RIANDA v. SAN BENTIO TITLE GUARANTEE CO (1949)

Plaintiffs brought this action against the defendant title company for $5,000 damages alleged to have been suffered by plaintiffs as the result of the alleged negligence of defendant in handling an escrow transaction. From a judgment in favor of defendant plaintiffs appeal.

There is no substantial dispute as to the facts. On July 2, 1946, Rianda was the owner of a ranch in San Benito County. On that date he agreed to sell, and Nick Daskarolis agreed to buy, the ranch for $91,200. The sale was negotiated by plaintiff Hublit, a licensed real estate broker. Daskarolis delivered a deposit of $5,000 to Hublit by means of a check made out to Hublit as trustee for Rianda. This first $5,000 check was immediately cashed by Hublit and deposited in her ‘trustee account.’

The sales agreement, a standard form of the California Real Estate Association, is entitled ‘Deposit Receipt’ and was signed by Hublit, Rianda and Daskarolis. It constitutes a complete agreement of purchase and sale. All necessary terms are therein contained. Among other things, it provided for a commission to Hublitt of $4,560, or one-half the deposit if the purchaser should default, provided that this amount did not exceed the full amount of the commission. It also provided that ‘On acceptance by purchaser, deposit to be immediately increased to 10% of purchase price.’ After providing for the amount of cash to be paid and the amount and terms of the deed of trust the agreement contains these three pertinent provisions:

‘That should the purchaser fail to pay the balance of the purchase price, or fail to complete the purchase, as herein provided, the amounts paid hereon may, at the option of the seller, be retained as the consideration for the execution of this agreement by the seller.’

‘That the evidence of title shall be (a) title insurance policy issued by a responsible title company to be furnished and paid for by the (b) seller. That should the title to said property prove defective or unmerchantable and should the seller be unable to perfect the same within a reasonable time from date hereof all amounts paid hereon shall be returned to the purchaser unless the purchaser elects to accept the title in said condition.’

‘That the deposit and all other payments called for herein, if made with other than lawful money of the United States of America, may be converted into cash immediately, unless otherwise provided for herein, and held subject to the terms of this Deposit Receipt.’

The contract also provided that Daskarolis agreed ‘to purchase the above described property on the terms and conditions herein stated.’

On July 3, 1946, Hublit sent the contract to the title company together with a covering letter addressed to Elliott, its vice-president and manager. That letter reads as follows:

‘Please prepare title search, necessary deed and deed of trust, etc covering the sale of 608 acres in San Benito County by Harry Rianda to Nick Daskarolis. Attached hereto is copy of contract agreement of sale. Mr. Rianda has requested that deed and deed of trust etc be submitted to his attorney, John J. Jones, Bank of America Bldg, 6 fl, San Jose, California, for approval before submitting to buyer and seller for signatures. Demand is hereby made by Broker Marian Hublit for 5% commission of selling price of $91,200.00. Commission is due and payable to Marian Hublit by seller, Harry Rianda, in the amount of $4,560.00.

‘Very truly yours,

‘Marian Hublit.’

In accordance with the provision of the contract requiring Daskarolis to increase the deposit to at least 10% of the purchase price upon acceptance by him, the buyer made out a second check for $5,000, naming the title company as payee, and on July 5, 1946, sent it to Hublit. Hublit testified that ‘The additional $5,000.00 check was given to me to bind and complete this contract, to be deposited with the escrow holder, which I did immediately.’ Upon delivery of this check to the title company by an agent of Hublit, the manager and vice-president of that company signed the following receipt:

‘July 5, 1946

‘Received Of Marian Hublit Check 90–1332 of Nick Daskarolis Five Thousand and no/100 Dollars on Escrow #9848.

‘San Benito Title Guarantee Company

‘By Stanley J. Elliott

‘Vice President’

Elliott thereupon, that day or the next, endorsed the check as follows: ‘Pay to the order 12 The Hollister National Bank 12 Hollister, Cal., Escrow Account, San Benito Title Guarantee Company.’ After endorsing the check Elliott placed it in the escrow file where it remained until the time of trial. At no time was it ever presented to the bank. The bank is located about 200 yards from the title company.

Pursuant to the letter from Hublit the title company thereafter prepared a title search, but no written report was ever rendered. It also prepared a deed to the property, and proposed buyer's and seller's instructions. These documents were all prepared from the information contained in the Deposit Receipt. Rianda signed the deed and the seller's instructions and delivered them back to the title company. The buyer's instructions were never signed by Daskarolis; in fact, neither the instructions nor the note and deed of trust were ever presented or delivered to him by the title company.

Under date of August 23, 1946, a Friday, the attorney for Rianda, whose office was in San Jose, wrote to the title company demanding the $5,000 on deposit with that company for his client on the ground that Daskarolis had determined not to complete the contract, and that, under its terms, Rianda was entitled to this money. On that date, and from July 5, 1946, to and until August 26, 1946, Daskarolis had on deposit in his checking account at the Hollister National Bank, the sum of $5,748.69. Sometime on August 26, 1946, Daskarolis withdrew $5,000 from this account and orally informed Elliott that he had ‘stopped payment’ on the $5,000 check on deposit with the title company. There is no evidence that in fact a formal ‘stop payment’ order was ever filed with the bank. The title company thereupon telephoned Hublit and informed her of Daskarolis' action, and also wrote to Jones to the effect that payment had been stopped on the check.

Elliott admitted that he knew that the $5,000 check was a payment to be used in the Rianda escrow, and knew of the major provisions of the Deposit Agreement, but claimed that he had no instructions from Daskarolis as to what to do with the check, so placed it in the escrow file.

On these facts the trial court determined that, as to the check, the title company owed Rianda and Hublit no duty, and was therefore not negligent. The reasoning of the lower court, which is adopted by respondent on this appeal, is best disclosed in an opinion prepared by that court that fully and fairly states its position. It reads, in part, as follows:

‘It is true that when an escrow is formed the depositary is as much the agent of the purchaser as of the seller, and is charged with the duty of obeying their instructions. But the escrow is not formed until instructions shall have been received by the depositary from both parties. See Hudson v. Slonaker, 89 Cal.App. 620 [265 P. 346]; Tuso v. Green, 194 Cal. 574 [229 P. 327]; Neher v. Kauffman, 197 Cal. 674 [242 P. 713]; Thoroman v. David, 199 Cal. 386 [249 P. 513]; Los Angeles City High School District v. Quinn, 195 Cal. 337 [234 P. 313] and Thompson v. Walsh, 76 Cal.App.2d 188 [172 P.2d 745].

‘It must be conceded that the escrow was incomplete. The receipt by defendant of plaintiff Hublit's letter * * * with alleged Deposit Receipt * * * attached was the beginning of the escrow and created the relationship of escrow holder in the defendant for the plaintiffs and subsequently upon receipt of escrow instructions from plaintiff Rianda, an agency was established in the defendant for plaintiff Rianda. But at no time was an agency created in the defendant for Daskarolis. By the provisions contained in the Deposit Receipt, it cannot be said that the Daskarolis check for $5000.00 * * * was the property of plaintiff Rianda. It appears clear too, that the receipt of the $5000.00 check which came to defendant by way of a messenger, did not convey to defendant the information that the check represented the balance of a 10% deposit on the purchase price. Neither of the plaintiffs saw fit to give any instructions to the defendant at any time concerning the $5000.00 check. The issuance by defendant of a receipt to plaintiff Hublit for the $5000.00 check certainly in itself created no liability in defendant.

‘The defendant could not have properly handled the matter without adequate instructions from each of the parties. It is plain that plaintiff Hublit's letter, the Deposit Receipt and the Daskarolis check forwarded to defendant, were to lie dormant in the hands of defendant until receipt of instructions from each of the parties.

‘The evidence shows no act of negligence and no act of fraud on the part of defendant and therefore it is found that defendant should have judgment herein.’

It will be noted that it is the basis of the above opinion that a complete escrow was not formed here because the buyer had not signed the formal instructions, and until that was done the title company had no duty to do anything with the check. We do not think that the law requires that formal instructions be signed before a complete escrow is formed. Certainly, the cases cited in support of that conclusion in the above opinion do not go that far. They simply hold that, where there is no valid underlying contract on file with the title company, other than can be found in the instructions of the buyer and seller, these two independent documents can be used to create a binding and complete contract, and therefore a complete escrow. Thus, in Tuso v. Green, 194 Cal. 574, 229 P. 327, one of the leading cases on the subject, the Court simply held that where there was no other valid contract of sale, but where the buyer's and seller's instructions concur in all terms and conditions, even though each writing is signed by only one party, there was a valid and binding contract. The basic premise of the opinion is that if there had been an independent contract signed by both parties, a complete escrow would have resulted. Hudson v. Slonaker, 89 Cal.App. 620, 265 P. 346, fairly states the principle for which the cases cited by the trial court and respondent stand. At page 624 of 89 Cal.App., at page 348 of 265 P., it is stated: ‘The facts in the above case [Tuso v. Green] were similar to those in the case at bar, and this authority, together with the later cases of Neher v. Kauffman, 197 Cal. 674, 242 P. 713, and Thoroman v. David, 199 Cal. 386, 249 P. 513, establishes the contrary principle to that contended for by respondent, viz., the principle that the separately executed escrow instructions are to be considered and construed together, and not as ‘unrelated, individual instructions.”

In the instant case the Deposit Receipt was signed by all parties. It was a complete and valid contract. Every provision necessary to create a valid contract of purchase and sale was in that contract. In fact, when the buyer's and seller's instructions were prepared by the title company they were prepared entirely from the information contained in the Deposit Receipt. The instructions would have added nothing to the rights and liabilities of the parties. When this complete contract was deposited with the title company, with the check, it seems quite clear that a complete escrow existed. It is no insurmountable obstacle that Daskarolis did not sign formal instructions. He signed the Deposit Receipt. That contract contemplated that the transaction should be handled by a title company. He signed the check and named the title company payee. He permitted Hublit to delivery the contract and check to the title company, and knew it had been done. Clearly, he had appointed the title company his agent to complete the transaction in accordance with the terms of the Deposit Receipt.

Inasmuch as an escrow was created, the title company was charged with the duty of exercising skill, care and diligence in the handling of the escrow. The failure of the title company to cash the check to protect the seller constitutes actionable negligence. Not only under the express terms of the Deposit Agreement, but under general provisions of the law it was the duty of the title company to present the check for payment within a reasonable time, § 3265b, Civ.Code, and clearly July 5th to August 26th was an unreasonable time. The case is no different than one where the depositary makes a wrongful return of the money to the person who deposited it. In such event the depositary is liable. Montgomery v. Pacific Coast Land Bureau, 94 Cal. 284, 29 P. 640, 28 Am.St.Rep. 122; Cohn v. Valentine, 88 Cal.App. 430, 263 P. 846; Jones v. Title Guaranty & Trust Co., 178 Cal. 375, 173 P. 586; Gallagher v. California Pacific Title & Trust Co., 13 Cal.App.2d 482, 57 P.2d 195.

The present case is somewhat similar to Citizen's National Bank of Roswell, N.M. v. Davisson, 229 U.S. 212, 33 S.Ct. 625, 57 L.Ed. 1153. In that case a complete contract of purchase and sale, as here, was deposited with the bank together with a check. No formal instructions were signed. The officers of the bank placed the contract in an envelope. The contract contained a forfeiture clause similar to the one here involved. The bank officers never read the contract and had no knowledge of its terms. The purchaser defaulted and demanded back his deposit, and the bank complied. An action was then brought by the seller and broker. They were held entitled to recover. The Court stated, 229 U.S. at page 223, 33 S.Ct. at page 629, 57 L.Ed. 1153:

‘Upon the whole case, we are clear that the effect of the deposit of the contract and check with the bank was to constitute it a custodian or stakeholder for the benefit of both parties, holding the money without right or interest in it, bound above all things not to take sides between the parties, and answerable ultimately to the one or the other, according to their respective rights as between themselves. * * *

‘The fact that no officer of the bank read this contract or knew of its terms is of no avail to the bank. By the very circumstances of the deposit it was put upon notice that it was assuming a duty that could not be fully understood or fairly performed without a knowledge of the contents of the contract; it had possession of that instrument, with full opportunity to examine it; except for its own negligence it would have known the terms thereof. To permit it now to set up its own ignorance as an excuse or justification of its conduct in violating the rights of one of the parties to the contract would be to permit it to take advantage of its own wrong.’

The Court held that the bank had violated its duty of acting impartially between the parties, and was liable for the amount of the deposit.

The present case is much stronger. Here Elliott knew of the provisions of the contract. He knew that the check was to be forfeited to the seller if the buyer defaulted. He even endorsed the check. He had express authority given in the contract to cash the check. In addition, the title company had implied authority to cash the check, as the cashing of the check was an act reasonably necessary to accomplish the purpose of the agency. § 2319, Civ. Code; Rest. of the Law of Agency, § 35. The title company knew that, regardless of whether instructions were signed by the buyer or seller, a binding contract existed between them. Under such circumstances it was its duty to cash the check and hold the proceeds until events demonstrated who was entitled to it. By failing to cash it, the title company made it possible for Daskarolis to withdraw the money on August 26th to the injury of Rianda and Hublit.

We think, as a matter of law, an escrow was created on July 5th when the contract and check were deposited. On that date, or within a reasonable time, the title company should have cashed the check and deposited the proceeds in its escrow account. Its failure to do so was negligence. Even if this were not so, its actions on and subsequent to August 23rd were clearly negligent. On that day, or the 24th, it was informed by the attorney for Rianda that Daskarolis had defaulted and that Rianda claimed the money on deposit. It did nothing on the 23rd and 24th, and then on Monday, the 26th, Daskarolis drew the money out and told the title company that he had stopped payment. This was clearly negligence on the part of the title company. That negligence, and the prior negligence, caused Rianda and Hublit to lose money that was rightfully theirs. Defendant is therefore liable.

The judgment is reversed.

PETERS, Presiding Justice.

WARD and BRAY, JJ., concur.