To Do or Not To Do—Whose Instructions to Follow In Closing An Escrow

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Few would hazard to consummate any real estate transaction without the services of a neutral escrow holder. Traditionally, general escrow law has defined the existence and scope of an escrow holder’s liability based on whether one was a “party” to the escrow. At its most basic, each party deposits its documents and funds into escrow and provides instructions to the escrow holder, the conditions of escrow are satisfied, and escrow “closes.” It all seems straightforward.

Two recent cases demonstrate how the function of an escrow holder can be complicated by the involvement of a third party, such as a lender, in the overall transaction. The relationship of a lender’s closing instructions to the duties of an escrow holder in a purchase and sale transaction was addressed in both The Money Store Investments Corp. v. Southern California Bank,1 and Plaza Home Mortgage, Inc. v. North American Title Company, Inc.2 While one might conceptually argue that the lenders in these cases were “parties” to the larger escrow transaction, the courts in both cases focused on contract principles rather than the duties of an escrow holder as an agent of a party to the escrow. As discussed further in this article, this distinction is critical, limiting the scope of the escrow holder’s obligations as a neutral, and curtailing liability (e.g., based in tort or contract) to other non-parties. This article provides an analysis of the Plaza and Money Store cases and their implications for California law concerning escrow liability.

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