Appeal by plaintiffs from judgment entered 18 October 2007 by
Judge Jack A. Thompson in Johnston County Superior Court. Heard in
the Court of Appeals 18 August 2008.
Woodruff, Reece & Fortner, by Gordon C. Woodruff, for
Pendergrass Law Firm, PLLC, by James K. Pendergrass, Jr., for
Horack Talley Pharr & Lowndes, P.A., by Robert B. McNeill and
Phillip E. Lewis, amicus curiae for The North Carolina Land
Katherine Jean and David R. Johnson, amicus curiae for The
North Carolina State Bar.
HUNTER, Robert C., Judge.
In this case we consider who, between buyer and seller, bears
the risk of loss in a residential real estate sale where the
attorney who handled the closing misappropriated the remainingsales proceeds owed to the sellers from his trust account.
(See footnote 1)
trial court resolved this issue against plaintiff-sellers, William
Wood Johnson and Suzanne Wayne Johnson (the Johnsons) on summary
judgment. After careful review, we reverse and remand.
On 17 November 2005, defendant-buyers Timothy P. and Shelley
D. Schultz (the Schultzes) entered into a written contract with
the Johnsons to purchase their residential property located at 502
West Woodall Street (West Woodall property) in Benson, North
Carolina, for $277,500.00. The parties utilized the North Carolina
Bar Association's 2005 standard Offer to Purchase and Contract
form (NCBA Contract). The Schultzes hired defendant-attorney
Donald A. Parker (Mr. Parker) to represent them in closing the
transaction. Mr. Parker conducted the closing and was the only
attorney involved in the closing.
The closing occurred at Mr. Parker's office on 3 January 2006.
As part of the closing process, Mr. Parker drafted a deed to the
West Woodall property for the Johnsons in exchange for a $125.00
fee. The Schultzes provided $76,933.56 of their personal funds
toward the balance of the purchase price and obtained a loan from
defendant State Farm Bank for the remainder ($200,320.24). Thesefunds were deposited into Mr. Parker's trust account prior to
(See footnote 2)
During the closing, the Johnsons executed a deed to the
West Woodall property to the Schultzes. The deed and deed of trust
were recorded at 4:46 p.m.; in addition, Mr. Parker tendered a
check, drawn from his trust account, to the Johnsons for the net
proceeds due ($262,881.38).
On 3 January 2006, Mr. Parker's trust account contained
sufficient funds to cover the check. However, on 4 January 2006,
his trust account did not have sufficient funds as he had
misappropriated them. The Johnsons did not try to cash the check
until May 2006; the check bounced and was returned as NSF (non-
sufficient funds). At the time they filed this appeal, the
Johnsons still had not received the remaining money owed to them
for the West Woodall property.
The Johnsons filed suit asserting breach of contract against
the Schultzes, Mr. Parker, State Farm Bank, and Mr. Halbrook. The
Johnsons sought rescission of the deed and recovery of title to the
West Woodall property, or in the alternative, monetary damages. In
his answer, Mr. Parker admitted the Johnsons' material allegations.
Both the Johnsons and the remaining defendants respectively moved
for summary judgment. In its judgment, the trial court allowed
defendants' motion, denied the Johnsons' motion, and dismissed the
Johnsons' claim with prejudice. The court determined that the
Johnsons had to bear the risk of loss of the sales proceeds . . .resulting from the escrow agent, Defendant Donald A. Parker, having
embezzled the [money] . . . [because] Plaintiffs were entitled to
receive those sales proceeds at the time of such embezzlement.
The court further concluded that Defendants Schultz were lawfully
vested with title to the [real] Property on January 3, 2006, the
day before Defendant . . . Parker embezzled the . . . sales
proceeds. Therefore, Defendants Schultz were entitled only to the
[real] Property, [and] not [to] the embezzled sales proceeds, at
the time of . . . embezzlement[.] The court also quieted title to
the West Woodall property in the Schultzes subject only to State
Farm Bank's recorded deed of trust. The Johnsons appeal.
A. Motion to Dismiss and Standard of Review
At the outset, we address the section in the Schultzes' brief
which asserts that the Johnsons' appeal should be dismissed due to
the Johnsons' failure to comply with N.C.R. App. P. 28(b)(6).
Since the record on appeal contains no motion to dismiss filed in
accordance with Rules 25 and 37 of the North Carolina Rules of
Appellate Procedure, we decline to address this argument as
presented in defendant's brief. E.g.
, Morris v. Morris
, 92 N.C.
App. 359, 361, 374 S.E.2d 441, 442 (1988) (declining to address a
motion to dismiss raised in the defendant's brief where the record
contained no motion to dismiss filed in accordance with Rule 37);
see also State v. Easter
, 101 N.C. App. 36, 41, 398 S.E.2d 619, 622
(1990) (declining to address a motion to dismiss raised in the
State's brief where the record contained no motion to dismiss filedin accordance with Rules 25 and 37). We also believe the Johnsons
have presented sufficient legal argument to comply with N.C.R. App.
P. 28(b)(6); accordingly, we address the merits of this appeal.
When ruling on a motion for summary judgment, the evidence
must be considered in the light most favorable to the nonmoving
party. Roumillat v. Simplistic Enterprises, Inc
., 331 N.C. 57, 63,
414 S.E.2d 339, 342 (1992). Summary judgment should only be
granted if the moving party demonstrates there are no genuine
issues of material fact and that he or she is entitled to judgment
as a matter of law. Id
. at 62, 414 S.E.2d at 341. Our review is
. Forbis v. Neal
, 361 N.C. 519, 524, 649 S.E.2d 382, 385
B. Typical North Carolina Residential
Real Estate Transaction
Here, the residential real estate transaction between the
Johnsons and the Schultzes reflects the manner in which the vast
majority of residential real estate sales are conducted in this
state, particularly the contract, closing method, and form of
payment they used.
In a typical North Carolina residential real estate
transaction, the buyer and seller execute the standard, pre-printed
NCBA contract, which generally is provided to them by a real estate
agent who is involved in the transaction. Edmund T. Urban and A.
Grant Whitney, Jr., North Carolina Real Estate, § 26-1, at 653
(1996). [I]t is common for only one attorney to supervise and
handle the entire closing process. Patrick K. Hetrick, Larry A.
Outlaw, and Patricia A. Moylan, North Carolina Real Estate Manual,at 508 (North Carolina Real Estate Commission 2008-2009 ed. 2008).
Although the attorney may be chosen by buyer, lender, or seller,
[t]he most common practice is for the closing attorney to
represent the [buyer] and lender while performing limited functions
for the seller (such as preparation of the deed). Id.
[While a]ll parties to the real estate
transaction have the right to select their
respective attorneys independently and the
seller in a residential closing also may
choose to have an attorney, . . . this is
rare. By comparison, complex real estate
transactions, including most commercial and
industrial property closings, will involve
individual attorneys for the seller and buyer.
In North Carolina, two basic methods are used for completing
real estate transactions: The settlement closing and the escrow
closing. Id. at 505. In an escrow closing:
After the seller and [buyer] have entered
into a sales contract, they also enter into an
escrow agreement containing instructions to
the escrow agent from both seller and
purchaser. This agreement may bear any of a
number of titles including but not limited to
Escrow Agreement, Escrow Instructions, or
Deed and Money Escrow. The escrow agent
. . . then performs the specified closing
functions in accordance with the escrow
agreement independently of any further control
by either the seller or the [buyer]. The
escrow agent of necessity must be a
disinterested party. In areas where this type
of closing is popular, title insurance
companies and escrow divisions of lending
institutions frequently serve as escrow
agents. In North Carolina, law firms
occasionally act as escrow agents.
The seller and [buyer] must each furnish
the escrow agent with all documents and other
items necessary to complete the real estate
transaction. For the seller, this [typically]
means the deed . . . . The [buyer's] chiefobligations are to deliver an acceptable check
for the balance of the purchase price and to
execute all documents necessary for financing
the purchase. When both parties have complied
with the escrow agreement [terms] . . . the
escrow agent will complete the transaction
after first verifying by an updated title
search that the seller's title conforms to the
contract terms and that the [buyer's] check is
Id. at 506.
However, as with the parties here, the vast majority of real
estate closings in North Carolina are conducted via the settlement
closing method. Id. at 507. Typically, in a settlement closing,
the closing attorney . . . conduct[s] the closing in accordance
with the provisions of the sales contract and the detailed
instructions provided by the buyer's lender. Id. at 509. In the
instant case, the record contains no closing instructions from the
lender. Nevertheless, the NCBA standard 2005 Offer to Purchase
and Contract form, which the Johnsons and Schultzes utilized,
obligates the seller to deliver fee simple, marketable, and
insurable title to the buyer via general warranty deed at closing.
It obligates the buyer to provide the Balance of the purchase
price in cash at Closing. However, in spite of the cash
requirement, the attorney handling the closing typically deposits
all funds paid by the buyer and the lender into his trust account
and makes payments to the seller and others from the trust account,
which is exactly what occurred here. Id. at 524. Closing is
defined as the date and time of recording of the deed.
The most common practice in North Carolina is for the
buyer's attorney to handle the closing, including the preparationof the closing statement(s) and the disbursement of the funds. Id.
at 509. In this regard, generally,
[t]he closing attorney will collect from the
buyer a certified check (or comparable check
guaranteeing payment) for the amount due from
the buyer. The buyer's lender will have
provided the closing attorney with a certified
check for the amount of the buyer's loan (if
any) or may have wired the funds to the
attorney's trust account. There will be no
disbursement of funds at the closing meeting.
The closing attorney will place all funds in
his trust or escrow account and will not
disburse any of the funds until he can perform
a final title search.
Id. Finally, in real estate transactions involving a one- to
four-family residential dwelling or a lot restricted to residential
use[,] such as the transaction here, before disbursing the
remaining sales proceeds owed to the seller, the settlement
agent, who is often the closing attorney, must verify that the
funds the buyer and lender deposited into his trust or escrow
account are sufficiently reliable and must make sure that the
executed deed to the property, and if applicable, the deed of trust
are recorded. N.C. Gen. Stat. §§ 45A-2, -4 (2007).
C. Entitlement Theory
Here, the trial court resolved this case based on the
entitlement rule. The 'entitlement rule' has been adopted in
all jurisdictions that have considered how to allocate losses of
money deposited in escrow. Robert L. Flores, A Comparison of the
Rules and Rationales for Allocating Risks Arising in Realty Sales
Using Executory Sale Contracts and Escrows
, 59 Mo. L. Rev. 307, 309
(1994) (hereinafter, Flores, Escrows
) (footnotes omitted). Theentitlement rule generally places the risk of loss as to escrow
monies on the depositor-buyer under the theory that the escrow
holder is the buyer's agent even if the escrow holder was the
seller's . . . attorney[.] Id
. (footnote omitted).
fault overrides the general rule of allocating the risk of loss
to buyers. Id
. at 327 (footnote omitted).
For escrow loss, the cases in which fault
has been given a determinative role . . . may
be viewed in three categories. First, there
are cases in which one party has caused a
delay in closing of escrow, thus extending the
risk period. Second, there are cases in which
one party has committed some act, other than
mere delay, that enabled the holder to lose or
embezzle the money. Third, there are cases in
which one party has had a closer relationship
with the wrongdoing holder, and might be
blamed for putting the holder in a position to
cause the loss.
. at 331-32.
In the absence of fault, the entitlement rule shifts the risk
of loss solely to the party holding title to the funds at the
time the misappropriation occurred, a determination based on
whether the escrow conditions have been fully performed at the time
of embezzlement. Id
. at 344-45, 352. If all escrow conditions
have not been performed, the risk of loss remains solely with the
. at 352. If all conditions have been performed, the
risk of loss shifts solely to the seller. Id
. In other words, the
risk falls squarely on either the buyer or seller.
The trial court's judgment indicates that the court believed
an escrow arrangement was utilized here. In addition, the trial
court appeared to shift the risk of loss to the Johnsons as sellersnot based on fault but because the Johnsons were entitled to
receive th[e] sales proceeds at the time of . . . embezzlement.
In other words, in accordance with the entitlement rule applicable
to innocent parties, t
he court appeared to conclude that the
Johnsons had title to the money because all of the conditions of
the parties' escrow agreement had been performed at the time of Mr.
Both the Johnsons and the North Carolina State Bar (the State
Bar) argue that the transaction here is not an escrow.
Consequently, they contend the entitlement rule does not apply and
that the Schultzes as principals should bear the risk of loss due
to the defalcation of their attorney or agent Mr. Parker. The
Johnsons further argue that even if the arrangement here is an
escrow, this Court's decision in GE Capital Mortgage Services
, 114 N.C. App. 430, 442 S.E.2d 98 (1994), which is the only
North Carolina appellate case to apply the entitlement theory,
establishes that in the absence of fault, the risk of loss is then
allocated based on the attorney-client relationship. The Johnsons
assert this conclusion is strongly supported by the following
equitable principle emphasized by this Court in Avent
Our holding is consistent with the
equitable principle that 'where one of two
persons must suffer loss by the fraud or
misconduct of a third person, he who first
reposes the confidence or by his negligent
conduct made it possible for the loss to
occur, must bear the loss.'
. at 435, 442 S.E.2d at 101 (quoting Zimmerman v. Hogg & Allen
286 N.C. 24, 30, 209 S.E.2d 795, 799 (1974)). The Schultzes and the North Carolina Land Title Association
(NCLTA) argue that the arrangement here is an escrow, that Avent
and the entitlement rule do apply, and that their application
compels the grant of summary judgment in the Schultzes' favor.
As discussed infra
, we essentially agree with the Johnsons
that the arrangement here does not constitute an escrow, and
consequently, in accordance with equity, the risk of loss here
should fall on those parties who had an attorney-client
relationship with Mr. Parker.
Binding clients to the acts of their
lawyers can be unfair in some circumstances[,
such as where a] client might have authorized
a lawyer's conduct only in general terms,
without contemplating the particular acts that
lead to liability. However, it has been
regarded as more appropriate for costs flowing
from a lawyer's misconduct generally to be
borne by the client rather than by an innocent
third person. Where the lawyer rather than
the client is directly to blame, the client
may be able to recover any losses by suing the
lawyer, a right not generally accorded to
Restatement (Third) of The Law Governing Lawyers § 26, cmt. b
(2000). However, even assuming, arguendo
, that the arrangement
between the Johnsons and the Schultzes is an escrow, we agree
with the Johnsons that Avent
establishes that where there is no
fault and the buyer and seller are essentially innocent parties,
the risk of loss should be allocated based on the attorney-client
At the outset, we note that our research has failed to yield
a single North Carolina case which defines an escrow. A leading
encyclopedia on escrow provides:
An escrow, as a general rule, is created
when the grantor parts with all dominion and
control of a instrument or money by delivering
it to a third person or a depository with
instructions to deliver it to the named
grantee upon the happening of certain
conditions. It is an instrument which by its
terms imports a legal obligation, and which is
deposited by the grantor, promisor or obligor,
or his agent with a stranger or a third party,
the depositary, to be kept by him or her until
the performance of the condition or the
happening of [a] certain event and then to be
delivered over to the grantee, promisee, or
obligee. Escrow by definition means
neutral, independent from the parties to the
transaction . . . . Thus, when, pursuant to
an agreement, money is left in [the] hands of
the attorney or agent of one of the parties,
an escrow is not created; however, in some
jurisdictions, one may be the escrow agent of
both parties to an escrow if there is nothing
inconsistent or antagonistic between his acts
for the one and the other.
28 Am. Jur. 2d Escrow
§ 1 (2000) (footnotes omitted). Furthermore,
there are two somewhat different types of escrow arrangements
frequently associated with realty sales[,] the 'deed and money'
escrow and the 'set-aside' escrow, or 'cure' or 'repair' escrow.
, 59 Mo. L. Rev. at 320-22 (footnotes omitted).
[A] set-aside escrow . . . typically [is]
used to salvage the closing of a sale which
otherwise would be canceled due to the
discovery of a minor physical defect of the
realty, or the failure . . . to have cleared
all liens or other encumbrances on the title
to the realty. The sale goes forward and the
deed is delivered to the buyer and [typically]
the bulk of the purchase price is delivered to
the seller. A portion of the price is placed
in escrow, to be released to the seller afterthe seller, for example, . . . clears the
title by paying the overdue tax assessment or
. at 322 (footnote omitted). In other words, in a set-aside
escrow, but for one of the parties' failure to perform, there is no
need for an escrow, and as such, it entails a degree of fault.
In contrast, in a typical deed and money escrow,
[s]oon after entering into a contract for the
sale of the realty, or perhaps simultaneously,
the buyer and seller agree upon a person to
serve as escrow holder. The parties agree
that the buyer will deposit with the escrow
holder some portion of the purchase price, and
the seller will deposit an executed deed and
related documents. Jointly or separately the
parties set forth instructions for the escrow
holder. Ordinarily the buyer instructs the
holder to release the purchase price to the
seller when a valid deed has been recorded and
a title insurance policy has been issued,
after a title search has shown that the seller
has marketable title. The seller instructs
the holder to record and deliver the deed to
the buyer when the purchase price has been
. at 321 (footnotes omitted). In other words, in contrast to a
set-aside escrow, the creation of a deed and money escrow does
not arise out of a failure to perform and does not involve fault.
Nevertheless, both types of escrows create risks that the deeds or
. . . documents deposited by a seller will be misappropriated by
the escrow holder, . . . [or] that the [escrow] holder will lose,
mismanage, or simply embezzle the money on deposit[.] Id
. at 322-
23 (footnotes omitted).
In the instant case, the record is completely devoid of any
evidence tending to establish the creation of an escrow between the
parties, including any escrow instructions to Mr. Parker from thebuyers (the Schultzes), the sellers (the Johnsons), or the lender
(State Farm Bank). Furthermore, here, the only conditions that
appear in the record are those provided in the parties' Offer to
Purchase and Contract[.] In contrast, in Avent
, the Court
explicitly mentioned that there was an escrow agreement,
requiring the escrow agent, who was the buyer's closing attorney,
to deliver the remaining sales proceeds to the seller once the
seller cancelled the prior lender's deed of trust. Avent
, 114 N.C.
App. at 431-32, 442 S.E.2d at 99. Hence, based on the above
definitions and law, the arrangement in the instant case does not
appear to be a formal escrow.
Nevertheless, regardless of whether the arrangement here
classified as an escrow, we are aware that the same escrow risk
of attorney defalcation is present. However, even assuming,
, that the arrangement here is an escrow, we believe that
in the context of North Carolina residential real estate
transactions, this Court's decision in Avent
courts should first allocate the risk of loss based on fault, and
in the absence of fault, allocate it based on the attorney-client
relationship. Furthermore, we believe that as between essentially
innocent parties, the imposition of the risk of loss on the
parties who were actually represented by the wrongdoing attorney is
not only more consistent with how residential real estate
transactions are generally closed in this state, but also produces
a more equitable result.
E. Avent's Entitlement Rule
, the arrangement here is an escrow or
sufficiently equivalent to an escrow so as to trigger the
application of entitlement rule analysis, we believe this Court's
entitlement analysis in Avent
establishes that in the absence of
entitlement based on fault, the risk of loss should be allocated
based on the attorney-client or agency relationship in accordance
with equity. In this regard
, we believe it is significant that in
: (1) the escrow at issue was a set-aside escrow which
was only created due to the seller's failure to perform at closing,
as opposed to the instant case, which would be classified as a
deed and money escrow; (2) the Court explicitly noted that the
parties in that case agreed that entitlement theory applied; and
(3) the Court explicitly squared its holding with the equitable
principle cited supra
is the only North Carolina appellate decision to utilize
the entitlement rule, and it shares numerous factual similarities
with the instant case: (1) it was a residential real estate
transaction; (2) the buyers had obtained financing from a lender;
(3) there appeared to be only one closing attorney, who was chosen
by the buyers; (4) the attorney embezzled the sales proceeds still
owed to the seller from his trust account; and (5) the seller
executed the deed to the buyers at closing. Avent
, 114 N.C. App.
at 431-32, 434, 442 S.E.2d at 99, 101. However, it is very
significant that, unlike here, where
both the Schultzes and the
Johnsons were prepared to meet their contractual obligations at
closing, the seller in Avent
was not. Id
. at 431-32, 442 S.E.2d at99. In other words, in Avent
, but for the seller's failure to
perform, the escrow never would have been created.
(See footnote 3)
The dissent argues the Court's analysis in Avent
involves a straightforward application of the general entitlement
rule and that the decision clearly establishes that the risk of
loss should be allocated based on who held title to the funds at
the time of defalcation. We disagree. First, we think it is
debatable as to how completely the Court in Avent
general entitlement theory. In this regard, we think it is
significant that before beginning its analysis,
the Court in Avent
specifically noted, the parties agree that generally when property
in the custody of an escrow holder is lost or embezzled by the
holder, as between the buyer and the seller, the loss falls on the
party who was entitled to the property at the time of the loss or
, 114 N.C. App. at 432, 442 S.E.2d at 100. In
other words, the parties agreed to resolve the issue based on the
entitlement rule, and the Court analyzed it as such.
Next, in spite of the fact that: (1) the buyer had chosen
Avent as the attorney; (2) the lender had consented to the
arrangement; and (3) the escrow conditions had not been performed
at the time of embezzlement, factors which, under the generalentitlement rule, would result in placing the risk of loss solely
on the buyer, the Court concluded that the risk of loss fell on the
seller because the funds were in escrow solely due to the seller's
failure to perform at closing. Id
. at 434-35, 442 S.E.2d at 101.
Hence, while the Court held that the seller was entitled to the
funds held in escrow at the time of the embezzlement and that [the
seller] . . . therefore [had to] bear the loss[,] we believe the
Court based this conclusion on the seller's fault (failure to
perform) because but for the seller's fault, the escrow would never
have been created. Id
. at 435, 442 S.E.2d at 101. In fact, the
Court explicitly stated:
While it is true that Avent was retained by
the [buyers], and consented to by [the
lender], it was [the seller] who gave him the
opportunity to abscond with the escrow funds
by failing to meet its contractual
obligations, thereby necessitating the escrow
agreement as a means of closing the
transaction as scheduled.
Finally, we think it is particularly significant that the
Court was careful to square its analysis and holding with a long-
standing principle of equity: Our holding is consistent with the
equitable principle that 'where one of two persons must suffer
loss by the fraud or misconduct of a third person, he who first
reposes the confidence or by his negligent conduct made it possible
for the loss to occur, must bear the loss.' Id
, 286 N.C. at 30, 209 S.E.2d at 799).
Furthermore, we believe that this Court's decision in Avent
and the equitable principle highlighted within it establish that in
the absence of fault, our courts should consider the attorney-client relationship and impose the loss on those parties whom the
attorney represented. In other words, as between essentially
innocent parties, if the attorney solely represented the buyer or
the seller, then the loss should fall solely on that party alone.
However, if the attorney represents both buyer and seller, the
buyer and seller should share the loss. Finally, we believe this
approach is much more consistent with the equitable principle
highlighted in Avent
, as well as the manner in which the majority
of North Carolina residential real estate transactions are closed,
than the general entitlement rule which, in the absence of fault:
(1) imposes the risk of loss solely on buyers even where a seller's
attorney misappropriates the funds; and (2) shifts the loss solely
to sellers based on an artificial determination that the buyer's
attorney becomes the seller's agent once the escrow conditions
have been performed. See
, 59 Mo. L. Rev. at 361.
Clearly, Mr. Parker bears the ultimate responsibility for his
malfeasance. In addition, while the Johnsons
did not present the
trust account check to a financial institution for payment until
May 2006: (1) the Schultzes concede that Mr. Parker
misappropriated the funds on 4 January 2006; (2) the real estate
transaction was closed late in the afternoon on 3 January 2006; (3)
pursuant to N.C. Gen. Stat. . 45A-4, Mr. Parker was not permitted
to disburse the sales proceeds to the Johnsons until the deed and
deed of trust were recorded, which occurred at 4:46 p.m.; and (4)
Mr. Johnson testified that he was unable to leave Mr. Parker'soffice until after 5:00 p.m., at which time the banks were closed.
As such, unlike with the set-aside escrow in Avent
, it cannot be
said that but for the Johnsons' failure to cash the trust account
check until May 2006, Mr. Parker could not have stolen the trust
account monies because he had already misappropriated them.
While not explicitly labeled as fault, the dissent argues that
the risk of loss should be shifted to the Johnsons as sellers
because they chose to accept a check drawn on Mr. Parker's trust
account instead of demanding cash as provided in the standard 2005
NCBA contract form or some other surer method of payment. As
, because such a rule would significantly disrupt
the way residential real estate transactions are traditionally
closed in North Carolina and because such a rule would conflict
with the equitable principle highlighted in Avent
At the outset, we note our disagreement with the dissent's
explanation of the Johnsons' and a typical seller's decision to
accept a check drawn on an attorney's trust account purely as a
product of the seller's free choice. While it is true that the
standard 2005 NCBA contract form provides the seller with the right
to receive the balance of the purchase price in cash, as discussed
, a seller who demands cash would be highly atypical.
in residential real estate transactions such as in the
case sub judice
, the closing attorney typically does not represent
the seller, and by law, the attorney is not permitted to distribute
funds to the seller until the deed is recorded. As such, the
typical seller would likely be unaware as to what form of paymentthe buyer will provide until the actual closing or possibly until
the deed has already been executed and recorded.
(See footnote 4)
seller could still refuse the payment, this would almost certainly
delay the completion of the closing. As such, while the dissent
frames a seller's choice to receive an attorney's trust account
check purely as a product of the seller's own convenience or as a
product of deference to the typical practice, we believe this
ignores the fact that the seller's decision to accept a trust
account check, i.e., to not delay the closing, can also be viewed
as an accommodation to the buyer.
(See footnote 5)
As such, we do not think that
by accepting a check drawn from Mr. Parker's trust account, the
Johnsons exhibited any fault.
Most significantly, we believe that shifting the risk of loss
based merely on the form of payment the seller accepts wouldsignificantly disrupt the way residential real estate closings are
handled under our current system, especially in terms of creating
delay, and would shift the risk of loss to the seller in almost
every case unless the seller demands payment in cash. Such a rule
squarely conflicts with the equitable principle emphasized by this
Court in Avent
and does not take into account the unique way
residential real estate transactions are typically closed in North
Carolina, i.e., by a single attorney chosen by the buyer.
Furthermore, while certainly neither a buyer nor a seller would
expect an attorney to misappropriate the closing funds, as we
[I]t has been regarded as more appropriate for
the costs flowing from a lawyer's misconduct
generally to be borne by the client rather
than by an innocent third person. Where the
lawyer rather than the client is directly to
blame, the client may be able to recover any
losses by suing the lawyer, a right not
generally accorded to nonclients[.]
Restatement (Third) of the Law Governing Lawyers § 26, cmt. b
Hence, given the lack of fault here, in accordance with equity
and the entitlement rule as articulated in Avent
, the risk of
loss here should have been allocated based on which parties reposed
confidence in Mr. Parker, i.e., which parties had an attorney-
client relationship with him.
G. Attorney-Client Relationship
[T]he relation of attorney and client may be implied from the
conduct of the parties, and is not dependent on the payment of a
fee, nor upon the execution of a formal contract. N. C. State Barv. Sheffield
, 73 N.C. App. 349, 358, 326 S.E.2d 320, 325 (citation
omitted), cert. denied
, 314 N.C. 117, 332 S.E.2d 482, cert. denied
474 U.S. 981, 88 L. Ed. 2d 338 (1985). Here, in allocating the
risk of loss between two essentially innocent parties, the trial
court erred by not allocating the risk to those parties who had an
attorney-client relationship with Mr. Parker. We note that the
Schultzes admitted below and continue to admit that Mr. Parker was
their attorney. Consequently, we conclude that the trial court
erred by granting summary judgment in the Schultzes' favor, and
because Mr. Parker acted as their attorney, we further conclude the
Schultzes must bear the loss.
In contrast to the Schultzes, the Johnsons asserted below that
they did not have an attorney-client relationship with Mr. Parker.
However, the Schultzes disputed this assertion, contending that in
addition to representing them, Mr. Parker also served as the
Johnson' attorney or agent at closing. Because the trial court
failed to consider this disputed issue of material fact between the
parties, we remand this case to the trial court with instructions
to consider whether Mr. Parker also acted as the Johnsons'
attorney, and consequently, whether the Johnsons' must share the
H. Title Insurance and Closing Protection Letter
Here, neither the Johnsons nor the Schultzes argue that they
intended to shift the risk of loss in this transaction based on
title insurance or the closing protection letter. In addition,
they do not argue that the Schultzes' title insurance policy or theclosing protection letter cover this loss. As such, these issues
are not properly before this Court.
I. Enhanced Consumer Protection
While chapter 45A of the North Carolina General Statutes seeks
to protect buyers, lenders, and sellers from each other's
unscrupulous actions, neither it, nor any other statutory law
protects these parties from the crippling economic loss that an
attorney's malfeasance can potentially impose on them if the
attorney absconds and is essentially judgment proof. N.C. Gen.
Stat. §§ 45A-1 _ 45A-7 (2007). Our law imposes no bonding or
malpractice insurance requirements on attorneys in general, let
alone in the context of residential real estate closings where an
attorney might handle hundreds of thousands of dollars in trust
monies. Either requirement would shift some of the economic risk
via insurance from typically innocent and unsophisticated buyers
and sellers to the wrongdoing attorney. While the Client Security
Fund provides a possible source of some relief, it is clearly a
fund of last resort. See
27 NCAC 1D, Rule .1401(b)(7),(8). In
addition, whether a loss is reimbursable is in the sole discretion
of the board who administers the Fund, and even if the loss is
deemed reimbursable, reimbursement is capped at $100,000.00. Id
Rules .1417(b), .1418(g). As such, our legislature may wish to
consider creating safeguards to protect innocent consumers inresidential real estate sales such as those that exist in
(See footnote 6)
In sum, we conclude that where, as here: (1) one attorney is
used to handle a residential real estate closing, (2) the attorney
misappropriates the remaining balance of the purchase price owed to
the seller, and (3) the risk of loss must be allocated to one or
more parties, courts should first consider the existence of fault.
However, if fault does not exist and the risk must be allocated
between essentially innocent parties, courts should then consider
which parties had an attorney-client relationship with the
wrongdoing attorney and impose the risk of loss on those parties.
Where multiple parties to the transaction have an attorney-client
relationship with the offending attorney, the risk of loss should
be shared among them.
Because the trial court resolved this case under a
misapprehension of law, we reverse the grant of summary judgment in
the Schultzes' favor. Furthermore, because the Schultzes admit
that Mr. Parker was their attorney, we conclude that the Schultzes'
must bear the loss. Finally, because the trial court did not
consider whether Mr. Parker also acted as the Johnsons' attorney,a material issue of fact which the Johnsons and the Schultzes
disputed below, we remand and instruct the trial court to consider
this issue to determine if the Johnsons must share the loss.
Reversed and remanded.
Chief Judge MARTIN concurs.
Judge WYNN dissents in a separate opinion.
NORTH CAROLINA COURT OF APPEALS
Filed:3 February 2009
WILLIAM WOOD JOHNSON and wife,
SUZANNE WAYNE JOHNSON,
No. 06 CVS 2148
TIMOTHY P. SCHULTZ and wife,
SHELLEY D. SCHULTZ, DONALD A.
PARKER, JERRY HALBROOK, Trustee
and STATE FARM BANK, F.S.B.,
WYNN, Judge, dissenting.
This matter arises from the misappropriation of real estate
sales proceeds by the closing attorney after the closing of the
real estate transaction. The issue on appeal is whether the
residential buyers should be held accountable for the residential
sellers' decision to accept their sales proceeds in the form of a
check rather than in cash, as provided for in the sales contract,
or some other surer method of payment. Because the sellers chose
to accept a check rather than cash, I hold that the buyers are not
accountable for the actions of the closing attorney that later
rendered that check worthless. Additionally, my holding is
supported on the grounds that, after the closing, the buyers had
neither a claim to the trust account funds, nor control over how
the sellers chose to accept payment of those funds.
(See footnote 7)
In GE Capital Mortgage Services v. Avent, 114 N.C. App. 430,
432, 442 S.E.2d 98, 100 (1994), this Court held: [G]enerally when
property in the custody of an escrow holder is lost or embezzled by
the holder, as between the buyer and the seller, the loss falls on
the party who was entitled to the property at the time of the loss
or embezzlement. Further, this Court explained:
Ordinarily, the determination as to which
party is entitled to the escrow property
depends upon whether the conditions of the
escrow were satisfied prior to the loss or
embezzlement. For example, if the escrow
agent embezzles the purchase price prior to
the seller's performance of the escrow
condition, the buyer has retained title to the
money and must therefore bear the loss.
Conversely, if the embezzlement occurs after
the seller has performed the escrow condition,
then the seller must bear the loss because he
was entitled to it at the time of the
Id. at 432-33, 442 S.E.2d at 100 (internal citations omitted).
The majority interprets the decision in Avent, the only North
Carolina case to apply the entitlement theory, to stand for the
proposition that, in the absence of fault, the courts should impose
the loss on the party represented by the wrongdoing attorney.
However, I do not agree that the existence of an attorney-clientrelationship determines the outcome of this case because the
conduct of the attorney in this case exceeded the scope of any
agency relationship created with either the buyers or the sellers.
The attorney was tasked with performing legal services for the
closing of the real estate transaction. Indeed, the attorney's
conduct, of criminally misappropriating the real estate sales
proceeds from his trust account after the closing, was outside the
scope of the attorney-client relationship created to close this
transaction. Neither the buyers nor the sellers should be held
accountable for the intentional and criminal conduct of the
attorney which went beyond the scope of an attorney-client
I also see no need to remand this matter to the trial court to
consider whether the closing attorney acted as the sellers'
attorney. As the majority notes, this real estate closing was
conducted via the settlement closing method and all of the
conditions for closing this real estate matter were satisfied,
including the making of payments to the seller and others from the
trust account, which according to the majority, is exactly what
Rather than holding the buyers liable for the criminal actions
of the attorney, which were well beyond the scope of the attorney-
client relationship, we should follow the teachings of Avent.
Thus, in this case, as was done in Avent, we should ultimately
allocate the risk of loss to the party that held title to the funds
in escrow at the time of the embezzlement. We should also followthe conclusion of Avent and hold that [h]aving obtained title to
the property [at closing], the [buyers] no longer held title to the
funds in escrow. Thus . . . [the sellers] must bear the loss
resulting from [the attorney's] embezzlement of the escrow funds.
Avent, 114 N.C. App. at 434-35, 442 S.E.2d at 101.
The logic of this outcome is confirmed by the conduct of the
sellers in the exercise of their choice to receive the sales
proceeds in the form of a check which allowed the recalcitrant
attorney to misappropriate the funds after the closing date.
(See footnote 8)
at the time of the closing, the sales proceeds for the real estate
transaction were in the trust account of the closing attorney. In
exchange for conveying title to the buyers, the sellers chose to
accept those proceeds in the form of a check, drawn upon the
attorney's trust account. Once the buyers obtained title to the
property, they no longer had any claim to the funds in the closing
attorney's trust account, nor did they have control over how the
seller would choose to accept those funds. The monies in the trust
account at that time belonged to the sellers who, under the sales
contract, could have required payment in the form of cash.
Instead, the sellers chose to accept a check and now desire toplace the risk of doing so on the buyers. In my view, the
relationship between the buyers and sellers consummated when, in
exchange for conveying title to the buyers, the sellers accepted
the trust account sales proceeds in the form of a check rather than
cash, as provided for in the sales contract.
Indeed, notwithstanding the sales contract requirement that
the sales proceeds be paid in cash, the sellers were free to accept
any other means of payment_perhaps for their own convenience or out
of deference to the typical practice of accepting a trust account
check. In any event, that was a decision made by the sellers, not
the buyers. It is undisputed that the sales proceeds were in the
trust account on the date of closing and could have been converted
to cash, issued as a certified check or money order, wired to the
sellers' account, or transferred by some other commercial
transaction method that would have been surer than a check. Common
sense dictates that the risks of accepting a check are far greater
than those associated with accepting cash or some other surer
method of payment.
(See footnote 9)
It follows that the buyers should not be held accountable for
the sellers' decision to accept their payment in the form of a
check rather than cash or some other surer method of payment. Ultimately, the risk of accepting sales proceeds from a real estate
transaction in payment forms other than cash, as provided for by
the sales contract, is on the sellers, not the buyers.
(See footnote 10)