Introduction

The California Court of Appeals, First Appellate District, Division Five recently upheld demurrer in favor of a title insurer, who also served as escrow agent in connection with the sale of property in Alameda County, dismissing negligence and contract claims as the plaintiff was not a third party beneficiary of either the title policy or escrow agreement. See Christensen v. First Am. Title Co., No. A166796, 2024 Cal. App. Unpub. LEXIS 489 (Jan. 25, 2024).

The case involved a .26 acre parcel of land containing a single-family residence (the “Property”) that was purchased by Oscar and Nancy Hanawai Goodman (the “Goodmans”) in 1992. In 1994, the Goodmans purchased a portion of the adjoining lot (the “Addition”) in order to extend their property line further south. The 1994 deed identifies both the Property and the Addition together, approximately 0.319 acres (the “Expanded Property”), but the Goodmans did not obtain an official lot line adjustment to reflect an expanded parcel. After transferring the Property and Expanded Property to a trust (the “Trust”) by two deeds in the year 2000, the Trust sold the Property – but not the Expanded Property – to Benjamin and Gabrielle Blair (the “Blairs”) in 2013. The Blairs thereafter sold the Property – but, again, not the Expanded Property – to Plaintiffs in 2019, though Plaintiffs claimed that the Blairs and their real estate agents represented that the sale was for the Expanded Property. First American Title Insurance Company (“First American”) was the escrow agent and title insurer for the Blairs' 2013 purchase of the Property from the Trust and for Plaintiffs' 2019 purchase of the Property. Plaintiffs alleged that First American knew there were two deeds from the Goodmans to the Trust because of its role in the 2013 purchase, and brought claims of negligence against First American for its roles in the 2013 and 2019 sales and breach of contract regarding the 2013 sale.

The Trial Court
First American filed a demurrer as to all claims against it. As to the negligence claim based on the 2019 sale, First American argued the duties it owed were limited and it could not have effected a transfer of the Expanded Property because the Blairs owned only the Property. With respect to the negligence claim based on the 2013 sale, First American argued escrow agents do not owe duties to third parties. As to the contract claim, First American argued Plaintiffs were not the intended third party beneficiaries of the 2013 contract. The trial court sustained the demurrer without leave to amend and issued judgment in favor of First American.

Claims Related to the 2013 Sale
Plaintiffs argued that First American owed them a duty of care regarding the transfer of Property from the Trust to the Blairs because that transaction was “intended to benefit ‘Plaintiffs and all future owners of the Subject Property because it was the first time the original parcel and the [Addition] should have been officially joined by a lot line adjustment.’” Quoting Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co., 27 Cal.4th 705 (2002), the Court stated that “[t]he determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.” While the Court agreed with Plaintiffs that their injury was “certain,” it found that future owners of property are “collateral” to the primary purpose of a sale of property. It found further that Plaintiffs’ allegations did not support foreseeability because there are no factual allegations showing First American could have foreseen that the Blairs would allegedly misrepresent the property they owned when selling it to future buyers and that the real estate agents involved in the future sale would not catch or correct the misrepresentation. The Court also determined that the “closeness” element did not support a finding of negligence, as the connection between Plaintiffs’ injury and First American's conduct in the 2013 sale transaction is attenuated because the more immediate cause was the alleged misrepresentation by the Blairs and the real estate agents in the 2019 sale. The Court found that First American did not bear any “moral blame” because it did not “act fraudulently, illegally, or with any intent to cause anyone disadvantage.” Finally, the Court found that the situation did not implicate a policy against preventing future harm, since escrow companies already had duties to perform which could give rise to actions for breach of contract for damages. For these reasons, the Court upheld demurrer of the negligence claim.

As to Plaintiffs’ breach of contract claim, the Court noted that a third party could bring suit only when certain criteria are met, including “whether a motivating purpose of the contracting parties was to provide a benefit to the third party.” The Court found that this was not the case in the 2013 transaction, as there was no indication that the parties to the 2013 transaction had a “motivating purpose” to benefit Plaintiffs, consistent with the concept that providing a benefit to subsequent purchasers of real property is “ordinarily not among the motivating purposes of a contract for escrow and title insurance services.” As such, the Court upheld demurrer of the breach of contract claim.

Claims Related to the 2019 Sale
Regarding the negligence claim pertaining to the 2019 sale to Plaintiffs, the Court upheld demurrer for First American. The Court found that First American owed no duty of care in its capacity as title insurer, as Plaintiffs’ relationship with First American was purely contractual. In its capacity as escrow agent, Plaintiffs argued First American owed them a duty of care as an escrow agent “to identify and include the correct legal description in the grant deeds.” After pointing out that “an escrow holder’s obligations are limited to compliance with the parties’ instructions,” the Court held that First American had done just that – the Blairs transferred the Plaintiffs’ title to the Property only, and because the transfer to Plaintiffs could not include property the Blairs did not own, First American had verified the proper description of the Property, which was the property being transferred by the Blairs. While Plaintiffs raised theories of adverse possession of mutual mistake in the 2013 deed, they provided no authority that the Blairs could transfer the Expanded Property based on such theories absent a legal proceeding to quiet title or for reformation of the 2013 grant deed.

Takeaways
The takeaways from this case include that (1) Courts will impose a high threshold to find a title insurer and escrow agent negligent in matters of negligence asserted by third parties who are attenuated from the subject transaction; and (2) similarly, where a third-party beneficiary asserts a breach of contract claim against a title insurer based on a transaction it was not party to, Courts will require that the parties to the contract entered into the contract with a “motivating purpose” to benefit future owners, not normally the case with standard real-estate transactions.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Thomas Persico at tpersico@riker.com, Kevin Hakansson at khakansson@riker.com, or Kori Pruett at kpruett@riker.com.