Escrow – Who the Money Belongs To, And Why it is Important

An escrow involves the deposit of money, documents, or other things, with a third party to be delivered on occurrence of specified conditions. In a typical transaction, the buyer of real estate deposits the purchase money, and the seller deposits the deed to the property. The instructions provide that the deed is to be recorded on receipt and distribution to the seller of the purchase money. Typically, in Northern California real estate escrows are handled by a “controlled escrow company” referring to any person or company “whose principal business is the handling of escrows of real property transactions” that contemplate the issuance of title insurance, where the escrow holder is controlled by or controls a title insurer or an underwritten title company. (Ins. Code, § 12340.6, subd. (a)). What are most important in an escrow is who makes the deposit, and what their instructions are. In a recent escrow, the parties were sloppy in their $48 million dollar transaction and instructions, which resulted in a $1 million dollar surprise. It always amazes this Sacramento real estate attorney when a little bit of attention during the transaction would have prevented paying a huge amount of attention (read as ‘fees’) in litigation.

In Tribeca Companies, LLC v. First American Title Insurance, Tribeca was an LLC that invested in distressed properties by buying and foreclosing defaulted mortgage loans. Tribeca entered a joint venture with Grishin that was to invest cash for the deals. The joint venture was called Sky Group LLC. Grishin’s member in the JV was his SGSF LLC. Tribeca’s member was Sky Pacific. Sky Pacific was the manager of the LLC. The Joint Venture Agreement provided that, for each deal, SGSF was to deposit $1 million in escrow and review the deal. If it did not like the deal, its money would be refunded. If it approved the investment in writing, the money would become nonrefundable, and SGSF was to deposit the balance of the necessary funds.

Tribeca opened an escrow for the JV with First American. Here’s where it gets sloppy – Grishin individually wired $1 million dollars into the escrow, but the escrow officer mistakenly credited the money to Tribeca. Grishin informed Tribeca by telephone that he approved of the deal. The deal they were working on fell apart, largely because Grishin had only $16 million to invest, but needed $47 million. Tribeca thought yahoo!, $1 million for me. Not so fast. Grishin instructed the escrow officer to return the funds, which they did. Tribeca sued the escrow company.

Tribeca’s lawsuit alleged claims of breach of contract, breach of fiduciary duty, negligence, fraud, and negligent misrepresentation. The court noted that an essential element of each of these claims is that a defendant’s alleged misconduct was the cause in fact of the plaintiff’s damage. “An act is a cause in fact if it is a necessary antecedent of an event.” In the claim for breach of contract, the test for causation in a breach of contract … action is whether the breach was a substantial factor in causing the damages.

Courts have held “[t]he deposit of moneys in the escrow does not alter or change the ownership thereof.” First American held Grishin’s money in trust for his benefit, and no other party had any claim to his funds because he never designated another party as the beneficiary. Tribeca’s deal was with SGSF LLC; these were Grishin’s own personal funds. And besides, SGSF never approved the deal in writing, so regardless of the source of the funds, they remained refundable.

Civil Code section 2344 provides that “If an agent receives anything for the benefit of his principal, to the possession of which another person is entitled, he must, on demand, surrender it to such person … and is responsible therefore, if, after notice from the owner, he delivers it to his principal.” There was no reason for the escrow to release the money to anyone other than the party that deposited the money. A $48 million dollar deal in which the parties failed to follow the terms of their own agreements. Maybe Grishin was very smart and Tribeca dumb or these people were so awash in dough that no one cared for following the rules.

Photos:
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