In Edelman v. Belco Title & Escrow, LLC (http://law.justia.com/cases/federal/appellate-courts/ca7/13-2363/13-2363-2014-04-25.html) the plaintiffs sued an escrow agent after investing $3M in a failed real estate deal.
The plaintiffs invested the monies directly with the developers of a mixed-use project. The plaintiff never met with nor spoke to the defendant escrow agent and there was no document that formalized the relationship between plaintiffs and defendant other than some boilerplate closing forms.
Plaintiffs sued when they lost their entire investment after a prior mortgage lender foreclosed on the subject development, wiping out plaintiffs’ entire investment.
Affirming summary judgment for the escrow agent, the court first addressed a procedural pleading issue. FRCP 8(b)(6) provides that a complaint allegation is admitted if that allegation isn’t denied. The purpose of a responsive pleading is to put everyone on notice of what a defendant admits and what it intends to contest.
Here, since defendant answered plaintiff’s earlier versions of the complaint which contained identical allegations to the current version, plaintiffs were on notice of what allegations were admitted and which ones were not.
On the merits, the Court found that the defendant escrow agent didn’t owe a fiduciary duty beyond its specific instructions from the plaintiffs.
In Illinois, a principal and agent stand in a fiduciary relationship as a matter of law. The agent occupies a position of trust towards the principal and he (the agent) must act in the utmost good faith and apprise his principal of all key facts within the agent’s knowledge that could affect the principal’s legal relationships.
Illinois law is clear that an escrowee, like a trustee, owes a fiduciary duty to act only according to the specific escrow instructions. No Illinois court has held that an escrowee in defendant’s position is tasked with an obligation to seek additional instructions from parties to a real estate deal.
Here, the plaintiffs and defendant never met nor communicated. The defendant wasn’t party to the underlying loan agreement that documented plaintiffs’ $3M investment. The loan agreement parties were the plaintiffs and the developers (who weren’t named as defendants).
Also, the disbursement agreement wasn’t signed and offered no details of the plaintiff-defendant relationship. The Court also pointed out that the plaintiffs never deposited any funds with the defendant: plaintiffs paid the $3M directly to the developers.
The Seventh Circuit bolstered its no fiduciary duty finding with a policy argument. It held that escrow transactions would be “destabilized” if an escrow agent like defendant could be legally liable in circumstances like here, where it didn’t know what responsibilities it owed and to whom.
Take-aways:
– an escrowee or closing agent only owe duties spelled out in instructions given him by his lender-principal;
– it will be difficult for a real estate lender to prove a fiduciary duty claim where there is no physical or paper connection between the lender and escrow agent and where the lender doesn’t fund a loan through the escrow agent.