Legal Update


  • July 17th, 2010
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An escrow agent’s duty to disclose the distribution of loan monies to the lender, as agreed in the closing instructions, does not end upon close of escrow but continues until all monies have been distributed and the loans are closed.  Plaza Home Mortgage, Inc. v. North American Title Company, Inc.  184 CA4th 130 (2010).

FACTS: In March 2007, Plaza Home Mortgage (“Plaza”), a residential mortgage lender, loaned $1.1 million to Oliver Aleta (“Buyer”) for the purchase of a residence in Northridge, CA, owned by Monette Santillian (“Seller”).    Plaza lent Buyer 100 percent of the purchase price and funded the transaction via two loans secured by an $880,000 first deed of trust and a $220,000 second deed of trust.  North American Title Company (“North American”) acted as the escrow holder and settlement agent, and Investors Title Company (“Investors”) served as the sub-escrow.  North American prepared and delivered to Plaza a Good Faith Estimate setting forth the terms, estimated costs, and disbursements at closing of the loans.

On March 1, 2007, Plaza disbursed the loan proceeds, part of which paid off the existing liens on the property and the balance was then sent to North American for distribution in accordance with the closing instructions.  The grant deed was recorded March 2, 2007, and escrow was closed.

After the close of escrow but before the balance of funds was disbursed by North American, Seller sent a written instruction to North American requesting that $53,853 be paid to a Mr. Edward Peregrino, an “attorney-in-fact” for the Buyer.  North American complied, sending the money to Peregrino on March 5, 2007.  Since this last minute instruction was not given until after escrow closed, Plaza did not learn of it until it received an updated final HUD-1 on March 8, 2007, wherein the payment was disclosed under “Additional Settlement Charges.”

Peregrino made the first two mortgage payments for Buyer, who never moved into the property and then defaulted  Plaza foreclosed on the property and resold it for $760,000 in late 2007.

Plaza sued North American for breach of contract, negligence and equitable indemnity, alleging that North American was contractually obligated to advise Plaza of “all…expected closing costs and disbursements prior to closing so that [Plaza] would be advised about the destination of its loan monies.”  Plaza also claimed North American breached the contract when North American disbursed $53,853 to Peregrino without Plaza’s knowledge or consent.  Plaza alleged that if it had known of the payment prior to the disbursement, it would have investigated the “irregular transaction” further and potentially not funded the loans at all.  When the trial court ruled in favor of North American and dismissed the case, Plaza appealed.

DECISION: The Court of Appeal reversed the trial court’s judgment, holding that North American’s duties as the settling agent continued at least through its preparation of the final HUD-1, and specifically that North American’s duty to disclose to Plaza any “additional payoffs or fees” not included in the estimated HUD-1 continued until the loans closed.  North American claimed that it had no duty to disclose the $53,853 payment because escrow closed when the loans funded and the deed recorded on March 2, before North American received Seller’s instruction to pay Peregrino.  According to North American, after close of escrow Seller had “equitable title to the money” and could distribute it as she saw fit.  However, the court disagreed with North American’s argument, and instead held that North American’s duties and obligations in the closing instructions contract with Plaza remained in effect until the loans closed, not just when escrow closed.

The Court held that Plaza, as the lender, and North American, as the settling agent, had a direct contractual relationship arising from the closing instructions.  Plaza’s closing instructions provided for distribution of the loan proceeds based on information it had received from North American in the estimated HUD-1, and North American agreed to disburse the proceeds as set forth in the estimated HUD-1.  The Court stated that if this were not the case, then a “legal holiday” would effectively be created between escrow and settlement, wherein potentially unlawful conduct such as illegal “kickbacks” would be encouraged.

ANALYSIS: It appears likely that this transaction was a scam by Peregrino and the Buyer to buy the property with no money down and pocket a $53,000 kick-back as a “credit” from the Seller.  The escrow company unwittingly facilitated the scam by disbursing the $53k to Peregrino after closing and without the lender’s knowledge.  To avoid liability, the escrow agent must comply with the closing instructions given by the lender and may only disburse the loan funds in accordance with the estimated HUD-1 approved by the lender.  The escrow agent may not comply with any changes in those instructions, even after the close of escrow, unless the change is approved by the lender.  This obligation continues at least until all escrowed funds are disbursed.