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Court Ruling Potentially Expands Duties to Third Parties

Written by Zana Tomich on February 4, 2013 Category: Business Law & Transactions

The Michigan Court of Appeals has ruled that a title company owed at least a common law duty, and perhaps more, to plaintiffs who had contracted to have a home built. In Elsebaei v. Seaver Title Co., Inc. (unpublished, December 27, 2012), Plaintiffs contracted with a construction company to have a home built in Farmington Hills. The project was to be financed via construction loans through Charter One Bank. Charter One then contracted with Defendant title company to obtain the necessary paperwork from the construction company, perform title searches on the property, and to distribute the necessary funds to the construction company from Charter One. Unfortunately, the construction company admittedly defrauded Plaintiffs. Plaintiffs later brought several claims against Defendant title company of which the only surviving claim is breach of fiduciary duty.

At the trial court level, Defendant title company (“Defendant”) moved for summary disposition on the theory that since it had contracted with Charter One and not Plaintiffs it did not have any duty to Plaintiffs and thus could not have committed a breach of duty. The trial court denied the motion and granted partial summary disposition to Plaintiffs. On appeal, the court reasoned that while duties typically arise through a direct relationship between parties, “if one having assumed to act, does so negligently, then liability exists as to a third party for failure of the defendant to exercise care and skill in the performance itself.” (citation omitted). In other words, a party could conceivably have a legal duty to a third party with whom it has no contractual relationship. The court then summarily concludes that since Defendant’s actions “concerned the protection of plaintiffs’ property interests…” Defendants therefore owed a common-law duty to Plaintiffs.

The court further speculated that a “special relationship” might exist between Plaintiffs and Defendant title company which would allow Defendant to be held liable for not protecting Plaintiffs from the criminal acts of a third party (in this case the construction company). However, the court did not decide this issue and remanded the case back to the trial court.

This ruling is curious because although the court rightly points out that a duty to a non-contracting third party may arise in certain circumstances, it does not necessarily follow that such a duty must arise based on these facts. While the court provides notably little reasoning on this question, it seems to rely on the facts that Defendant was responsible for dispersing funds to the construction company and that Defendants actions concerned Plaintiffs’ property interests. However, previous case law seems to suggest that the duty to a non-contracting third party is the exception rather than the rule and the court’s ruling in this case would seem to conceivably extend such a duty to any agent disbursing funds on behalf of a bank or any entity performing acts that could potentially affect property rights. Further, it would be remarkable indeed if on remand the trial court found that Defendant title company had a responsibility to protect Plaintiffs from the criminal activities of the construction company based on a “special relationship” between Plaintiffs and Defendant. It is worth repeating that there was no contractual relationship whatsoever between Plaintiffs and Defendant.

The upshot of this case has the potential to be significant. With every expansion of duties in the business world, the cost of doing business rises. Not only do businesses need to be aware of their duties to clients, but it appears that may also need to be more vigilant regarding possible duties to third parties. Although this case does not firmly lay down a liability-expanding rule, it certainly seems to open the door for a subsequent court to do so. A case such as this has the potential to affect all Michigan title companies and thus the entire real estate sector. This case will certainly be interesting to watch on remand.

The attorneys at Dalton & Tomich, PLC have experience in real estate matters in Michigan and throughout the country. We represent individuals and organizations. If you are in need of legal counsel regarding real estate, please do not hesitate to contact us regarding your matter.

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