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Liability for Breach of Escrow Agreement

Escrows are generally discussed in the context of real estate. Especially in mortgages where the mortgage company establishes an escrow account to pay the property tax and insurance during the term of the mortgage.  Escrow companies are also used in the transfer of high value personal and business property, like websites and businesses, and in the completion of person-to-person remote auctions.  Generally once an escrow agreement is made, an escrow account is established by a broker under the provisions of license law for the purpose of holding funds on behalf of the broker’s principal or some other person until the consummation or termination of transaction.  The account is held primarily to pay obligations such as property taxes and insurance premiums.

When the conditions of the escrow agreement are fulfilled and the depositary fails or refuses to deliver the escrowed item, the remedy, either in law or equity, lies against the depositary and not against the depositor[i].  However, the other party to the escrow may be joined as a defendant with the depositary when that party’s failure to comply with the required escrow conditions caused the depositary to refuse to act, or that party asserts rights in the escrowed property which adversely affect the plaintiff’s rights in it.

However, all the parties and the depositary may be joined in an action when that is necessary to obtain complete relief. For example, the purchasers under a land sale contract are indispensable parties in an action by a seller and a real estate broker to recover the earnest money from the escrow agent, when the seller and broker would not be entitled to a division of the earnest money until it was established that the purchasers were in default.

When the depositary wrongfully delivers the subject of the escrow to a third person, the person entitled to the property may maintain an action against the third person without joining the escrow holder or the depositor[ii].

When the depositor wrongfully deals with the property after it is deposited in the escrow, the other party to the agreement, not the depositary, is the proper party to bring an action.  For instance in Gunby v. Hayden, 181 Mo. App. 449 (Mo. Ct. App. 1914), the owner entered into a written contract with an individual whereby both parties agreed to exchange lands. Both gave a check to the escrow holder in consideration of the contract. The money represented by checks was only to be turned over to the owner when deeds passed. The owner and the individual then entered into a new contract in lieu of the old contract. The owner told the escrow holder that the deeds passed and to release the money. Before the escrow holder released the money, the owner and the individual placed stop payments on the checks. The escrow holder filed a three count petition against the owner to recover the value of the owner’s check and protest fees. The trial court entered judgment for the owner and the escrow holder appealed. The court affirmed the decision of the trial court. The court held that the escrow holder did nothing to cause liability to attach to him, but the owner’s wrongful act in stopping payment on the check may have rendered the owner liable to the individual. The escrow holder’s petition failed to state a cause of action. He neither received nor lost any money. There was no right of recovery shown that he held.

[i] Law v. Title Guarantee & Trust Co., 91 Cal. App. 621 (Cal. App. 1928).

[ii] Id.

Inside Liability for Breach of Escrow Agreement