Opinion
B160348.
10-29-2003
ARCH ESCROW CORPORATION, Cross-complainant and Respondent, v. KTW et al. Cross-defendants and Appellants.
Jeffrey L. Melczer for Cross-defendants and Appellants. McCormick, Siepler & Baker and Thomas Kirchoff for Cross-complainant and Respondent.
INTRODUCTION
Cross-defendants and appellants, KTW, LLC, Lindom Properties, Inc., and Mei Hu Chu appeal from the judgment against them to indemnify cross-complainant and respondent Arch Escrow Corporation in the lawsuit filed in the Los Angeles Superior Court by plaintiff Zhi Cheng Guo. We affirm.
STATEMENT OF FACTS
The Escrow
In 2000, Defendants Vifon Corporation, Walter and Ellen Wong (Sellers) sold their restaurant known as Kim Fung Restaurant to plaintiff, Zhi Cheng Guo (Buyer.) Both Buyer and Seller retained cross-complainant and Respondent, Arch Escrow Corporation (Escrow) to handle the sale. Cross-defendants and appellants, KTW, LLC, Lindom Properties, Inc. and Mei Hu Chu (Landlord) were the management company for the property owner at the time of the sale.
The original escrow instructions for the restaurants sale were dated April 28, 2000. The instructions included a condition that the Buyer obtain a satisfactory lease (new or assigned) from Landlord in connection with the restaurant premises. The escrow instructions called for the assignment of the existing lease for the restaurant from defendant Sellers to plaintiff Buyer and Landlords consent to that assignment. The close of escrow was scheduled for May 22, 2000 but was ultimately extended to May 24, 2000.
On May 4, 2000 Escrow forwarded correspondence to Landlord advising that it was handling the sale of Kim Fung restaurant. Along with this correspondence were three copies of the Assignment of Lease, already signed by Buyer and Sellers. Escrow requested that Landlord sign the Consent to Assignment and return it.
In a Memorandum to Escrow dated May 8, 2000, Landlord acknowledged receipt of the executed Assignment of Lease. Landlord noted, however, that it required additional financial information on the Buyer in order to approve the assignment. Buyer provided Landlord with the financial information.
Ten days later, on May 18, 2000, Landlord informed Escrow that they required the addition of another person, Hung Chiu Wong, on the lease assignment. On May 19, 2000, Landlord sent Escrow a "Demand Statement" which stated that Landlord "will approve the assignment of lease" subject to additional terms and conditions. These conditions included:
1) the addition of Hung Chiu Wong as an additional assignee; 2) the Buyers security deposit of $4,475.42; 3) a $300 assignment fee; and 4) copies of the Buyers and Hung Chiu Wongs drivers licenses and social security cards.
Escrow complied with each condition of the demand statement.
On May 23, 2000, Escrow met with Buyer, Seller and the additional assignee Hung Chui Wong. After the meeting, Escrow forwarded to Landlord an amended Assignment of Lease adding Hung Chui Wong, Buyers security deposit, the $300 assignment fee and copies of the requested drivers licenses and social security cards. In its May 23, 2000 correspondence to Landlord, Escrow advised Landlord that the escrow closing was May 24, 2000. Landlord assured Escrow that it would approve the Assignment of Lease.
On the day escrow closed, Landlords Rick Hsu returned the $300 assignment fee check to Escrow and requested the check be reissued and made payable to Properties Inc. Escrow complied and forwarded a replacement check on May 30, 2000.
On the day escrow was scheduled to close, Buyer asked Escrow about the status of the consent to the lease assignment. At that time, Buyer was told by Escrow that it had received consent to the lease assignment. The sale closed on that date, with Buyer paying $52, 136.07 to Seller.
After escrow closed, Landlord sought to preclude Buyer from selling certain items in the restaurant. When Buyer was unable to negotiate an accommodation with Landlord, he abandoned the property and initiated litigation against Escrow and the Sellers. Plaintiff did not name Landlord as a defendant.
The Trial
Buyer sued Sellers, Vifon Corp., Walter and Ellen Wong, for unjust enrichment based upon the Sellers alleged failure to deliver consent to the lease assignment. Sellers cross-complained against Escrow claiming it was Escrows fault that the sale closed without the consent of Landlord. Lastly, Escrow cross-complained against Landlord for indemnification claiming Escrow was misled by Landlord. In trial, Landlord argues its actions were not grounds for finding it liable to Escrow for indemnification.
After a court trial, the court ruled in favor of Buyer, awarding $52,136.07 against defendant Sellers, Vifon Corporation [Walter and Ellen Wong]. The Court awarded Sellers full indemnification from cross-defendant Escrow even though Escrow did everything that could have been done with respect to the escrow. The Court found the Sellers were entitled to indemnification from Escrow because Escrow "should not have closed the escrow until [Escrow] had the [consent to the lease] assignment." The Court next awarded Escrow full indemnification from Landlord finding that Escrow reasonably relied upon Landlords written and verbal assurances that the Landlord would approve the lease assignment.
Landlord timely appealed the judgment of indemnification against it in this case. There was no appeal of the underlying claim against Sellers or Escrow.
STANDARD OF REVIEW
We review the jurys and trial courts factual findings for sufficiency of the evidence. Under that standard of review, "[w]e resolve all evidentiary conflicts in favor of the prevailing parties, and indulge all reasonable inferences possible to uphold the trial courts [and jurys] findings. [Citation.]" (Jordan v. City of Santa Barbara (1996) 46 Cal.App.4th 1245, 1254-1255.) We independently review legal issues. (Imperial Irrigation Dist. v. State Wat. Resources Control Bd. (1990) 225 Cal.App.3d 548, 553.) We review mixed questions of law and fact using either standard depending on whether the issue is essentially factual or legal. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 800-801.)
APPELLANTS CONTENTION
Appellants contention starts with the undisputed proposition that Escrow failed to strictly comply with the instructions and was therefore liable to Sellers. Appellant contends that "it does not follow that because Escrow relied on Landlord cross-defendants statements, even if that reliance was reasonable, that Escrow is entitled to indemnification from Landlord cross-defendants." The appellant argues that this "Court must hold that as a matter of law it is never reasonable for an escrow to fail to follow its specific instructions based upon the representations of a third party." (Emphasis in original.)
The rationale for this suggested ruling is that "to hold otherwise would encourage escrows to fail to comply with the letter of their instructions and then seek indemnification from others for that failure. Escrows will lose their sanctity. The Court must not allow this to happen."
RESPONDENTS CONTENTION
Respondents contention is that the "restitutionary nature of the [indemnification] doctrine mandates that Landlord beheld liable for its failure to abide by its written and verbal assurances to Escrow and the parties to the escrow. It would be manifestly unjust to allow Landlord to escape liability where the damages occasioned by the parties herein resulted from its negligence."
DISCUSSION
This appeal presents the question whether it is contrary to public policy to allow an escrow holder who negligently fails to comply with the escrow instructions to receive equitable indemnification from a party on whos active misrepresentation the escrow holder relied? Appellant argues that had Escrow complied fully with its instruction, it could not have closed without the Landlords required written consent. We agree, as did the trial court and the judgment for Seller against Escrow acknowledges the correctness of this argument. Appellant next argues correctly that the doctrine of equitable indemnification is not available where it would operate against public policy. (Platt v. Coldwell Banker Residential Real Estate Services (1990) 217 Cal.App.3d 1439, 1444-1445.) The real heart of appellants contention in this appeal arises from the next step in his argument; that being "[a]s a matter of public policy, it is never reasonable for an escrow to fail to follow its specific instructions based upon representations of a third party." Appellant also brings to our attention that there "are no cases cited by Respondent where an escrow which has not complied with the letter of its instructions is entitled to indemnification from a third party."
An escrow holder is the limited agent and fiduciary of all parties to an escrow. (Rianda v. San Benito Title Guar. Co. (1950) 35 Cal.2d 170, 173; Colonial Savings & L. Assn. v. Redwood Empire Title Co., supra, 236 Cal.App.2d 186, 190.) The agency is limited because the escrow agent only represents his principals insofar as he carries out the escrow instructions. (Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App.2d 160, 164.) A breach of this fiduciary duty or the failure to exercise reasonable skill and diligence in carrying out the escrow instructions subjects the escrow holder to liability. (Axley v. Transamerica Title Ins. Co. (1978) 88 Cal.App.3d 1, 9; Romo v. Stewart Title of California (1995) 35 Cal.App.4th 1609, 1618, fn. 9.) Thus, the escrow agent is liable for any loss caused by his failure to strictly comply with his principals instructions or by his disposal of escrow property in violation of those instructions. (Colonial Savings & L. Assn. v. Redwood Empire Title Co. (1965) 236 Cal.App.2d at pp. 190-191; Kirby v. Palos Verdes Escrow Co. (1986) 183 Cal.App.3d 57, 64-65.) For example, in Builders Control Service of No. Cal., Inc. v. North American Title Guar. Co. (1962) 205 Cal.App.2d 68, the holder of funds who received notice that the funds were subject to an assignment was held liable when it disbursed the funds in violation of the assignment.
There is no dispute among the parties in this case that the escrow holder breached its obligation to the parties when it failed to verify that Landlord had executed the written agreement to the assignment prior to the close of escrow. The judgment of the trial court granting the Seller indemnification from Escrow affirmed that conclusion and the parties did not dispute that judgment by appeal.
We reject appellants proposition that an escrow holder can never receive indemnification from a third party. Public policy has dictated that escrow holders owe a fiduciary duty to their parties and that a violation of that duty will result in liability. We were not directed to any case authority, any legislative history or other pronouncement that would preclude the application of equitable indemnity for the benefit of an escrow holder in the appropriate case. The near strict liability that applies to escrow holders who fail to perform in accordance with the escrow instructions seems sufficient on its face to provide the incentive needed to discourage poor performance, negligent or otherwise. It does not follow that the duties and obligations of escrow holders are so strictly defined that an escrow holder cannot receive equitable indemnification as a matter of law. The true and proper question is whether such indemnification is appropriate in the case under inquiry.
The indemnification of Escrow by Landlord in this case was premised on the principle of equitable estoppel. Doctrine of "equitable estoppel," which was originally known as "estoppel in pais," and is also called "estoppel by conduct," provides that whenever a party has, by his own statement or conduct, intentionally and deliberately led another to believe a particular thing true and to act upon such belief, he is not, in any litigation arising out of such statement or conduct, permitted to contradict it.
Equitable estoppel is premised upon the fundamental principle that conduct on the part of one party has induced another party to take such a position that he will be injured if the first party is permitted to repudiate his acts. (Sumrall v. Cypress (1968) 258 Cal.App.2d 565.) The doctrine of estoppel affirms that a person may not lull another person into a false sense of security by conduct causing the latter to forbear to do something which he otherwise would have done and then take advantage of the inaction caused by his own conduct. (Tresway Aero, Inc. v. Superior Court of Los Angeles County (1971) 5 Cal.3d 431; Common Wealth Ins. Systems, Inc. v. Kersten (1974) 40 Cal.App.3d 1014.) It is elementary that equitable estoppel lies only where someone by his words or conduct willfully causes another to believe the existence of a certain state of things and induces him to act on that belief so as to alter his own previous position; the vital principle is that he who by his language or conduct leads another to do what he would not otherwise have done shall not subject such person to loss or injury by disappointing the expectations upon which he acted. (California Sch. Employees Assn. v. Jefferson Elementary Sch. Dist. (1975) 45 Cal.App.3d 683.)
This difference in the character or kind of wrong, which each joint tortfeasor has done to the injured third person, is thus the essential foundation for the shift in liability between them accomplished by means of indemnification. This transfer in liability is not done simply because the two tortfeasors are not in pari delicto (Herrero v. Atkinson (1964) 227 Cal.App.2d 69, 74) or because the negligence or wrong of one is greater than that of the other as in pure comparative negligence. (Li v. Yellow Cab Co. (1975) 13 Cal.3d 804, 829, as modified; American Can Co. v. City & County of San Francisco (1962) 202 Cal.App.2d 520, 525-526.) Equitable indemnity is not a sharing in liability in proportion to fault as pure comparative negligence. It is instead a total and complete transfer of liability that is equitably justified by the difference in character or kind of the wrongs of the two tortfeasors. (See Alisal Sanitary Dist. v. Kennedy (1960) 180 Cal.App.2d 69, 75.)
The trial judge made factual findings that there was a difference in fault between Landlord and Escrow. The substantial evidence in the case supports the trial judges findings that Landlord was the source of intentional misrepresentations and Escrow negligently acted upon those representations. In this situation Escrows liability to Seller was based upon his negligence in failing to verify that the assignment had been signed prior to the close of escrow. Landlords liability, on the other hand, rests upon the fact that Landlord (intentionally) misrepresented to Escrow that the assignment had been agreed to. Further, these misrepresentations were made after Escrow complied with all preconditions to the agreement that Landlord extracted. As between Landlord and Escrow, the liability and negligence of the former would appear to be primary and active while that of the latter would seem to be secondary and passive. (Aerojet General Corp. v. D. Zelinsky & Sons (1967) 249 Cal.App.2d 604, 607; Rest., Restitution (1937) §§ 76, 86, 89.)
The case of Cahill Bros., Inc. v. Clementina Co. (1962) 208 Cal.App.2d 367, 381-382 (Cahill Bros.), relied upon by appellant does not support a different result in this case. In Cahill Bros., Justice Molinari stated:
"The thrust of these cases is that if the person seeking indemnity personally participates in an affirmative act of negligence, or is physically connected with an act or omission by knowledge or acquiescence in it on his part, or fails to perform some duty in connection with the omission which he may have undertaken by virtue of his agreement, he is deprived of the right of indemnity."
In other words, the person seeking indemnity cannot recover if his negligence is active or affirmative as distinguished from negligence that is passive. "The crux of the inquiry [whether a specific right to indemnity exists] is participation in some manner by the person seeking indemnity in the conduct or omission which caused the injury . . . ."
(Id. at p. 381.) Later California cases quoting Cahill Bros. have ignored the fact that this disqualifying personal participation in or physical connection to the wrong done the third person was stated simply as an alternative to the more traditional active versus passive negligence test and instead have added it as a second precondition to the right to equitable indemnity. (See, e.g., Atchison, T. & S.F. Ry. Co. v. Lan Franco (1968) 267 Cal.App.2d 881, 886-887; Standard Oil Co. v. Oil, Chemical, etc., Internat. Union (1972) 23 Cal.App.3d 585, 590-591.) Under either approach, the character of the wrong doing committed by the tortfeasors determines the difference in the result.
The trial court here found that Escrow was entitled to equitable indemnification from Landlord due to Landlords intentional misrepresentations regarding the status of the lease assignment. We find no error in this result.
DISPOSITION
The judgment of the trial court is affirmed. Respondent is awarded costs on appeal.
We concur: RUBIN, J. and BOLAND, J. --------------- Notes: Appellant does not challenge the sufficiency of the evidence to support the trial judges factual findings in this case that "[Escrow] did everything that [it] could have done" with respect to the escrow.