Penklor Properties, LLC v. Jo Ellen Buehler ( 2019 )

03/25/2019
IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
February 13, 2019 Session
PENKLOR PROPERTIES LLC v. JO ELLEN BUEHLER ET AL.
Appeal from the Chancery Court for Shelby County
No. CH-15-0568 Jim Kyle, Chancellor
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No. W2018-00630-COA-R3-CV
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Appellant Mid South Title Services, LLC agreed to act as escrow agent for a real estate
transaction in which Appellee Penklor Properties, LLC was the buyer. Appellee tendered
earnest money, which, under the Purchase and Sale Agreement, was to be held by
Appellant unless and until the parties to the Purchase and Sale Agreement submitted a
signed written agreement changing the terms of the escrow. Very shortly after the
Purchase and Sale Agreement was signed, Appellant received a purported amendment
from the seller’s former attorney and real estate broker. The amendment requested that
Appellant release $53,000.00 of the escrowed funds in satisfaction of the
attorney/broker’s “former legal fees.” Without inquiring further, Appellant issued the
requested check. Appellant later discovered that the amendment was not, in fact,
authorized by the parties to the Purchase and Sale Agreement. Appellee filed suit against
Appellant for breach of contract and breach of fiduciary duty, and the trial court entered
judgment against Appellant. Appellant appeals. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed and Remanded
KENNY ARMSTRONG, J., delivered the opinion of the court, in which J. STEVEN
STAFFORD, P.J., W.S., and ARNOLD B. GOLDIN, J., joined.
Richard J. Myers, Memphis, Tennessee, for the appellant, Mid South Title Services,
LLC.
John D. Horne, Memphis, Tennessee, for the appellee, Penklor Properties, LLC.
OPINION
I. Background
Appellee Penklor Properties, LLC (“Penklor”) is a real estate development and
investment firm located in Cincinnati, Ohio. Scott Davis is Penklor’s president. Jo Ellen
Buehler is the widow of Harold Buehler. The Buehlers developed a large portfolio of
low-income, single-family residences in Shelby County through the use of tax incentives.
United Development Co. 2001, LP (“UDC”) is a limited partnership, of which Mrs.
Buehler is the General Partner. Javier Michael Bailey was the Buehlers’ attorney prior to
his disbarment on April 26, 2012. After his disbarment, Mr. Bailey served as a licensed
real estate broker for the Buehlers. Appellant Mid South Title Services, LLC (“Mid
South”) is a real estate closing and title insurance company located in Memphis. M.
Taylor Hewgley serves as Mid South’s COO.
On November 20, 2012, Penklor submitted a written offer to Mrs. Buehler,
individually and on behalf of the various UDC limited partnerships, to purchase
approximately 1,053 parcels of residential property for $22,500,000.00. The parties
subsequently agreed to a sale price of $24,900,000.00. On November 26, 2012, the
parties signed the counter-offer. The Purchase and Sale Agreement (“Agreement”)
provided that Penklor, the Buyer, would make an earnest money deposit of 1% of the
purchase price. Under the Agreement, the sale was contingent on Penklor’s satisfactory
inspection of the properties. The Agreement designated Vanecia Kimbrough as the
closing agent for the seller, and she engaged Mid South to serve as escrow agent. There
was no written agreement concerning Mid South’s involvement; however, it is
uncontested that Mid South agreed to serve as escrow agent.
On December 3, 2012, Penklor transferred $249,000.00 in earnest money to Mid
South’s escrow account at SunTrust Bank. On December 4, 2012, Mr. Bailey sent Ms.
Kimbrow an email stating that he was preparing “an addendum to the escrow agreement
that addresses the distribution of $5[3],000 immediately.”
On December 6, 2012, Mr. Bailey sent another email to Ms. Kimbrough with a
“Requested Amendment to the Contract” (the “Amendment”). The Amendment contains
signatures purporting to be those of Mrs. Buehler and Mr. Davis. Both signatures are
dated December 6, 2012, with Mr. Davis’s alleged signature being made at 11:00 a.m.
and Mrs. Buehler’s at 1:00 p.m. The Amendment states:
The $249,000 deposited with Mid South title shall be distributed and
handled as follows: 1) $149,000.00 shall be used to pay all costs relating to
title and legal fees associated with the preparation and transfer of property
interest. 2) $53,000 shall be immediately transferred to Javier Bailey to
payoff outstanding fees and encumbrances and outstanding invoice for
former legal fees, 3) $47,000 shall be used for earnest money.
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On or about December 7, 2012, Mr. Bailey contacted Mid South requesting a
$53,000.00 check. Without contacting Penklor, Mr. Hewgley authorized the distribution
of the funds to Mr. Bailey and issued a check on Mid South’s escrow account. On
receipt, Mr. Bailey immediately presented the check at SunTrust for cashing. SunTrust’s
teller contacted Mid South, while Mr. Bailey waited, and Mr. Hewgley confirmed that the
check could be cashed. The bank cut Mr. Bailey a cashier’s check for $46,000.00 and
gave him the remaining $7,000.00 in cash.
Following its inspections, on February 12, 2013, Penklor concluded that it would
not go forward with the purchase of the properties. Penklor exercised its contingency to
void the Agreement and requested return of its $249,000.00 earnest money deposit.
Thereafter, Mr. Hewgley contacted Penklor stating that Mid South could only refund
$196,000.00 as it had distributed $53,000.00 to Mr. Bailey. Penklor denied signing the
Amendment or otherwise authorizing release of escrowed funds.
On April 27, 2015, Penklor filed suit for breach of contract, breach of fiduciary
duty, ordinary and gross negligence, and conversion naming Mid South, Mrs. Buehler,
UDC, and Mr. Bailey as defendants. Concerning the Amendment, the complaint alleges
that it
contained an unauthorized and/or forged signature purporting to be the
signature of the authorized representative of [Penklor]. In fact, no such
agreement had been authorized by [Penklor], and no such document was
executed by [Penklor], all of which facts were known, or should have been
known, by the Defendants.
On July 25, 2015, Mrs. Buehler and UDC filed an answer to the complaint,
wherein Mrs. Buehler averred that “the signature found at line 33 of the Amendment is
not hers.” On August 7, 2015, Mid South filed it answer, wherein it asserted, as an
affirmative defense, that “[b]y delivering the earnest money of $249,000.00 to [Mid
South] pursuant to the Real Estate Agreement [i.e., the Purchase and Sale Agreement
executed by and between Mrs. Buehler and Penklor], [Mid South] became the Holder as
defined in the Real Estate Agreement.” Mid South continued that “[l]ines 150 and 152 of
the Real Estate Agreement state ‘No party shall seek damages from Holder (nor shall
Holder be liable for the same) for any matters arising out of or related to the performance
of Holder’s duties under this earnest money paragraph.’” As the purported “Holder”
under the Agreement, Mid South maintained that it could not be sued. Concurrent with
its answer, Mid South filed a counter-complaint for breach of contract against Penklor,
wherein it argued that Penklor had breached the Agreement by filing suit against Mid
South in contravention of the foregoing exculpatory provisions. Mid South sought its
attorney’s fees and costs associated with defending Penklor’s lawsuit.
On August 10, 2015, Penklor filed an answer to Mid South’s counter-complaint,
wherein it stated that “no document was executed by [Penklor] and [Mid South]
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establishing an escrow agent relationship, nor agreeing that [Mid South] was a
beneficiary of the Purchase and Sale Agreement . . . .” After Penklor moved for default
judgment (for failure to answer) against Mr. Bailey, he filed an answer on August 27,
2015, wherein he denied any liability.
On May 20, 2016, Mid South filed a motion for summary judgment as to all
claims. On September 16, 2016, the trial court granted partial summary judgment
dismissing Penklor’s claims against Mid South sounding in conversion, misappropriation,
gross negligence and/or breach of express contract. The trial court denied Mid South’s
motion for summary judgment as to Penklor’s claims for negligence and breach of
fiduciary duty, and these claims were heard in a two-day bench trial. On January 26,
2018, the trial court entered its findings of fact and conclusions of law. These findings
were reduced to final judgment on February 5, 2018.
On February 26, 2018, Mid South filed a motion to alter or amend the judgment
pursuant to Tennessee Rules of Civil Procedure 52.02 and 59.01. The trial court denied
the motion by order of March 14, 2018. The trial court granted Penklor’s motion for
discretionary costs by order of March 23, 2018. After appeal, this Court determined that
the order appealed was not final (for lack of ruling on attorney’s fees) and entered a show
cause order on July 17, 2018. On August 13, 2018, Appellant filed a revised final
judgment in this court.
II. Issues
We perceive that there is one dispositive issue: Whether, by releasing escrowed
funds to Mr. Bailey, Mid South breached its fiduciary duty as Penklor’s escrow agent.
II. Standard of Review
Because this case was tried by the court sitting without a jury, we review the trial
court’s findings of fact de novo with a presumption of correctness, unless the evidence
preponderates against those findings. McGarity v. Jerrolds, 429 S.W.3d 562, 566 (Tenn.
Ct. App. 2013); Wood v. Starko, 197 S.W.3d 255, 257 (Tenn. Ct. App. 2006). For the
evidence to preponderate against a trial court’s finding of fact, the weight of the evidence
must “demonstrate . . . that a finding of fact other than the one found by the trial court is
more probably true.” Williams v. City of Burns, 465 S.W.3d 96, 108 (Tenn. 2015); The
Realty Shop, Inc. v. R.R. Westminster Holding, Inc., 7 S.W.3d 581, 596 (Tenn. Ct. App.
1999). This Court conducts a de novo review of the trial court’s resolution of questions
of law with no presumption of correctness. Kelly v. Kelly, 445 S.W.3d 685, 691-92
(Tenn. 2014); Armbrister v. Armbrister, 414 S.W.3d 685, 692 (Tenn. 2013).
III. Analysis
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Here, the Agreement provides, in relevant part, as follows:
3. Earnest Money. Buyer has paid or will pay within 5 days after the
Binding Agreement Date to Javier Michael Bailey or First National Realty,
Inc. (name of Holder) (“Holder”) . . . an Earnest Money deposit of 1% by . .
. Bank Wire to Account Provided (“Earnest Money”). . . . Holder shall
disburse Earnest Money only as follows:
(a) at closing to be applied as a credit toward Buyer’s Purchase price;
(b) upon a written agreement signed by all parties having an interest in the
funds;
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(d) upon a reasonable interpretation of the Agreement;
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. . . No party shall seek damages from Holder (nor shall Holder be liable for
the same) for any matter arising out of or related to the performance of
Holder’s duties under this Earnest Money paragraph. . .
In the first instance, Mid South argues that it is entitled to protection under the
exculpatory language of the contract, i.e., “No party shall seek damages from Holder (nor
shall Holder be liable for same) for any matter arising out of or related to the performance
of Holder’s duties . . . .” Concerning this argument, the trial court held that “[b]ecause
[Mid South] had not been designated as “Escrow Agent” or “Holder” of the Earnest
Money Deposit in the Purchase and Sale Agreement, [Mid South] was not a party to the
Contract and was not entitled to claim any benefit set forth in the Contract.” We agree.
Mid South is not named in the Agreement between Mrs. Buehler and Penklor. It is,
therefore, not entitled to the protections afforded under the contract.
Although Mid South is not entitled to rely on the exculpatory language in the
parties’ Agreement, by accepting the role of escrow agent, it is bound by the Agreement
between the parties as to how they want the escrowed funds administered. As the Sixth
Circuit Court of Appeals has noted:
[T]he particular tasks with which the escrow holder is charged are
those set forth in the escrow agreement. See generally 30A C.J.S.
Escrows § 10(a). An escrow agreement “is in essence a contractual
undertaking to assure the carrying out of obligations already contracted
for.” Id. § 2.
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West Knoxville Associates Ltd. Partnership v. Ticor Title Ins. Co., 124 F.3d 201, 1997
WL 561420, at *5 n. 8 (6th Cir. 1997) (emphasis added). In addition to its duty to
comply with the explicit directions given by the parties to the escrow agreement, an
escrow agent also occupies a fiduciary relationship with both the parties to the escrow
agreement. Id. (“An escrow holder occupies a fiduciary relationship with both the parties
to the escrow agreement, and has attendant duties of loyalty, disclosure, and care.”); see
also Ogle v. Realty World-Barnes Real Estate Co., No. 03A01-9610-CH-00336, 1997
WL 207993 (Tenn. Ct. App. April 28, 1997) (holding that an escrow agent breached her
fiduciary duties to plaintiffs by encroaching on the escrow account). Indeed, “[c]ommon
law fiduciary duties of an escrow or closing agent include (i) complying with the
instructions of the principals; and (ii) exercising ordinary skill and diligence in the
agent’s employment.” 2 Title Ins. Law § 20:30, Westlaw (August 2018). Accordingly,
“upon accepting a purchase contract for escrow or closing, . . . a title company assumes a
duty to follow all explicit and implied instructions for escrow and closing, and to
perform all services undertaken with the skill and diligence reasonably expected of a real
estate professional.” Id. (emphasis added). In Tennessee, one who stands in a fiduciary
relationship with another has a duty to exercise the “utmost good faith.” Estate of Doyle
v. Hunt, 60 S.W.3d 838, 845 (Tenn. Ct. App. 2001) (citing Mason v. Pearson, 668
S.W.2d 656, 663 (Tenn. Ct. App. 1984); Baker v. Baker, 142 S.W.2d 737, 750 (Tenn. Ct.
App. 1940)). Although there are no bright-line rules for what constitutes “utmost good
faith,” Tennessee courts have observed that a fiduciary is “required to exercise the same
degree of diligence and caution that a reasonably prudent businessman would employ in
the management of his own affairs.” Id. (citing In re Estate of Inman, 588 S.W.2d 763,
767 (Tenn. Ct. App.1979)). An agent who breaches his or her fiduciary duties to his or
her principals is liable for any pecuniary loss caused by the breach. See Youngblood v.
Wall, 815 S.W.2d 512 (Tenn. Ct. App.1991).
By accepting the role as escrow agent for the transaction between Mrs. Buehler
and Penklor, Mid South assumed a duty not only to comply with the parties’ explicit
instructions as outlined in the Earnest Money portion of their Agreement, but also to
exercise the “utmost good faith” in carrying out the parties’ wishes concerning the
escrowed funds. Mid South argues that it did, in fact, comply with the explicit
instructions outlined in the Agreement. Specifically, Mid South contends that the
Amendment requesting the release of the $53,000.00 to Mr. Bailey was “a written
agreement signed by all parties having an interest in the funds.” Upon satisfaction of the
explicit instruction set out in the parties’ Agreement, Mid South maintains that it was
required to release the funds. While it is true that an escrow agent is subject to liability
for failing to follow the joint instructions provided by the parties to the escrow, as
discussed above, the duty of an escrow agent does not end with rote compliance with the
parties’ agreement. Rather, the escrow agent must also exercise the utmost good faith as
a fiduciary to the parties.
Implicit in the Agreement between Mrs. Buehler and Penklor is the fact that the
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escrowed funds are to be used in furtherance of the transaction between Mrs. Buehler and
Penklor concerning Penklor’s purchase of properties from Mrs. Buehler. This is the
essence, or the res, of the contract.
As set out in full context above, the Amendment provides
The $249,000 deposited with Mid South title shall be distributed and
handled as follows: 1) $149,000.00 shall be used to pay all costs relating to
title and legal fees associated with the preparation and transfer of
property interest. 2) $53,000 shall be immediately transferred to Javier
Bailey to payoff outstanding fees and encumbrances and outstanding
invoice for former legal fees. . .
(Emphases added). Mrs. Buehler and Penklor finalized their Agreement on November
26, 2012. It is undisputed that Mr. Bailey was disbarred by the Tennessee Supreme Court
effective April 26, 2012. The parties knew of the disbarment because the reason for Mid
South’s involvement and agreement to serve as escrow agent was Penklor’s insistance
that the escrow agent be an attorney. As such, Mr. Bailey, who was initially named in the
Agreement, could not fulfill this role. As denoted in the Amendment, the disputed
$53,000.00 in escrowed funds were to be paid to Mr. Bailey for “outstanding fees” and in
satisfaction of an “outstanding invoice for former legal fees.” It is axiomatic that Mr.
Bailey’s “former legal fees” could not be associated with this transaction because he was
disbarred some seven months prior to Penklor and Mrs. Buehler’s Agreement. As such,
the request for distribution of $53,000.00 in escrowed funds was clearly outside the scope
of the Agreement.
While we concede that the parties were free to change the nature and use of the
escrowed funds, the Amendment provided to Mid South by Mr. Bailey is more than
suspect. First, as noted above, following his disbarment (in April 2012), Mr. Bailey
could not have accrued legal fees for work done on this transaction (which was entered in
November 2012). This, in itself, should have alerted Mid South to seek verification from
the parties concerning their wishes for the escrowed funds. Furthermore, the Amendment
specifically contemplates payment of the legal fees associated with this transaction in the
earmarking of $149,000.00 in escrowed funds for this purpose. In view of the fact that
the Amendment designates $149,000.00 for “legal fees associated with the preparation
and transfer of property interest” for this transaction, a reasonably prudent business
person would question the nature and origin of the “outstanding fees and encumbrances
and outstanding invoice for former legal fees” payable directly to Mr. Bailey, who was
not a licensed attorney at any time during this transaction.
Not only was the reason for the $53,000.00 disbursement suspect, but the timing
of the Amendment was also dubious. The parties Agreement was entered on November
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26, 2012, and Penklor wired the $249,000.00 to Mid South’s bank on December 3, 2012.
The purported Amendment was allegedly signed by Mrs. Buehler and Mr. Davis on
December 6, 2012. Mid South issued the check for $53,000.00 on December 7, 2012 and
tendered it directly to Mr. Bailey on the same day. The truncated timeline is even more
suspicious given the fact that Mr. Hewgley spoke with Penklor’s attorney only one day
before Mr. Hewgley authorized the $53,000.00 check. It is undisputed that Penklor’s
attorney did not mention any forthcoming amendment to the parties’ Agreement.
Furthermore, the Agreement was contigent on Penklor’s approval of the condition
of all of the 1,053 properties after exercising its right of inspections. The inspection of
this number of properties could not have been accomplished by the time of the purported
Amendment. Without Penklor’s approval of the condition of the properties, there was no
reason to believe that Penklor would authorize any disbursement of its earnest money.
Based on the totality of the circumstances, the trial court held that
[g]iven the number of warning signals in existence at the time Mr. Bailey
asked [Mid South] to disburse $53,000.00 of Penklor’s earnest money
deposit, a prudent escrow agent would have been expected to act for
Penklor as an Escrow Agent would have acted in the management of his
own affairs . . . [Mid South] should have . . . [made] inquiry of Penklor
[whether] that disbursement had in fact been authorized, before making
[the] disbursement.
We agree with the trial court’s conclusion. As a fiduciary to both Mrs. Buehler and
Penklor, Mid South had a duty to exercise the “utmost good faith” in carrying out the
parties’ mandates for the escrowed funds as outlined in their Agreement. By advancing
escrowed funds under what can only be described as very suspicious circumstances and
for purposes not contemplated in the Agreement or arising out of the transaction between
Penklor and Mrs. Buehler, Mid South breached its fiduciary duty to Penklor.
Mid South spends much of its appellate argument on the question of whether the
trial court erred in finding breach of duty without the aid of expert testimony outlining
the duty of an escrow agent in Shelby County. Based on the foregoing analysis, we
conclude that the duty Mid South breached is one of common sense.
As recently discussed by this Court,
any claim . . . may require expert proof
when the subject matter requires that the court and jury have
the aid of knowledge or experience not held by ordinary
witnesses, Lawrence County Bank v. Riddle, 621 S.W.2d
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735, 737 (Tenn. 1981), and where common knowledge
furnishes no criteria for judgment or where proof depends on
observation and analysis outside the common experience of
jurors, expert testimony is required to establish the proof.
Hall v. State, No. E2004-01635-CCA-R3-PD, 2005 WL 2008176, at *30
(Tenn. Crim. App. Aug. 22, 2005), perm. app. denied (Tenn. Dec. 19,
2005). Thus, when
Issues . . . are not subject to an intelligent determination
simply on the basis of deductions made and inferences drawn
from ordinary knowledge, common sense, and practical
experience gained in the ordinary affairs of life . . . the
testimony of a witness with special knowledge and skill is
required in order to arrive at an intelligent conclusion.
Id. (quoting Lawrence County Bank, 621 S.W.2d at 737); see also Tenn.
R. Evid. 702 (stating that expert testimony is admissible “[i]f scientific,
technical, or other specialized knowledge will substantially assist the trier
of fact to understand the evidence or to determine a fact in issue”).
However, “[i]f the finder of fact can comprehend the subject of expertise
without expert testimony, then an expert witness is not necessary.” Miller
v. Willbanks, 8 S.W.3d 607, 615 (Tenn. 1999) (citing Lawrence County
Bank, 621 S.W.2d at 737).
Jackson v. Burrell, No. W2018-00057-COA-R3-CV, 2019 WL 237347, *6 (Tenn. Ct.
App. Jan. 16, 2019) Stafford, J., dissenting in part). Here, Mid South’s breach of
fiduciary duty is easily gleaned based on “deductions made and inferences drawn from
ordinary knowledge, common sense, and practical experience gained in the ordinary
affairs of life,” and no expert testimony is necessary. In view of the reasons given for the
requested $53,000.00, the timing of the Amendment, the lack of any mention of an
amendment by Penklor’s attorney, and the fact that Penklor had not exercised its right of
inspection at the time of disbursement of the escrowed funds, a reasonably prudent
business person would have made further inquiry before issuing the check to Mr. Bailey.
IV. Conclusion
For the foregoing reasons, we affirm the trial court’s order. The case is remanded
for such further proceedings as may be necessary and are consistent with this opinion.
Costs of the appeal are assessed to the Appellant, Mid South Title Service, LLC, for
which execution may issue if necessary.
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KENNY ARMSTRONG, JUDGE
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