On November 26, the U.S. District Court for the Central District of California entered judgment in favor of a real estate company plaintiff, concluding that the defendant, a title guaranty company, breached its duty of care by releasing more than $13 million in escrow funds without authorization from the depositor. The case began in 2015 when the plaintiff deposited the funds, intending to invest in what appeared to be a hotel property acquisition. However, the escrow parties and a purported family friend restructured the deal and diverted the entire sum, while the defendant released the funds despite purported warning signs.

The case raised a complex question: “When escrow funds are fraudulently diverted, who bears the loss — the third-party depositor who provided no instructions, or the escrow holder who disbursed the funds without authorization?” The court determined that both the escrow company and the depositor failed to exercise reasonable care that would have prevented the fraud. According to the court, the alleged wrongdoers themselves were effectively judgment-proof, leaving the dispute between two victims: a family business that funded the escrow at the direction of the lead wrongdoer (the purported family friend) and an escrow company that released the funds amid suspicions of fraud.

Ultimately, the court held the defendant owed the plaintiff only a tort duty of care, not a fiduciary duty, and breached that duty by uncritically following instructions from suspect parties. Because the plaintiff’s principals also failed to exercise due care with their own funds, the court ruled that both parties were equally responsible for the losses. The court entered a judgment for the plaintiff on its negligence claim, but reduced damages by half according to comparative fault.