Introduction
In a recent case from the Court of Appeals of Washington, the Court addresses who is responsible when an escrow agent absconded with escrow funds between the borrowers and the lender and its assignee. After examining three binding cases, the Court reversed the trial court’s dismissal of the refinancing borrower, Tang Real Estate Investments (“Tang”) and remanded the case back for discovery, motion practice and/or trial. Tang Real Est. Invs. v. Escrow Servs. of Wash., 2024 Wash. App. LEXIS 673.
Background
Tang, a real estate investment company, focused its work in Seattle, King County, Washington. At issue are two of Tang’s properties: 8329 44th Avenue South in Seattle (“44th Ave.”) and 3226 102nd Place Southeast in Everett (“102nd Place”). These properties have loans from non-party Level Capital and with Kiavi Funding Inc. (“Kiavi”), respectively.
The problems arose when Tang tried to refinance both of these loans solely with Kiavi. Tang chose Escrow Services of Washington (“ESW”) to provide the closing and escrow services, which included “facilitation, holding, and exchange of funds and documents.” As a condition precedent to closing on new loans, Kiavi required that ESW “make all necessary payments to satisfy all existing liens.” ESW failed to complete the closing instructions for 44th Ave. and 102nd Place, and then the sole escrow agent for ESW, Aurora Rivera (“Rivera”), stole the funds held in trust to use for her personal benefit.
Kiavi then transferred 44th Ave.’s loan servicing operation to Newrez LLC d/b/a Shellpoint Mortgage Servicing (“Newrez”), which in turn transferred the loan servicing to Select Portfolio, which provides loan servicing for Citibank, the current owner of the 44th Ave. Note. Kiavi also transferred the loan servicing operations for 102nd Place to Newrez.
Tang sued everyone involved for “breach of contract, professional negligence, and declaratory relief,” indicating that Tang took no responsibility for the stolen funds. The trial court disagreed, finding that Tang bore full responsibility as Tang selected ESW to provide escrow services. The trial court granted all the defendants’ motions to dismiss for failure to state a claim.
Appeal
After filing a motion for reconsideration, Tang appealed. The court focused its attention on three critical cases speaking to situations when escrow funds are stolen before closing: Lechner v. Halling, 35 Wn.2d 903, 216 P.2d 179 (1950), Lieb v. Webster, 30 Wn.2d 43, 190 P.2d 701 (1948), and Angell v. Ingram, 35 Wn.2d 582, 213 P.2d 944 (1950). Those cases stand for the principle that “when an escrow agent absconds with money he is holding in his capacity as depositary, the loss must fall upon the person as whose agent he is holding the money at the time.”
Kiavi argued that Lechner, Lieb, and Angell are distinguishable from these facts because those cases involve two-party escrow transactions when the situation at hand is a one-party escrow transaction regarding refinancing loans. The Court replied that “the rule set forth in Lechner, Lieb, and Angell is properly applied to financial transactions involving two innocent parties where an escrow agent embezzles funds in “those unfortunate cases in which one party or the other must sustain a heavy loss by reason of their misplaced confidence in a third party.” Lechner, Lieb, and Angell are controlling law here. Kiavi and the other defendants reiterate their argument below that Tang was responsible for Rivera absconding with the escrow funds because Tang chose ESW as his agent.
Rejecting all the defendants’ arguments, the Court found that even though Tang chose ESW, Kiavi gave instructions to ESW that all liens had to be paid and necessary payments made and that transformed ESW into its agent. And as that agent failed to follow its instructions, risk of loss shifted from Tang to it. It went on to state that “Angell is controlling on this point. In Angell, Ingram agreed to purchase Angell’s residence, and Angell then hired Webster, an escrow agent, to facilitate the sale of the property. Although Angell selected and retained Webster, our Supreme Court held that the risk of loss rested with Ingram because Webster held the escrow funds as Ingram’s agent when he absconded with the money.”
Finally, the Court found that the lower court erred in dismissing Tang’s claims against the other parties involved, Newrez, Select Portfolio, and Citibank. The Court relied on Washington Supreme Court precedent, which concluded that when an assignee of a contract takes payment under a contract, they assume the conditions the contract imposes as consideration. “Here, according to the complaint, Citibank is ‘the current owner of the note’ for the 8329 44th Avenue South property and Newrez and Select Portfolio are responsible for loan servicing operations for one or both of the properties. It can therefore be hypothesized—as CR 12(b)(6) permits—that [Newrez, Select Portfolio, and Citibank] accepted payments under the new loans relating to the two properties and thereby assumed the risk of loss of the escrow funds under Lechner, Lieb, and Angell.”
Takeaway
The significant takeaway from this matter is that the terms of an escrow agreement and all instructions from lenders should be exceedingly clear as to who bears the risk of loss as to an escrow agent’s actions after funds have been transmitted to the agent.
For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Kori Pruett at kpruett@riker.com, or Thomas Persico (currently serving as Assistant General Counsel with JPMorgan Chase).
