Court Opinion

ID: 9587303
Source: CourtListenerOpinion
Date Created: 2023-08-21 23:20:49.877331+00
Date Added: 2024-06-11T17:37:12.588395
License: Public Domain

BROOKS, Judge,
dissenting,
I respectfully dissent on all issues addressed by the majority and would therefore affirm the judgment of the trial court.
THE ALLEGED BREACH OF THE ESCROW CONTRACT
The crux of the majority opinion is that the documents submitted to Ticor showed Burkons’ intent to subordinate his deed of trust only to a construction loan. I disagree.
The first document executed by the parties was the real estate purchase contract. This contract is a form agreement and contains the following pertinent handwritten language: “Escrow to contain subordination agreement drawn up by buyer’s attorney on a form acceptable to Title Co. Escrow to contain letter of intent as to amounts and use, (financials attached)____” This indicates that the parties were going to execute a subordination agreement prepared by the buyers’ attorney; the title company was to approve the form, or at least find it acceptable, and the escrow was to contain a letter of intent as to amounts and use. A supplement to the real estate purchase contract states: “The buyer may not place another lien of any type against this property without written permission from the seller.” The purchase contract makes no reference to conditioning subordination to a deed of trust securing a construction loan.
The escrow instructions do not differ materially from the purchase agreement. They are provided on a standard Ticor form, and spaces are typed in indicating that payment to the seller will be in the form of a $1,000 earnest money payment, $24,000 cash at the close of escrow and a $110,000 note and first deed of trust. Other typed provisions reiterate statements in the purchase contract concerning the requirement that the seller must accept the subordination agreement and letter of intent in writing. There is no reference to a construction loan.
The next significant document is the subordination agreement. It is a form document not prepared by Ticor which contains language at the top of the first page stating “See attached letter of intent made part of this subordination agreement.” The body of the subordination agreement refers to a $67,000 loan but makes no reference whatsoever to the use of the loan.
The document upon which the majority relies for its conclusion that the subordination agreement was intended to be for a construction loan was the letter of intent appended to the subordination agreement. That letter reads:
Rev. Domenico Spano and Dr. Dennis B. Noss formed a joint venture to construct a medical complex on the project mentioned. We, therefore, intend to start construction as soon as approval is met.
We have contracted for the property to be carefully masterplanned by Frank Clemente and Associates (955-0740), of Phoenix, Arizona, and hope our site plan is ready by December 1, 1983.
Because of our building methods, subordination will be minimal, approximately 50% of selling price.
The letter was signed by Schnitzer, on behalf of Burkons, as having been accepted and approved.
The issue is whether this letter should have put Ticor on notice that the parties intended to subordinate only to a construction loan. If so, Ticor’s later knowledge *314that Pyramid I was using the loan as the source of its down payment raises factual issues concerning Ticor’s duty to disclose this information to Schnitzer and to seek clarification before closing escrow.
However, the letter of intent does not address how the loan proceeds are to be used. It simply states that subordination will be approximately 50% of the selling price which is consistent with a $67,000 loan in relation to a $135,000 selling price. Although the letter discusses the buyers’ intent to construct a medical complex, it does not indicate the source of funds for construction or state that the $67,000 loan is to be used for construction. Further, it is hardly reasonable to assume that a $67,-000 loan would suffice to construct a medical complex.
While the letter is incomplete in the sense that it did not state how Spano and Noss intended to use the loan proceeds, the parties did not make this information significant to Ticor for purposes of closing the escrow. The escrow instructions simply directed Ticor to close the escrow upon receiving the monies and the documents described in those instructions. The instructions called for a subordination agreement and a letter of intent that had been signed and accepted by the seller. This is precisely what Ticor received. Neither the instructions themselves, nor other duties imposed by law, require an escrow officer to question the wisdom or legal consequences of those documents. Shaheen v. American Title Ins. Co., 120 Ariz. 505, 586 P.2d 1317 (App.1978). See also Woodworth v. Redwood Empire Savings & Loan Ass’n, 22 Cal.App.3d 347, 99 Cal.Rptr. 373 (1971). The only condition placed on the subordination by the letter of intent was a limit of $67,000 on the amount to which the Burkons deed of trust would be subordinated. The result was an unconditional subordination of Burkons deed of trust to a $67,000 first deed of trust.
The majority states that Yancy admitted in an interview with Burkons' investigator that she knew that the purpose of the subordination was to make construction on the property possible and that the funds that were supposed to be used to finance construction were instead being used to make the down payment on the property. However, in response to that same allegation in the trial court, Ticor produced an affidavit in which Yancy swore that no one informed her while the escrow was pending that the Burkons deed of trust should only be subordinated to a construction loan. Yancy further stated under oath that she had no knowledge of an agreement between Burkons and Pyramid I that the loan proceeds were to be used to improve the property.
Burkons did not produce an affidavit that controverted Yancy’s sworn statements. The allegations that he made based upon Yancy’s unsworn statements in an interview with a third party did not constitute facts that the trial court could consider in ruling on Ticor’s motion for summary judgment. Prairie State Bank v. Internal Revenue Service, 155 Ariz. 219, 745 P.2d 966 (App.1987). We therefore cannot consider the alleged statements on appeal. See id.
The majority also states that Yancy’s supervisor, Albert Pieri, admitted that he believed that the purpose of the subordination agreement was to make construction possible. I disagree.
First, it is important to note that Pieri was not involved in the Burkons escrow. However, during Pieri’s deposition, Burkons’ counsel asked him to read and interpret some of the escrow documents. He was then asked what the letter of intent told him about the nature of the loan to which the sellers were going to subordinate. This exchange followed:
A. It says that they’re going to construct a complex, a medical complex.
Q. So you are telling me that that letter of intent tells you that the sellers are going to subordinate to a construction loan?
A. It says they intend to start construction as soon as approval is met.
Q. “Construct” is the key word; is that correct?
A. If you say so.
*315Q. No, sir, I’m asking you what that says to you.
A. I don’t know that it is. I don’t know. I didn’t handle the transaction, sir.
This testimony does not constitute an acknowledgement on Pieri’s part that the purpose of the subordination agreement was to make construction possible.
ORDER OF RECORDING.
The majority also concludes, however, that Ticor breached the escrow contract by recording the deeds of trust in the wrong order. The majority states that Ticor should have recorded the Burkons deed of trust before the Jacobson deed, because the escrow instructions stated that Burkons was to receive a first lien. The Jacobson deed of trust would then have gained priority only by reason of the subordination agreement rather than by the order of recording. Had Ticor recorded “in the correct order,” the reasoning continues, Burkons could have attacked the subordination agreement and preserved his first lien position.
I disagree, because this analysis again assumes that subordination was conditioned on the new loan being a construction loan. As previously discussed, the subordination agreement unconditionally put the Burkons deed of trust in second position to the Jacobson deed of trust. Further, the escrow instructions do not tell Ticor how to effectuate that second position nor do they refer to a particular recording order. They do not even specify which instruments to record. However, boilerplate printed language in the escrow instructions authorizes Ticor to record whatever instruments are necessary to carry out the instructions.
Ticor could have effectuated Burkons’ second position simply by the recording order, i.e., recording the Jacobson deed of trust prior to the Burkons deed of trust. However, Ticor carried out its instructions to place Burkons’ lien in a second lien position by recording the Burkons deed of trust after the Jacobson deed of trust and also by recording the subordination agreement. Whether Ticor put the Burkons deed of trust in second position by the recording order of the deeds, by recording the subordination agreement or both, the bottom line is that the agreement to subordinate, not the recording order, created Burkons’ subordinate lien position. Where a party agrees to subordinate its lien or waives its right to priority, the order of recording becomes irrelevant. Colonial Villas, Inc. v. Title Insurance Co. of Minnesota, 145 Ariz. 590, 703 P.2d 534 (App.1985). See also Middlebrook-Anderson Co. v. Southwest Savings & Loan Assoc., 18 Cal.App.3d 1023, 1034, 96 Cal.Rptr. 338, 344 (1971).
The cases relied upon by Burkons to support his contention that Ticor recorded in the wrong order involve situations in which there were express agreements to subordinate only to construction loans, a fact notably absent from the documents in this case. See Middlebrook-Anderson Co., 18 Cal.App.3d at 1031, 96 Cal.Rptr. at 342. Ruth v. Lytton Savings & Loan Assoc., 266 Cal.App.2d 831, 72 Cal.Rptr. 521 (1968), modified on other grounds, 272 Cal.App.2d 24, 76 Cal.Rptr. 926 (1969); Spaziani v. Millar, 215 Cal.App.2d 667, 30 Cal.Rptr. 658 (1963).
COMPLETION AND RECORDATION OF THE SUBORDINATION AGREEMENT
In an argument not addressed by the majority, Burkons contends that Ticor was without authority to fill in the blanks on the subordination agreement and record it without further instruction from the parties. I disagree.
It should first be noted that Burkons does not contend that Ticor filled in the information incorrectly. The accuracy of that information is directly confirmed by the buyers’ note and the Jacobson deed of trust. Burkons simply complains that Ti-cor wasn’t authorized to fill in the blanks and that had it not done so, the agreement would have been incomplete and thus nonbinding.
Where a person signs a form instrument that contains blank spaces, he implicitly authorizes the holder to fill in the blanks in *316accordance with the underlying agreement. Hutcheson v. Herron, 131 Ill.App.2d 409, 413, 266 N.E.2d 449, 452 (1970). See also Poland v. Gibson, 190 Neb. 696, 699, 211 N.W.2d 900, 902 (1973). According to Stika’s uncontroverted testimony, Schnitzer authorized Stika to have the blanks completed according to the deed of trust and loan obtained by the buyers. Stika, in turn, authorized Ticor to fill in the blanks by delivering the signed agreement and directing that it be completed in compliance with the later delivered note and deed of trust.
An agent who possesses the authority to conduct a transaction has the implied authority from his principal to do what is necessary to carry it out. Carrel v. Lux, 101 Ariz. 430, 440, 420 P.2d 564, 574 (1966). A principal who gives his agent a document containing blanks vests the agent with the authority to fill in those blanks in accordance with the principal’s intentions. Hutcheson, 131 Ill.App.2d at 413, 266 N.E.2d at 452; First National Bank of Jackson v. IDS Mortgage Corp., 353 So.2d 775, 778 (Miss.1978); Poland, 190 Neb. at 699, 211 N.W.2d at 902.
While acknowledging that Ticor had authority to fill in the blanks according to the parties’ intent, Burkons nevertheless argues that Ticor was aware of the buyers’ intent but not of his intent. He claims that Ticor should have contacted him or Schnitzer prior to filling in the blanks. However, by signing the agreement and having it notarized, Schnitzer had already communicated his intent to approve a subordination to a $67,000 loan and deed of trust without regard to the identity of the lenders, the interest rate which the buyers would have to pay or other terms of that loan. There is no evidence of a contrary intent in any documents transmitted to Ticor; and there is no evidence that Schnitzer objected to the filled in spaces when escrow closed. To the contrary, Stika testified that after signing the subordination agreement, Schnitzer complained only about the delay in closing. Further, when Burkons initially received copies of the subordination agreement and other documents from Ticor, he expressed no objection to Ticor’s authority to fill in the blanks. It was not until more than a year after closing that Burkons raised an objection to Ticor’s authority.
I would hold that Ticor did not breach its escrow agreement by filling in the blank spaces of a subordination agreement signed by both parties and delivered to it with instructions from the buyers’ agent to complete it in accordance with loan documents to be delivered prior to the close of escrow.
ALLEGED BREACH OF FIDUCIARY DUTIES
An escrow relationship gives rise to two distinct fiduciary duties by an escrow agent. The escrow agent must act in strict accordance with the terms of the escrow agreement and has a duty to disclose a known fraud. Berry v. McLeod, 124 Ariz. 346, 604 P.2d 610 (1979). See also Maganas v. Northroup, 135 Ariz. 573, 576, 663 P.2d 565, 568 (1983).
As previously discussed, I would find that Ticor fully complied with its fiduciary duties to follow its escrow instructions. The issue remaining is whether there is evidence from which a trier of fact could conclude that Ticor breached its fiduciary duty by failing to disclose knowledge of Pyramid I’s alleged fraud.
Burkons contends, and the majority agrees, that the following information possessed by Ticor is equivalent to knowledge of fraud: (1) Ticor knew that Burkons had agreed to subordinate his deed of trust only to a construction loan deed of trust; (2) Ticor learned that the loan was not a construction loan and that the buyers intended to fund their down payment from its proceeds; (3) Ticor knew that the property would be overencumbered; and (4) Ti-cor had handled previous escrows involving the same buyer and the same scheme. Again, I disagree.
Ticor’s knowledge that the buyers intended to fund their down payment with part of the loan proceeds is significant to the fraud issue only if Ticor knew that Burkons believed he was subordinating to a construction loan deed of trust. Neither *317Burkons nor Schnitzer instructed Ticor that the loan proceeds could not fund the down payment.
Burkons’ contention that Ticor knew that the property was overencumbered ignores the fact that Schnitzer too could have discerned that fact by looking at the purchase contract and subordination agreement. It is obvious that the total amount of the liens placed against the property exceeded the sales price. Thus, Ticor had no information to disclose relating to overencumbrances that was not readily apparent to the seller.
The majority places considerable emphasis on the fact that Ticor had an internal written policy describing frauds which can occur during real estate transactions where property is overencumbered. However, Ti-cor’s knowledge that some overencumbered property transactions can be vehicles of fraud is not evidence that Ticor knew that the Burkons transaction was fraudulent.
Berry v. McLeod holds that actual knowledge of a fraud triggers an escrow agent’s duty of disclosure. 124 Ariz. at 352, 604 P.2d at 616. A suspicion of fraud is insufficient to mandate disclosure. Id. There is simply no evidence in the record that Yancy had knowledge that a fraud was being perpetrated. At the time she was handling the Burkons escrow, other escrows which she handled involving Pyramid I had not resulted in problems. There is no evidence whatsoever that she knew that the buyers did not intend to fulfill their payment obligations. An escrow officer does not have a duty to search for fraud. Id. The parties to an escrow contract do not pay her to be an investigator or attorney. In any event, the only information which Yancy had a duty to disclose was already disclosed to the seller in the escrow documents — the seller had agreed to an unconditional subordination of his purchase money deed of trust to a second deed of trust on overencumbered property.
BAD-FAITH BREACH OF ESCROW CONTRACT
Since Ticor did not breach its escrow contract, it follows that Ticor could not be liable for a “bad faith” breach. However, I would hold that Burkons’ claim is not recognized as a matter of law.
Every contract contains an implied covenant of good faith and fair dealing. Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 383, 710 P.2d 1025, 1038 (1985). Arizona courts have recognized tort recovery for breach of an implied covenant of good faith and fair dealing in cases involving insurance and employment contracts. See Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986) (insurance contracts); Wagenseller, 147 Ariz. 370, 710 P.2d 1025 (employment contract); Sparks v. Republic National Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied, 459 U.S. 1070, 103 S.Ct. 490, 74 L.Ed.2d 632 (1982); Noble v. National American Life Ins. Co., 128 Ariz. 188, 624 P.2d 866 (1981).
As stated in Rawlings, although tort recovery for breach of an implied covenant is well established for insurance contracts, it is only reluctantly extended to other relationships. 151 Ariz. at 158, 726 P.2d at 574.
In Rawlings, our supreme court indicated that tort recovery may be appropriate where the type of contract involved is one in which the plaintiffs seek certain intangible benefits, rather than commercial advantage or profit, and where the parties’ relationships “are characterized by elements of public interest, adhesion and fiduciary responsibility.” Id. Historically, such relationships have been held to include duties of common carriers to carry passengers or goods safely, relationships between innkeeper and guests, physician and patient, and attorney and client. Id. at 159, 726 P.2d at 575.
To the contrary, the escrow contract involved in this litigation was a vehicle for Burkons to obtain economic gain when the deal closed. Further, escrow agents are retained to close a deal pursuant only to the parties’ agreed-upon instructions. Finally, escrow contracts involve individualized and customized terms instead of the “contract of adhesion” provisions often part of an insurance contract. The parties, not the escrow agent, create the contract *318terms. Escrow companies simply memorialize these agreements. The escrow instructions delineating the parties’ deal is expressly approved by the parties to the contract. If a party disagrees with a proposed term, he can change it or reject it.
I would find that the trial court correctly determined that Burkons’ tort claim arising out of breach of an escrow contract did not state a cause of action.
CONCLUSION
For all of the foregoing reasons, I would affirm the judgment of the trial court.