

Wolf, Rifkin & Shapiro and Marc E. Rohatiner, Los Angeles, for Defendant and Appellant.

Billet, Kaplan & Dawley and Terry S. Kaplan, Los Angeles, for California Land Title Association as Amicus Curiae on behalf of Defendant and Appellant.

Stephan, Oringher, Richman & Theodora, Harry W.R. Chamberlain II, Los Angeles, Robert M. Dato; Robie & Matthai, Edith M. Matthai and Pamela E. Dunn, Los Angeles, for American Insurance Association and Association of Southern California Defense Counsel as Amici Curiae on behalf of Defendant and Appellant.

Doumani & Grandon, Grandon & Associates, Robert M. Grandon; Callahan & Blaine and Jim P. Mahacek, Santa Ana, for Plaintiff and Respondent.

BROWN, J.

The question presented by this case is whether an escrow holder owes a duty of care to a nonparty to the escrow based on an assignment to that nonparty by another nonparty to the escrow. We answer this question in the negative.

The complicated factual background of this case will be presented more fully below, but in brief, the question presented arises under the following circumstances: Dr. John Furnish, the maker of a promissory note secured by a deed of trust on real property in Corona Del Mar, refinanced his secured obligations by obtaining a new loan from a new lender, a portion of the proceeds of which was to pay the earlier note in full. Defendant Continental Lawyers Title Company (CLTC) provided escrow services for the refinance transaction and was instructed by the parties to the escrow to pay the note by issuing a check to Talbert Financial (Talbert). CLTC followed that instruction on closing of the refinance transaction. In this lawsuit, plaintiff Summit Financial Holdings, Ltd. (Summit) sued CLTC for negligence. Summit contended that in the refinance transaction CLTC should have paid the note by issuing a check to Summit rather than Talbert because CLTC knew Talbert had assigned its rights in the note and deed of trust to Summit. Neither the assignor, Talbert, nor the assignee, Summit, were parties to the escrow. Nevertheless, the trial court, relying on Kirby v. Palos Verdes Escrow Co. (1986) 183 Cal. App.3d 57, 227 Cal.Rptr. 785 (Kirby), concluded that CLTC owed a duty of care to Summit, and that CLTC breached that duty because CLTC, with knowledge of the assignment from Talbert to Summit, paid Talbert rather than Summit. The trial court awarded judgment to Summit against CLTC for negligence, but the Court of Appeal reversed, holding that CLTC owed no duty of care to Summit.

We agree with the Court of Appeal and affirm its judgment.

I. FACTUAL AND PROCEDURAL BACKGROUND¹

A. The Loan

In August 1994 Furnish borrowed $425,000 from Talbert, and signed the note payable to Talbert. The note was secured by the deed of trust on the property. Both the note and the payment book given to Furnish required him to pay the monthly installments on the note to Talbert at Talbert's Orange, California, address.²

At the same time the deed of trust was recorded, a document entitled "Assignment of Deed of Trust" was recorded that assigned the beneficial interest under the note and deed of trust from Talbert to Summit. However, neither Talbert nor Summit gave Furnish notice of the assignment, as[, according to Furnish, was] required by Civil Code section 2937.³

B. The Refinance

In September 1995 Furnish obtained a new loan from Dundrel Securities (Dundrel) that was used in part to pay the note. Furnish and Dundrel employed Beverly Hills Escrow (BHE) to handle the refinancing transaction, and CLTC acted as an escrow holder in connection with issuing the title insurance for the new deed of trust securing the new note payable to Dundrel. [Neither Talbert nor Summit was a party to the BHE escrow or the CLTC escrow.]

CLTC prepared a preliminary title report noting (at item 6) that the property was encumbered by a deed of trust securing the Talbert note, and that an assignment of the note and deed of trust from Talbert to Summit had been recorded. BHE thereafter obtained a note payoff demand from Talbert specifying the outstanding balance to be paid to Talbert to fully pay the note. On September 8, 1995, BHE forwarded Talbert's payoff demand to CLTC and identified it as the "Demand for item 6 on the Preliminary Title Report."

On close of the refinancing transaction, CLTC paid Talbert from funds deposited with CLTC by Dundrel in accordance with the payoff demand and BHE's instructions. Summit did not receive these funds from Talbert.

C. The Legal Proceedings

In February 1997 Furnish filed for protection under chapter 11 of the United States Bankruptcy Code (11 U.S.C.), and in April 1997 the bankruptcy court entered an order for sale of the property free and clear of all liens. The order directed that the proceeds of the sale be used to pay the amounts owed the first trust deed holder, Dundrel, and amounts owed to another secured creditor, and that any purported liens on the property held by other parties, including Summit, would attach to the remaining proceeds of the sale.

In July 1997 Furnish moved in the bankruptcy court for an order disallowing Summit's lien claim on the remaining proceeds from the sale of the property. Furnish argued the amount he paid Talbert in 1995 in the refinance transaction fully extinguished Furnish's obligations under the note. He established that he never received notice of the assignment of the deed of trust[, and he contended that notice was] required by section 2937, subdivision (d), and [that] under section 2937, subdivision (f), a debtor's payment to the prior note holder before receiving notice of the assignment pro tanto extinguishes the underlying obligation. The payment to Talbert therefore[, Furnish argued,] fully extinguished the note. Summit opposed the motion, arguing that (1) the recorded assignment of the note and deed of trust was adequate to provide constructive notice of the transfer from Talbert to Summit, and (2) in any event Furnish received a notice that complied with section 2937, subdivision (d). The bankruptcy court concluded Furnish was not given the notice required by section 2937, subdivision (d) and the payment to Talbert extinguished the note under section 2937, subdivision (f). It therefore disallowed Summit's lien claim on the remaining proceeds for the sale of the property.⁴ In this proceeding, Summit sought recovery from CLTC of the note payment CLTC made to Talbert, contending that CLTC was negligent by making the note payment to Talbert rather than to Summit. The trial court concluded Kirby was controlling and that CLTC owed a duty of care to Summit. The trial court further found that CLTC was negligent [and] breached its duty of care to Summit, and [that] CLTC's negligence was a proximate cause of Summit's injury. Accordingly, the trial court entered judgment for damages in favor of Summit against CLTC.⁵

[The Court of Appeal reversed on the ground that Summit, being a stranger to the escrow, was not owed a duty of care by CLTC]

II. DISCUSSION

"An escrow involves the deposit of documents and/or money with a third party to be delivered on the occurrence of some condition." (3 Miller & Starr, Cal. Real Estate (3d ed.1989) § 6:1, pp. 2-3 (rev.9/00); see Fin.Code, § 17003, subd. (a).) An escrow holder is an agent and fiduciary of the parties to the escrow. (Amen v. Merced County Title Co. (1962) 58 Cal.2d 528, 534, 25 Cal.Rptr. 65, 375 P.2d 33 (Amen); Rianda v. San Benito Title Guar. Co.

(1950) 35 Cal.2d 170, 173, 217 P.2d 25.) The agency created by the escrow is limited—limited to the obligation of the escrow holder to carry out the instructions of each of the parties to the escrow. (Vournas v. Fidelity Nat. Tit. Ins. Co. (1999) 73 Cal.App.4th 668, 674, 86 Cal.Rptr.2d 490 (Vournas); Schaefer v. Manufacturers Bank (1980) 104 Cal. App.3d 70, 77, 163 Cal.Rptr. 402 (Schaefer); Blackburn v. McCoy (1934) 1 Cal. App.2d 648, 655, 37 P.2d 153.) If the escrow holder fails to carry out an instruction it has contracted to perform, the injured party has a cause of action for breach of contract. (Amen, at p. 532, 25 Cal.Rptr. 65,

375 P.2d 33.)

In delimiting the scope of an escrow holder's fiduciary duties, then, we start from the principle that "[a]n escrow holder must comply strictly with the instructions of the parties. [Citations.]" (Amen, supra, 58 Cal.2d at p. 531,25 Cal.Rptr. 65,375 P.2d 33.) On the other hand, 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." (Claussen v. First American Title Guaranty Co. (1986) 186 Cal.App.3d 429, 435-436, 230 Cal.Rptr. 749; see, e.g., Vournas, supra, 73 Cal. App.4th at p. 674, 86 Cal.Rptr.2d 490; Romo v. Stewart Title of California (1995) 35 Cal.App.4th 1609, 1618, fn. 9, 42 Cal. Rptr.2d 414; Schaefer, supra, 104 Cal. App.3d at pp. 77-78,163 Cal.Rptr. 402; Axley v. Transamerica Title Ins. Co. (1978) 88 Cal.App.3d 1, 9, 151 Cal.Rptr. 570.) Absent clear evidence of fraud, an escrow holder's obligations are limited to compliance with the parties' instructions. (Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App.2d 160, 162, 70 Cal.Rptr. 378; 3 Miller & Starr, Cal. Real Estate, supra, § 6:26, p. 68.) Here, even though the escrow holder, CLTC, was aware of the assignment from Talbert to Summit, there is no evidence CLTC was aware of any collusion or fraud in the fund disbursement that would have adversely affected any party to the escrow.

However, because CLTC knew Talbert had assigned its rights in the note and deed of trust to Summit, Summit contends CLTC breached both a fiduciary duty and a tort duty to Summit by...