The escrow agreement said one thing. The sales contract said another. Guess which one won
The Hawai'i Supreme Court just gave escrow companies a clear win – and handed real estate professionals a sharp reminder about how escrow agreements actually work.
On March 20, the court ruled that an escrow company did nothing wrong when it released a defaulting buyer's entire deposit to the seller. The decision vacated an intermediate appellate court ruling that had found enough of a dispute to send the case to trial. The Supreme Court said no – the escrow company followed the agreement, and that was the end of it.
Here is what happened.
In 2013, Naho Yamaguchi agreed to buy a unit in the Ritz-Carlton Residences, Waikiki Beach for $1,182,800. The seller was PACREP LLC. Title Guaranty Escrow Services handled the escrow. Yamaguchi signed the sales contract, which incorporated a separate escrow agreement between PACREP and Title Guaranty. She was not a signatory to that escrow agreement, but the sales contract said she had reviewed it, approved its terms, and accepted its obligations.
By 2016, Yamaguchi had deposited roughly $592,400 into escrow – more than half the purchase price. Then she defaulted.
PACREP notified her of the default and gave her 20 days to fix it. She did not. PACREP then sent two termination letters, both copied to Title Guaranty. The first said PACREP would retain 15% of the purchase price as liquidated damages. The second, sent 18 days later, said PACREP would retain all deposits. Both letters told Title Guaranty to cancel escrow and release the funds.
Title Guaranty did exactly that. It sent the remaining balance of $250,014.39 to PACREP. The rest of Yamaguchi's deposit had already gone to PACREP earlier for permitted construction costs under the escrow agreement.
Yamaguchi went after PACREP in arbitration and won a conversion award of $412,750.90, offset by $177,420 in liquidated damages owed to PACREP. That judgment was satisfied. But she also sued Title Guaranty separately, arguing the escrow company should not have released all her money – especially after getting two letters from PACREP that said different things about how much the seller intended to keep.
The trial court sided with Title Guaranty. The intermediate appellate court disagreed, finding that the conflicting letters created a factual dispute about whether Title Guaranty had breached its duty as a trustee of Yamaguchi's funds.
The Supreme Court stepped in and vacated the appellate court's ruling.
The logic was straightforward. The escrow agreement – the document that governed Title Guaranty's duties – said that when a buyer defaults and the seller certifies the termination in writing, escrow must treat all of the buyer's funds as the seller's property. The seller then gets those funds on written request. Title Guaranty did that. It followed the escrow agreement to the letter.
The court drew a critical line that anyone in this industry should pay attention to. The sales contract incorporated the escrow agreement, but the escrow agreement did not incorporate the sales contract. That means the sales contract's rules about how much the seller could actually keep after a default – and how much had to go back to the buyer – were not part of the escrow company's playbook. Under the sales contract, if the buyer had paid more than 15% of the purchase price, the seller was entitled to retain 15% of the purchase price or the amount of actual damages incurred, whichever was greater, with the remainder to be refunded. But none of that was written into the escrow agreement. Title Guaranty was not required to read the sales contract, interpret its remedies provision, or decide how much the seller was actually entitled to keep. That was a dispute between buyer and seller, not a problem for the escrow company.
The court also found no breach of fiduciary duty. Title Guaranty owed Yamaguchi a duty as a trustee of her funds under Hawai'i law, but that duty was to follow the escrow agreement strictly – nothing more. The two letters from PACREP, even if they could be read as conflicting, did not conflict with the escrow agreement itself. The agreement said all funds go to the seller on default. That is what happened.
For anyone in the mortgage and real estate space, this is a case worth knowing. It tells you that when the escrow agreement and the sales contract say different things about what happens on a default, the escrow company answers to the escrow agreement. Period. If the buyer has a problem with how much the seller kept, that fight is with the seller – not the escrow company.
It also sends a practical message. If you are structuring a transaction where the sales contract spells out how default proceeds should be divided but the escrow agreement simply hands everything to the seller, you have a gap. And as this case shows, that gap can cost a buyer hundreds of thousands of dollars before anyone at the escrow company is required to ask a single question about it.
The case was remanded to the ICA to address the award of attorney fees and costs, which remains unresolved.
