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California Escrow Co. in trouble -When escrow has closed and the seller then changes instructions for distribution of the money, escrow cannot always carry them out.

California Escrow Co. in trouble -When escrow has closed and the seller then changes instructions for distribution of the money, escrow cannot always carry them out.

A million dollar property in Northridge was under contract for sale. The buyer’s side was handled by Peregrino, the buyer’s “attorney in fact.” The title company prepared the estimated HUD-1, showing disbursement of the funds.

The lender disbursed the loan proceeds to the title company, the liens were paid off, and the balance was to be distributed. The settlement agent certified that there were no payoffs not disclosed in the estimated HUD-1.

The deed recorded, but before the balance of the proceeds were paid out, escrow received additional instructions from the seller to pay the buyer’s agent, Peregrino, $53,000. This was done, and reflected in the final HUD-1.

The buyer defaulted after two payments, and settled with the lender who took back the property. The lender then sued the escrow company, because they had not disclosed all the payoffs PRIOR to the closing, so that the lender knew where its money was going. The court agreed with the lender.

The escrow company argued to no avail that it had no duty to further disclose, once escrow closed and the loan had funded. But the court reasoned that the closing instructions from the lender was a valid contract with escrow, requiring that no disbursement contrary to the estimated HUD-1, without disclosure.

What does this really mean, and what about this Peregrino guy? The lender wants to see where the money goes, to ensure itself that there is no kickback, and that the property is not overvalued. A lender in a California real estate sale is held to know the value of a property by the anti-deficiency statutes; here, if the Seller gave Peregrino (who represented the seller) a $53,000 kickback, maybe the property was worth $53k less then the actual sale price. The court pointed out that accepting the escrow company’s argument would create a “legal holiday,” between close of escrow and settlement, that could encourage unlawful conduct, such as the kickback here which was a red flag that the property was overvalued. The escrow company paid the price-apparently the buyer, seller, and Peregrino walked away without a hitch.

Plaza Home Mtg. Inc. V. North American Title Co. (2010) No. D054685, Cal App 4th District.

Law Office of James J. Falcone