Escrow Liability – Sham Deals

Type Matter:  Escrow Liability
Issue:  Is an Escrow Company likely to be held liable when a sham deal between Buyer and Seller goes bad?
Answer:  Generally No
Facts:  In an effort to avoid a foreclosure, a Seller and Buyer conspired to create a paper trail in which the Buyer would ostensibly purchase the subject property.  In reality, the Seller would not vacate the property and would pay “rent” to the Buyer which would be used to pay the new mortgage.  At some point in time, the Buyer ceased making payments to the lender and pocketed the “rent.”  The lender initiated foreclosure proceedings which cost the Seller to lose the property.  The Seller then brought an action for conspiracy to commit fraud against everyone involved, including the Escrow Company.

Results:  Counsel for the Escrow Company convinced counsel for Plaintiff Seller to dismiss the case against the Escrow Company.  First, Plaintiff signed all of the documents instructing the Escrow Company to act in the manner that it did.  As such Plaintiff could not argue that the Escrow Company acted in consistent with Plaintiff’s instructions.  Second, since Plaintiff intended to trick the lender, Plaintiff had unclean hands and should not profit from such activities.  Perhaps most significantly, the Escrow Company is not responsible for interpreting the intentions of the Buyer and the Seller.  Escrow companies are simply responsible for following the written instructions of the parties.  These arguments were enough to persuade Counsel for Plaintiff to execute a dismissal of the Escrow Company.

Lessons:  Escrow Companies should recognize their obligation is to follow the written language of the instructions.  When an Escrow goes beyond this activity, it exposes itself for a claim that it misinterpreted its duties and/or acted improperly.  To best protect itself and to substantiate it has handled everything pursuant to written instructions; such instructions should be clearly stated in writing.  Further the Escrow file should be carefully and completely maintained.  In addition, the notion that it is better to walk away from a bad deal than to be involved in such a deal should be followed.  If an Escrow Company thinks there are questionable activities taking place, it is better not to handle that transaction.

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