Opinion ID: 1404309
Heading Depth: 2
Heading Rank: 2

Heading: The Escrow Agent's Duty to Disclose Fraud

Text: Burkons alleged that Ticor breached its implied contractual, fiduciary duty by failing to inform him that the Tower loan was not being used for construction but, rather, to finance the down payment, with the balance apparently going to Pyramid. Acknowledging an escrow agent's obligation to maintain confidentiality with each of the parties to the escrow, Burkons claims nevertheless that when the agent knows a fraud is being perpetrated, it has an obligation to reveal the facts to the parties. Our law on this issue is based on Berry v. McLeod, 124 Ariz. 346, 604 P.2d 610 (1979). McLeod had agreed to sell a parcel of real property to a corporation that, unknown to him, had been formed by his brokers to acquire the property from their client and resell it to another at double the price. The title company established two escrows for the transaction, one for the sale from McLeod to the corporation and the second for the sale between the corporation and the final purchaser. McLeod's personal representative sued the escrow company, claiming it knew of the scheme and failed to inform McLeod that his brokers were making secret profits. Id. at 352, 604 P.2d at 616; see Note, Escrowee's Duty to Disclose Fraud: An Expansion of the Limited Agency Doctrine, 22 ARIZ. L.REV. 1146, 1147 (1980). McLeod's representative alleged both negligence and breach of fiduciary duty. This court held that though the trial judge should have directed a verdict on the negligence issue, a jury question remained: if the escrow agent knew of the fraud, it would be liable for breach of its fiduciary obligation to disclose a known fraud. Berry, 124 Ariz. at 352, 604 P.2d at 616; see also D'Ascoli, 94 Ariz. at 234, 383 P.2d at 121-22 (the escrow agent, a fiduciary, must conduct the transaction with scrupulous honesty, skill and diligence.). Acknowledging the Berry rule, Ticor argues that because there is no evidence it had actual knowledge that a fraud was being committed, the court of appeals impermissibly expanded Berry by applying it to this case. In Ticor's view, the court held the escrow agent liable for negligent failure to discover a fraud rather than for failing to disclose a known fraud. Ticor's view of the Berry case is too restrictive. Berry requires the escrow agent to disclose information when it knows that a fraud is being committed. Berry, 124 Ariz. at 352, 604 P.2d at 616. It does not require the escrow agent to investigate and search for fraud. Id. But our reading of Berry also leads to the conclusion that it does not permit the escrow agent to close its eyes in the face of known facts and console itself with the thought that no one has yet confessed fraud. Although not required to investigate, when the agent is aware of facts and circumstances that a reasonable escrow agent would perceive as evidence of fraud, then there is a duty to disclose. Note, supra, 22 ARIZ.L.REV. at 1153 (describing Berry's holding). See American State Bank v. Adkins, 458 N.W.2d 807, 810-11 (S.D. 1990) (following Berry rule); PROSSER AND KEETON ON THE LAW OF TORTS § 106, at 738-39 and n. 42 (5th ed. 1984); Keeton, Fraud-Concealment and Non-Disclosure, 15 TEX.L.REV. 1, 10 (1936). Applying this rule, we must determine whether the facts and circumstances known to Ticor could support a finding that a reasonable escrow agent would have perceived them as evidence of fraud, so that there was a duty to disclose. That inquiry is easily answered on the record before us. Certainly the trier of fact would be entitled to consider that no reasonable business purpose was served by Pyramid's scheme, that no reasonable seller would have agreed to it if he had understood it, and that the documents  particularly the letter of intent  were misleading because they implied the funds would be used for construction. The factfinder could conclude that the escrow agent, with all its experience, must have been aware of these circumstances. There was ample evidence that Ticor was aware of the actual facts of the transaction. Yancy, the escrow officer for all of Pyramid's transactions with Ticor, knew before closing that the combined liens on the property were greater than the purchase price and that the Tower lien was not going to be used for development but instead would be used to finance the down payment, with the rest to be disbursed directly to the buyer. Of course, while one might hope that the buyer would use the disbursement to develop the property, it is highly unusual, to say the least, to disburse development funds directly to the buyer without control. In fact, Yancy was so concerned about the methods being used that she called the problem to the attention of one of her supervisors. For reasons not shown in this record, the supervisor told her that Ticor's internal policy dealing with over-encumbrancing was inapplicable to the Burkons escrow. It is possible that Ticor's policy was inapplicable, but the record shows nothing to support that statement, especially when this escrow was the third in a series of over-encumbered escrows that Ticor handled for Pyramid and some unfortunate seller. Most important, Ticor's internal policy raised the flag of suspicion quite high. Ticor had conducted in-house educational programs designed to make the escrow personnel aware of a creative situation that could involve us in a loss because of fraud. Exhibit to Plaintiffs' Response in Opposition to Defendant's Motion for Summary Judgment, filed Aug. 27, 1986, at L-6, L-14. At an in-service training meeting, Ticor's escrow officers had been warned about over-encumbered property. This is where buyers are allowed to place a loan on the property which is superior to the sellers' carry back, but allows the buyer enough money to pay the down payment from it and the balance goes into his pocket. The total encumbrances exceed the sales price and company policy is that we will not handle this type of transaction, ( Id. at L-3), because it is an outright swindle. Id. at L-13. Escrow officers were taught the use of tactful customer relations skills in explaining why Ticor did not accept such escrows. Id. at L-6. Ticor's documents require its personnel to notify parties to the escrow where there is an over-encumbrance and repeat that Ticor will not handle an over-encumbered property transaction. Id. at L-11, L-13. Given the foregoing, we must conclude that the trial judge erred in granting summary judgment on the count alleging that Ticor breached its fiduciary duties by failing to notify Burkons that the property was being over-encumbered. It is impossible to say as a matter of law that a reasonable escrow agent would not perceive the over-encumbrance situation as substantial evidence of fraud in light of the internal policies of this very escrow agent. There was strong evidence that the actual facts known to Ticor raised substantial evidence of fraud. Under such circumstances, the principles set forth in Berry require the escrow agent to disclose the facts to the parties. We reject Ticor's suggestion that there is no duty to disclose unless the escrow agent actually knows that a fraud is being perpetrated. Parties perpetrating fraud rarely confess to their escrow agents, and absolute knowledge of fraud can seldom be established. Such a rule is so unrealistic that it would actually make escrow agents reluctant accomplices to land fraud schemes. Because of the principle of confidentiality, the escrow agent would act at its peril in making any disclosure without an actual confession of fraud. We prefer as a matter of common law policy to rely on Berry 's point: if the facts actually known to the escrow agent present substantial evidence of fraud, there is a duty to disclose.