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02/12/93 JAMES A. STUART v. CECIL O. CLARKE AND

February 12, 1993

JAMES A. STUART, APPELLANT
v.
CECIL O. CLARKE AND FARID SROUR, APPELLEES



Appeal from the Superior Court of the District of Columbia; (Hon. Virginia L. Riley, Trial Judge)

Before Ferren and Terry, Associate Judges and Gallagher, Senior Judge. Opinion Per Curiam. Dissenting opinion by Associate Judge Terry.

The opinion of the court was delivered by: Per Curiam

PER CURIAM: Appellant (the seller) contracted to sell real property to appellees (the buyers). At the time of contract, the seller knew that the land records showed there was an unreleased 1948 deed of trust on the property, although he assumed it previously had been satisfied. Well prior to settlement, the title company advised the seller that he could not convey clear title to the property, but he took no action. The buyers came to settlement prepared to meet their contract obligations and to pay for the property. The seller came to settlement well knowing he was unable to convey good title because he had long failed to obtain a release of the old deed of trust.

The parties agreed at settlement to put a portion of the purchase money, i.e., the amount of the unreleased deed of trust ($13,500), in escrow with the title company named in the contract of sale until the seller obtained its release, at which time he would be entitled to receive from the escrow agent the remainder of his purchase money. But, very significantly, the deed to the property was delivered to the purchasers at settlement. The buyers, therefore, acquired title to the property at settlement; it remained for the seller to perform his previously violated contractual obligation to furnish clear title by obtaining a release of the 1948 deed of trust, in order to obtain the escrowed $13,500, held for his benefit.

Some time later, the escrow agent absconded with the money. The buyers brought this action against the seller, seeking damages for breach of contract, a declaratory judgment, and other relief; the seller responded with a counterclaim for $13,500. The only issue presented on this appeal is whether the buyers or the seller must bear the loss resulting from the escrow agent's defalcation.

The trial court held that the seller, not the buyer, should suffer the loss. The court ruled:

If one is entitled to funds and fails to collect them before they are stolen, the burden of the loss must necessarily fall on that person. * * * This failure cannot be allowed to shift the risk of loss back to the .

We agree.

The general rule is that "when an escrow agent absconds with money he is holding in his capacity as depositary, the loss must fall upon the person as whose agent he is holding the money at the time." Lechner v. Halling, 35 Wash. 2d 903, 216 P.2d 179, 183 (Wash. 1950). "Under the normal escrow situation where the escrow agent defaults prior to performance of the escrow condition, the loss falls upon the depositor, for he is deemed to have retained legal title to the subject matter of the escrow, and is deemed to be entitled to the return of such subject matter, should the other parties fail to perform." Cradock v. Cooper, 123 So. 2d 256, 258 (Fla. Dist. Ct. App. 1960). This case, however, does not reflect the "normal escrow situation"; the loss, therefore, does not fall on the buyer-"depositor." Id. More specifically, this case is distinguishable from other, more typical escrow situations because title to the property has passed to the buyer, and thus the proceeds of sale -- including the amount retained in escrow -- have passed to the seller, subject to his performance of a condition subsequent entitling him to release of the escrowed funds. The buyers cannot logically be the owners of both the purchased property and the portion of the money in escrow.

A basic principle applies here: the nature of an escrow agreement, like any other contractual arrangement, must be determined by the intent of the parties as evidenced by all the facts and circumstances surrounding the creation of the escrow. See Ferguson v. Caspar, 359 A.2d 17, 20-21 (D.C. 1976); 30A C.J.S. Escrows § 6 (b), at 502 (1992). In the typical escrow arrangement to facilitate transfer of title to real property, the seller and buyer "employ a third party to accept their respective tenders of performance under the contract." Ferguson, 359 A.2d at 20. Thus, the seller's deed, the buyer's purchase money, and other pertinent instruments are deposited with the escrow agent pending each party's performance of his or her respective duties required for settlement. Until each party has satisfied the respective conditions precedent, legal title to the property does not pass to the buyer and legal title to the purchase money does not pass to the seller. Id. at 22-23.

This case does not involve the above typical escrow arrangement. Rather, the parties reached a settlement and legal title to the property passed to the buyers. In return, the seller received purchase money in the form of cash and a purchase money note for the balance due along with a deed of trust. At the closing, however, there was one problem: there was a 1948 deed of trust remaining on the property, and thus the seller had not delivered clear title as promised. In order to close the deal despite the outstanding deed of trust, the parties agreed that an escrow agent would hold $13,500 of the purchase money (presumably an amount relating to the 1948 mortgage note) until the seller could obtain a release of the old deed of trust. Therefore, the seller, rather than receiving an additional $13,500 from the buyers as part of the purchase price, settled for $13,500 in escrow until he could clear the property's title.

The record is not clear what the parties' intention was with respect to the escrowed funds if the seller failed to obtain a release. Given the purpose of the escrow, however, it would appear that if the seller failed to obtain a release, the $13,500 either would go to pay off the deed of trust, with any left over remaining with the seller, or the $13,500 would go back to the buyers as compensation for purchasing a clouded title. *fn1

Given the above terms of the parties' settlement agreement under which title to the property passed to the buyer -- unlike the typical escrow arrangement where the deed also remains in escrow -- we conclude the better interpretation is to say that title to the $13,500 passed to the seller when title to the property passed to the buyers. To induce the buyers to settle despite the clouded title, the seller agreed to escrow a portion of the purchase money to secure his performance, i.e., to make good on his earlier promise to remove the 1948 deed of trust "cloud" from the buyers' title. See 30A C.J.S. Escrows § 4, at 498-99 (discussing different types of escrows, including a money escrow as distinguished from a common law escrow for conveyance of property). In other words, the seller agreed to put $13,500 of the purchase money in escrow as consideration for the buyers' willingness to go ahead with the settlement. Thus, the condition the parties agreed to for release of the escrowed funds (clearing title) was a condition "subsequent to passage of title to the matter in escrow." Id. § 5 (b), at 500.

Based on our reading of the escrow arrangement, we conclude the facts of this case are more in line with Cradock v. Cooper, (seller bore risk of loss of defalcation because purpose of escrow was to settle cloud on title after title to property had already passed to buyer and because buyer retained no control over escrowed funds), than with the more typical case cited in the Dissent, Zaremba v. Konopka, 94 N.J. Super. 300, 228 A.2d 91 (N.J. Super. Ct. Ch. Div. 1967) (buyer bore risk of loss of defalcation because purpose of escrow was to hold down payment while buyer obtained financing before title to property had passed and thus buyer still had title to escrowed finds at time of defalcation). It simply does not make sense to say the buyers had title to the escrowed funds while recognizing that the buyers also had title to the real property. Once ...


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