BAHRAM REZA TABATABAI, Plaintiff and Appellant, v. EMERALD ESTATE ESCROW, INC., et al. Defendants and Respondents.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
Plaintiff Bahram Reza Tabatabai (plaintiff) appeals from the dismissal of his complaint against defendants Emerald Escrow (Emerald) and Reid Breitman (Breitman) following defendants' successful demurrers. We determine that Emerald's demurrer was well-taken, and so affirm Emerald's judgment of dismissal. Because we conclude that the complaint states a cause of action against Breitman, however, we reverse the judgment as to him.
FACTUAL AND PROCEDURAL SUMMARY
The following factual scenario is gleaned from the complaint: 1 In early 2005, plaintiff owned a residence on Rexford Drive in Beverly Hills (the Rexford Property), which was encumbered by a first deed of trust securing a $1.5 million loan. The property had a fair market value of at least $2.1 million.
On or about June 5, 2005, Christopher Dee Miller (Miller) brought Breitman to visit plaintiff at his residence. Miller introduced Breitman as an experienced real estate investor and attorney. At that meeting, Miller and Breitman proposed to plaintiff the following real estate transaction: Breitman would form a corporation (the LLC) which would hold title to the Rexford Property; plaintiff, Miller, and Breitman would be shareholders of the LLC; plaintiff would deed the Rexford Property to the LLC; Breitman would loan the joint venture $200,000 to remodel the Rexford Property; the remodeled home would be sold at its fair market value, which Miller and Breitman estimated would be $3.8 million; the net proceeds of the sale would be distributed such that plaintiff would receive at least $550,000 (his equity in the Property at the time the joint venture was formed), then Breitman would be repaid the $200,000 loan, then the remaining proceeds would be evenly divided among the three partners; and Breitman would prepare a joint venture agreement documenting these arrangements. Plaintiff told Miller and Breitman that he would consider the proposal, while indicating that the property was then listed with a real estate broker at a price of $2.3 million. Plaintiff alleges that the foregoing proposal presented by Miller and Breitman at the June meeting was not a genuine business proposition but rather part of a scheme to defraud him by acquiring title to the Rexford Property without compensating plaintiff for its value.
Also in June 2005, Miller helped plaintiff secure a $170,000 loan secured by a second deed of trust on the Rexford Property. The proceeds of that loan were delivered to plaintiff on July 18, 2005, by way of a check drawn on the account of Heritage Escrow payable to plaintiff in the amount of $143,279.17. The next day, plaintiff was arrested by federal authorities, who seized the uncashed check. Plaintiff has been in federal custody ever since. After he was incarcerated, plaintiff entrusted the handling of his financial matters, including payments on his credit cards and real property and automobile loans, to Miller.
With knowledge of the foregoing facts, Miller caused to be prepared a power of attorney pursuant to which plaintiff appointed Miller his attorney-in-fact to conduct, on plaintiff's behalf, all of his real estate, banking and business transactions. Miller then forged plaintiffs' signature, which was notarized by Angela Mkrtchyan, a Bank of America employee. With the notarized power of attorney in hand, Miller went to Heritage Escrow, explained the original check was lost and requested a replacement check. Heritage issued a second check, again payable to plaintiff in the amount of $143,279.17 (the “$143,000 check”).
Again with the notarized power of attorney in hand, Miller took the replacement check to Emerald, told Emerald that the check represented the deposit in connection with plaintiff's pending real property transaction, and instructed Emerald to deposit the check in its trust account. Emerald did so. Miller subsequently informed Emerald that the pending transaction was cancelled, and instructed Emerald to wire the money held in its trust account on plaintiff's behalf to Manor Holdings, Inc. “FBO Tabatabai.” Emerald did so. The account to which Emerald wired plaintiff's funds was controlled by Miller, who converted the money to his own use, resulting in a $143,279.17 loss to plaintiff.
In September, plaintiff's real estate broker presented to plaintiff, through Miller, an offer to purchase the Rexford Property for $2.1 million. Miller advised plaintiff to reject the offer, and later falsely advised plaintiff that the buyer had rescinded the offer. Miller then persuaded plaintiff to accept the joint venture proposal on the terms previously discussed with Breitman. Breitman created a corporate entity, Hyperion, to hold title to the Rexford Property and, through Miller, instructed plaintiff to transfer the property to Hyperion. Plaintiff complied by executing, in the presence of a notary public, a grant deed to the Rexford Property.
Breitman caused an escrow for the transfer of the Rexford Property to be opened at Emerald Escrow without plaintiff's knowledge or consent by forging plaintiff's signature on the escrow instructions. According to the terms of the escrow instructions, the Rexford Property was sold to Hyperion for $1,700,000, the approximate amount of the encumbrances on the property.
In November 2005, plaintiff learned that Miller had failed to pay plaintiff's creditors as agreed and had likely misappropriated his funds. Through his attorney, plaintiff contacted Miller, Breitman and Emerald to demand that the escrow on the Rexford Property be cancelled. However, the escrow had already closed, and title to the property was then held by Hyperion. Pursuant to an amendment to escrow instructions containing plaintiff's forged signature, the net proceeds of the sale, $14,953.97, were wired by Emerald into a bank account controlled by Miller.
Plaintiff subsequently learned that Breitman was the president of Hyperion, and that plaintiff had received no shares in the corporation as contemplated by the joint venture proposal. In February 2006, Hyperion evicted plaintiff's mother from the property, and sold it to a third party two months later for a substantial profit.
Plaintiff sued Emerald and Breitman, among others. Plaintiff alleged three causes of action against Emerald: breach of a bailment contract in connection with the $143,000 check; negligence in its handling of the $143,000 check; and negligence in failing to discover that the seller's (plaintiff's) signature on the escrow instructions was forged. Plaintiff alleged ten causes of action against Breitman, all based upon his actions in proposing the real estate joint venture for the purpose of divesting plaintiff of the Rexford Property without compensating him: intentional misrepresentation; negligent misrepresentation; fraud and deceit; constructive trust; unjust enrichment; an accounting; conversion; breach of fiduciary duty; intentional infliction of emotional distress; and conspiracy.
The trial court sustained the demurrers of Emerald and Breitman without leave to amend, and entered their dismissals. Plaintiff appeals those judgments.
A. Standard of Review
“On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, the standard of review is well settled. The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. [Citations.] The court does not, however, assume the truth of contentions, deductions or conclusions of law. [Citation.] The judgment must be affirmed ‘if any one of the several grounds of demurrer is well taken. [Citations.]’ [Citation.] However, it is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. [Citation.] And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment. [Citation.]” (Aubry v. Tri–City Hospital Dist. (1992) 2 Cal.4th 962, 966–967; accord, Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.)
B. Emerald's Demurrer to Third Amended Complaint
1. Emerald's handling of the $143,000 check
The complaint alleges that, when Miller delivered to Emerald the $143,000 check payable to plaintiff, Miller and Emerald entered into a bailment contract, with Miller the bailor and Emerald the bailee. Plaintiff then alleges that he was the third party beneficiary of that contract, and that Emerald breached the contract, presumably by disposing of the bailed goods without notice to him, the intended beneficiary.2 Plaintiff further alleges that Emerald was negligent in following Miller's instructions without notifying plaintiff of those instructions.
Emerald demurred to the causes of action for breach of bailment and negligent bailment, contending that, because Emerald as bailee followed the explicit instructions of Miller, the bailor, plaintiff could not state a cause of action for breach of the bailment contract, or for negligence in its handling of the subject of the bailment. The trial court agreed, sustaining Emerald's demurrer to these causes of action.
Plaintiff and Emerald misunderstand the parties to the bailment contract. The $143,000 check was payable to plaintiff. Miller, who presented the notarized (but forged) power of attorney to Emerald along with the check, was purporting to act on plaintiff's behalf. Thus plaintiff, not Miller, was the bailor; Miller was the bailor's agent.
Miller again presented the forged power of attorney when he instructed Emerald to wire the $143,000 to an account in the name of Manor Holdings. Because Miller was not purporting to be acting in his own behalf but as the agent of plaintiff, when Emerald wired the money as directed by Miller, it was following plaintiff's instructions, in fulfillment, not breach, of the bailment contract.
Plaintiff relies on a single case, Sun ‘n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, to argue that the transaction was sufficiently suspicious to invoke a duty on the part of Emerald to question the authenticity of the power of attorney. In Sun ‘n Sand, supra, the complaint alleged that plaintiff's employee obtained authorized signatures on company checks for small amounts payable to the defendant bank, for amounts owed to the bank. In fact, no such debt was owed. The employee purportedly then altered the checks by increasing the amounts to several thousand dollars, and presented them to the bank. Notwithstanding that the bank was the named payee, it permitted the proceeds of the checks to be deposited in the faithless employee's personal account at the bank. The Supreme Court held that these two circumstances – a check payable to the bank at which it was presented, which bank was owed no money from the drawer of the check, and a request by the individual presenting the check to deposit the funds in her personal account at the payee bank –suggested “a possible misappropriation.” The court concluded that “Sun ‘n Sand's allegations define circumstances sufficiently suspicious that UCB should have been alerted to the risk that Sun ‘n Sand's employee was perpetrating a fraud. By making reasonable inquiries, UCB could have discovered the fraudulent scheme and prevented its success.” (Sun ‘n Sand, Inc. v. United California Bank, supra, 21 Cal.3d at pp. 694 –695 (Sun ‘n Sand ).)
Analogizing from Sun ‘n Sand, supra, plaintiff contends that the circumstances of Miller's presentation of the $143,000 check to Emerald were sufficiently suspicious to alert Emerald to a possible misappropriation, thereby invoking Sun ‘n Sand's duty to make reasonable inquiries. Plaintiff argues: “The facts alleged in the TAC show that Emerald had no previous relationship with [plaintiff] or Miller (stranger) prior to the bailment at issue in this case. The facts allege that the stranger approached Emerald to negotiate a check made payable to [plaintiff ] in the amount of $143,000 and to wire the $143,000 into a third party bank account over which the payee of the check, [plaintiff], had no control. [¶] Under the law, and contrary to the trial court's ruling, the facts alleged in this case rose to sufficiently suspicious circumstances to have imposed a duty on Emerald to make reasonable inquiries because the risk to [plaintiff] was reasonably foreseeable.”
These alleged facts are in no way similar to those alleged in Sun ‘n Sand. Surely there is nothing unusual or suspicious about the fact that the parties to a proposed real estate transaction have no previous relationship with the company chosen to act as escrow agent on the transaction. Neither is there anything unusual about the fact that one of the parties to the proposed transaction had appointed an attorney-in-fact to act on his behalf. And because Miller had a notarized power of attorney which appeared regular on its face appointing him plaintiff's attorney-in-fact, there was nothing out of the ordinary in Miller instructing Emerald to wire the funds to a corporation's bank account “FBO Tabatabai.” Had Emerald known that plaintiff had no control over that bank account, then its suspicions perhaps ought to have been raised. However, no such allegation appears in the complaint.
Moreover, Emerald was required by statute to honor the provisions of the power of attorney. The Probate Code provides as follows: “A third person shall accord an attorney-in-fact acting pursuant to the provisions of a power of attorney the same rights and privileges that would be accorded the principal if the principal were personally present and seeking to act.” (Prob.Code, § 4300.) Moreover, “[a] third person may rely on, contract with, and deal with an attorney-in-fact with respect to the subjects and purposes encompassed or expressed in the power of attorney without regard to whether the power of attorney expressly authorizes the specific act, transaction, or decision by the attorney-in-fact.” (Prob.Code, § 4301.) Probate Code section 4303 specifically absolves Emerald from liability for following Miller's instructions. That section provides that “[a] third person who acts in good faith reliance on a power of attorney is not liable to the principal or to any other person for so acting if all of the following requirements are satisfied: [¶] (1) The power of attorney is presented to the third person by the attorney-in-fact designated in the power of attorney. [¶] (2) The power of attorney appears on its face to be valid. [¶] (3) The power of attorney includes a notary public's certificate of acknowledgement or is signed by two witnesses.” (Prob.Code, § 4303, subd. (d).) The facts alleged in the complaint establish that all three of these conditions were met. Moreover, there is no allegation that Emerald was not acting in good faith in its dealings with Miller. Thus, plaintiff cannot prevail against Emerald for its conduct in connection with the $143,000 check.
2. Emerald's failure to discover forged signature on escrow instructions
The complaint alleges a cause of action against Emerald for negligence as an escrow holder. The relevant allegations are these: In October 2005, Breitman approached Emerald to open an escrow for the sale of the Rexford Property. Breitman and Miller executed escrow instructions naming plaintiff as the seller and specifying the terms of the sale; there is no separate written purchase and sale agreement.3 Plaintiff was incarcerated at the time and did not know about or consent to the escrow.
Plaintiff alleges that Emerald had a duty to compare his (forged) signature on the escrow instructions with his (genuine) signature on the grant deed. Plaintiff maintains that Emerald's failure to do so resulted in escrow closing in accordance with terms of the forged escrow instructions, that is, the transfer of the Rexford Property from plaintiff to Hyperion for a price substantially below its fair market value. In addition, Emerald followed the instructions contained in a forged amendment to the escrow instructions, again without verifying plaintiff's signature, resulting in the loss of $14,953, the net proceeds of the sale which Emerald wired to a bank account as instructed in the forged amendment.
Emerald demurred to this cause of action, contending that it has no liability under these facts, since an escrow holder has no duty to verify the seller's signature unless instructed to do so by the escrow instructions.
Established principles govern an escrow holder's duties: “An escrow holder is an agent and fiduciary of the parties to the escrow. [Citations.]” (Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705, 711 (Summit ).) The agency is limited, however, to the obligation to complete the escrow in strict accordance with the instructions of each of the parties to the escrow. (Ibid.; Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App.2d 160, 162.) “If the escrow holder fails to carry out an instruction it has contracted to perform, the injured party has a cause of action for breach of contract. [Citation.]” (Summit, supra, 27 Cal.4th at p. 711.)
“An escrow holder has a fiduciary duty ‘to communicate to his principal knowledge acquired in the course of his agency with respect to material facts which might affect the principal's decision as to a pending transaction, particularly where ․ he knows that the principal is looking to him for protection as to those very facts of which he has knowledge.’ (Contini v. Western Title Ins. Co (1974) 40 Cal.App.3d 536, 547 [escrow holder who agreed to perform a title search has a duty to notify the client when a judgment lien shown in the abstract of title is not described in the title insurance policy]; Spaziani v. Millar (1963) 215 Cal.App.2d 667, 684 [complaint stated a cause of action for negligence against escrow holder who knew the plaintiff intended to obtain a construction loan, prepared indefinite and uncertain escrow instructions, learned the senior lien was not a construction loan, and without informing the plaintiff or receiving further instructions, closed the escrow].)” (Kirby v. Palos Verdes Escrow Co. (1986) 183 Cal.App.3d 57, 64–65 (Kirby ), disapproved on other grounds in Summit, supra, 27 Cal.4th at pp. 712–714, bracketed explanations of case citations added.)
“A breach of this fiduciary duty or the failure to exercise reasonable skill and diligence in carrying out the escrow instructions subjects the escrow holder to liability. [Citation.] Likewise, the escrow agent is liable for any loss caused by his failure to strictly comply with his principal's instructions or by his disposal of escrow property in violation of those instructions. [Citation.]” (Kirby, supra, 183 Cal.App.3d at p. 65, disapproved on other grounds in Summit, supra, 27 Cal.4th at pp. 712–714.)
However, “an escrow holder ‘has no general duty to police the affairs of its depositors'; rather, an escrow holder's obligations are ‘limited to faithful compliance with [the depositors'] instructions.’ [Citations.] Absent clear evidence of fraud, an escrow holder's obligations are limited to compliance with the parties' instructions. [Citations.]” (Summit, supra, 27 Cal.4th at p. 711.)
For example, in Lee v. Title Ins. & Trust Co., supra, 264 Cal.App.2d at pages 161–162, the plaintiffs alleged that the escrow holder knew the following facts, but failed to notify them: 1) a trust deed for $135,000 secured a loan of $100,000; 2) other defendants were defrauding the plaintiffs by selling real property to them at an inflated price; and 3) other defendants had falsely promised to obtain financing and tenants for the property. The plaintiffs did not allege that the escrow holder was negligent in the handling of the escrow or failed to carry out the escrow instructions. The appellate court held that the escrow holder was under no duty to notify the plaintiffs of the alleged facts.
The Lee court concluded that an escrow holder does not have a duty “to go beyond the escrow instructions and to notify each party to the escrow of any suspicious fact or circumstance which has come to his attention before or during the life of the escrow which could conceivably affect such party even though the fact or circumstance is not related to his specific escrow instructions.” (Lee v. Title Ins. & Trust Co., supra, 264 Cal.App.2d at p. 162.) If the law were otherwise, “once an escrow holder received information (from whatever source) he would be forced to decide independently whether to believe the information and disclose it or disbelieve it and conceal his knowledge. If he concealed his knowledge he would risk suit. If he discloses and the information is inaccurate, he may be sued by all parties to the escrow for interfering with their contract. Establishing a rule which would create such a dilemma and subject the escrow holder to a high risk of litigation would damage a valuable business procedure. Manifestly, [the plaintiffs'] contention, if adopted by judicial fiat, would effectively discourage a reasonable and prudent man or company from acting as an escrow holder and would ultimately defeat the very purpose for which escrows originated.” (Id. at p. 163, fn. omitted.)
The escrow instructions attached to the plaintiff's third amended complaint provide that “Buyer and Seller authorize Escrow Holder to accept and rely on Copies and Signatures as defined in this Agreement as originals, to open escrow and for other purposes of escrow.” There is no requirement that Emerald verify plaintiff's signature on the documents deposited in escrow, and plaintiff does not claim that Emerald failed to properly carry out the escrow instructions themselves. Neither does the complaint allege that Emerald was aware of clear evidence of fraud being committed against plaintiff by the other defendants, or that Emerald was aware that the “seller's” signature on the escrow instructions was different from plaintiff ‘s signature on the grant deed.
Notwithstanding the foregoing, plaintiff relies on Lee v. Escrow Consultants, Inc. (1989) 210 Cal.App.3d 915 to argue that Emerald had a duty to verify plaintiff's signature on the escrow instructions. In that case, the appellate court found a provision in the escrow instructions requiring that all amendments to the instructions be in writing obligated the escrow holder to verify the parties' signatures on an amendment which authorized a pre-closing release of the buyer's funds to the seller. (Id. at p. 924.) The court reasoned that the escrow holder could not ensure that it was complying with the terms of the escrow instructions without verifying the signatures on the amendment.
Plaintiff ignores the fact that the escrow instructions in Lee v. Escrow Consultants, Inc. differ from those in the present case in two significant particulars: The instructions to Emerald did not contain the provision on which the Lee court relied to find a requirement that the escrow holder verify signatures, and the instructions in Lee did not include the provision quoted above from the instructions to Emerald directing the escrow holder to accept without verification copies and signatures. Thus, Lee v. Escrow Consultants, Inc. is not persuasive authority for plaintiff's contention that Emerald was negligent in failing to verify his signature on the escrow instructions. We note as well that, whatever the merits of the holding in Lee under the facts of that case, to adopt that holding here would be to impose a newly-created duty on all escrow holders to verify signatures in all escrows. We decline to do so.
In short, we conclude that the allegations of the complaint are insufficient to state a cause of action against Emerald for negligence.
C. Breitman's Demurrer to the Fourth Amended Complaint
Although plaintiff alleges multiple causes of action against Breitman, the gist of his complaint is for fraud and deceit. That is to say, plaintiff alleges that Breitman defrauded him of the Rexford Property by proposing to plaintiff a bogus real estate joint venture with the intention of obtaining title to the Rexford Property and realizing the profits on its subsequent sale without compensating plaintiff for his equity interest in the property. He further alleges that, in reliance on Breitman's representations regarding the joint venture, plaintiff refused a bona fide offer to purchase the Rexford Property for $2.1 million, his acceptance of which would have netted him approximately $400,000. Because this fraudulent scheme is the basis for all of plaintiff's various causes of actions and theories of relief, we address this single cause of action below.
The trial court sustained without leave to amend Breitman's demurrer to plaintiff's fourth amended complaint, ruling that, with respect to the causes of action for fraud and deceit, plaintiff did not sufficiently allege the required element of reliance, or otherwise state a claim for relief. In this the court erred.
The complaint alleges that “Breitman and Miller knowingly and willfully conspired with each other to defraud [plaintiff] out of his Rexford property. At the June 2005 meeting, Breitman and Miller conspired to make intentionally false representations to [plaintiff] to induce [plaintiff] to transfer the Rexford property to the purported joint venture entity, Hyperion. Breitman and Miller conspired to have Miller visit [plaintiff] in prison to further induce [plaintiff] to transfer the Rexford property to Hyperion.” Plaintiff rejected a bona fide offer to purchase the Rexford Property, which would have resulted in a substantial profit to plaintiff, and instead executed a grant deed in favor of the entity Breitman named, which resulted in his uncompensated loss of the property. These allegations sufficiently plead a cause of action for fraud and deceit. That is to say, plaintiff has alleged facts which, if proved, entitle him to relief from Breitman.
Breitman asserts that plaintiff did not adequately plead justifiable reliance, an essential element of a fraud cause of action. In his demurrer, Breitman argued: “It is patently unreasonable for [plaintiff] to have signed over a Grant Deed in response to a verbal proposal made four months earlier, especially where, as here, the verbal proposal was allegedly made by a person he had never met and who had not prepared any of the documents allegedly promised during the four month lapse of time, was never embodied in writing, and, importantly, was not accepted in writing or otherwise in person.” Whether or not plaintiff's reliance was reasonable under the circumstances of this case is a question of fact. (See Guide v. Koopman (1990) 1 Cal.App.4th 837, 840.) Breitman could prevail on a demurrer based on his argument that plaintiff was not justified in relying on Breitman's representations only if such reliance was unwarranted as a matter of law. (See Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1332.) Breitman cites no authority which would render plaintiff's reliance under the circumstances alleged in the complaint unreasonable as a matter of law. Thus, the allegations of the complaint state a cause of action for fraud and deceit.
In his brief on appeal, Breitman also points out that plaintiff sued Hyperion on substantially the same facts; that action was dismissed with prejudice after Hyperion's requests for admission were deemed admitted and its demurrer was sustained.4 Breitman explains that the fourth amended complaint “endeavors to revive the claims lost against Hyperion, by bringing essentially the same claims against Breitman ․, [but] asserts facts which cannot be squared with the many declarations, verified complaints, unverified complaints and bankruptcy court filings that preceded it․” However, the basis of Breitman's demurrer was not that the facts alleged in the fourth amended complaint are inconsistent with facts alleged or admitted in other judicial proceedings. Rather, Breitman maintained that plaintiff cannot prevail in this lawsuit because the factual allegations of the complaint do not establish formation of a joint venture, the purported objective of the fraudulent scheme: “Because all of the claims asserted by [plaintiff] in the FAC are bootstrapped around the formation of such joint venture, and such formation was not pled sufficiently, after numerous attempts to do so, the trial court properly sustained the demurrer to the FAC without further leave to amend.”
The problem with this argument is that the fourth amended complaint does not purport to state a cause of action against Breitman for breach of a joint venture agreement, which would require sufficient allegations of the formation of a joint venture. Rather, plaintiff alleges that the proposed joint venture was but a ruse, the initial step in Breitman's plan to defraud plaintiff of his interest in the Rexford Property.
Because we determine that the complaint states a cause of action for fraud and deceit, the trial court erred in sustaining the demurrer and dismissing the complaint against Breitman. As the remainder of the causes of action are either based on the same facts as those for fraud and deceit, or simply state different remedies which plaintiffs seeks upon proof of his entitlement to relief, we do not address them separately.
The judgment in favor of Emerald is affirmed; plaintiff is to bear Emerald's costs of appeal. The judgment in favor of Breitman is reversed, and the matter is remanded to the trial court for further proceedings. Plaintiff is to recover from Breitman the costs of appealing the judgment in his favor.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
MOSK, J., Concurring and Dissenting
I concur in the affirmance of the judgment based on the sustaining of the demurrer to the ninth and tenth causes of action in the Third Amended Complaint against Emerald Estate Escrow, Inc. (Emerald) and the sustaining of the demurrer to the causes of action in the Fourth Amended Complaint against Reid Breitman (Breitman). I would reverse the judgment based on the sustaining of the demurrer to the eleventh cause of action in the Third Amended Complaint against Emerald.
A. Third Amended Complaint—Emerald
1. Negligence—Eleventh Cause of Action
In his eleventh cause of action, plaintiff alleges Emerald, in its capacity of escrow agent for the sale of the Rexford Property, breached its duty of care to plaintiff by failing to verify plaintiff's signature on the escrow instructions, submitted to Emerald in connection with the sale of the Rexford Property, especially in view of the fact that Emerald had a notarized grant deed with plaintiff's actual signature that appears to be a signature different than that on the forged document. The escrow instructions that are attached to plaintiff's Third Amended Complaint provide, “Buyer and Seller authorize Escrow Holder to accept and rely on Copies and Signatures as defined in this Agreement as originals, to open escrow and for other purposes of escrow.”
There is no requirement that Emerald verify plaintiff's signature on documents deposited in escrow. It is alleged that the escrow instructions themselves were forged. Thus, the issue is whether plaintiff stated a cause of action for negligence in connection with Emerald accepting and carrying out escrow instructions on which plaintiff's signature had allegedly been forged when Emerald had plaintiff's actual signature on a different document.
Plaintiff relies on Lee v. Escrow Consultants, Inc. (1989) 210 Cal.App.3d 915 (Escrow Consultants ). In that case, the plaintiff alleged its escrow holder had improperly disbursed funds pursuant to a forged amendment to an instruction. The trial court sustained a demurrer, and the appellate court reversed. Although the court acknowledged the general rule that an escrow holder has no duty to go beyond its instructions and notify either party of suspicious facts or circumstances not related to the specific escrow instructions, it found the rule did not apply because the instructions at issue required any amendments be in writing. They provided: “ ‘NO NOTICE DEMAND OR CHANGE OF INSTRUCTIONS SHALL BE OF ANY EFFECT IN THIS ESCROW UNLESS GIVEN IN WRITING BY ALL PARTIES AFFECTED THEREBY.’ ” (Id. at p. 924.) This requirement was sufficient, the court reasoned, to allow the plaintiff to state a cause of action based on the escrow company's failure to verify that all parties had in fact signed the amended instruction. (Ibid.) The case was decided on a demurrer. On the record before it, the appellate court concluded only that “the limited nature of an escrow holder's duty does not preclude plaintiff from stating a cause of action.” (Id. at p. 924.)
In the instant case, plaintiff alleges that Emerald was negligent in accepting the escrow instructions without verifying his signature because it “had never met” plaintiff. Although Escrow Consultants, supra, 210 Cal.App.3d 915 is distinguishable, it is arguable that the reasoning is applicable and that Emerald should have taken steps to at least check the forged signature on the escrow instructions against the actual signature on the notarized grant deed signatures. In a sense, as far as Emerald was concerned, plaintiff was a party to the escrow. Emerald viewed the seller of the property as a party to the escrow and undertook to act on that party's behalf. In not noticing that the signature on the escrow instructions arguably was suspicious, a duty to the actual seller may have been breached. Moreover, Emerald purported to act on behalf of plaintiff who was not actually a party to any escrow with Emerald. Plaintiff should have an opportunity to establish facts showing a breach of a duty to one whom Emerald should have treated as an escrow party or as a stranger who actually had no connection with Emerald. As this case arose from the sustaining of a demurrer, plaintiff should have the opportunity under the circumstances to prove that Emerald was negligent in accepting escrow instructions containing plaintiff's forged signature.
Negligence may be pleaded in general terms. (See 4 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 596, p. 721.) Although the pleading here is not a model of clarity, plaintiff has pleaded sufficient facts to state a cause of action for negligence against Emerald based on its conduct in accepting and following escrow instructions that were forged. This is not to say that an escrow company is necessarily negligent in accepting forged instructions. Plaintiff is, however, in this case, entitled to attempt to establish such negligence, especially in view of Emerald's possession of plaintiff's actual signature. Thus, the demurrer to the Eleventh cause of action should have been overruled
2. Bailment and Negligence Against Emerald—
Ninth and Tenth Causes of Action
Miller deposited with Emerald a check made payable to plaintiff in the amount of $143,000 for the purchase of property, but then instructed Emerald that the transaction would not take place and therefore to wire the money to a third party bank account—an account over which it turned out, plaintiff had no control. Emerald asserts that because there is no allegation that Emerald received any consideration or that plaintiff put Emerald on notice that he had a claim to the object of any bailment, and because plaintiff alleges that Emerald acted in accordance with the depositor's instructions, plaintiff failed to allege a claim based on bailment or negligence.
Plaintiff relies upon Sun'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671. In that case, an employee, as part of an embezzlement scheme, obtained authorized company signatures from a corporate officer on checks for small amounts payable to a third party. The employee altered the checks, increasing the amounts to several thousand dollars, and then presented them to a bank for payment into her personal account. The bank accepted the checks for deposit into her account even though she was not the payee. (Id. at p. 678.) The court held that if a third party, who is not the payee of a check, attempts to negotiate that check and deliver the money into his own account, this constitutes sufficiently suspicious circumstances of fraud to impose a duty on the bank to make reasonable inquiries. The court said: “[A]n attempt by a third party to divert the proceeds of a check drawn payable to the order of a bank to the benefit of one other than the drawer or drawee suggests a possible misappropriation. Accordingly, we conclude that [the plaintiff's] allegations define circumstances sufficiently suspicious that [the defendant bank] should have been alerted to the risk that [the plaintiff's] employee was perpetrating a fraud. By making reasonable inquiries, [the bank] could have discovered the fraudulent scheme and prevented its success.” (Id. at pp. 694–695.)
Plaintiff contends Emerald conducted itself as a bank in cashing plaintiff's check and transferring the funds to a third party account. Plaintiff also contends that in Sun' n Sand, Inc. v. United California Bank, supra, 21 Cal.3d 671 and in this case, the bank and the escrow company were put on notice of a potential fraud by what was on the face of the check (e.g., made payable to plaintiff not Miller) and the account into which the check was deposited (not plaintiff's account).
Emerald, however, notes it is not a bank, and that, as an escrow company, it has different duties than a bank. There is nothing to suggest that Emerald owed plaintiff a duty. Essentially, plaintiff alleges that Miller, by using a fraudulent power of attorney, obtained from the Bank of America a “replacement check” payable to plaintiff to “replace” a check that plaintiff had received, but had not cashed because of his arrest. Miller deposited the check with Emerald as plaintiff's deposit on the impending purchase of property. The money was deposited in Emerald's “Trust Account.” After telling Emerald the pending transaction had been called off, Miller asked Emerald to wire the money to plaintiff at Manor Holdings, Inc. “FBO Tabatabai,” a bank account actually controlled by Miller.
Plaintiff alleges Emerald breached its duty to plaintiff who was the intended beneficiary of a bailment contract because there was nothing on the check suggesting a third party could negotiate the check; Emerald did not inquire whether Manor Holdings, Inc. was plaintiff's bank account; Emerald had no knowledge of any relationship between Miller and plaintiff; Emerald did not verify, and relied upon, an uncorroborated power of attorney; and thus, plaintiff lost the money. There is no indication of any bailment here that was “gratuitous.” (13 Witkin, Summary of Cal. Law (10th ed. 2005) Personal Property, § 163, p. 175.)
Banks generally do not owe duties to nondepositors to investigate or disclose suspicious activities. (See Software Design & Application, Ltd. v. Hoefer & Arnett, Inc. (1996) 49 Cal.App.4th 472 [bank owes no duty to nondepositor to investigate or disclose suspicious activities on the part of the accountholder]; Rodriguez v. Bank of the West (2008) 162 Cal.App.4th 454 [when person opened account in another's name forging latter's name, deposited latter's money in the account and stole money from the account, bank owed no duty to noncustomer].) Plaintiff alleges Miller deposited a check with Emerald to be used as plaintiff's deposit on an impending purchase of property. This was not a general bank-like deposit in which the money is mingled with the funds of Emerald, with Emerald as a debtor. (See Fidelity Savings & Loan Assn. v. Rodgers (1919) 180 Cal. 683, 686.) The funds here were a special deposit that were deposited in Emerald's trust account to be used for a particular purpose and thus did not belong to Emerald. (See Bank of America v. Board of Supervisors (1949) 93 Cal.App.2d 75, 80.)
“ ‘An escrow involves the deposit of documents and/or money with a third party to be delivered on the occurrence of some condition.’ [Citations.] An escrow holder is an agent and fiduciary of the parties to the escrow. [Citations.] The agency created by the escrow is limited—limited to the obligation of the escrow holder to carry out the instructions of each of the parties to the escrow. [Citations.] If the escrow holder fails to carry out an instruction it has contracted to perform, the injured party has a cause of action for breach of contract. [Citation.]” (Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705, 711 (Summit ).)
Under Financial Code section 17003, an escrow does not require a binding contract between parties. (See Pasternak v. Boutris (2002) 99 Cal.App.4th 907, 920 (Pasternak ).) Moreover, under that section an escrow does not require an exchange of property. (Ibid.) Here, there was just one party to the escrow—Miller. “In delimiting the scope of an escrow holder's fiduciary duties, then, we start from the principle that ‘[a]n escrow holder must comply strictly with the instructions of the parties. [Citations.]’ (Amen [v. Merced County Title Co. (1962) ] 58 Cal.2d [528,] 531.) On the other hand, an escrow holder ‘has no general duty to police the affairs of its depositors'; rather, an escrow holder's obligations are ‘limited to faithful compliance with [the depositors'] instructions.’ [Citations.] Absent clear evidence of fraud, an escrow holder's obligations are limited to compliance with the parties' instructions. [Citations.]” (Summit, supra, 27 Cal.4th at p. 711.) An escrow holder generally owes no duty to a nonparty to the escrow when the escrow holder follows instructions of a party to the escrow to distribute funds, possibly subject to some claim by the nonparty.” (See 3 Miller & Starr, Cal. Real Estate (2010) § 6:12, pp. 6–34–6–35, § 6:18, pp. 684–690.)
Thus, when Miller directed that the funds be transferred to plaintiff at a different account, Emerald was obligated to follow those directions. In Summit, supra, 27 Cal.4th at page 715, the court discussed the issue of negligence by an escrow company. It noted that the “threshold question in an action for negligence is whether the defendant owed the plaintiff a duty to use due care.” (Ibid.) It then discussed whether, under Biakanja v. Irving (1958) 49 Cal.2d 647, a defendant can be held liable to a person not in privity with the transaction. The court in Summit concluded, “there was no reason to depart from ‘the general rule that an escrow holder incurs no liability for failing to do something not required by the terms of the escrow or for a loss caused by following the escrow instructions. (Axley v. Transamerica Title Ins. Co. [ (1978) ] 88 Cal.App.3d [1,] 9.)’ ” (Ibid.)
Applying the factors in Summit, supra, 27 Cal.4th at page 715, the action was intended to benefit plaintiff; the certainty of the injury element was satisfied, and there was no allegation that Emerald could have forseen that plaintiff would not receive the funds; Emerald's actions in following Miller's instructions were not blameworthy; and there was not “a sufficiently close connection” between the payment and the injury suffered by plaintiff. It was only when Miller failed to pay plaintiff that the injury took place.
Because plaintiff was not a party to the escrow and did not submit escrow instructions, Emerald was not acting as his agent with regards to the transaction. Any requirement for Emerald to inquire further or to hold the funds when such requirements were not part of the instructions submitted by any party should not be implied. (Markowitz v. Fidelity Nat. Title Co. (2006) 142 Cal.App.4th 508, 528.) Emerald did not know plaintiff was somehow a party to the escrow—which he was not—or relying on Emerald for protection. (Ibid.) Plaintiff's remedies are against Miller.
Plaintiff alleges a number of suspicious circumstances. The check did not indicate that a third party could negotiate it, but Miller presented a power of attorney. Emerald did not attempt to confirm whether Manor Holdings was plaintiff's account, but the instructions indicated that it was. Emerald did not make reasonable inquiries related to the transaction, but it had no obligation to do so, as Miller was the only party to the escrow and had a power of attorney. Emerald had no prior knowledge or experience with Miller's connection, if any, to plaintiff. And, as noted, Miller presented a power of attorney. Emerald did not have knowledge of plaintiff's true signature, but it was not under an affirmative duty to verify the signature, absent more suspicious circumstances. Although the circumstances may have been somewhat questionable, Emerald relied on a notarized power of attorney in making the deposit. In short, plaintiff has not pleaded facts in connection with this transaction that would state a cause of action against Emerald for negligence or breach of a bailment in connection with its following its customer's instruction.
B. Fourth Amendment Complaint—Breitman
Plaintiff in his notice of demurrer states that Breitman “will and hereby does generally and specially demur to the Fourth Amended Complaint ․ in this action on the following grounds: 1. The First Amended Complaint fails to state facts sufficient to constitute a cause of action by Tabatabai against Breitman. (C.C.P., § 430.10(e), (f) and (g) as follows: ․” Then Breitman specifies the lack of necessary allegations in specified causes of action—omitting entirely from the general demurrer discussion the Sixteenth and Nineteenth causes of action. The demurrer did not specify that it was to specific causes of action or that the ground as to each cause of action was failure to state facts sufficient to constitute a cause of action. Thus, if it is not determined that all causes of action fail to state facts sufficient to constitute a cause of action, Breitman's demurrer must be overruled. (See 5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 954, p. 369, Cal. Rules of Court, rule 3.1320, subd. (a); Storer v. Austin (1902) 136 Cal. 588; Fleming v. Albeck (1885) 67 Cal. 226.)
Plaintiff alleges Breitman represented himself to plaintiff as a real estate investor and a licensed attorney. Breitman proposed to loan $200,000 to build an additional floor onto the Rexford Property. Breitman and Miller suggested to plaintiff that after the additional floor was built, the Rexford Property could be sold for $3,800,000 based on the estimated equity he had in the Rexford Property as of June 2005; Breitman would recoup the $200,000 loaned to add a second floor to the Rexford Property; and the remaining net proceeds from the sale would be split three ways between plaintiff, Breitman, and Miller. Breitman further represented that he would form a corporation for the joint venture which would take title to the Rexford Property; that plaintiff would be a shareholder of the corporation; and that the articles of incorporation and by-laws would be provided to plaintiff.
Plaintiff further alleges that Breitman promised he would draft and provide a written agreement which would memorialize the discussed terms of the joint venture. At that time, but unknown to plaintiff, Breitman was a defendant in a pending lawsuit with a “convicted felon” and business partner, in which action Breitman was accused of defrauding creditors of approximately $3 million. Thereafter, Breitman was found to have given false and perjurious testimony and to have participated in a “plan to defraud creditors.” This action resulted in a judgment against Breitman in the amount of $2,795,266. Also, at that time of the representations, Breitman did not disclose that he was a principal of a company that had been “de-listed” from the Nasdaq Market for “the protection of the public interest” due to “the magnitude of improper conduct and the regulatory/criminal histories of the individuals involved in the company.”
Plaintiff alleges that not knowing of the prior bad acts committed by Breitman, plaintiff believed that the representations made by Breitman and Miller were true. Plaintiff accepted the terms of the joint venture with Breitman and Miller (joint venture) instead of selling the Rexford Property for $2.1 million and realizing net proceeds of $404,000. Breitman knew that the representations made to plaintiff were false when he made them.
Plaintiff alleges that he justifiably relied on Breitman's representations regarding the joint venture; Breitman failed to disclose to plaintiff that he, Breitman was and had been involved in many fraudulent and unscrupulous real estate and business dealings in which people had been defrauded of millions of dollars; Breitman did not make plaintiff a shareholder of the joint venture—Hyperion—or give plaintiff any ownership interest in Hyperion; and Breitman made himself the president of Hyperion.
Plaintiff alleges he provided the grant deed to the Rexford Property to Breitman and Miller upon assurances from them that plaintiff would soon receive the written joint venture agreement and that escrow would not open until plaintiff received the written joint venture agreement. Without plaintiff's knowledge or consent, Breitman and Miller forged plaintiff's signature and initials on escrow instructions regarding the sale of the Rexford Property. Plaintiff was listed as the “Seller” and Hyperion was listed as the “Buyer.” Escrow was opened with Emerald in October 2005 at the request of Breitman without plaintiff's knowledge or consent and without any written agreement between Breitman or Hyperion and plaintiff.
Plaintiff alleges that according to the terms of the forged escrow instructions, the Rexford Property was sold to Hyperion for $1.7 million; the forged sale price of $1.7 million was just enough to cover the encumbrances on the Rexford Property (first and second liens); the net proceeds from the forged sale were $14,953.97; pursuant to a forged amendment to the escrow, the $14,953.97 was wired into Miller's Washington Mutual checking account; as a result, the sale proceeds were wired into an account over which plaintiff had no control, and plaintiff never received the $14,953.97; and Breitman, as president of Hyperion, sold the Rexford Property to a third party on April 4, 2006, for a substantial profit.
According to plaintiff, as a result of plaintiff's reliance upon Breitman's false representations and non disclosures, plaintiff lost the Rexford Property and sustained damages consisting of at least $550,000 in equity in the Rexford Property as of November 2005 and an estimated $366,667 in lost profits from the planned remodeling and sale of the Rexford Property.
Plaintiff alleges that Breitman knew the representations or promises were false. False promises can be the basis for fraud. (5 Witkin, supra, Pleading, § 721, pp. 137–138.) Plaintiff alleges who made the representations and when they were made, thus satisfying the specificity requirement.
Breitman asserts that plaintiff did not plead justifiable reliance. But plaintiff did plead justifiable reliance. He also specifically alleged that in reliance on Breitman's false representations and nondisclosures, he signed the grant deed transferring the Rexford Property to Hyperion. Breitman asserts any reliance was not reasonable. Nevertheless, plaintiff alleges facts sufficient to assert reasonable reliance, which is ordinarily a question of fact. (See Guido v. Koopman (1991) 1 Cal.App.4th 837, 843.) Accordingly, plaintiff has stated facts sufficient to state a cause of action for fraud. Thus, because plaintiff has alleged at least one cause of action that states facts sufficient to constitute a cause of action, the general demurrer should have been overruled.
The allegations in other causes of action appear to have stated facts sufficient to constitute causes of action—e.g. breach of fiduciary duty and conspiracy, which went unchallenged in defendant Breitman's points and authorities. But in view of the conclusion, it is not necessary to discuss each cause of action.
I would reverse the judgment as to the eleventh cause of action against Emerald in the Third Amended Complaint, and as to the Fourth Amended Complaint against Breitman. I would affirm the judgment as to the ninth and tenth causes of action against Emerald in the Third Amended Complaint.
1. FN1. Emerald's demurrer to the third amended complaint was sustained without leave to amend, while Breitman prevailed on his demurrer to the fourth amended complaint. Both complaints are based on essentially the same factual allegations.
2. FN2. Civil Code section 1825 states: “A depositary [bailee] must give prompt notice to the person for whose benefit the deposit was made, of any proceedings taken adversely to his interest in the thing deposited, which may tend to excuse the depositary from delivering the thing to him.”
3. FN3. In fact, the escrow instructions appear as a provision in the purchase agreement which is on the California Association of Realtors form entitled “California Residential Purchase Agreement and Joint Escrow Instructions.”
4. FN4. On February 23, 2009, Breitman filed a motion to strike and dismiss the third amended complaint, as well as a request for judicial notice in support thereof. The motion argued that plaintiff's claims against Breitman were barred by the doctrines of res judicata and collateral estoppel, and was based, among other things, on the requests for admission which had been deemed admitted in plaintiff's earlier case against Hyperion. After granting Breitman's demurrer, the trial court stated that the motion to strike was moot.
ARMSTRONG, Acting P. J.
KRIEGLER, J.MOSK, J.