Opinion ID: 2600740
Heading Depth: 2
Heading Rank: 1

Heading: The Asserted Fiduciary Duty: Kirby

Text: In contending that the escrow holder here, CLTC, owed a duty of care to Summit, even though neither Talbert nor Summit were parties to the escrow, Summit relies upon Kirby, supra, 183 Cal. App.3d 57, 227 Cal.Rptr. 785. In Kirby, the Pierces opened an escrow with Palos Verdes Escrow Company, Inc. (Palos Verdes) for the purchase of certain real property. While awaiting permanent financing from the Small Business Administration (SBA), the Pierces took out a short-term loan from Universal Financial (Universal), which loan was secured by a second deed of trust on the property. Universal then assigned the note and the deed of trust to the Kirbys, and the assignment was recorded. After funds from the SBA were deposited into escrow, Universal made a demand on Palos Verdes for payment of the Pierces' note, and the Pierces orally authorized payment. Because one of its officers had reviewed the title insurance policy on the property before forwarding it to the Pierces, Palos Verdes had constructive notice of Universal assignment to the Kirbys. Nevertheless, Palos Verdes made the payment to Universal. When the Kirbys demanded payment from Universal and Universal failed to pay them, the Kirbys filed suit against Palos Verdes on the theory it performed its escrow duties negligently by paying Universal rather than the Kirbys. The Kirbys prevailed in the trial court, and the Court of Appeal affirmed. ( Kirby, at pp. 60-61, 227 Cal.Rptr. 785.) Kirby began its analysis by reviewing the familiar principles recited above. ( Kirby, supra, 183 Cal.App.3d at pp. 64-65, 227 Cal.Rptr. 785.) However, after acknowledging that the agency created by an escrow is limited to the obligation to carry out the instructions of the parties to the escrow, and that an escrow holder is liable to the parties insofar as it fails to carry out the instructions it has contracted to perform, Kirby held that Palos Verdes was liable to the Kirbys, who were strangers to the escrow, precisely because it did carry out the instructions of a partythe Pierces. The rationale Kirby gave for this anomalous conclusion was that [r]eceipt of notice of the assignment was equivalent to the receipt of new escrow instructions regarding the party to be paid. ( Builders' Control Service of No. Cal, Inc. v. North American Title Guar. Co. (1962) 205 Cal. App.2d 68, 74, [22 Cal.Rptr. 712]) Such 'new instructions conflicted with the Pierces' verbal instructions to pay Universal. This conflict should have alerted defendant to a potential problem in paying Universal rather than the Kirbys, and vice versa. As the escrow holder faced with conflicting instructions, Palos Verdes had the duty to delay payment of escrow funds until such time as the proper payee was identified. [Citation.] ( Kirby, at pp. 65-66, 227 Cal.Rptr. 785.) As the Court of Appeal in the present case observed, Kirby appears to be the only California case that holds an escrow holder can be liable to strangers to the escrow for injuries allegedly caused by the escrow holder following its principals' instructions. We agree with the Court of Appeal that Kirby 's analysis for its novel legal conclusion is not convincing. Kirby 's holding rested on its reading of Builders' Control Service that (1) knowledge of an escrow holder that a nonparty distributee of funds from the escrow has made an assignment of the right to receive those funds is deemed an amendment to the escrow instructions by the parties to the escrow, and (2) an escrow holder who follows the parties' instructions rather than the `deemed amended' instructions is exposed to liability even though its principals suffer no injury from the fact the escrow holder followed its principals' instructions. [¶] Kirby's holding is flawed because Builders' Control Service does not stand for either legal proposition. In Builders' Control Service, a lender agreed to fund an owner-builder's construction of homes, and to ensure that the loan funds would actually be used to pay the construction costs, the lender deposited the funds with the plaintiff fund control agent. The parties to the loan also agreed that the owner-builder would assign the proceeds from the sale of the newly constructed homes to the fund control agent as an additional source of funds to pay the construction costs. The defendant title company acted as an escrow holder for the proceeds of the home sales, and, because it had received a copy of the assignment and had recorded it, the title company knew that the owner-builder had assigned the proceeds of the sales to the fund control agent. Nevertheless, the title company assertedly made deductions from the sales proceeds in violation of the terms of the assignment. ( Builders' Control Service of No. Cal., Inc. v. North American Title Guar. Co., supra, 205 Cal.App.2d at pp. 70-72, 22 Cal.Rptr. 712 ( Builders' Control Service ).) In Builders' Control Service, then, the question was whether the defendant title company, acting in its capacity as an escrow holder and knowing that its principal had assigned the sales proceeds held by it, was liable to the plaintiff fund control agent for violating the terms of the assignment. As the Court of Appeal in the present case correctly observed: Although the Builders' Control Service court concluded the escrow holder was obligated to disburse the funds to the owner-builder's assignee, the principles it applied have no application to whether an escrow holder owes duties to a nonparty based on an assignment made by [one] stranger to the escrow to [another] stranger to the escrow. The Builders' Control Service court first noted that when a home sale escrow closed, the escrow holder held the sales proceeds as agent for the owner-builder principal. The Builders' Control Service court then cited section 2344 for the rule that, when a principal has assigned funds to a third party, an agent for that principal who comes into possession of those funds must surrender them to the third party. (205 Cal.App.2d at p. 73, 22 Cal. Rptr. 712.) Thus, Builders' Control Service stands for the proposition only that an agent's obligation to disburse proceeds held by the agent for its principal is coextensive with the principal's obligation to disburse those proceeds to the assignee. [Fn. omitted.] We agree with the Court of Appeal here that Kirby misread Builders' Control Service. Builders' Control Service holds only that an agent's knowledge of an assignment by its principal obligates the agent to honor the principal's assignment; Kirby transformed that obligation, which is founded in the law of agency, into a duty owed to honor contracts made by creditors of the principal even though the escrow holder had no agency relationship with the creditor. [Fn. omitted.] The Builders' Control Service court did say that receipt of notice [of an assignment] is tantamount to new instructions. ( Builders' Control Service, supra, 205 Cal.App.2d at p. 74, 22 Cal.Rptr. 712.) However, under the facts of that case, the statement meant no more than that a party to an escrow may issue new instructions to the escrow holder in the form of an assignment. As the Court of Appeal here observed: Kirby 's citation to Builders' Control Service as holding that receipt of notice of the assignment was equivalent to the receipt of new escrow instructions regarding the party to be paid demonstrates Kirby 's misreading of Builders' Control Service. In the context of Builders' Control Service, the agent's receipt of notice of the assignment could be deemed the equivalent of a new instruction regarding the party to be paid because the assignment was made by the owner-builder, a party to the escrow entitled to give instructions to the escrow holder. However, Kirby transmuted that agency concept into a holding that transactions by strangers to an escrow can supersede and amend the instructions given by the parties to the escrow. Nothing in Builders' Control Service supports that remarkable conclusion. [5] For the reasons stated, Kirby v. Palos Verdes Escrow Co., supra, 183 Cal.App.3d 57, 227 Cal.Rptr. 785, is disapproved insofar as it is inconsistent with the views expressed herein.