California court confirms that escrow agent’s duty is to the lender not the homeowner

In Ruvalcaba v. Ocwen Loan Servicing, No. 15-cv-00744 (S.D. Ca. July 13, 2017), the District Court for the Southern District of California considered the scope of a title company’s duties when acting as a sub-escrow agent and to whom it owes duties arising out of a lender’s closing instructions and concluded that the duties are to the lender, not the homeowner.

The homeowner asserted that the title company acted negligently in a refinance transaction when it failed to verify the payoff amount to be tendered to the original lender within forty-eight hours prior to closing, resulting in a payoff that was $4,000.00 short. As a consequence, the original lender did not release and discharge its deed of trust and the refinancing lender was unable to obtain a valid first lien on the property. Among other claims the homeowner sued the title company for negligence in failing to verify the proper payoff amount due to the refinancing lender within forty-eight hours prior to closing and its subsequent failure to remedy the payoff deficiency.

In this transaction, the title company acted as a sub-escrow company, whose role was limited to the performance of only the most rudimentary of escrow functions – payout of funds. As a general principle, a sub-escrow company’s duties are defined and limited by the terms of the escrow instructions. The instructions tendered to the title company stated that in order to close the loan on behalf of the refinancing lender, it must verify the payoff amount within forty-eight hours of closing. If its failure do so results in an actual loss, it has to reimburse the refinancing lender.

The court held that the title company had no duty to the homeowner under the lender’s escrow instructions because the homeowner was not a party to the instructions, or to the escrow agreement itself. Any duty owed by the title company under the instructions would have been to the refinancing lender, not to the homeowner. Additionally, the homeowner does not constitute a third party beneficiary to the escrow instructions, as nothing in the instructions expressly indicated an intent to benefit her and the homeowner was not a successor or assignee of the refinancing lender.

The purpose of the escrow instructions was to guide the two lending companies through the refinance transaction. In analyzing whether the title company had a duty to the homeowner, a third party, who was not in privity of contract with it, the court examined the following factors: “(1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant’s conduct and the injury suffered; (5) the moral blame attached to the defendant’s conduct; and (6) the policy of preventing future harm…” and readily concluded that no duty should be imposed on the title company.

Ultimately, because the homeowner did not plead facts establishing that the title company owed her a duty of care, the court did not need to address the remaining elements of her negligence claim. While the negligence claim was dismissed the court granted the homeowner leave to amend. The court noted that the homeowner may be able to plead facts sufficient to demonstrate that the title company owed her a duty of care.

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