Escrows Can Be Negligent, Even While Following Escrow Instructions

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California escrows perform an important role in modern real estate and business transactions. While escrow holders are not exempt from negligence, many escrows have made such an argument, contending that they cannot commit negligence so long as they follow the escrow instructions.

One court summarily rejected the arguments of a “malfeasant escrow holder [that attempted] to dictate the nature of the litigation . . . and to claim immunity from tort liability . . . .” Virtanen v. O’Connell (2006) 140 Cal.App. 4th 688, 699.

This ruling reflects that escrow holders have two, separate duties: “It is elemental that the duty of an escrow holder is [1] to comply strictly with the instructions of its principal and [2] to exercise reasonable skill and ordinary diligence with respect to the employment. If the escrow holder fails to follow his instructions or acts negligently, he may be liable for any loss occasioned thereby.” Diaz v. United Cal. Bank (1977) 71 Cal.App. 3d 161, 166.

Indeed, these independent (though potentially overlapping) duties are highlighted by Kirk Corp. v. First Am. Title Co. (1990) 220 Cal.App. 3d 785, 806, which explained that there are two duties: “An escrow holder . . . must comply strictly with the instructions of the principals . . . . Similarly, it is the duty of the escrow holder to exercise ordinary skill and diligence in his employment and if he acts negligently, he is liable for any loss proximately occasioned by such negligence.”

The California Supreme Court explained that “[i]t is the duty of an agent to obey the instructions of his principal and exercise in his employment reasonable skill and ordinary diligence, and, if defendant violated instructions or acted negligently . . . , it would ordinarily be liable for any loss occasioned by its breach of duty.” Rianda v. San Benito Title Guarantee Co. (1950) 35 Cal. 2d 170, 173.

The California Supreme Court also found that, “[u]pon the escrow holder’s breach of an instruction that it has contracted to perform or of an implied promise arising out of the agreement with the buyer or seller, the injured party acquires a cause of action for breach of contract. Similarly, if the escrow holder acts negligently, it would ordinarily be liable for any loss occasioned by its breach of duty.” Amen v. Merced Cnty. Title Co. (1962) 58 Cal. 2d 528, 532.

Other cases have explained the two duties of an escrow holder: “It is the duty of an escrow holder to comply strictly with the instructions of his principal . . . . Likewise, it is the duty of an escrow holder to exercise ordinary skill and diligence in his employment, and if he acts negligently he is responsible for any loss occasioned thereby . . . .” Colonial Sav. & Loan Asso. v. Redwood Empire Title Co. (1965) 236 Cal.App. 2d 186, 190-91; see Common Wealth Ins. Systems, Inc. v. Kersten (1974) 40 Cal.App. 3d 1014, 1030 (“[a]n escrow holder . . . must comply strictly with the instructions of the principals . . . . Similarly, it is the duty of the escrow holder to exercise ordinary skill and diligence in his employment and if he acts negligently, he is liable for any loss proximately occasioned by such negligence”); Wade v. Lake Cnty. Title Co. (1970) 6 Cal.App. 3d 824, 828 (“The duty of an escrow holder is to comply strictly with the instructions of his principal. . . . It is also the duty of an escrow holder to exercise reasonable skill and ordinary diligence in his employment, and if the escrow holder acts negligently, it is ordinarily liable for any loss occasioned by its breach of duty”); Hannon v. Western Title Ins. Co. (1989) 211 Cal.App. 3d 1122, 1127 (“if the escrow holder acts negligently, it would ordinarily be liable for any loss occasioned by its breach of duty”)

These dual responsibilities are illustrated by an appeal where summary judgment in favor of an escrow holder was affirmed, finding that the evidence in support of the motion “demonstrate[s] an absence of an essential element of [plaintiff’s] case, namely, failure of [the escrow holder] to follow instructions or that [escrow holder] acted negligently.” Axley v. Transamerica Title Ins. Co. (1978) 88 Cal.App. 3d 1, 10.

While escrow holders may cite to Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App. 2d 160, 163, which found that “no liability attaches to the escrow holder for his failure to do something not required by the terms of the escrow or for a loss incurred while obediently following his escrow instructions,” this sentence begins with “it is generally held that . . . .”

In fact, this same quote from Lee appears in Axley v. Transamerica Title Ins. Co. (1978) 88 Cal.App. 3d 1, 9, immediately preceded by the proposition that “[i]t is also the duty of an escrow holder to exercise reasonable skill and ordinary diligence in its employment, and if the escrow holder acts negligently, it is ordinarily liable for any loss occasioned by its breach of duty.”

This area of law is stated plainly by California Jurisprudence: “An escrow holder must exercise reasonable skill and ordinary diligence in its employment; if the escrow holder acts negligently, it is liable for any loss proximately occasioned by that negligence.” 30 Ca. Jur. Escrows (3rd. ed. 2014) § 17; see 12 Witkin Sum. Cal. Law Real Property § 305 (an “escrow holder, like any agent, is liable to either principal (vendor or purchaser) for negligent performance”).

“Had the legislature intended to exempt escrow agents from liability on unwritten instructions, it could have done so explicitly.” Zang v. Nw. Title Co. (1982) 135 Cal. App. 3d 159, 168.

Litigants should encourage the California Court of Appeal to make clear that an escrow holder can be held liable for negligence and other tortious conduct, even while following escrow instructions.

About Scott Talkov

Scott Talkov is a real estate lawyer, business litigator and bankruptcy lawyer in California. He founded Talkov Law Corp. after of experience with one of the region's oldest law firms, where he served as one of the firm's partners. He has been featured on CNN, KCBS, and KCAL-9, and in the Los Angeles Times, the Orange County Register, the San Diego Union-Tribune, and the Press-Enterpise. Scott has been named a Super Lawyers Rising Star every year since 2013. He can be reached about new matters at info@talkovlaw.com or (844) 4-TALKOV (825568). He can also be contacted directly at scott@talkovlaw.com.

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