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Int'l Capital Corp. v. Moyer: Broker Liable for Failing to Follow Escrow Agreement

An Illinois appellate court has considered whether a broker acting as an escrow agent properly released escrowed funds to seller when purchase contract failed to close.

International Capital Corporation ("Buyer") entered into an agreement to purchase an apartment building owned by Park I. Butch and R. Adam Sakurauskas (collectively, "Sellers"). Scott Harris ("Broker"), a broker with Marcus and Millichap Real Estate Investment Brokerage Company of Chicago ("Brokerage"), had shown the Buyer the property and agreed to serve as escrowee of the Buyer's earnest money. The original earnest money amount was $25,000; however, the Buyer obtained a number of extensions prior to the closing date, each time increasing the earnest money until the earnest money totaled $40,000. The final extension was granted in December 1998.

In April 1999, the transaction still had not closed. At that time, the Brokerage sent the Buyer a letter advising the Buyer that the Sellers had requested release of the escrowed funds and the Brokerage sought the Buyer's consent to release the funds to the Sellers. The Buyer responded to the letter, stating it was continuing to work on obtaining financing for the transaction and that the Brokerage should not release the escrowed funds.

In May 1999, the Buyer learned from the Broker that the escrowed funds had been released to the Sellers. The Buyer had never received a notice from any party stating it was in default of the purchase agreement and the Broker had never received a release from the Buyer before releasing the funds. The Buyer sued the Broker for breach of fiduciary duty in his role as escrowee, and the trial court ruled that the Broker had breached his fiduciary duty by releasing the escrowed funds to the Sellers and awarded the Buyer $40,000 plus interest. The Broker appealed.

The Appellate Court of Illinois, First Division, partially affirmed the trial court. The court first considered the breach of fiduciary duty allegations. Escrowees owe a fiduciary duty to both the party making the deposit as well as to the party for whose benefit the deposit is made. The actions of the escrowee are governed by the terms of the escrow agreement. In this case, the purchase agreement simply stated that the escrowed funds were to be held for the mutual benefit of the parties and would be applied to the closing price. There were no further instructions on how to distribute the escrow funds if the contract did not close. The parties had agreed that the amount of the earnest money would to serve as liquidated damages if the contract did not close.

The court ruled that the Broker breached his fiduciary duty to the Buyer when he released the escrowed funds to the Sellers. Since the escrow agreement contained no distribution instructions in the event that the purchase contract did not close, the Broker could not release the escrowed funds without the consent of the Buyer. The Broker argued that since the parties had agreed the earnest money would serve as liquidated damages in the event the transaction did not close, the Broker had been entitled to release the escrowed earnest money to the Sellers. The court rejected that argument, ruling that the escrow agreement did not give the Broker the right to make such determinations. The court stated that the Broker could have obtained a release from the Buyer allowing him to distribute the escrowed funds to the Sellers or could have sought a judicial declaration on how to distribute the escrowed funds. But the court ruled that the Broker's unilateral decision to distribute the escrowed funds without receiving such authority in the escrow agreement constituted a breach of fiduciary duty.

Next, the court considered the damages the Buyer should receive. The trial court had awarded the Buyer the entire amount of the escrowed funds, determining that the Buyer was entitled to receive the entire loss caused by the fiduciary duty breach. The Brokerage argued that the Buyer had not suffered any loss from the fiduciary duty breach, as the earnest money represented the amount the Buyer owed to the Sellers as liquidated damages for the failure of the purchase agreement to close. The Brokerage argued that the Buyer could recover damages only if the Buyer could argue that the Sellers were not entitled to receive the earnest money. Otherwise, the Buyer had suffered no damages by the Broker's actions. The court found that the trial court had not considered whether the Buyer was entitled to a recovery of its earnest money, and so the case was sent back to the trial court for further proceedings. The court stated that the Buyer was only entitled to recover damages caused by the Broker's actions, so if the Buyer was not entitled to a recovery of the earnest money, then the trial court should not award that amount to the Buyer. Thus, the case was remanded to the trial court for further proceedings.

Int'l Capital Corp. v. Moyer, No. 1-02-2401, 2004 WL 438976 (Ill. App. Ct. Mar. 10, 2004). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].