Judge: Sandy N. Leal, Case: 2022-01275296, Date: 2023-08-24 Tentative Ruling

Demurrer to Cross-Complaint

Cross-Defendant All Funding Escrow, Inc.’s (Escrow Company) Demurrer to the Cross-Complaint of Coldwell Banker Residential Brokerage Company dba Coldwell Banker Realty (Broker) is SUSTAINED with leave to amend.

Escrow Company demurs to the fourth cause of action for negligence and the fifth cause of action for declaratory relief in Broker’s Cross-Complaint.

Fourth Cause of Action – Negligence

The elements of negligence are (1) the defendant owed the plaintiff a legal duty, (2) the defendant breached the duty, and (3) the breach proximately or legally caused (4) the plaintiff's damages or injuries. (Thomas v. Stenberg (2012) 206 Cal.App.4th 654, 662.)

Here, Escrow Company contends Broker hasn’t adequately alleged the element of duty regarding the transaction involving sale of real property in Irvine.

The Cross-Complaint alleges Broker assisted Xiaoying Zhu in selling the subject property, and that Zhu contacted Escrow Company for assistance with obtaining a power of attorney for her husband, Plaintiff Shuchen Zhang. (Cross-Complaint, ¶¶ 14, 18.) Broker alleges, “Cross-Defendants were negligent in verifying ‘Shuchen Zhang’s’ identity,” and “circumvented California laws regarding in-person notarization and instead opted for an out-of-state notarization method that did not adequately verify ‘Shuchen Zhang’s’ identity.” (Id. at ¶¶ 61, 62.) Broker seeks indemnification for its costs in defending this action and any potential judgment. (Id. at ¶ 65.) The alleged escrow instructions include Exhibit 4, paragraph 19, as well as Exhibit 5 to the Cross-Complaint, which describe Escrow Company’s duties regarding transfer of title from sellers Shuchen Zhang and Xiaoying Zhu to buyer Tao Zhou. Broker does not identify specific provisions in the escrow agreement regarding Escrow Company to verify the identity of sellers.

Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705, 711 (Summit) (cleaned up), holds:

“In delimiting the scope of an escrow holder's fiduciary duties, then, we start from the principle that an escrow holder must comply strictly with the instructions of the parties. On the other hand, an escrow holder has no general duty to police the affairs of its depositors; rather, an escrow holder's obligations are limited to faithful compliance with the depositors’ instructions. Absent clear evidence of fraud, an escrow holder's obligations are limited to compliance with the parties' instructions. Here, even though the escrow holder, CLTC, was aware of the assignment from Talbert to Summit, there is no evidence CLTC was aware of any collusion or fraud in the fund disbursement that would have adversely affected any party to the escrow.”

In Summit, supra, 27 Cal.4th 715-716, the California Supreme Court held the escrow holder did not owe a tort duty of care to a nonparty to the escrow based on assignment to a nonparty.

Broker contends, “Cross-Defendant had a written instruction to deliver title from the sellers, Shuchen Zhang and Xiaoying Zhu, to buyer Tao Zhu, free from encumbrances. Cross-Defendant did not adequately comply with the written instructions of the parties, and instead, delivered title from someone who was not even authorized to deliver title, the man impersonating ‘Shuchen Zhang.’” (Opposition, 6:24-28.)

Broker cites Amen v. Merced County Title Co. (1962) 58 Cal.2d 528, 532 for the proposition that, “if the escrow holder acts negligently, ‘it would ordinarily be liable for any loss occasioned by its breach of duty.’” However, Amen discussed an action for breach of contract based on the escrow instructions. Broker does not cite case law holding an escrow holder may be liable to a nonparty under facts similar to those alleged in the Cross-Complaint.  

Broker has not shown that, as a nonparty to the escrow agreement, it has a viable claim against Escrow Company under Summit based on failure to verify the identity of a seller.

Fifth Cause of Action – Declaratory Relief

Escrow Company contends Broker fails to allege an actual controversy between the parties based on the absence of a legal duty between Escrow Company and Broker. For the reasons set out above, Broker has failed to adequately allege a breach of duty supporting its claim for declaratory relief.

Therefore, the demurrer is sustained with 20 days’ leave to amend.