## Facts

- Sellers William and Suzanne Johnson contracted to sell a residence in Benson, North Carolina to buyers Timothy and Shelley Schultz for $277,500 using the North Carolina Bar Association standard purchase contract.
- The Schultzes hired attorney Donald A. Parker as the sole closing attorney to handle the transaction.
- The Schultzes funded the purchase with personal funds and a lender loan; the funds were deposited into Parker’s trust account before closing.
- At closing, the Johnsons executed a deed conveying title to the Schultzes; the deed and deed of trust were recorded the same day.
- Parker delivered a trust-account check to the Johnsons for the net sale proceeds, and his trust account had sufficient funds at the time the check was issued.
- The next day, Parker’s trust account lacked sufficient funds because he misappropriated money; months later the Johnsons attempted to cash the check and it was returned for insufficient funds.
- The Johnsons remained unpaid for the net proceeds and sought equitable rescission of the deed and return of title.

## Issues

1. Between an innocent buyer and an innocent seller, who bears the loss when the closing attorney misappropriates sale proceeds after the deed is recorded?
2. Did the trial court err by allocating risk based on who was “entitled” to the funds at the moment of misappropriation rather than by enforcing the parties’ contract and the closing attorney’s agency role?

## Decision

- The North Carolina Court of Appeals reversed summary judgment against the Johnsons and remanded.
- The court held the buyers bore the risk of loss resulting from Parker’s misappropriation of the sellers’ proceeds.
- The court rejected the trial court’s entitlement-based approach as controlling under these closing circumstances.

## Legal Principles

- Risk allocation in a residential closing begins with the parties’ contract; absent an express neutral-escrow arrangement, contract structure and agency principles control.
- A closing attorney is not automatically a neutral stakeholder; the attorney’s principal-client relationship and whose obligation the attorney is performing matter for allocating loss.
- When a party’s agent misappropriates funds while carrying out that party’s payment obligations, the loss generally falls on the principal who selected and empowered the agent, not on the other innocent party.
- Rules associated with classic escrow arrangements do not automatically govern where the transaction lacks a defined escrow agreement allocating the risk of loss.

## Conclusion

The court placed the loss from the closing attorney’s theft on the buyers because the attorney was the buyers’ agent for handling and disbursing purchase funds under the contract and closing structure, and it remanded for further proceedings on the sellers’ requested equitable relief.


Johnson v. Schultz, 195 N.C. App. 161, 671 S.E.2d 559 (N.C. Ct. App. 2009)