Alert
Escrow Officers: Duty and Exposure
Read Time: 6 minsAs one of the participants to a real estate transaction, the actions of the title company escrow officer are often scrutinized when it is determined that a loan involves fraud. The scope of the escrow officer’s duties to all of the parties to the transaction, specifically including the lender, is the subject of a case in which the Texas Supreme Court recently denied a petition for review.
When closing the real estate transaction, it is well-settled law that an escrow agent owes a fiduciary duty to all parties of an escrow agreement—seller, buyer, and lender. A fiduciary duty consists of (1) the duty of loyalty; (2) the duty to make full disclosure; and (3) the duty to exercise a high degree of care to conserve the money and pay it only to those persons entitled to receive it. Moreover, a fiduciary must avoid any act of self-dealing that places personal interests in conflict with the beneficiaries and must always act with the utmost good faith. In the title company context, the duty arises from “closing a title insurance contract” (issuance of the title insurance policy) and “closing the business transaction” (referring to the role of the title company as escrow agent and all that entails).
Does the scope of that fiduciary duty change or expand in the context of mortgage fraud? In Texas American Title Company v. Home Loan Corporation d/b/a Expanded Mortgage Credit, No. 06-0549, Home Loan Corporation d/b/a Expanded Mortgage Credit (Home Loan) sued Texas American Title Company (TATCO) for breach of fiduciary duty arising out of a real estate closing handled by TATCO in which Home Loan was the lender. The day prior to closing the loan, and after the lender had approved the HUD statement, the seller provided TATCO a request for TATCO to disburse half of the seller’s proceeds ($41,450.82) directly to the mortgage broker. The disbursement of the seller’s proceeds in this manner was not disclosed to Home Loan. Additionally, the disbursement of the seller’s proceeds to the mortgage broker was not disclosed on the HUD statement that had been approved by Home Loan prior to Home Loan disbursing the loan proceeds. It was later determined that the loan was procured by fraud when the loan went into default (it should be noted that the seller’s disbursement requests could have been seen as a sign of fraud and failing to disclose deprived Home Loan of potentially crucial information).
In its lawsuit against TATCO and the mortgage brokers, Home Loan alleged that TATCO breached its fiduciary duty by failing to: (1) notify Home Loan that the seller requested over half of the proceeds to be paid to the loan broker; (2) accurately disclose on HUD-1 statements how TATCO disbursed the loan proceeds.
In its motion for summary judgment, which was granted by the trial court, TATCO argued that its fiduciary duty was limited to carrying out the terms of the real estate contract and escrow agreement and disclosing any actual knowledge of a fraudulent scheme directed at Home Loan. Because of these limited duties, TATCO took the position that it was not required to disclose the seller’s funding request as TATCO was to remain impartial without favoring either party. Further, TATCO asserted it had no obligation to police the affairs of the other parties or report suspicious circumstances unless it had actual knowledge of fraudulent plans. Lastly, the request and actual funding disbursement to the principal mortgage loan broker occurred after Home Loan released funds and thus, TATCO argued, could not have caused damages to Home Loan.
On appeal, the Court of Appeals rejected TATCO’s attempt to constrain the duty of disclosure to actual knowledge of fraud. The Court stated, “[o]rdinarily, a fiduciary duty of full disclosure requires disclosure of all material facts known to the fiduciary that might affect the rights of the person to whom the duty is owed.” The Court found that no Texas decision had directly addressed any limitation on the scope of an escrow or other settlement agent’s fiduciary duty of disclosure. Further, no rationale supported limiting a fiduciary’s duty to disclose because fiduciary duties are created by law, not contract and such high duties should not be “whittled down by exceptions [or contract]” The Court declined to select the law the State would follow, leaving that decision to the Supreme Court. Because there was no law supporting TATCO’s motion for summary judgment, the Court of Appeals reversed the trial court’s ruling granting TATCO’s motion for summary judgment.
The Court of Appeals opinion appeared to invite the Supreme Court to take this case and determine the scope of the fiduciary duty of disclosure owed by a title company. The Supreme Court initially seemed to have accepted that invitation, requesting briefing on the merits of TATCO’s petition for review. The Supreme Court recently denied TATCO’s petition for writ, following heavy briefing by both sides, allowing the lower court opinion to stand. The Supreme Court’s decision not to decide means the current state of the law remains unclear.
As one of the participants to a real estate transaction, the actions of the title company escrow officer are often scrutinized when it is determined that a loan involves fraud. The scope of the escrow officer’s duties to all of the parties to the transaction, specifically including the lender, is the subject of a case in which the Texas Supreme Court recently denied a petition for review.
When closing the real estate transaction, it is well-settled law that an escrow agent owes a fiduciary duty to all parties of an escrow agreement—seller, buyer and lender. A fiduciary duty consists of (1) the duty of loyalty; (2) the duty to make full disclosure; and (3) the duty to exercise a high degree of care to conserve the money and pay it only to those persons entitled to receive it. Moreover, a fiduciary must avoid any act of self-dealing that places personal interests in conflict with the beneficiaries and must always act with the utmost good faith. In the title company context, the duty arises from “closing a title insurance contract” (issuance of the title insurance policy) and “closing the business transaction” (referring to the role of the title company as escrow agent and all that entails).
Does the scope of that fiduciary duty change or expand in the context of mortgage fraud? In Texas American Title Company v. Home Loan Corporation d/b/a Expanded Mortgage Credit, No. 06-0549, Home Loan Corporation d/b/a Expanded Mortgage Credit (“Home Loan”) sued Texas American Title Company (“TATCO”) for breach of fiduciary duty arising out of a real estate closing handled by TATCO in which Home Loan was the lender. The day prior to closing the loan, and after the lender had approved the HUD statement, the seller provided TATCO a request for TATCO to disburse half of the seller’s proceeds ($41,450.82) directly to the mortgage broker. The disbursement of the seller’s proceeds in this manner was not disclosed to Home Loan. Additionally, the disbursement of the seller’s proceeds to the mortgage broker was not disclosed on the HUD statement that had been approved by Home Loan prior to Home Loan disbursing the loan proceeds. It was later determined that the loan was procured by fraud when the loan went into default (it should be noted that the seller’s disbursement requests could have been seen as a sign of fraud and failing to disclose deprived Home Loan of potentially crucial information).
In its lawsuit against TATCO and the mortgage brokers, Home Loan alleged that TATCO breached its fiduciary duty by failing to: (1) notify Home Loan that the seller requested over half of the proceeds to be paid to the loan broker; (2) accurately disclose on HUD-1 statements how TATCO disbursed the loan proceeds.
In its motion for summary judgment, which was granted by the trial court, TATCO argued that its fiduciary duty was limited to carrying out the terms of the real estate contract and escrow agreement and disclosing any actual knowledge of a fraudulent scheme directed at Home Loan. Because of these limited duties, TATCO took the position that it was not required to disclose the seller’s funding request as TATCO was to remain impartial without favoring either party. Further, TATCO asserted it had no obligation to police the affairs of the other parties or report suspicious circumstances unless it had actual knowledge of fraudulent plans. Lastly, the request and actual funding disbursement to the principal mortgage loan broker occurred after Home Loan released funds and thus, TATCO argued, could not have caused damages to Home Loan.
On appeal, the Court of Appeals rejected TATCO’s attempt to constrain the duty of disclosure to actual knowledge of fraud. The Court stated, “[o]rdinarily, a fiduciary duty of full disclosure requires disclosure of all material facts known to the fiduciary that might affect the rights of the person to whom the duty is owed.” The Court found that no Texas decision had directly addressed any limitation on the scope of an escrow or other settlement agent’s fiduciary duty of disclosure. Further, no rationale supported limiting a fiduciary’s duty to disclose because fiduciary duties are created by law, not contract and such high duties should not be “whittled down by exceptions [or contract]” The Court declined to select the law the State would follow, leaving that decision to the Supreme Court. Because there was no law supporting TATCO’s motion for summary judgment, the Court of Appeals reversed the trial court’s ruling granting TATCO’s motion for summary judgment.
The Court of Appeals opinion appeared to invite the Supreme Court to take this case and determine the scope of the fiduciary duty of disclosure owed by a title company. The Supreme Court initially seemed to have accepted that invitation, requesting briefing on the merits of TATCO’s petition for review. The Supreme Court recently denied TATCO’s petition for writ, following heavy briefing by both sides, allowing the lower court opinion to stand. The Supreme Court’s decision not to decide means the current state of the law remains unclear.