Md. court: Commingled-funds defense does not work with escrow

Defendants sued for allegedly converting money held in escrow to unauthorized uses cannot defend themselves by claiming the escrow funds had been validly commingled with other accounts, Maryland’s second highest court has held.

The commingled-funds defense is not available for money held in escrow because such funds are intended to be “specific, segregated and identifiable” even when placed in other accounts, the Court of Special Appeals ruled Tuesday.

“Commingling of funds, in our view, does not occur when funds are placed in an escrow account to be disbursed only by agreement, even if those funds are physically located in the same account with other funds,” Judge Patrick L. Woodward wrote for the Court of Special Appeals. “In other words, if the funds, although physically mixed with other funds in an escrow account, are still under the control of the owner or restricted in use by agreement with the owner, commingling of such funds does not occur.”

The reported decision is the first by a Maryland appeals court regarding the applicability of the commingled-funds defense to money placed in escrow.

The Court of Special Appeals rendered its decision in holding that Sage Title Group LLC must return the $2.42 million Robert Roman, a lender, had placed in escrow with the company to show liquidity in an effort to help his customer, builder Brian McCloskey, secure construction loans.

The 3-0 ruling overturned Baltimore County Circuit Judge Michael J. Finifter’s decision that Roman was not owed the money because his claim of unlawful conversion by Sage Title was unavailable to him because the escrow funds had been commingled with the company’s other accounts.

Finifter’s ruling overturned a jury’s verdict that had found Sage Title liable for its then-employee Kevin Sniffen’s disbursement of the escrow funds from a commingled account. Sniffen, Sage Title’s Baltimore branch manager, was subsequently fired.

In its 3-0 decision, the Court of Special Appeals restored the jury’s verdict.

“Based on these facts, we conclude that, although Roman’s monies were placed with other funds in Sage Title’s escrow account, the $2,420,000 deposited to that escrow account was sufficiently specific, segregated, and identifiable to support a claim of conversion,” Woodward wrote, noting that Roman had identified the specific amount via checks he had drafted.

“The funds were segregated because, by agreement, the funds were to be placed in an escrow account, belonging to Roman, be accessible only to Roman, and be returned to Roman,” Woodward added. “Finally, the funds were sufficiently identifiable, because all of Roman’s monies were not returned by Sniffen to Roman, nor were they disbursed with Roman’s permission.”

The Court of Special Appeals, however, did uphold Finifter’s dismissal of Roman’s claim that Sage Title had acted negligently in handling the escrow funds. The court agreed with the trial judge that Roman had failed to present expert testimony that Sage Title violated the standard of care in handling his escrow funds.

No negligence

The court rejected Roman’s argument that “an unauthorized transfer of someone else’s money is so obviously negligent that expert testimony is clearly not necessary” to establish negligence.

Expert testimony is needed “because most lay people are not familiar with the operation of escrow accounts, nor with any standard of care a title company owes to individuals or entities who are not customers, but who deposit funds in escrow with the title company,” Woodward wrote.

“Here, it was not ‘so obvious’ that, when Sage Title disbursed the funds per the instructions of its customer, McCloskey, it was violating a duty owed to Roman, who was not its customer. The parties in this case also were sophisticated developers accustomed to working with title companies and multiple parties to move large sums of money in and out of escrow accounts; the standard of care for title companies in such circumstances is unknown to the average juror.”

Steven M. Klepper, Sage Title’s appellate attorney, declined to comment on the court’s decision or if the company plans to appeal. Klepper is with Kramon & Graham P.A. in Baltimore.

Roman’s attorney, Ronald A. Baradel, did not return telephone and email messages seeking comment Wednesday. Baradel is with Council, Baradel, Kosmerl & Nolan P.A. in Annapolis.

Judges Stuart R. Berger and Dan Freidman joined Woodward’s opinion in Robert Roman v. Sage Title Group LLC, No. 40, September Term 2014.