Posting for

     Wednesday, January 23, 2002

 

     by:  Bert Rush

     brush@firstam.com

 

     ESCROW NEGLIGENCE/FRAUD/DOUBLE ESCROWS

 

     Last year at this time, Rich Angelo (Marlton, NJ) reported to us the decision of the Nevada Supreme Court in Mark Properties, Inc. v. National Title Co., upholding an escrow agent's duty to disclose to "parties to the escrow" the presence of fraud or "suspicious circumstances" in a transaction.  This decision followed Arizona case law.

 

     Now, Doug Hancock (Land Title/Las Vegas, NV) sends word that, following a rehearing, the Mark Properties decision has been withdrawn, and replaced with a new decision (Mark Properties v. National Title Co., 117 Nev. Adv. Op. No. 77 (11/26/01).  This new decision contains a revised statement of the facts, and a slightly different holding.  Here's what it says.

 

     Mark Snop and Mark Raiter were real estate investors from Israel, looking for opportunities in Las Vegas.

 

     Snop and Raiter were introduced to Sam Ventura and Michael Bash, who were local developers and promoters.  During 1995 and 1996, Ventura and Bash induced Snop and Raiter to invest in three joint ventures, to purchase two vacant parcels and a motel property.

 

     The first of these joint ventures involved purchase of a forty-acre parcel for $2.4 million.  The escrow was handled by National Title Company.  The transaction was structured as a "double escrow"--the first escrow being a sale from the original owner to a corporation controlled by Bash, and the second escrow being a sale from Bash's corporation to the Snop/Raiter/Ventura/Bash joint venture.  Predictably, the second escrow involved a higher price, and funds from closing of the second escrow would be used to finance closing of the first.

 

     The second joint venture involved purchase of a twenty-acre parcel adjacent to the aforementioned forty-acre parcel, for $700,000.  Again, the transaction was structured as a double escrow with the first escrow being a sale from the original owner to Bash's corporation, and the second being a sale from Bash's corporation to the joint venture--at a higher price and with funds from the second escrow used to finance closing of the first.

 

     The third joint venture involved purchase of a motel, the "Sunbird Inn," for $4 million.  Once again, this would be a double escrow.  Bash's corporation opened escrow with Lawyers Title, depositing $75,000 earnest money--with $50,000 from Snop/Raiter and $25,000 from Ventura/Bash.  But the deal foundered when Bash failed to obtain some needed licenses.

 

     At about this time, Snop and Raiter became suspicious that they were being defrauded by Ventura and Bash.  So, Raiter contacted the escrow officer at Lawyers Title and, identifying himself as an investor with Bash, requested that earnest money held in escrow be frozen pending outcome of litigation between Snop/Raiter and Ventura/Bash.  Despite this request, the escrow officer paid the refund to Bash's corporation.

 

     Snop and Raiter (d/b/a "Mark Properties") filed suit against National Title and Lawyers Title, alleging escrow negligence and breach of fiduciary duty.

 

     As to National Title, Mark Properties alleged the escrow officer (one Nancy Wilder) had been aware that the first transaction was structured as a double escrow, and that there was a price differential between the first and second escrows, but this was not disclosed to Snop/Raiter.  Instead, Snop/Raiter alleged that they only learned that their "seller" was Bash's corporation (and not an unrelated party) on the day set for closing.  By that time, it was too late--they fell victim to Ventura's assurances that this was to "facilitate" the closing.  As a result, Snop/Raiter alleged they did not discover frauds against them until much later--when the third joint venture was foundering.

 

     As to Lawyers Title, Mark Properties claimed the escrow officer should have held onto earnest money after the third transaction was cancelled, as requested by Raiter.

 

     After a pre-trial hearing, the trial court granted summary judgment in favor of National Title and Lawyers Title, following California case law to the effect that duties of an escrow agent are strictly limited to following the instructions of parties to the escrow.  Hence, there is no duty to make disclosures, nor to follow instructions from "non-parties" to the escrow, as a matter of law.

 

     Mark Properties appealed.

 

     In its initial decision, the Nevada Supreme Court affirmed in part, and reversed in part, agreeing with the trial court that Lawyers Title had no duty to follow instructions from a "non-party" to the escrow, but disagreeing that National Title had no duty to disclose presence of a "double escrow."  In this latter connection, the Court held that the allegations presented "triable issues" of whether National Title breached a duty owed to Mark Properties (as a party to the escrow) "to disclose fraud or suspicious circumstances of which it was aware."  In so holding, the Court declined to follow older case law from California (supposedly limiting the duty of an escrow agent to following instructions from parties to the escrow), and instead followed Arizona case law (mainly, Burkons v. Ticor Title Ins. Co. of California, 813 P.2d 710 [1991]).

 

     Now, after rehearing, the Court has withdrawn its initial decision and issued a revised decision, once again affirming summary judgment in favor of Lawyers Title and reversing summary judgment in favor of National Title.  In its revised decision, the Court backs off from the statement that National Title should have disclosed "suspicious circumstances," instead emphasizing that an escrow agent has a duty to disclose fraud of which the agent is aware.

 

     In this case, the Court acknowledges evidence that Snop and Raiter knew of a "double closing" before agreeing to close the first transaction, but concludes "the facts concerning who knew what, and when any knowledge of the details of the double escrow was acquired, are unclear and highly contested."

 

     In particular, the Court described testimony of the National Title escrow officer, admitting she was aware of a "double escrow" in which her transaction was the second part.  (It appears the first escrow was handled elsewhere.)  She was also aware there was a price difference between the two transactions.  She believed Snop, Raiter and their attorney were likewise aware of the double escrow and the price differential, and they had "no problem," because she overheard them discussing it at her closing.  On the other hand, in deposition the escrow officer admitted she couldn't understand much of what was said between Snop and Raiter because they were speaking Hebrew or Russian, that "there's a lot of things in the conversation (she) probably missed" because she often does other work "during these kind of meetings," and that she can't recall whether "the subject of profit to either Mr. Bash or Mr. Ventura...was ever discussed."

 

     Against this factual background, the Court described the escrow agent's duty to disclose by quoting the Burkons decision, as follows:

 

          "(An escrow agent may not) close its eyes

          in the face of known facts and console itself

          with the thought that no one has yet confessed

          fraud.  Although not required to investigate,

          when the agent is aware of facts and

          circumstances that a reasonable escrow agent

          would perceive as evidence of fraud, then

          there is a duty to disclose."

 

     With that, the Court concluded:

 

          "There is a triable, albeit highly contested,

          issue of material fact regarding whether (the

          escrow agent) breached her duty to disclose

          to Mark Properties fraud of which she was

          aware concerning the escrows of the forty

          and twenty-acre parcels.  It is clear...that

          she knew of the double escrows and the

          price differentials.  But whether she learned

          of these facts by overhearing Snop and

          Raiter discuss them with their attorney, or

          discovered the facts previously through

          some other source, is in dispute.  We leave

          the resolution of these questions to the trier

          of fact."

 

     Comment:  Seems to me the Court's revised decision reflects greater appreciation for the confusing evidence in this case and, at the same time, greater sensitivity to the limited fiduciary role of the escrow/closing officer--with equal obligations to all parties to an escrow.

 

     Here are some lessons:

 

     First, an escrow agent should always disclose the presence of a double escrow, in writing, to the parties to both escrows (mainly, to the seller in the first escrow, and to the buyer in the second).  This is not to say that all (or most) double escrows involve fraud, it's just a good rule to follow.

 

     Second, if an escrow agent is aware of a price differential or proposed use of funds from the second escrow to finance the closing of the first escrow, these facts should also be disclosed, in writing, to the parties.

 

     Third, the rules above should be followed even where the escrow agent believes the parties are already aware of the circumstances of the double escrow.

 

     Fourth, escrow and closing folk should advise management of double escrow situations, and get a second opinion or consensus as to how to proceed. 

**********

   Following Wednesday's posting, Neil Moffett (Salt Lake City, UT) writes:

 

     Should the escrow agent disclose the dollar amount of the price differential, or merely that there is a price differential between the first and second escrow?

 

     Along the same lines, Nancy Smith (Bakersfield, CA) writes:

 

     The following is language to be included in escrow instructions (to be signed by both parties) we received from counsel several years ago with regard to "double escrows where we were handling both escrows.  In first escrow we will call #100N " This escrow is to close concurrently with escrow #101 X.  Escrow holder is instructed to accept funds from escrow #101X for use by buyer in this escrow #100N on day of close of escrow."  Second escrow #101X would have language: " This escrow  #101X to close concurrently with escrow #100N wherein seller is acquiring said property.  Escrow holder is instructed to transfer funds from seller's proceeds to escrow #100N for use by buyer in escrow #100N on day of close of escrow. " All parties are aware of a concurrent escrow but the exact terms and amounts of each remain between each buyer and seller.    The exact amount of funds to be transferred would be later specified in an amendment signed by seller as it pertains to his proceeds.   After reading your information, I question whether the above language is sufficient?  Buyer in second escrow would know something was up when the preliminary report did not show seller's name as owner of property.  Of course, if first or second escrow was being handled by another escrow./title company, we could not do a "concurrent" close due to the "Good Funds" Law in the state of California.

 

     Reply by Bert Rush:  My rule of thumb is that an escrow agent has no duty, and should not, investigate the business matters of his or her client--outside of what's disclosed within the escrow.  The revised decision in the Mark Properties case is, I think, totally in agreement with this.  Now, question is, how to apply this rule in a double escrow situation?

 

     Situation No. 1:  Escrow agent is aware of double escrow, but is not aware of the terms of deal being handled by an "other" escrow agent involved.  One approach may be to require, as a condition of your handling the escrow, that the party with knowledge of terms of the other escrow make a disclosure, in your escrow, of any price differential, use of funds from one escrow to finance the other, and identity of parties to the other escrow.  A second approach may be for the escrow agent to disclose his or her knowledge of the presence of the other escrow, together with the statement that the other escrow may be based on a different price, and that funds from one escrow may be intended to be used to finance the other.  This latter approach should be followed with advance notice to your client, and the client's consent.  In the case of such a disclosure being made to a very unsophisticated party, you may want to require that that party be represented by legal counsel as a condition of your closing the escrow.

 

     Situation No. 2:  Escrow agent is aware of double escrow, and is aware of specific terms of other escrow.  Again, with advance notice and consent of your client, you may want to disclose presence of the double escrow, price differential, proposed use of funds from one to finance the other, and identities of parties to the other escrow.  If the client resists, you may want to require a similar disclosure to be made by the client, in writing, as a condition of your closing.

 

     In both situations, there is risk that details set forth in a disclosure will be changed at the last minute.  The escrow agent should be alert to this risk, and make efforts to keep all parties aware of last minute changes before closing--again, with written acknowledgments and consents signed by the parties for our escrow files.