Opposition Brief — Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co.

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In The , CHF ICE OF 73: CLERK

Supreme Court of the Gnited States

*

SUMMIT FINANCIAL HOLDINGS, LTD.,

Petitioner,

V.

CONTINENTAL LAWYERS TITLE COMPANY,

o—

Respondent.

On Petition For A Writ Of Certiorari

To The Supreme Court Of California

¢

BRIEF IN OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI

¢

WOLF, RIFKIN & SHAPIRO, LLP

MARC E. ROHATINER

DENISE M. PARGA

Counsel of Record

11400 W. Olympic Blvd.

Los Angeles, CA 90064

(310) 478-4100

Attorneys for Respondent

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

1. Whether the state court’s decision, which cannot

be reconciled with state statutes creating a duty of due

care, violates due process where it impermissibly shifts.

the burden of proof and is not supported by substantial

evidence.

2. Whether a title company, with actual notice of a

recorded assignment of deed of trust, owe a duty of due

care to the beneficiary of record, when the title company

mistakenly pays the wrong party and subsequently recon-

veys the beneficiaries’ recorded deed of trust.

Page

QUESTIONS PRESENTED..................cccscsssccesessceees i

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STATEMENT OF THE CASE................cccssssccesseceeees 1

REASONS FOR DENYING THE PETITION............ 4

CONCLUSION ......:00snxseesssasesepubieieenneeninaeiaanenmadeans 11

ii

| TABLE OF CONTENTS

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TABLE OF AUTHORITIES

Page

STATE CASES

Biakanja v. Irving, 49 Cal.2d 647 (1958).............0000.. 3, 4, 11

Gay v. Winter, 34 Cal. 153 (1867) .0........ eee eeeseeeeneeeees 10

Kentucky Fried Chicken of California, Inc. v.

Superior Court, 14 Cal.4th 814 (1997)... eee 9

Li v. Yellow Cab Co. of California, 13 Cal.3d 804

lac thai canal scih chu bisinsayeusbuebenveesaansreb teens sbnvnsiawws 9

Parsons v. Crown Disposal Co., 15 Cal.4th 456

Dias dotaiai shocuvendsenconsennvbinabesaieianedenic 10, 11

Quelimane Company, Inc. v. Stewart Title Guar-

I Stig BP RL GEE BO (DOGG) 0.000 .senncrcssccessevenscosssvensoscs 11

FEDERAL CASES

Adams v. Robertson, 520 U.S. 83 (1977)...........ccccecceeeeeeee 1,5

Bonner v. Gorman, 213 U.S. 86 (1909)..................scccssecceees 7

Herb v. Pitcairn, 324 U.S. 117 (1945) .................sccccsssscceeees 8

State of Kansas v. Occidental Life Ins. Co., 95 F.2d

935 (10 Cir. 1938), cert. denied, 305 U.S. 603

ia a Eline daeasineieibnndbendbvaseevovekeenians 7,8

Webb v. Webb, 451 U.S. 493 (1981).............. eee eeeeeeeeees 6, 7

Yee v. City of Escondido, 503 U.S. 519 (1992)... 1,5

Boer V. FIOrris, 401 U.S. BT CIGT1).......0...scscs..s.scneceencnee 7

STATE STATUTES

Ts scnacawusboseasdnvicsssaeteabecsousevess 10

I TEE CME ME OD... oansuctsevevsssvacnsvesesossnnevsseosoneses 10

iv

TABLE OF AUTHORITIES -— Continued

Page

California Civil Code § 1714(a)............... ccc ceeceeeceee ees 4,9, 10

CaiBnnwnin Ciwid Comin © BGT onic cnvecessccscccescccesececsvscecsniccscase 1

FEDERAL STATUTES

28 U.S.C. § 1257........ ss osavseilaeilabatalaa Commicaecaidsdeadaeteatabdcuies 5

FEDERAL RULES

U.S. Supreme Court Rules, Rule 14(g)(i) ......... ee 5

1

JURISDICTION

As discussed in Part I of Reasons for Denying the

Petition, Petitioner failed to raise its current federal claim

in the California Supreme Court and that court did not

address the issue. This Court has held that it will not

consider a petitioner’s federal claim unless it was pre-

sented to or addressed by the state court whose decision is

being presented for review. See, e.g., Adams v. Robertson,

520 U.S. 83, 85 (1997); Yee v. City of Escondido, 503 U.S.

519, 533 (1992).

oe

7

STATEMENT OF THE CASE

In August 1994, John A. Furnish (“Furnish”) was the

owner of residential property in Costa Mesa, California

(the “Property”). Furnish obtained a personal loan in the

amount of $425,000.00 from Talbert Financial, Inc.

(“Talbert”), evidenced by a promissory note (the “Note”)

and secured by a second deed of trust recorded against the

Property (the “Deed of Trust”). Concurrently with the

recordation of the Deed of Trust, an assignment of the

Note and Deed of Trust in favor of Petitioner was also

recorded (“Assignment”).

The Note expressly provided that, absent written

notice to the contrary, all payments were to be made

directly to Talbert. After the loan was made, Talbert sent

Furnish a payment book listing Talbert’s address for

payment. Neither Talbert nor Petitioner provided Furnish

notice of the assignment as required by California Civil

Code § 2937. Nor did Talbert or Petitioner provide the

notice required by the Note to pay anyone else other than

Talbert.

2

In September 1995, Furnish refinanced the Property

and paid off the loan. In the refinance transaction, Beverly

Hills Escrow acted as the escrow holder. Lawyers Title

Insurance Corporation, through its agent, Respondent,

issued a title insurance policy to the new lender, Dundrel

Securities, Inc. Respondent also acted as the sub-escrow

holder in the transaction. Neither Talbert nor Petitioner

were parties to the escrow.

The prelimirsary report reflected the Assignment.

However, no party to the escrow ever instructed Beverly

Hills Escrow or Respondent to send the payoff of the loan

to Petitioner instead of to Talbert. Talbert was the only

party to submit a beneficiary demand for payment to

Beverly Hills Escrow. Beverly Hills Escrow instructed

Respondent to pay Talbert’s demand, which Respondent

did. Talbert did not remit the funds to Petitioner.

Petitioner sued Respondent in the state court alleging

negligence on the part of Respondent. Specifically, Peti-

tioner asserted that since Respondent was aware of the

Assignment from Talbert to Petitioner, Respondent was

negligent in paying Talbert as opposed to Petitioner.

While that action was pending, Furnish filed for

bankruptcy protection. The Bankruptcy Court entered an

order to permit Furnish to sell the Property free of all

liens. Petitioner filed a claim to the net proceeds. On

October 2, 1997, the Bankruptcy Court entered its order

disallowing Petitioner’s claim because notice of assign-

ment of the Note was not given to Furnish as required by

California law and payment to Talbert extinguished the

Note. Petitioner’s motion for reconsideration was denied.

Petitioner never appealed the order.

3

Thereafter, the state court matter was tried as a bench

trial. The trial court concluded that Respondent owed a duty

of care to Petitioner and was negligent in paying Talbert

instead of Petitioner. However, the trial court attributed fifty

percent fault to Petitioner and awarded Petitioner fifty

percent of its alleged damages. J udgment was entered in

favor of Petitioner in the amount of $258,830.27.

Respondent appealed the trial court’s judgment to the

California Court of Appeal, arguing in part that Petitioner

was a stranger to the escrow and, therefore, Respondent

did not owe Petitioner a duty of care. The Court of Appeal

reversed the trial court’s judgment, holding that Petitioner

did not owe a duty of care to Respondent under Biakanja

uv. Irving, 49 Cal.2d 647, 650 (1958).

Petitioner petitioned the California Supreme Court for

review, which was granted. Petitioner framed the issue as

follows:

Does a title company, with actual notice of a re-

corded Assignment of Deed of Trust, owe a duty

of due care to the record owner of the trust deed

when, acting as an escrow holder, it pays the

wrong party during the payoff of the underlying

promissory note.

[Petition for Review to the California Supreme Court,

appended hereto at App. 1.]

The California Supreme Court held that Respondent

did not owe a duty of due care to Petitioner in that Peti-

tioner was not a party to the escrow and Respondent had

never been instructed by a party to the escrow to pay

Petitioner.

4 ,

REASONS FOR DENYING THE PETITION

Petitioner contends that under California Civil Code

§ 1714(a), Respondent is responsible for all injury caused

by its negligent conduct and that the California Supreme

Court has no authority to determine a person’s duty-of due

care. Under California law, a six-factor test is applied to

determine a partys duty of care to a third party like

Petitioner. Biakanja v. Irving, 49 Cal.2d 647, 650 (1958).

In its opinion in the case at bar, the California Supreme

Court, relying on long established precedent, held that

“the threshold question in an action for negligence is

whether the defendant owed the plaintiff a duty to use

care.” Petitioner argues that the California Supreme Court

misinterpreted California Civil Code § 1714(a), should not

have considered the threshold issue of duty to use care and

should not have applied the six-factor test to conclude that

Respondent owed no duty of care to Petitioner. Petitioner

now argues that its due process rights were violated by the

California Supreme Court’s interpretation of California

law.

For the following reasons, this claim is not properly

presented in this case and in any event, is entirely without

merit:

1. Petitioner failed to raise any federal issue in

the California Supreme Court. The California

Supreme Court, in turn, never discussed any fed-

eral constitutional issue. Because the California

Supreme Court did not have a fair opportunity to

address the federal question that is sought to be

presented here, this Court should not consider

Petitioner’s federal claim.

2. There is no federal question presented. The

California Supreme Court decision is premised

5

solely on its interpretation of California law.

Where parties have been fully heard, even an er-

roneous decision of the state court does not de-

prive the unsuccessful party of his property

without due process of law.

3. The California Supreme Court decision is not.

erroneous. Under long-standing judicial princi-

ples, that court has the right to determine

whether a duty of care exists in a particular case.

I

THE QUESTION PRESENTED IS NOT PROPERLY

BEFORE THE COURT BECAUSE IT WAS NEI-

THER PRESENTED NOR ADDRESSED IN THE

CALIFORNIA SUPREME COURT

The constitutional issue presented by Petitioner is not

properly before the Court. With “very rare exceptions,”

this Court has adhered to the rule in reviewing state court

judgments under 28 U.S.C. § 1257 that a federal claim will

not be considered unless it was either addressed by, or

properly presented to, the state court that rendered the

decision that is the subject of review. Adams v. Robertson,

520 U.S. 83, 86 (1997); Yee v. Escondido, 503 U.S. 519, 533

(1992). As is evidenced from the California Supreme

Court’s decision appended to the Petition for Writ of

Certiorari, the California Supreme Court did not address

any federal issues. As stated in Adams, “[w]hen the

highest state court is silent on a federal question before

us, we assume that the issue was not properly presented.”

Id. 520 U.S. at 86. Petitioner bears the burden of defeating

this assumption.

Rule 14(g)(i) of the U.S. Supreme Court rules requires

Petitioner to identify in the Petition when and how the

6

federal questions sought to be reviewed were raised and

the state court’s disposition of the federal question “so as

to show that the federal question was timely and properly

raised and that this Court has jurisdiction to review the

judgment on a writ of certiorari.” Petitioner has failed to

make that showing.

Nor were any federal issues presented to the Califor-

nia Supreme Court. Petitioner presented the following

issue to the California Supreme Court: “Does a title

company, with actual notice of a recorded Assignment of

Deed of Trust, owe a duty of due care to the record owner

of the trust deed when, acting as an escrow holder, it pays

the wrong party during the payoff of the underlying

promissory note.” [Petition for Review to the California

Supreme Court, appended hereto at 1-A.] Petitioner’s

basis for review before the California Supreme Court was

the presence of a conflict between the Second and Fourth

Appellate Districts regarding the existence of a duty of due

care by an escrow holder to third parties, the analysis of

which was solely premised on state law.

This Court stated in Webb v. Webb, 451 U.S. 493, 499

(1981):

Principles of comity in our federal system require

that the state courts be afforded the opportunity

to perform their duty, which includes responding

to attacks on state authority based on the federal

law, or, if the litigation is wholly private, constru-

ing and applying the applicable federal require-

ments.

This Court further stated in Webh, that this principle of

comity requires “a proper respect for state functions, ... and

a continuance of the belief that the National Government

7

will fare best if the States and their institutions are left

free to perform their separate functions in their separate

ways.” Id. 451 U.S. at 500, citing Younger v. Harris, 401

U.S. 37, 44 (1971).

Since Petitioner failed to raise its federal claim in the

state proceedings and the California Supreme Court failed

to rule on a federal issue, this Court is without jurisdiction

in this case. Even if the rule is prudential rather than

jurisdictional, prudence dictates that the Petition should

be denied.

II

THE CALIFORNIA STATE COURT DECISION DID

NOT VIOLATE THE DUE PROCESS CLAUSE OF

THE FIFTH AMENDMENT BECAUSE PETI-

TIONER HAD NOTICE AND AN OPPORTUNITY

TO BE HEARD

Petitioner contends that the California Supreme Court's

interpretation of a California statute violates the Due

Process Clause of the Fifth Amendment. It is well estab-

lished that “when parties have been fully heard in the

regular course of judicial proceedings, an erroneous

decision of the state court does not deprive the unsuccess-

ful party of his property without due process of law... .”

Bonner v. Gorman, 213 U.S. 86, 90 (1909). The Tenth

Circuit Court of Appeal elaborated on this principle in

State of Kansas v. Occidental Life Ins. Co., 95 F.2d 935

(10th Cir. 1938), cert. denied, 305 U.S. 603 (1938):

The basic requisites of due process when applied to

judicial proceedings are that, having due regard to

the form and nature of the proceeding and the

character of the rights which may be affected, the

8

order, judgment, or decree be entered by a court

clothed with jurisdiction of the subject matter

and that the party or parties bound by it have

notice and be afforded an opportunity to present

every available defense. An order, judgment, or

decree entered in such circumstances does not

violate the due process clause even though it be

erroneous in fact or law, or both.

Id. 95 F.2d at 937.

It has been a long standing principle of this Court that

it will not review judgments of state courts that rest on

state grounds. The policy underlying this principle was

succinctly stated in Herb v. Pitcairn, 324 U.S. 117, 125-26

(1945):

The reason is so obvious that it has rarely upon

thought to warrant statement. It is found in the

partitioning of power between the state and fed-

eral judicial systems and in the limitations of our

own jurisdiction. Our only power over state

judgments is to correct them to the extent that

they incorrectly adjudge federal rights.

Petitioner assails the California Supreme Court decision

because it contends that the California Supreme Court did

not properly interpret a state statute. Significantly, Peti-

tioner does not contend that it was deprived of notice and the

opportunity to be heard or that the judicial process was

somehow infected with procedural irregularities. Petitioner’s

sole complaint rests on its dissatisfaction with the California

Supreme Court’s application of California law. Under these

circumstances, no constitutional issue is presented.

9

Ill

THE CALIFORNIA SUPREME COURT DECISION

IS NOT ERRONEOUS BECAUSE IT FOLLOWED

LONG ESTABLISHED JUDICIAL PRINCIPLES IN

REACHING ITS DECISION

California Civil Code § 1714(a) provides:

Every one is responsible, not only for the result of

his willful acts, but also for an injury occasioned to

another by his want of ordinary care or skill in the

management of his property or person, except so

far as the latter has, willfully or by want of ordi-

nary care, brought the injury upon himself.

Petitioner contends that under California Civil Code

§ 1714(a), Respondent is responsible for all injury caused by

its negligent conduct ess of whether or not Respon-

dent owed a duty of care to Petitioner under the circum-

stances.

Petitioner argues that the California Supreme Court

misinterpreted California Civil Code § 1714(a) and should

not have applied the six-factor test to conclude that

Respondent owed no duty of care to Petitioner. Petitioner’s

argument is not supported by long established principles

of negligence. Similar arguments that Section 1714(a)

establishes a duty that cannot be judicially interpreted

have failed. See, e.g., Kentucky Fried Chicken of Califor-

nia, Inc. v. Superior Court, 14 Cal.4th 814, 828 (1997).

The California Supreme Court, in Li v. Yellow Cab Co.

of California, 13 Cal.3d 804, 814 (1975), stated the intent

of the Legislature in enacting Section 1714 in 1872:

[I]t was not the intention of the Legislature in

enacting section 1714 of the Civil Code, as well

as other sections of that code declarative of the

10

common law, to insulate the matters therein ex-

pressed from further judicial development; rather

it was the intention of the Legislature to an-

nounce and formulate existing common law prin-

ciples and definitions for purposes of orderly and

concise presentation and with a distinct view to-

ward continuing judicial evolution.

Even before the enactment of the California Civil

Code in 1872, the California Supreme Court characterized

negligence as “the failure to exercise that degree of care

which may reasonably be expected from a person in the

given individual’s situation.” Gay v. Winter, 34 Cal. 153

(1867). In fact, the Legislature, in enacting the California

Civil Code in 1872 (which included section 1714), ex-

pressly provided that its provisions are to be liberally

construed with a view to “effect its objects and promote

justice.” California Civil Code §4. The Legislature also

intended that the Civil Code, insofar as its provisions are

substantially the same as existing common or statutory

law, must be construed as continuations thereof and not as

new enactments. California Civil Code § 5.

The California Supreme Court recognizes that under

Section 1714 each person has a duty to use ordinary care

and is liable for injuries caused by his failure to exercise

reasonable care in the circumstances. Parsons v. Crown

Disposal Co., 15 Cal.4th 456, 472 (1997). However, the

Court stated “[wJhether a given case falls within an

exception to this general rule, or whether a duty of care

exists in a given circumstance, is a question of law to be

determined on a case-by-case basis. [citations omitted.]”

The Court further noted that duty “is not an immutable

fact of nature but only an expression of the sum total of

those considerations of policy which lead the law to say

11

that the particular plaintiff is entitled to protection.

[citations omitted, emphasis in original.]” Id. 15 Cal.4th at

472.

With respect to duties to strangers, the California

Supreme Court has stated that “[rJecognition of a duty to

manage business affairs so as to prevent purely economic

loss to third parties in their financial transactions is the

exception, not the rule, in negligence law.” Quelimane

Company, Inc. v. Stewart Title Guaranty Co., 19 Cal.4th

26, 57 (1998). Under California law, a six-factor test is

applied to determine a party’s duty of care to a third party

like Petitioner. Biakanja v. Irving, 49 Cal.2d 647, 650

(1958). The California Supreme Court applied the six-

factor test and determined that Respondent did not owe a

duty of care to Petitioner.

In short, the California Supreme Court properly

analyzed whether or not Respondent owed a duty of care

to Petitioner under the circumstances.

4

Vv

CONCLUSION

Respondent respectfully requests the Court to deny

the Petition for a Writ of Certiorari.

Respectfully submitted,

WOLF, RIFKIN & SHAPIRO, LLP

MARC E. ROHATINER

DENISE M. PARGA

Attorneys for Respondent,

Continental Lawyers

Title Company

App. 1

IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA

SUMMIT FINANCIAL No.

HOLDINGS, LTD.

Plaintiff and Respondent,

VS.

CONTINENTAL LAWYERS

TITLE,

Defendant and Appellant.

Fourth Appellate District No. G023428

Orange County Superior Court No. 767157

The Honorable Raymond J. Ikola, Judge

PETITION FOR REVIEW

GRANDON & ASSOCIATES

Robert M. Grandon,

State Bar No. 164011

242 S. Orange Ave.,

Suite 202

Brea, CA 92821

(714) 257-9503

Attorneys for Plaintiff

and Respondent

TABLE OF CONTENTS

PETITION FOR REVIEW 1

ISSUE PRESENTED 2

ARGUMENT 3

App. 2

APPELLANT’S LIABILITY FOR NEGLI-

GENCE SHOULD BE AFFIRMED SINCE

THE TRIAL COURT PROPERLY FOUND

APPELLANT OWED A DUTY OF DUE

CARE TO THE RECORDED OWNER OF

THE TRUST DEED IN ACCORDANCE

WITH KIRBY V. PALOS VERDE ESCROW

COMPANY, INC.

THIS CASE RAISES SIGNIFICANT PUBLIC

POLICY ISSUES 8

CONCLUSION 11

TABLE OF AUTHORITIES

CASES PAGE(S)

Kirby v. Palos Verdes Escow [sic] Co..............ccccecceeeeeeees 1

(1986) 183 CA3d 57

SRE 5 i sees ican cacvancecdivrins Seknassmeedabenencnds 5

(1968) 68 Cal. 2d 728

I i CI ii iain cides ons ciiasegvabaciontiainsetnncnaes

(1968) 69 C2d 1085

fe ELC SIRI EE DW NEM ORL Fe ROEM OE Mine mR ASE 6

(1958) 49 Cal.2d 647, 320 P.2d 16

Weernnt Oe FEF CRONE, TI ovis icccvcnvacsccieccndscaguassstvanss 7

(1975) 15 Cal.3d 40, 46

J’Atre Corporation v. Gregory ..........ccesccosssceneccsscccnecceescs 8

(1979) 24 Cal. 3d 799

App. 3

STATUTES

Civil Code

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RULES OF COURT

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BIE TUF sivistsunxanketainguaniageensiusearmitataphundionspinoeeemiceouoteee oo 1

ISSUE PRESENTED

Does a title company, with actual notice of a recorded

Assignment of Deed of Trust, owe a duty of due care to the

record owner of the trust deed when, acting as an escrow

holder, it pays the wrong party during the payoff of the

underlying promissory note.

ARGUMENT

Appellant’s LIABILITY FOR NEGLIGENCE

SHOULD BE AFFIRMED SINCE THE TRIAL

COURT PROPERLY FOUND APPELLANT

OWED A DUTY OF DUE CARE TO THE RE-

CORDED OWNER OF THE TRUST DEED IN

ACCORDANCE WITH KIRBY V. PALOS

VERDE ESCROW COMPANY, INC.’

Appellant was found liable for negligence by the trial

court for paying off the wrong party despite actual knowledge

* A complete factual and procedural background is set forth in the

Court of Appeals decision, which is attached as Appendix A.

App. 4

of the recorded assignment of the promissory note and deed of

trust in favor of Respondent — the exact encumbrance the

payoff was intended to clear. Appellant was also held

liable for its violation of Civil Code §2941 for improperly

reconveying, and thereby destroying, Respondent’s Trust

Deed/security interest.

The Fourth Appellate District reversed the trial court,

finding that, despite Appellant's actual knowledge of

Respondent’s interest in the subject property (including

the admitted purpose of the entire payoff transaction) and

Appellant’s subsequent destruction of Respondent’s

interest, Appellant owed no duty of due care to Respon-

dent.

In determining whether Appellant owed a duty of due

care the trial court looked to the case of Kirby v. Palos

Verdes Escrow Co., (1986) 183 CA3d 57 for guidance.’

The Kirby court found the escrow agent liable when it

had notice of an assignment and paid the assignor instead of

the recorded beneficiary, just like the case at bar. The factual

similarity to the instant case is significant and compelling.

The Kirby court, as cited by the Fourth Appellate

District, discussed (quoting from Kirby) the exact dilemma

at issue herein:

“Receipt of notice of the assignment was equiva-

lent to receipt of new escrow instructions regard-

ing the party to be paid. [citation omitted] Such

* The trial court also noted a lack of published appellate opinions

for guidance, noting that Kirby was the only case on point. The court of

Appeals also noted Kirby was the central authority at issue in this case.

App. 5

“new” instructions conflicted with the Pierces

verbal instructions to pay Universal. This con-

flict should have alerted defendant to a potential

problem in paying Universal! rather than the

[Plaintiffs! and vice versa. As an escrow

holder faced with conflicting instructions,

[defendant] had the duty to delay payment

of escrow funds until such time as the

proper payee was identified.”

Summit, at 10, Appendix A (emphasis added)

The Kirby court instructed that the escrow holder

should resolve the inconsistencies before acting, or it acts

at its peril. This is a prudent approach approved by the

trial court but soundly rejected by the Fourth Appellate

District.

Respondent maintains that the Fourth Appellate

District incorrectly reversed the trial courts judgment in

the instant case by rejecting the reasoning of Kirby and

ignoring the effects of the recording statutes.

The Fourth Appellate District in this matter went to

great lengths to distinguish Kirby by sidestepping the

principals of negligence relied upon by both the trial and

Kirby courts, and looking to the law of agency as its basis

for reversal.

The Fourth Appellate District ruled that Appellant

was the agent of Furnish (the debtor on the promissory

note and deed of trust) and that since Appellant followed

the instructions given it, there could be no liability, espe-

cially to a non-party to the escrow.

The problem with the Fourth Appellate Districts

reasoning on ‘:#s point is that it ignores the admitted

App. 6

knowledge of Appellant. Had Appellant merely followed

orders without any knowledge of Respondent’s interest the

Fourth Appellate District might have been correct. How-

ever, from knowledge comes foreseeability of harm. In

recognizing the importance of the foreseeability of harm in

creating a duty of due care this court has held:

Since the chief element in determining

whether defendant owes a duty or an obli-

gation to plaintiff is the foreseeability of

the risk, that factor will be of prime con-

cern in every case. Dillon v. Legg, (1968) 68

Cal. 2d 728 at 740; [emphasis added]

Since Appellant had actual notice of Respondent’s

recorded interest, it was certainly foreseeable that if due

care was not used (as indeed it was not) damage would be

suffered by Respondent (as both trial and appellate courts

found to have been the case).

The law of negligence is clear on the issue of assump-

tion of duty: when one undertakes to act, he must do so

with due care. C.C. §1714(a); Rowland v. Christian, (1968)

69 C2d 108; 112. Simply stated: Appellant knew Respon-

dent was the holder/beneficiary of record and had a right

to receive the payoff funds. Appellant, (acting as escrow

agent) had those very funds, and when Appellant acted to

disburse those funds it had a duty to use due care so as

not to damage Respondent’s right to receive its payment.

Appellant could have used the Kirby approach and re-

solved the discrepancy, but it chose haste over prudence’,

* Even Appellants own expert testified that Appellant should have

initiated some communication to Respondent, the beneficiary of record,

(Continued on following page)

App. 7

a decision which proximately caused damage to Respon-

dent.

Another problem with the Fourth Appellate Districts

opinion in Summit is that the court ruled that mere

foreseeability of harm is not enough, by itself, to create a

duty of due care. The court then went on to opine that——

since the Furnish/Dundrel transaction did not involve

Respondent, there was less of a reason to find the exis-

tence of a legal duty of care. Unfortunately, the Court of

Appeals misunderstood the transaction at issue: The

whole point of the Furnish/Dundrel loan wes to

payoff Respondent’s encumbrance! Thus, Respondent

was a third party beneficiary to the Furnish/Dundrel

agreement. By omitting this key fact the Fourth Appellate

District misapplied this courts ruling in Biakanja v. Irving

(1958) 49 Cal.2d 647, 320 P.2d 16.

In Biakanja this court stated (at pg. 650):

“The determination whether in a specific case the

defendant will be held liable to a third person not

in privity is a matter of policy and involves the

balancing of several factors ... ” {emphasis

added].

Since, as demonstrated above, Respondent was

directly involved in the Furnish/Dundrel transaction as a

third party beneficiary the Fourth Appellate District

misapplied the factors enumerated in Biakanja.

before paying off a third party with no record interest. Unfortunately

Appellant did not.

App. 8

Since Biankja, this court has provided further guid-

ance on the issue of determining whether to impose a duty

of due care:

“Rather than traditional notions of duty, this

court has focused on foreseeability as the

key component necessary to establish li-

ability: “While the question whether one owes a

duty to another must be decided on a case-by-

case basis, every case is governed by the rule of

general application that all persons are required

to use ordinary care to prevent others from being

injured as the result of their conduct... . [Fore-

seeability] of the risk of a primary consid-

eration in establishing the element of duty.”

(Weirum v. RKO General, Inc. (1975) 15 Cal.3d

40, 46 [emphasis added]

The misapplication of Biakanja by the Fourth Appel-

late District is critical since it is the basis for finding no

duty of due care. In Summit the Fourth Appellate District

held:

“We hold that CLTC did not owe a duty of care to

Summit under Biakanja v. Irving, Supra, 49

Cal.2d 647. We also conclude Kirby was incor-

rectly decided and should not be followed” Sum-

mit at pg. 23

This small paragraph from the Summit opinion

clearly demonstrates the need for Supreme Court Review:

1) a clear conflict of published opinions and 2) a mistake in

law by the court of appeals.

App. 9

THIS CASE RAISES SIGNIFICANT

PUBLIC POLICY ISSUES

Civil Code section 1714(a) provides that every person

is responsible, not only for the results of his or her willful

acts, but also for an injury occasioned to another by his or

her want of ordinary care or skill in the management of

his property or person. By its terms, this section imposes

the obligation to exercise ordinary care and skill to avoid

injury to others. This court has approved and relied upon

the legislatures express statement of sin policy in C.C.

§1714(a) stating:

In addition, this holding is consistent with the

Legislature’s declaration of the basic principle of

tort liability, embodied in Civil Code section

1714, that every person is responsible for injuries

caused by his or her lack of ordinary care. (See

Rowland v. Christian, supra, 69 Cal.2d at p.

119.) That section does not distinguish among in-

juries to one’s person, one’s property or one’s fi-

nancial interests. Damages for loss of profits or

earnings are recoverable where they result from

an injury to one’s person or property caused by

another’s negligence. Recovery for injury to one’s

economic interests, where it is the foreseeable re-

sult of another’s want of ordinary care, should

not be foreclosed simply because it is the only in-

jury that occurs. J’Aire Corporation, v. Gregory,

(1979) 24 Cal. 3d 799; 157 Cal. Rptr. 407

As this court has acknowledged, §1714(a) codifies a

basic tenant [sic] of an ordered society and the public

policy of California. This statute was the basis for the

Kirby court’s decision as well as the trial courts decision.

In this case Appellant knew of Respondent’s interest

and despite this knowledge, went ahead and paid the

an EIS cca OPO

————

App. 10

wrong party and destroyed Respondent’s security interest.

It is submitted that Appellant acted in a manner substan-

tially likely to create harm: exactly the type of immoral

malfeasance the law of negligence was intended to rem-

edy.

The Court of Appeals sanctioned this conduct, aliow-

ing contractual machinations to replace objective reason-

ableness as the standard to judge a miscreant’s actions.

This case could be used as a basis for a new trend in fraud,

leaving the public and victims without remedy against

those that fail to act as a reasonable and prudent person,

but who follow their principal’s instructions (except in the

Second Appellate District which would, under Kirby, hold

these persons liable).

The Fourth Appellate District’s opinion not only

lessens the basic duty to act reasonably, not a good thing

in an ordered society, but at the same time renders the

recording act and statutes meaningless. If a title company

with actual knowledge of a beneficiary with a recorded

interest in real property can pay the wrong party, with no

interest, with impunity (per the ruling in Summit), then

how can courts impose liability on anyone.

The floodgates of fraud have opened, this court must

close them.

Respondent submits that the present conflict between

the Second and Fourth Appellate Districts regarding the

existence of a duty of due care by an escrow holder to

known third parties is necessary to provide guidance to

trial courts, attorneys, escrow holders and property own-

ers.

App. 11

Review and reversal are also necessary in order to

maintain the viability of the recording statutes, for if

actual notice of a recorded interest is not sufficient to

protect a property holder, what is?

CONCLUSION

For the foregoing reasons, Respondent respectfully

requests that this court grant review.

Dated: May 1, 2001

Respectfully Submitted,

/s/ Robert M. Grandon

Robert M. Grandon

Grandon & Associations

Attorneys for Respondent

App. 12

APPENDIX “A”

CERTIFIED FOR PUBLICATION

COURT OF APPEAL,

FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

SUMMIT FINANCIAL D036868

HOLDINGS, LTD., (Super. Ct. No. 767157)

Plaintiff and Respondent, (Filed Mar. 27, 2001)

Vv.

CONTINENTAL LAWYERS

TITLE COMPANY,

Defendant and Appellant.

APPEAL from a judgment of the Superior Court of

Orange County, Raymond J. Ikola, Judge. Reversed.

Wolf, Rifkin & Shapiro and Marc Eliot Rohatiner for

Defendant and Appellant.

Doumani & Grandon, Robert M. Grandon; Callahan

& Blaine and Jim P. Mahacek for Plaintiff and Respon-

dent.

In 1994 Dr. Furnish, the maker of a promissory note

secured by a deed of trust on real property in Corona

Del Mar (referred to as the note, the deed of rust and

the property, respectively), refinanced his secured

obligations by obtaining a new loan from a new lender, a

portion of the proceeds of which was to pay the note in

full. Appellant Continental Lawyers Title Company

(CLTC) provided escrow services for the refinance

App. 13

transaction and was instructed by the parties to the

escrow to pay the note by issuing a check to Talbert

Financial (Talbert). CLTC followed that instruction on

closing of the refinance transaction.

In this lawsuit, respondent Summit Financial

Holdings, Ltd. (Summit) sued CLTC for negligence.

Summit alleged that in the refinance transaction CLTC

should have paid the note by issuing a check to Summit

rather than Talbert because CLTC knew Talbert had

assigned its rights in the note and deed of trust to

Summit. The trail court, relying on Kirby v. Palos

Verdes Escrow Company, Inc. (1986) 183 Cal.App.3d 57

(Kirby), concluded CLTC as escrow holder owed a duty

of care to third parties, including Summit, who were not

parties to the escrow; and breached that duty because

CLTC, with knowledge of the assignment from Talbert

to Summit, paid Talbert rather than Summit. The trial

court awarded judgment to Summit against CLTC for

negligence, and this appeal by CLTC followed.

Although CLTC raises numerous claims on appeal,

the dispositive issue is whether Kirby correctly held that

a stranger to the escrow is owed a duty of care by an

escrow holder. We conclude an escrow holder owes a

duty of care only to the parties to and participants in

the escrow, and Kirby incorrectly held an escrow holder

liable to a stranger to the escrow under a negligence

theory. Because CLTC owed no duty of care to Summit,

we reverse the judgment.

App. 14

I

FACTUAL AND PROCEDURAL BACKGROUND

A. The Loan

In August 1994 Furnish borrowed $425,000 from

Talbert, and signed the note payable to Talbert. The note

was secured by the deed of trust on the property. Both the

note and the payment book given to Furnish required him

to pay the monthly installments on the note to Talbert at

Talbert’s Orange, California address.’

At the same time that the deed of trust was recorded,

a document entitled “Assignment of Deed of Trust” was

recorded that assigned the beneficial interest under the

note and deed of trust frorn Talbert to Summit. However,

neither Talbert nor Summit gave Furnish notice of the

assignment, as required by Civil Code 2937.”

B. The Refinance

In September 1995 Furnish obtained a new loan from

Dundrel Securities (Dundrel) that was used in part to pay

the note. Furnish and Dundrel employed Beverly Hills

Escrow (BHE) to handle the refinancing transaction, and

CLTC acted as an escrow holder in connection with issuing

the title insurance for the new deed of trust securing the

* Under the terms of the note, the first six monthly installments

were impounded. Furnish paid three other monthly installments to

Talbert in June, July and August 1995. Other than the impounded

amounts and these three payments, Furnish made no payments on the

note.

* All statutory references are to the Civil Code unless otherwise

specified.

App. 15

new note payable to Dundrel. Summit was not a party to

the BHE escrow or the CLTC escrow.

CLTC prepared a preliminary title report noting (at

item 6) that the property was encumbered by a deed of

trust securing the Talbert note, and that an assignment of

the note and deed of trust from Talbert to Summit had

been recorded. BHE thereafter obtained a note payoff

demand from Talbert specifying the outstanding balance

to be paid to Talbert to fully pay the note. On September 8,

1995, BHE forwarded Talbert’s payoff demand to CLTC

and identified it as the “Demand for item 6 on the Pre-

liminary Title Report.”

On close of the refinancing transaction, CLTC paid

Talbert from funds deposited with CLTC by Dundrel in

accordance with the payoff demand and BHE’s instruc-

tions. Summit did not receive these funds from Talbert.

C. The Legal Proceedings

In February 1997 Furnish filed for protection under

Chapter 11 of the United States Bankruptcy Code, and in

April 1997 the bankruptcy court entered an order for sale

of the property free and clear of ali liens. The order di-

rected that the proceeds of the sale be used to pay the

amounts owed the first trust deed holder Dundrel and

amounts owed to another secured creditor, and that any

purported liens on the property held by other parties,

including Summit, would attach to the remaining proceeds

of the sale.

In July 1997 Furnish moved in the bankruptcy court

for an order disallowing Summit’s lien claim on the re-

maining proceeds from the sale of the property. Furnish

App. 16

argued the amount he paid Talbert in 1995 in the refi-

nance transaction fully extinguished Furnish’s obligations

under the note. He established that he never received

notice of the assignment of the deed of trust as required by

section 2937, subdivision (d), and under section 2937,

subdivision (f), a debtor's payment to the prior note holder

before receiving notice of the assignment pro tanto extin-

guishes the underlying obligation. The payment: to Talbert

therefore fully extinguished the note. Summit opposed the

motion, arguing that (1) the recorded assignment of the

note and deed of trust was adequate to provide construc-

tive notice of the transfer from Talbert to Summit, and (2)

in any event Furnish received a notice that complied with

section 2937, subdivision (d). The bankruptcy court con-

cluded Furnish was not given the notice required by

section 2937, subdivision (d). And the payment to Talbert

extinguished the note under section 2937, subdivision (f).

It therefore disallowed Summit’s lien claim on the remain-

ing proceeds for the sale of the property.

In this proceeding, Summit sought recovery from

CLTC of the note payment CLTC made to Talbert, con-

tending that CLTC was negligent by making the note

payment to Talbert rather than to Summit. The trial court

concluded Kirby was controlling and that CLTC owed a

duty of care to Summit. The trial court further found that

CLTC was negligent, breached its duty of care to Summit,

and CLTC’s negligence was a proximate cause of Summit’s

App. 17

injury. Accordingly, the trial court entered judgment for

damages in favor of Summit against CLTC*

II

ANALYSIS

A. Standard of Review

Summit argues that whether CLTC owed a duty of

care to Summit involves the resolution of disputed facts,

and we must therefore defer to the trial court’s ruling if it

is supported by substantial evidence. However, Summit

cites no authority supporting that argument, and the

courts have concluded that whether a duty of care exists is

a question of law for the court; our review of the trial

court’s ruling is therefore de novo. (Koepke v. Loo (1993) 18

Cal.App.4th 1444, 1450-1451; Delgado v. American Multi-

Cinema, Inc. (1999) 72 Cal.App.4th 1403, 1406-1407.)

B. Kirby Erred by Imposing on Escrow Holders a Duty

of Care to Strangers to the Escrow

An escrow holder is the dual agent of, and owes duties

to, the parties to the escrow. The primary duty owed by an

escrow holder is to strictly and faithfully perform the

instructions given to it by the parties to the escrow.

(Vournas v. Fidelity Nat. Tit. Ins. Co. (1999) 73 Cal.App.4th

668, 674.) An escrow holder owes ancillary duties to the

parties to the escrow, including a duty “to communicate to

his principal knowledge acquired in the course of his

* The trial court reduced the damage award sought by Summit

because it concluded Summit was contributorily negligent.

App. 18

agency with respect to material facts [that] might affect

the principal’s decision as to a pending transaction,

particularly where, as here, 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.) If the escrow holder breaches this

obligation of disclosure, or does not exercise reasonable

skill and diligence in carrying out the escrow instructions,

the escrow holder can be liable to its principal for any

resulting injury.(Colonial Savings & L. Assn. v. Redwood

Empire Title Co. (1965) 236 Cal. Ap.2d 186, 190-191.) How-

ever, an escrow holder ordinarily incurs no liability for

failing to do something not required by the escrow instruc-

tions or for a loss caused by following the escrow instruc-

tions. (Axley v. Transamerica Title Ins. Co. (1978) 88

Cal.App.3d 1, 9; accord, Romo v. Stewart Title of Califor-

nia (1995) 34 Cal.App.4th 1609, 1618 Fn. 9 [obligation of

escrow holder limited to faithful compliance with instruc-

tions from the principal[.)

Kirby appears to be the only case that holds an escrow

holder can be liable to strangers to the escrow for injuries

allegedly caused by the escrow holder following its princi-

pals’ instructions.‘ We conclude that the case law on which

Kirby relied for its legal analysis does not support the

conclusion it reached, and we disagree with Kirby’s hold-

ing that an escrow holder who follows its principals’

* Kirby appears to be the first California case to permit a stranger

to the escrow to recover against the escrow holder for negligence, and

this aspect of Kirby has not been followed by any reported California

App. 19

instructions can be liable to strangers to the escrow under

a negligence theory.’

In Kirby, the plaintiffs loaned funds to Universal! and

received an unsecured promissory note from Universal.

Universal loaned funds to the Pierces and received a not

secured by a deed of trust; Universal assigned the Pierces’

note and deed of trust to plaintiffs as security for Univer-

sal’s note to plaintiffs and the assignment was recorded.

The Pierces opened an escrow with defendant escrow

holder to refinance the note they had given to Universal.

Universal submitted a pay-off demand to the escrow

holder and the Pierces authorized the escrow holder to pay

Universal’s demand. The escrow holder paid Universal

although it was aware Universal had assigned the Pierces’

note to the plaintiffs. Plaintiffs later sued the escrow

holder, alleging that because it was aware of the recorded

assignment of the Pierces’ note from Universal to plaintiffs

it performed its escrow duties negligently by paying

* The cases in which escrow holders have been held liable to third

parties did not involve third parties who were strangers to the escrow.

For example, in Warington Lbr. Co. v. Fullerton Mtge. & Escrow Co.

(1963) 222 Cal.App.2d 706, the escrow holder entered into an agree-

ment with the third party to pay funds to the third party upon receiving

the money, and the escrow holder's liability rested on the court's

conclusion that the escrow holder “was no longer merely a disbursing

agent but was a principal under the agreement.” (Jd. at p. 710.)

Similarly, in Feinberg v. Intrastate Escrow Corp. (1963) 216 Cal_App.2d

80, the plaintiff-creditor agreed to withhold levying on property in

return for the agreement by both the property-owner debtor and the

escrow holder to pay the plaintiff on funding of a new loan on the

property. The court held the escrow holder was estopped to deny

liability to the plaintiff because the escrow holder actively participated

in inducing the plaintiff to detrimentally rely on the promise of

payment. (Jd. at pp.82-85.)

App. 20

Universal rather than plaintiffs. (Kirby, supra, 183

Cal.App.3d at pp. 60-61.) Kirby held the defendant escrow

holder liable to the plaintiffs on a negligence theory.

Kirby’s analysis began with a review of established

principles governing an escrow holder’s role and duties.

Kirby recognized an escrow holder is a limited agent of the

parties to the escrow, representing these principals only

insofar as it carries out the escrow instructions, and that a

breach of an escrow holder’s duty to use reasonable skill

and diligence in implementing the escrow instructions

exposes it to liability for any resulting injury suffered by

its principals. (/d. at pp. 64-65.) However, after citing nu-

merous cases that describe the duties owed by an escrow

holder to its principal, Kirby relied on Builders’ Control

Service of No. Cal., Inc. v. North American Title Guar. Co.

(1962) 205 Cal.App.2d 68 (Builders’ Control Service) to

hold that an escrow holder owes the same obligations to

nonparties to the escrow. The Kirby court noted that the

escrow holder had constructive knowledge of the assign-

ment of the Pierces’ note from one nonparty (Universal) to

another nonparty (the plaintiffs), and then stated:

* In the earlier portion of its opinion, Kirby recognized the Pierces

were entitled to pay Universal, even though Universal had assigned the

Pierces’ promissory note to the plaintiffs, because an obligor is entitled

to pay the original obligee until the obligor receives notification of the

assignment, and merely recording the assignment does not suffice as

notification that required payment be made to the assignee. (Kirby,

supra, 183 Cal.App.3d at pp. 62-63.) That aspect of Kirby is consistent

with current law (see §2937, subds. (d), (f)), and validates the bank-

ruptcy court’s ruling that the payment to Talbert exonerated Furnish’s

liability under the note.

App. 21

“Receipt of notice of the assignment was equiva-

lent to the receipt of new escrow instructions re-

garding the party to be paid. [Citing Builders’

Control Service.) Such ‘new’ instructions con-

flicted with the Pierce’s verbal instructions to

pay Universal. This conflict should have alerted

defendant to a potential problem in paying Uni-

versal rather than the [plaintiffs], and vice versa.

As the escrow holder faced with conflicting in-

structions, [defendant] had the duty to delay

payment of escrow funds until such time as the

proper payee was identified. [Citation.]

“Notwithstanding the fact that payment to Uni-

versal would have been proper under the provi-

sions of the [Commercial Code], that act

represented a violation of defendant’s overriding

duty as an escrow agent .. . [Defendant] may be

held accountable for the loss it occasioned by neg-

ligently paying escrow funds to the wrong party.”

(Kirby, supra, 183 Cal.App.3d at pp. 65-66.)

Kirby’s holding rested on its reading of Builders’

Control Service that (1) knowledge of an escrow holder

that a nonparty distributee of funds from the escrow has

made an assignment of the right to receive those funds is

deemed an amendment to the escrow instructions by the

parties to the escrow, and (2) an escrow holder who follows

the parties’ instructions rather than the “deemed

amended” instructions is exposed to liability even though

its principals suffer no injury from the fact the escrow

holder followed its principals’ instructions.

Kirby’s holding is flawed because Builders’ Control

Service does not stand for either legal proposition. In

Builders’ Control Service, a lender agreed to fund the

owner-builder’s construction of homes and deposited the

App. 22

loan proceeds with the plaintiff, a fund control agent;

plaintiff was to use those funds to pay the construction

costs. The parties also agreed that the owner-builder

would assign the proceeds from the sale of the newly

constructed homes to the plaintiff fund control agent as an

additional source to pay the construction costs. The defen-

dant acted as escrow holder for the proceeds of the home

sales knowing the owner builder had assigned the sales

proceeds to the plaintiff fund control agent. (Builders’

Control Service, supra, 205 Cal.App.2d at pp. 70-71.) The

issue in Builders’ Control Service was whether the escrow

holder, knowing its principal had assigned the sales

proceeds held by it, was obligated to disburse those pro-

ceeds to the owner’s assignee, the fund control agent.

Although the Builders’ Control Service court con-

cluded the escrow holder was obligated to disburse the

funds to the owner-builder’s assignee, the principles it

applied have no application to whether an escrow holder

owes duties to a nonparty based on an assignment made

by a stranger to the escrow to a stranger to the escrow.

The Builders’ Control Service court first noted that when a

home sale escrow closed, the escrow holder held the sales

proceeds as agent for the owner-builder principal. The

Builders’ Control Service court then cited section 2344 for

the rule that, when a principal has assigned funds to a

third party, an agent for that principal who comes into

possession of those funds must surrender them to the

third party. (Jd. at p. 73.) Thus, Builders’ Control Service

stands for the proposition only that an agent’s obligation

to disburse proceeds held by the agent for its principal is

App. 23

coextensive with the principal’s obligation to disburse

those proceeds to the assignee.’

In our view, Kirby misread Builders’ Control Service.

Builders’ Control Service holds only that an agent’s know]-

edge of an assignment by its principal obligates the agent

to honor the principal’s assignment; Kirby transformed

that obligation, which is founded in the law of agency, into

a duty owed to honor contracts made by creditors of the

principal even though the escrow holder had no agency

relationship with the creditor. Moreover, the agent’s

obligation to the third party under Builders’ Control

Service is coextensive with the principal’s obligation to the

third party; Kirby transmuted the agent’s obligation into

one that is independent of the principal’s obligation

” The core holding of Builders’ Control Service is confirmed by an

understanding of the purpose and scope of the duties created by section

2344. As explained by the court in Garrison v. Edward Brown & Sons

(1944) 25 Cal.2d 473, 482-483, the obligation owed by an agent under

section 2344 as to funds held by the agent for its principal is limited to

what the claimant would otherwise be entitled to recover from the

agent’s principal; the “purpose of section 2344 .. . is to avoid circuitry of

action rather than to enlarge the scope of the recovery to which the

claimant is entitled against the principal.”

* Kirby’s citation to Builders’ Control Service as holding that

receipt of notice of the assignment was equivalent to the receipt of new

escrow instructions regarding the party to be paid demonstrates Kirby’s

misreading of Builders’ Control Service. In the context of Builders’

Control Service, the agent’s receipt of notice of the assignment could be

deemed the equivalent of a new instruction regarding the party to be

paid because the assignment was made by the owner-builder, a party to

the escrow entitled to give instructions to the escrow holder. However,

Kirby transmuted that agency concept into a holding that transactions

by strangers to an escrow can supersede and amend the instructions

given by the parties to the escrow. Nothing in Builders’ Control Service

supports that remarkable conclusion.

App. 24

because it held the agent liable on the note even though

the principal was exonerated from further liability on the

note by the payment to Universal.

An escrow holder is an agent of the parties to the

escrow and is responsible for following the escrow instruc-

tions of its principals. Kirby is the only case of which we

are aware that holds an escrow holder who follows its

principal’s instructions, and whose action caused no injury

to the principals, can nevertheless be liable to strangers to

the escrow for negligence. Because Kirby’s holding was

based on a misconstruction of existing law, we are con-

vinced it was erroneously decided and should not be

perpetuated. We therefore conclude that the trial court’s

judgment, to the extent it rests on Kirby, was erroneous

and must be reversed.

C. An Escrow Holder Owes No General Duty of

Care to a Nonparty Stranger to the Escrow

Summit alternatively argues the judgment was proper

because all persons are liable for injuries caused by their

negligent conduct. (§ 1714, subd. (a).) However, whether a

duty of care exists is the foundational legal issue, and

“(recognition of a duty to manage business affairs so as to

prevent purely economic loss to third parties in their

financial transactions is the exception, not the rule, in

negligence law.” (Quelimane Co. v. Stewart Title Guaranty

Co. (1998) 19 Cal.4th 26, 57-58 [declining to find duty].) In

Biakanja v. Irving (1958) 49 Cal.2d 647, the court stated

at page 650 that: “The determination whether in a specific

case the defendant will be held liable to a third person not

in privity is a matter of policy and involves the balancing

of various factors, among which are [1] the extent to which

the transaction was intended to affect the plaintiff, [2] the

App. 25

forseeability of harm to him, [3] the degree of certainty

that the plaintiff suffered injury, [4] the cioseness 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.” It is

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 instruc-

tions. (Axley v. Transamerica Title Ins. Co., supra, 88

Cal.App.3d at p. 9.) Application of the Biakanja factors

convince us we should not depart from this general rule.

First, the transaction CLTC undertook was not

intended to affect or benefit Summit. CLTC was engaged

by Dundrel and Furnish to assist them in closing a loan

transaction between Dundrel and Furnish, and any impact

that transaction may have had on Summit was collateral

to the primary purpose of the escrow. Second, although the

certainty of injury element is satisfied because the evi-

dence supports the conclusion Summit did not receive the

funds paid to Talbert, the forseeability of harm element

does not support a duty because there is no suggestion

CLTC could have foreseen that Talbert would default on

its obligation to disburse the funds to Summit as Talbert

had agreed to do under the assignment.”

* In arguing for imposition of a duty, Summit emphasizes that

CLTC knew Summit was the assignee of the note and deed of trust and

knew or should have foreseen that payment to Talbert would injure

Summit. However, foreseeability of financial injury to third persons is

not alone sufficient to impose liability for negligent conduct. (Quelimane

Co. v. Stewart Title Guaranty Co., supra, 19 Cal.4th 26, 57-58.)

App. 26

The next two factors also militate against imposing a

duty on CLTC. We do not assign morai blame to the act of

paying Taibert rather than Summit where that act ful-

filled CLTC’s duty as an escrow holder to perform the

instructions given to it by the parties to the escrow (Vour-

nas v. Fidelity Nat. Tit. Ins. Co., supra, 73 Cal.App.4th at

p. 674), and was an act authorized by statute (§ 2937,

subds. (d), (f)). Furthermore, there is not a sufficiently

close connection between the payment of Talbert and the

injury suffered by Summit to warrant imposition of a duty

of care. Although the payment to Talbert extinguished

Furnish’s obligation under the note, Summit’s injury was

caused by its own noncompliance with its statutory obliga-

tions (§ 2937, subd. (d)) and because Talbert breached its

contractual obligation to Summit.

Finally, we decline to impose the duty advocated by

Summit for reasons analogous to those articulated in

Sanchez v. Lindsey Morden Claims Service, Inc. (1999) 72

Cal.App.4th 249. In Sanchez, an independent insurance

adjuster was hired by the insurer to assist it in discharg-

ing the insurer’s obligation to pay its insured for a loss

covered by the policy. The insured sued the claims ad-

juster, alleging the adjuster negligently handled the claim

and caused economic injury to the insured. The Sanchez

court, applying the Biakanja v. Irving factors as refined by

Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, explained

at pages 253-255 the reasons it would not impose on the

adjuster a duty of care to the insured. The Sanchez court

noted the adjuster is subject to the control of its principals,

and it is the principal that ultimately decides whether to

pay the insured, and thus any injury to the insured is

primarily attributable to the principal’s actions. Moreover,

the insurer may by contract limit its exposure to the

App. 27

insured but an adjuster does not have that contractual

ability; imposing a duty to the insured could create the

anomaly that the adjuster is exposed to greater liability

than the principal. Sanchez also noted that an adjuster

owes a duty of loyalty to its principal; imposing a duty

toward the insured would be poor policy because the

conflicting obligations would interfere with the adjuster’s

faithful performance of its duty toward the principal.

(Accord, Gay v. Broder (1980) 109 Cal.App.3d 66, 74-75.)

Finally, the goal of deterring negligent conduct would not

be significantly advanced by imposing a duty because

adjusters are already deterred by the fact that the princi-

pal who hired them can seek indemnity from the adjuster

for negligent conduct.

The Sanchez court buttressed its conclusion not to

impose on the adjuster a duty of care to the insured with

the observation that:

“Our conclusion is also consistent with the gen-

eral law of agency. An adjuster is an agent hired

by a principal, the insurer, to investigate a claim.

Agents are not liable to third parties for eco-

nomic loss: ‘An agent’s mere failure to perform a

duty owed to his principal may render him liable

to third persons who rely on his undertaking

where there is physical damage to person or

property. [Citation.] But where the effect is

merely to cause economic loss, the law does not

yet recognize liability to a third person, except

where a duty is created by statute.’ [Citation.]”

(Sanchez v. Lindsey Morden Claims Services,

Inc., supra, 72 Cal.App.4th at p. 255, italics omit-

ted.)

Similar considerations support our conclusion in this

case, First, an escrow holder is subject to the control of its

App. 28

principals, and it is the principal that issues the instruc-

tions to be followed by the escrow holder. Second, imposing

a duty here would have the anomalous effect that the

original debtor is exonerated from liability on his debt by

his agent’s payment to Talbert but the agent making that

payment for its principal becomes liable on that debt.

Third, imposing a duty would be poor policy because it

would subject the escrow holder to conflicting obligations

and interfere with its primary duty to follow its principal’s

instructions. Finally, the goal of deterring negligent

conduct would not be significantly advanced by imposing a

duty because escrow holders are already deterred by the

fact that the principal who hired them can seek indemnity

from the escrow holder to the extent the principal was

injured by the escrow holder’s negligence.

C. Conclusion

We hold that CLTC did not owe a duty of care to

Summit under Biakanja v. Irving, supra, 49 Cal.2d 647.

We also conclude Kirby was incorrectly decided and should

not be followed. Accordingly, there is no basis for permit-

ting Summit to recovery from CLTC.

DISPOSITION

The judgment is reversed. Appellant shall recover

costs on appeal. CERTIFIED FOR PUBLICATION

/s/ McDonald

McDONALD, J.

App. 29

WE CONCUR:

/s/ Nares

NARES, Acting P.J.

/s/ O’Rourke, J.

O’ROURKE, J. z

PROOF OF SERVICE

I am employed in the County of Orange, State of

California. I am over the age of 18 and not a party to the

within action; my business address is 242 S. Orange Ave,

Suite 202 Brea, CA 92821.

On the date ascribed below, I served the foregoing

document described as:

PETITION FOR REVIEW

on the interested parties who have appeared in this action

by placing a true copy thereof enclosed in a sealed enve-

lope addressed as follows:

SEE ATTACHED SERVICE LIST

(X) I deposited such envelope in the mail at Brea, Cali-

fornia. The envelope was mailed with postage thereon

fully prepaid.

( ) I am readily familiar with the firm’s practice of

collection and processing correspondence for mailing.

Under that practice it would be deposited with U.S.

postage service on same day with postage thereon fully

prepaid at Brea, California, in the ordinary course of

business. I am aware that on motion of the party served,

App. 30

service is presumed invalid of postal cancellation date or

postage meter date is more than one day after date of

deposit for mailing in affidavit.

( ) I delivered such envelope by hand-delivery to the

offices of the addressee (s).

(X) I declare under penalty of perjury that the foregoing

is true and correct.

Executed on May 4, 2001, at Brea, California.

/s/ Robert M. Grandon

Declarant

SERVICE LIST

Marc Rohatiner

11400 W. Olympic Blvd.

Ninth Floor

Los Angeles, CA 90064

Clerk

Orange County Superior Court

Judge Raymond J. Ikola

700 Civic Center Dr.

Santa Ana, CA 92701

Clerk HAND DELIVERY

California Supreme Court ORIG. PLUS 13 COPIES

300 S. Spring St.

Los Angeles, CA 90013

Clerk

Fourth District Court of appeals

925 N. Spurgeon St.

Santa Ana, CA 92701-3724

Seige te.