Court Opinion

ID: 9747266
Source: CourtListenerOpinion
Date Created: 2023-08-27 15:07:52.094832+00
Date Added: 2024-06-11T07:25:22.062541
License: Public Domain

*1202TERRY, Associate Judge,
dissenting:
I cannot agree with the majority that, at the time of the escrow agent’s defalcation, the escrowed funds were the property of the seller. As I understand the law, those funds remained the property of the buyer until the 1948 deed of trust was released, regardless of the passage of title to the realty in the underlying transaction. Because the escrow agent absconded with the money before the seller effected the release of the deed of trust, ownership of the money never left the buyer, and its loss must be borne by the buyer, not the seller. I would therefore reverse the trial court’s judgment, not affirm it. Since my colleagues view the case differently, I respectfully dissent.
The relevant facts were stipulated in the trial court and are not in dispute. At settlement in October 1984 the buyers paid part of the purchase price in cash, and the seller took back a deferred purchase money note for the balance due, along with a deed of trust. There was, however, an earlier deed of trust on the property, executed in 1948, which had riot been released. The parties therefore agreed that $13,500 of the purchase price should be held in escrow until a release could be obtained. The buyers deposited that amount with an escrow agent, who later disappeared with the money.1 The sale was then completed, and the special warranty deed from the seller to the buyers was duly recorded. The deferred purchase money note was later paid in full by the buyers. It was agreed by the parties that title to the real property passed to the buyers at settlement. Thus the only question before the trial court was whether the buyers or the seller had to bear the loss of the $13,500 which had been placed in escrow.
The buyers argued that because the sales contract contained a promise by the seller to convey clear title, the seller bore the risk of loss of the escrowed funds, particularly because the seller had not acted with alacrity in securing the release of the 1948 deed of trust. The seller contended, on the contrary, that under settled law applicable to escrow accounts the risk of loss was on the buyers, who still had title to the escrowed money, and further contended that he had acted with due diligence in his efforts to secure the release of the 1948 deed of trust.
Ruling from the bench, the trial court found for the buyers, concluding that the seller bore the risk of loss because he “had within his power the release of the first deed of trust outstanding against the property, and therefore had within his power the right to demand the $13,500 from the title company, which was the dual agent of the defendant and the plaintiffs.” The court later entered a judgment based on this conclusion.
After the trial, in response to the seller’s motion to vacate or amend the judgment, the court issued written findings of fact and conclusions of law. The court recognized that “[t]he general rule of law in the District of Columbia is that the risk of loss caused by the defalcation of an escrow agent is placed on the party possessing title to the funds at the time the defalcation occurred.” In this case, however, the court concluded that even though the buyers had title to the escrowed funds at the critical time, the seller bore the risk of loss because he had been in the best position to prevent the defalcation by meeting the conditions of the escrow, i.e., by ensuring that the 1948 deed of trust was released. In my view, this was an error of law.
It is uniformly accepted, in the District of Columbia and elsewhere, that
[a]s between a vendor and vendee, the risk of loss caused by the defalcation of an escrow holder is placed upon the party possessing title to the property involved at the time the defalcation occurs.
Lawyers Title Insurance Corp. v. Edmar Construction Co., 294 A.2d 865, 867 (D.C.*12031972) (citations omitted);2 see Annotation, Who Must Bear Loss Resulting from Defaults or Peculations of Escrow Holder, 15 A.L.R.2d 870 (1952 & 1987 Supp.). Only “when the conditions specified in the escrow agreement have been fully performed [does] title to the purchase money [pass] to the seller.” Ferguson v. Caspar, 359 A.2d 17, 22 (D.C.1976); accord, Wagman v. Lee, 457 A.2d 401, 404 (D.C.), cert. denied, 464 U.S. 849, 104 S.Ct. 158, 78 L.Ed.2d 145 (1983).
These cases make clear that the risk of loss in the case at bar fell on the party who held title to the escrowed property-^-the $13,500 — at the time of the defalcation. Given this premise, it follows that this court should reverse the trial court’s judgment. The necessary condition precedent to the seller’s receiving the money held in escrow was that he demonstrate to the satisfaction of the buyers and the title company that the 1948 deed of trust was released. That was the sole reason for the creation of the escrow fund. The seller was not entitled to receive the escrowed money until after the release of that deed of trust, and even at the time of trial, by the buyers’ own admission, this condition had not been met. Consequently, the seller never had title to the escrowed money, and he should not be made to bear the risk of its loss, through defalcation or otherwise.
For this reason cases such as Cradock v. Cooper, 123 So.2d 256 (Fla.Dist.Ct.App.1960), are inapposite. In Cradock a similar dispute arose between a buyer-depositor and a seller. The court held for the buyer because “under the circumstances of the escrow agreement the depositor would not be entitled to the return of the subject matter under any circumstances, irrespective of performance of the terms of the agreement.” Id. at 258. Given that particular escrow agreement, the court held that the defalcating escrow holder was the sole agent of the seller. Id. at 258-259. In this case, however, there is no evidence of any special terms; consequently, we should treat this as “the normal escrow situation” in which “the loss falls upon the depositor” in the event of defalcation by the escrow agent. Id. at 258; see Zaremba v. Konopka, 94 N.J.Super. 300, 304-05, 228 A.2d 91, 94 (1967) (noting that Cradock applied an exception to the general rule based on the particular facts of the case).
The general rule, which I would apply here, has been stated as follows:
[I]f the escrowee absconds with the buyer’s purchase money before the terms and conditions of the escrow have been performed, the loss must fall on the buyer, because at the time of the defalcation the purchase money still belongs to the buyer.... On the other hand, if the terms of the escrow have been performed and thereafter the escrowee absconds with the money, the loss falls on the seller, because after the escrow terms have been met and performed, the money on deposit belongs to the seller.
R. Kratovil & R. Werner, Real Estate Law § 412, at 168 (7th ed. 1979) (citations omitted; emphasis in original); accord, 30A C.J.S. Escrows § 11, at 514 (1992).3 Until the condition of the escrow was fulfilled, the escrow agent had “no right to surrender the deposit,” Wagman v. Lee, supra, 457 A.2d at 404, and the seller had no right *1204to the escrowed $13,500. Because title to that money was in the buyers at the time of the defalcation, the burden of its loss should fall on them.4
This is not an inequitable result. Even though the seller lacked clear title at settlement, the buyers freely chose to enter into the escrow agreement. Indeed, it was the buyers who selected the escrow agent that later made off with the money. Further, even though the seller may have been dilatory in fulfilling his duty to effect the release of the 1948 deed of trust, the buyers were equally lax in not holding him to that duty. They could have rescinded the contract of sale when they came to settlement and found that the seller could not deliver the property with a clear title. Instead, by entering into the escrow agreement, the buyers implicitly afforded the seller a reasonable time within which to secure the release of the 1948 deed of trust. As the time dragged on, the buyers could have served on the seller a written demand for compliance within a specified period of time and, upon noncompliance, asked for their money back or sued to obtain it. But the buyers made no such demand; rather, they chose to indulge the seller in his inaction, thereby extending sub silentio the period of reasonableness. In these circumstances, the seller appears to have been no more at fault than the buyers.
Until today, there has been no precedent in this jurisdiction for shifting the risk of loss of purchase money in escrow to the seller before the conditions of the escrow are satisfied. I think that the trial court erred in so doing and that its judgment should therefore be reversed. I would remand the case with directions to enter an appropriate judgment for the seller.

. The corporate escrow agent, United Title and Escrow Company, was no longer in existence at the time of trial. From the record it appears that appellant Stuart had a newspaper article showing "that one of the principals of that company has, in fact, gone to jail as a result of fraud in connection with certain real estate settlement monies that he held improperly.”

. After stating the general rule applicable to escrow defalcation cases, the court in Lawyers Title, supra, concluded that it did not apply on the particular facts presented "as [this] is not a suit between buyer and seller." 294 A.2d at 867. It then went on to decide the case on other grounds. In the case at bar, of course, "a suit between buyer[s] and seller” is exactly what we have before us, so that the rule stated in Lawyers Title (and elsewhere) is not only applicable but, in my view, controlling.

. An example given in the cited section of C.J.S. fits this case precisely:
As between a vendor and purchaser, if property or money deposited by the purchaser is either lost or embezzled by the escrow holder, the loss falls on the one who owned the property or money at the time of its loss or embezzlement. If the escrow holder embezzles the purchase price before the time when, under the terms of the escrow, the vendor is entitled to it, the loss falls on the purchaser; but if the money is embezzled after the time when the vendor has become entitled to it, the loss falls on him.
[Footnotes omitted; emphasis added.]

. At trial, when the matter of the unreleased deed of trust first came up, the seller initially told the court, "I was not aware of it at the time of settlement....” In a later discussion with the court, however, the seller acknowledged that he had known about the deed of trust since he purchased the property in 1979. Because, in my view, the applicable law governing defalcation by escrow agents is clear, it does not matter when the seller first learned of the cloud on the title. Even ássuming that the seller knew about the unreleased deed of trust for years before the settlement date, the dispositive fact here is not the seller’s knowledge but the buyers’ ownership of the escrowed funds.