Opinion
December 3, 1959 —
January 5, 1960.
APPEAL from a judgment of the municipal court of Outagamie county: OSCAR J. SCHMIEGE, Judge. Affirmed.
For the appellants there was a brief by Lauer Peterson of Clintonville, attorneys, and Alfred S. Bradford of Appleton of counsel, and oral argument by Mr. Bradford and Mr. Ralph M. Lauer.
For the respondents there was a brief by Van Hoof Van Hoof of Little Chute, and oral argument by Gerard H. Van Hoof.
Action instituted by Kenneth H. Van Dyke and wife against Harold H. Lauer and wife for specific performance of a contract for the sale of real estate by the defendants, as vendors, to the plaintiffs, as purchasers.
The defendants owned a residence property which they wished to sell and entered into a listing contract with one M. E. Davidson, a licensed real-estate broker. Davidson interested the plaintiffs in the purchase of such property. Under date of September 7, 1957, the plaintiffs signed a written offer to purchase the property which was drafted by Davidson on a printed form. Such offer provided for a total purchase price of $11,500, and the terms of payment were "$3,000 down and the balance in cash to seller[s] at the closing of the deal," which $3,000 down payment the plaintiffs paid to Davidson. Such offer also contained the following paragraph:
"Purchaser has handed to M. E. Davidson, broker, the sum of $3,000 with instructions that same be deposited in a trust account in an insured bank, to be kept there until the deal is consummated, as an earnest-money payment upon the purchase price of said property. If this offer is not accepted, the earnest-money payment shall be returned to the purchaser. If purchaser defaults, such payment is forfeited and shall be applied first toward the commission of the broker."
The offer also required the defendant vendors to provide the purchasers with an abstract of title showing merchantable title, and provided for the parties meeting in Davidson's office for the purpose of executing and delivering the necessary legal documents to consummate the sale. Possession was to be delivered on or before October 5, 1957. It was further provided, "This offer may be accepted not later than the 9 day of Sept., 1957, by delivering to the purchaser[s] the acceptance form provided below duly signed by the owner[s]."
The defendant vendors accepted the offer on September 7, 1957, by subscribing the printed acceptance form at the bottom of the offer to purchase. Possession was delivered by the defendants to the plaintiffs on October 2, 1957. Before anything more could be done to close the sale, Davidson absconded with the $3,000. The defendants then refused to proceed further unless the plaintiffs paid the entire purchase price without any credit for the $3,000. The plaintiffs insisted on being credited with the $3,000 and instituted the instant action.
The action being one in equity, it was tried to the court without a jury. The trial court determined that the $3,000 loss should be borne by the defendants. Judgment was entered April 10, 1959, for specific performance of the contract as prayed for in the plaintiffs' complaint, under which judgment the plaintiffs were credited with the $3,000 down payment. From such judgment the defendants have appealed.
The sole issue on this appeal is whether the loss of the $3,000 embezzled by Davidson, the escrow holder, should fall upon the plaintiff purchasers or upon the defendant vendors.
The determining factor is not that Davidson was originally the agent of the vendors at the time the escrow arrangement was entered into, but rather who had title to the $3,000 at the time the escrow holder absconded with it. The controlling principle of law is well stated in the annotation entitled, "Who must bear loss resulting from defaults or peculations of escrow holder," 15 A.L.R.2d 870, 871, as follows:
"Speaking generally, it has become well settled that a loss occasioned by the default, peculation, or similar wrong of an escrow holder, must, as between the parties to the escrow transaction, be borne by the one who, at the time of its occurrence, was lawfully entitled to the right or property affected. "
If a purchaser deposits part or all of the amount of the purchase price in escrow with the broker of the vendor with instructions not to deliver the same to the vendor until certain title documents are received by the broker, with no agreement that the deposited money is to be immediately credited upon the purchase price, and the broker in the meantime absconds with the money, the loss falls upon the purchaser. Hildebrand v. Beck (1925), 196 Cal. 141, 236 P. 301, 39 A.L.R. 1076, and Lieb v. Webster (1948), 30 Wn.2d 43, 190 P.2d 701. In such a situation there is no intention manifested that title to the money should pass to the vendor until the title documents are received by the escrow holder. The defendant vendors in the instant case contend that the escrow agreement should be so construed as to provide that title to the deposited $3,000 was not to pass to themselves as vendors until the transaction was consummated on the day of closing at the broker's office. On the other hand, it is the position of the plaintiff purchasers that the condition for passing title to the $3,000 occurred when the vendors accepted the offer to purchase, and that the words, "as an earnest-money payment upon the purchase price of said property," evince an intention that such $3,000 then became the property of the vendors.
We are of the opinion that the cases of Boles v. Johnson (1951), 205 Okla. 356, 237 P.2d 620, and Summers v. Hedenberg (1916), 198 Ill. App. 460, support the position of the plaintiff purchasers.
In Boles v. Johnson, supra, the plaintiff vendee sought to hold the defendant vendor liable in damages because of the latter's breach in failing to convey certain real estate that the plaintiff had contracted to buy. The damages sought included $125 earnest money paid in escrow to an escrow holder under a written offer to purchase, which offer to purchase the defendant had accepted in writing. The defendant's defense with respect to the $125 was that it had never come into his possession. The offer to purchase recited the payment of the $125 as "earnest money on this purchase" and contained this further significant sentence, "If this offer is not accepted, or if good title is not delivered within a reasonable time, the earnest money shall be returned to me [the purchaser]." The Oklahoma court held that the defendant vendor was liable to the plaintiff for such $125 and stated ( 205 Okla. 359, 237 P.2d 623):
"The contract to purchase recited that the earnest-money payment was payment upon the purchase price. Subsequent to execution of the contract the defendant acknowledged acceptance of such offer and signed the agreement as owner of the property. Being owner of the property, it necessarily follows that any payment which was part of the total purchase price was for the seller's benefit."
The action in Summers v. Hedenberg, supra, was instituted by the vendor against the purchaser to have declared void a certain contract of sale of realty entered into between the parties; to have a declaration of forfeiture of the contract made by the plaintiff decreed valid; and that a $1,000 deposit made by the defendant in escrow with the Chicago Title Trust Company be forfeited and such title company ordered to pay such sum to the plaintiff. The contract of sale specified a purchase price of $29,500, of which $1,000 was to be paid down as earnest money, two further payments of $4,000 and $5,000 were to be paid at stated intervals, and the balance was to be paid in the form of notes secured by a deed of trust. The contract further provided that the contract, the $1,000 earnest money, the subsequently to-be-paid $4,000 and $5,000 payments, and the notes and trust deed, were to be held in escrow by the title company until a good and sufficient warranty deed of the vendor had been received and recorded, and the title company had issued its report that the purchaser had good title. The purchaser paid the $1,000 earnest money to the title company but failed to make any further payments, and the vendor declared a forfeiture. The court in its opinion stated ( 198 Ill. App. 466):
"The contract shows that the purchaser parted with the earnest money for the benefit of the seller; that is, he paid it as part of the purchase money. . . . It makes no difference whether the earnest money was delivered to the seller or by agreement is held by a third party. In case of defects in title which are not cured, at purchaser's option the contract becomes void and said earnest money should be returned. If the purchaser fails to perform, then at seller's option the earnest money should be retained by the vendor as liquidated damages.
"By the terms of the contract the earnest money was Summers' money from the moment it was paid over as part of the purchase money, and so remained unless there was a defect in the title which was neither cured nor excused."
It is our considered judgment that, if the plaintiff purchasers in the instant case had paid the $3,000 to Davidson and the latter had absconded with it prior to the defendant vendor's accepting the offer to purchase, the loss would have been upon the plaintiffs. However, as here, where the embezzlement occurred after the defendants had accepted the offer, the loss must be borne by them. This is because the $3,000 then constituted "an earnest-money payment upon the purchase price." As soon as it became such earnest-money payment upon the purchase price, title became vested in the defendants, subject to be divested by a condition subsequent if, at the time set for consummation, the defendants defaulted in performance under circumstances which entitled the plaintiffs to recover the earnest money.
By the Court. — Judgment affirmed.
MARTIN, C.J., took no part.