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Volusia County entered into a contract to purchase real estate from Freeman on November 7, 1991.   The purchase price was $893,200.00  with a $100,000.00  initial deposit to be held in escrow by Freeman’s attorney.  A subsequent second deposit of  $346,600.00 was placed in escrow with Freeman’s attorney on January 23, 1992.Embezzler

The closing on the Contract between Volusia County and Freeman occurred on November 6, 1992 at which time the County paid the balance of the purchase price of  $446,600.00 to Freeman’s attorney’s trust account.  The sellers had a mortgage on the property in the amount of $403,000.00 to be paid off.   The seller’s attorney showed the County a copy of an executed warranty deed and an executed satisfaction of mortgage that he said he would duly record.   The deed was recorded on November 10, 1992, the satisfaction of mortgage was not. It subsequently became apparent that Freeman’s attorney had embezzled  the county’s  purchase money from his trust account.   The mortgage was never paid off.   On December 10, 1992  the seller’s attorney  committed suicide.

On December 22,  the County  notified Freeman that as it had fully performed on the purchase contract the seller must pay off  the mortgage on the Property.  A law suit commenced.

The court noted that Freeman was  in no way complicit with the embezzlement by his attorney.    The court stated that it is a general rule of law that if property or money is embezzled or lost by an escrow holder, the loss, as between seller and buyer, falls on the one who owned the embezzled or lost property or money at the time of the loss. Accordingly, if the escrow holder embezzles the purchase price before the time when, under the terms of the escrow agreement the seller is entitled to receive it, the loss falls on the buyer, since it is still the Buyer’s money. Conversely, if the money is embezzled after the time when the seller has become entitled to the money, the loss falls on the seller, since it is considered the seller’s money. Cradock v. Cooper, 123 So.2d 256 (Fla. 2nd DCA 1960); Lipman v. Noblit, 45 A. 377 (Pa. 1900); Paul v. Kennedy, 102 A.2d 158 (Pa. 1954); Asher v. Herman, 267 N.Y.S. 2d 932 (N.Y. 1966); Pagan v. Spencer, 232 P.2d 323 (Cal. 1st DCA 1951); Hilderbrand v. Beck, 235 P. 301 (Cal. 1925); Kelly v. Steinberg, 306 P.2d 955 (Cal. 2nd DCA 1957); Zaremba v. Konopka, 228 A.2d 91 (N.J. 1957); Stuart v. Clarke, 619 A.2d 1199 (D.C. App. 1993); Matter of Berkley Multi-Units, Inc., 69 B.R. 638 (Bkrtcy. M.D. Fla. 1987); Crum v. City of Los Angeles, 294 P. 430 (Cal. 4th DCA 1931); Todd v. Vestermark, 302 P.2d 347 (Cal. 2nd DCA 1956).

Although it seems harsh to conclude that a loss occasioned by the embezzlement by an escrow agent who is also the attorney for one of the parties should fall on the other party, such a rule is founded on the principle that the escrow agent, even if  he is the attorney for one of the parties, is, when acting as the escrow agent, the agent of both parties until performance of the conditions of the escrow. 28 Am.Jur. 2d Escrow, §11. The attorney for one of the parties to a contract may act as the escrow agent in a real estate transaction by mutual agreement of the parties, if his duties as escrow agent involve no violation of duty to his  client and, in his capacity as escrow agent, he acts as an individual and not as an agent of his client. Thus, in this case by agreement of the parties, the seller’s attorney  was free to act in a dual capacity, being both the attorney for the Sellers and the escrow agent, an agent for both parties. 28 Am.Jur. 2d Escrow, §13.

The court ruled that as the mortgage was never paid off,  the closing was not consummated.  The buyer did not have marketable title and the seller was not entitled to the sales proceeds.  Therefore, ownership of or the right to the money remained with the County and under the general rule of law enunciated in Asher and Cradock the loss must fall on the County.

There is a clear exception to this rule where under the circumstances of the escrow agreement, the depositor would not be entitled to the return of the subject matter under any circumstances, irrespective of the performance of the terms of the agreement

It is clear from the facts of this case that the embezzlement of the money took place sometime between January 17, 1982 and prior to the date of closing, November 6, 1992. It was not until November 6, 1992 that the County finally performed its last act under the contract by depositing the remaining $446,600.00. . Therefore, under the rule of law enunciated in Cradock, Lipman, and Paul the loss in this case must, unfortunately, fall on the County. The fact that there was a “closing” is also of no significance. The transaction “closed” with both Buyer and Sellers believing that all of the money was in the trust account. If either of them had known of the embezzlement, , the “closing” would not have occurred.

In this case, the last of the conditions to be performed by the County was on November 6, 1992. The last condition to be performed by the Freemans — delivery of marketable title to the Property has never been performed. Clearly at the time of the embezzlement of escrowed funds the County was the owner of those funds. Therefore the loss of such funds, as a matter of law, must fall to the County. Although this result is harsh, particularly because the County and its legal staff did nothing wrong and were not negligent, the Court must follow the precedents cited herein. Since Foster, in his capacity as escrow agent, was acting as the agent of both parties and since the Freemans would not have been entitled to the escrowed funds at the time the funds were embezzled irrespective of performance of the Contract, the loss must fall on the County since the funds belonged to the County when they were stolen.

THE COUNTY OF VOLUSIA, v. FREEMAN. 7th Judicial Circuit in and for Volusia County, Civil Division. Case No. 93-30154-CI-CI, Division 32. December 3, 1993. Richard B. Orfinger, Judge. 2 Fla. L. Weekly Supp. 111a

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