The current credit crisis seems fraught with peril for almost all real estate professionals, most certainly escrow agents.  The wreckage of a deal gone awry, or perhaps one in which a party is simply looking for a reason to terminate the transaction, often leads to questions about the duties of an escrow holder, and they are most certainly heightened by principles governing dual agency.  See CC § 2079.  A quick review of some of the basic rules as applied to current circumstances seems in order for these professionals.

An escrow holder assumes the duties and responsibilities of fiduciary to the parties to an escrow (Commonwealth v. Kersten (1974) 40 Cal.App.3d 1014).  Those duties include an obligation to deal “in the highest good faith,” a prohibition against taking “even the slightest advantage,” and the need for full disclosure of all material facts.  Since an escrow holder receives instructions and information from parties whose interests naturally conflict, important issues arise with regard to whether confidential or sensitive information supplied by one party needs to be shared by the escrow holder with the other party.  Taken to an extreme, should the seller’s closing statement be disclosed to the buyer and vice versa?  Need financial statement information prepared for a lender but copied to the escrow holder, be disclosed to the buyer?  And if an escrow holder, as agent for the seller, is provided with certain information about the transaction, then is there a legal imputation of that information to the buyer because the escrow holder is also an agent for that party as well?  Other things being equal, the law might so provide.  CC § 2332.

The good news for escrow holders in this legal quagmire is that the courts have charged the escrow holder only with duties pertaining to the course and scope of its particular duty to a specific party.  Further, an agent who represents two principals in the same transaction has divided loyalties and so the knowledge of an agent of one principal is not automatically imputed to the other principal.  Janssen v. Gordon (1939) 35 Cal.App.2d 410.

Nonetheless, an escrow agent can by inadvertence engage in activities which confuse the lines of responsibility and broaden the scope of authority, such that the escrow holder actually does end up wearing two hats at the same time.  Legally, this is a very difficult position to defend.  The prudent escrow holder, as is the case when conflicting instructions are given, will thus notify the parties that close can only occur when matters become clarified.  Diaz v. United California Bank (1977) 71 Cal.App.3d 161.

Escrow holders often attempt to limit their liability by “exculpatory clauses” with which facially limit liability to egregious circumstances, such as, for example, intentional fraud.  But some courts have held that efforts to limit responsibility for an escrow holder’s own negligence are not enforceable as contrary to public policy.  Akin v. Business Title Corp. (1968) 264 Cal.App.2d 153.  Just how far courts will go in barring claims by reason of such clauses thus is uncertain, and so the prudent escrow holder will not reduce his or her diligence in keeping track of communications and maintaining clear lines of responsibility.

In the current credit crunch environment, careful escrow holders will want to have their own counsel review all of the form instructions employed to make sure they are updated, that they do not include over-reaching to the point of rendering the document entirely void, and to make sure that all the protections afforded by the law are included.

For further information, please contact William H. G. Norman.

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