Arizona Appeals Court Affirms Dismissal Of Negligence And Breach Of Duty Claims Against Settlement/Escrow Agent

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In a recent case from the Arizona Court of Appeals, the Court affirmed a grant of summary judgment in favor of a settlement/escrow agent, finding no breach of duty where the agent sufficiently...
United States Arizona Litigation, Mediation & Arbitration

Introduction

In a recent case from the Arizona Court of Appeals, the Court affirmed a grant of summary judgment in favor of a settlement/escrow agent, finding no breach of duty where the agent sufficiently disclosed to the seller the existence of a potentially fraudulent deed but did not further investigate or determine its validity. Moldovan v. Long, No. 1 CA-CV 23-0470, 2024 Ariz. App. Unpub. LEXIS 460 (Ct. App. May 30, 2024).

Background

In 2020, Elite Holdings, LLC ("Elite") contracted to sell a property in Paradise Valley, Arizona ("Property"). Prior to Elite's ownership, there was a November 2007 deed ("Turquoise Deed") which read, in pertinent part:

For the consideration of Ten Dollars, and other valuable considerations, I or we, JO ANN LONG, an unmarried woman, do/does hereby convey to JO ANN LONG, an unmarried woman as to and [sic] undivided 50% interest and TURQUOISE 5, LLC, an Arizona limited liability company as to an undivided 50% interest JO ANN LONG, an unmarried woman as Grantor, and, [sic] the following real property situated in Maricopa, [sic] County, Arizona ....

(Emphasis Omitted.)

In December 2007, Long transferred the Property to Elite's manager, Daniel D. Moldovan, who then transferred it to Elite. Capital Title Agency, Inc. ("Capital"), the escrow agent for the conveyance from Long to Moldovan, did not disclose the Turquoise Deed. From 2008 to 2010, there were several recorded deeds conveying the Property between Elite, Moldovan, and Moldovan's wife, ending with a conveyance to Elite in 2010.

When Elite received an offer on the Property in 2020, Elite executed a purchase contract and escrow agreement with the buyer, naming Pioneer Title Agency, Inc. (Pioneer) as the settlement/escrow company for the transaction. The purchase contract instructed Pioneer to "obtain and deliver ... a Commitment for Title Insurance together with [ ] documents that will remain as exceptions to Buyer's policy of Title Insurance ... including but not limited to ... deed restrictions." The escrow agreement with Pioneer cross-referenced the purchase contract and directed Pioneer to "close this transaction upon fulfillment of any additional escrow/title requirements."

As instructed, Pioneer obtained a commitment for title insurance, which required recording a deed that transferred Turquoise 5, LLC's ("Turquoise") 50% interest in the Property to Elite. Pioneer sent Moldovan the title report and told him that it "[l]ooks like the property is also owned by Turquoise 5, LLC. We'll need to have them sign a deed coming off title....(we'll need proof of the authorized signer as well for Turquoise 5) and then have you both sign a deed to the buyer." Shortly thereafter, Elite agreed to pay Turquoise in exchange for Turquoise's release of its interest.

In February 2022, Elite and Moldovan filed suit against Pioneer, Long, Turquoise, and Capital, among others, alleging that Pioneer refused to close escrow unless Turquoise conveyed title to Elite, and that Pioneer's failure to proceed without Turquoise's consent was negligent or a breach of fiduciary duty. They argued that Pioneer should have investigated the circumstances of the Turquoise deed, communicated with Long and Capital, evaluated Moldovan's claim of adverse possession, and requested that the buyer close escrow despite the deed.

The trial court granted Pioneer's motion for summary judgment and awarded attorneys' fees, finding that Elite and Moldovan failed to allege a breach of any term in the purchase contract or escrow agreement. Elite and Moldovan appealed.

Appeal

On appeal, Elite argued that because the Turquoise deed was "highly questionable, vague, and indefinite," Pioneer should have recognized Elite's sole ownership of the Property through adverse possession and contacted Long to investigate the validity of the Turquoise deed, instead of assuming the deed was valid and requiring Elite to obtain a release. Further, Elite and Moldovan contended that Pioneer committed negligent misrepresentation when it told them the Property "look[ed] like" it was "also owned by Turquoise 5, LLC." Finally, Elite argued that Pioneer blocked the transaction and declared the release the exclusive remedy to cure the defect.

The Arizona Court of Appeals rejected each argument, holding that Pioneer fulfilled its duties as settlement/escrow agent. First, the Court recognized that a settlement/escrow agent's duties to its principals stem from the terms of their contracts. In addition, settlement/escrow agents have implicit duties of strict compliance with the escrow agreement and disclosure of any facts a reasonable agent would perceive as evidence of fraud being committed on the parties. Critically, while settlement/escrow agents must conduct these duties with scrupulous honesty and diligence, agents are only required to disclose facts underlying a suspicion of fraud, and need not investigate or determine its validity.

Here, the Court determined that Pioneer did precisely as required. According to the Court, Pioneer satisfied its duties under the purchase contract and escrow agreement when it obtained an offer for title insurance and notified Elite of the actions necessary to secure the insurance and close on time. Pioneer fulfilled its duty of disclosure by notifying Elite of the Turquoise deed. Finally, regarding negligent misrepresentation, the Court explained that whether or not Pioneer assumed the validity of Turquoise's ownership was "irrelevant to the purpose of that communication, which was to communicate the Turquoise Deed's existence." Regardless of its validity, the Turquoise Deed's recordation "clouded the Property's title" and required Elite to address it. The Court opined that nothing in Pioneer's statements prevented Elite from investigating the deed, pursuing its adverse possession claim, or renegotiating the transaction, actions that Pioneer had no duty to perform. As such, Pioneer committed no breach of duty or negligent misrepresentation and the Court affirmed summary judgment in Pioneer's favor.

Additionally, the Court affirmed the award of attorneys' fees on two grounds. First, under Arizona statutory law, courts may award reasonable attorney fees to a successful party in "any contested action arising out of a contract, express or implied." A.R.S. § 12-341.01(A). Here, the Court found that the claims arose from an escrow agreement between Elite and Pioneer, allowing Pioneer to recover fees from Elite. Moreover, because Moldovan's claims would not exist but for the agreement, Moldovan was also liable for fees, even though he was not a party to the contract. Pioneer also requested fees against Elite under the escrow agreement's indemnification clause. There the Court held that it had no discretion to refuse an award of fees under an express indemnification provision in an escrow agreement and it was required to enforce the terms of the clause. With that, the Court therefore affirmed the award of reasonable attorneys' fees and costs against Elite and Moldovan.

Takeaways

This case clearly defines (1) the responsibilities of title agents when serving as settlement and escrow agents for closings and (2) that when a title defect is identified pre-closing, it is the purchaser of property who must ensure it is resolved before closing or take title subject to the claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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