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An Escrow Agent’s Duty to Disclose Fraud
May 31, 2019
Parsons Behle & Latimer Legal Briefings


The Utah Court of Appeals recently addressed the issue of whether a title company, in its capacity as an escrow agent, has a duty to stop or disclose fraud being committed by a party to a real estate transaction. The court clarified some issues and left some issues undecided.

Title companies in Utah have dual roles. In the first role, they search title records regarding real property and issue title insurance policies as agents of national insurance underwriters. In the second role, they act as an escrow agent, holding money and disbursing it in accordance with the instructions of the parties to the transaction. The general rule, in Utah and throughout the United States, is that an escrow agent, such as a title company, is a fiduciary to both parties and has an obligation to follow the instructions provided to it by the parties.

But what if fraud is committed by one of the parties to the escrow? Does the escrow agent have a duty to disclose the fraud to the other party? The answer differs from state to state. For example, in California and Arizona, the answer is “yes.” In Utah, the answer is uncertain.

In 1990, in the case of Schoepe v. Zions Bank, the Federal District Court of Utah weighed in on the issue. In Schoepe, a Buyer and Seller entered into an agreement in which the Buyer would purchase mining property from the Seller. The Buyer and Seller entered into an escrow agreement with Zions Bank wherein the Buyer would deliver installment payments to Zions Bank who would then deliver the payments to Seller. Over time, the mining property would be purchased by the Buyer through these periodic payments. During this process, Zions Bank, the escrow agent, made loans to the Buyer and took an assignment of rights under the purchase contract as security without notifying the Seller. After multiple extensions granted by the Seller, the Buyer defaulted under the purchase contract.

The Seller sued Zions Bank claiming it should have disclosed the loans it made to the Buyer. The Seller further claimed that the loans were the proximate cause of Buyer’s damages. Presumably, without the loans, the Buyer would have been unable to pay for the extensions. The Seller claimed that granting the extensions caused it harm. In an attempt to predict what the Utah Supreme Court would say if the case were pending there, the court in Schoepe found that an escrow agent has a duty to disclose fraud or material facts of a transaction to the parties in the escrow. However, because the Court was a federal court, not a Utah state court, the decision was not necessarily binding on Utah state courts.

Late last year, the Utah Court of Appeals addressed similar issues in Pyper v. Reil. In Pyper, the Plaintiff borrowed money and pledged real property as collateral for a loan to be used by Defendants to buy a company. The Defendants promised they would pay off the loan taken out by Plaintiff for the Defendants’ benefit. Plaintiff signed a note and trust deed to secure funds from the lender to enable the Defendants to buy the business. The funds were transferred to the account of an unrelated entity (not the company to be purchased) and the loan was never paid back by the Defendants.

In addition to suing the Defendants, the Plaintiff sued the title company for negligence asserting it should have been aware of and stopped the fraud that was being committed. The trial court dismissed the case and the Utah Court of Appeals affirmed the dismissal. The Court stated that a title company did not have an affirmative duty to stop fraud being committed in an escrow. The Court specifically noted, however, that it was not addressing the issue of whether a title company had a duty to disclose, not stop, fraud.

When a title company becomes aware of fraud in a transaction, the title company faces a difficult decision. It owes fiduciary duties to both parties to the transaction, including the party committing fraud. If it does not disclose the fraud, it is potentially liable to the non-defrauding party. If it discloses facts it believes constitute fraud causing a deal to fail, but the party whom the title company believes was committing fraud has a legitimate explanation regarding the disclosed facts, the title company could potentially be liable to the party whom it accused of committing fraud. There is an approach an escrow agent can take, should it find itself in a situation such as those above. If a title company becomes aware of facts it believes constitute fraud, it can simply withdraw from the transaction. An escrow agent should ensure its agreement with parties to an escrow allows it to withdraw for any or no reason, without explanation. Doing so provides an exit strategy when faced with the difficult decision to disclose or not disclose suspected fraud.

To contact Sean Monson, send an email to smonson@parsonsbehle.com or call (801) 532-1234.

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