The beneficiaries of a deed of trust sued an escrow holder for negligence after failing to receive a payoff when the grantor refinanced. This prevented the beneficiaries from receiving the money they were owed when the grantor filed for bankruptcy.
The case is Robert Weber, individually and as trustee, etc. v. Fidelity National Title Co. Inc. (Court of Appeal of California, Second Appellate Division, No. B223785).
In 2006, Analy Mortgage Center Inc. arranged for a loan to Dominic and Carolyn Montgomery in the amount of $550,000, secured by a trust deed on property in Santa Rosa, Calif. Of the $550,000, $470,000 was from Robert Weber and his wife, Cita Hetharia. The Webers were listed among the beneficiaries on the trust deed. Redwood Trust Deed Services was the Webers’ loan servicing agent and the trustee under the deed of trust.
In July 2006, the Montgomerys refinanced their loan through Analy. The refinancing increased the loan principal from $550,000 to $735,000. Instead of paying off the Webers’ loan, Analy decided to roll the Webers’ loan into the new loan, adding other lenders as beneficiaries on a new deed of trust to make up the difference.
To facilitate the new loan transaction, Analy and the Montgomerys opened escrow with Fidelity National Title Co. The Webers were not a party to the escrow. Redwood submitted to escrow, on behalf of the Webers, a beneficiary’s payoff demand showing a principal balance payoff of “zero.”
The Webers claim they were unaware of the transaction until after escrow closed.
Eventually, the Montomerys defaulted on the loan and the Webers along with other beneficiaries foreclosed.
The Webers sued Fidelity, Analy, Redwood and others for damages. They alleged a single cause of action against Fidelity for negligence. They have settled with Redwood.
The trial court granted Fidelity’s motion for summary judgment. In granting the motion, the trial court concluded that it is undisputed that the Webers were not parties to the escrow; Fidelity’s duties extended only to the parties to the escrow; Fidelity’s duty was limited to following the escrow instructions: and Fidelity followed the escrow instructions.
The appellate court affirmed the trial court’s ruling, noting that the California Supreme Court ruled in Summit Financial Holdings Ltd. v. Continental Lawyers Title Co., that an escrow holder’s duty is limited to faithful compliance with the depositors’ instructions.
In this case, the Webers argue that Fidelity did not follow the escrow instructions because it released escrow funds on the second loan before that loan was fully funded. The court disagreed.
“Fidelity was not instructed to pay the Webers,” the court stated. “Instead, Fidelity was instructed that full funding of the second Montgomery loan would come in party by ‘rolling over’ the original Montgomery loan. Thus, Redwood deposited into escrow on behalf of the Webers a beneficiary demand with a zero principal payoff. The second Montgomery loan was fully funded in the manner contemplated by the instructions of the parties to the escrow.
“Moreover, even if Fidelity had breached the escrow instructions, it had no duty to the Webers, who were not parties to the escrow,” the court said, pointing to Markowitz v. Fidelity National Title Co.
“Here the Webers were not parties to the escrow,” the court stated. “It is true the instructions required Fidelity to obtain a policy of insurance naming the Webers loss payees in the event the Montomerys failed to provide a policy. But that does not make the Webers parties to the escrow. The Webers gave Fidelity no instructions. In fact, they claim they were not even aware of the escrow until after it closed.”
The Webers also argued that triable issues of fact remain as to whether there was clear evidence of fraud. They opined that an escrow has a duty to notify a third party where there is clear evidence of fraud. The court disagreed, noting that the Webers did not explain how a closing statement that was not prepared for them and of which they were not aware is evidence of fraud.
“The Webers claim that Analy had no authority to act as their agent, and that Fidelity knew it,” the court stated. “But they point to nothing in their statement of disputed material facts or anywhere else to support the claim that Fidelity knew Analy lacked the authority. Nor do they point to anything that should have alerted Fidelity that Analy was attempting to defraud them.
“Moreover, even if Fidelity knew Analy was not the Webers’ agent, the Webers cite no authority that any such agency was required,” the court continued. “Escrows that require the reconveyance of an existing trust deed are most commonly established by parties who are not the agent of the beneficiary. In this regard, the Webers completely ignore Redwood’s role in the transaction. The damages to the Webers occurred when Redwood reconveyed their original trust deed under a zero principal payoff demand.”