## Facts

- Lechner owned real property in Darrington, Washington, operating the Pioneer Tavern, and retained Donahue Realty to sell the property.
- The Hallings agreed to buy for $13,000, consisting of $11,000 cash plus a house trailer valued at $2,000.
- The Hallings paid $2,000 earnest money to Donahue and later paid an additional $9,000 to Donahue, totaling $11,000 cash deposited with Donahue.
- The Hallings also delivered the trailer’s title and registration documents to Donahue, while temporarily retaining physical possession of the trailer to live in it.
- Donahue issued a writing stating the $13,000 (cash plus trailer) was the full purchase price and would be held “in escrow” pending delivery of specified items, including title insurance, a license, a warranty deed, and a bill of sale for equipment.
- Lechner executed a warranty deed and bill of sale to the Hallings and deposited them with Donahue.
- The Hallings took possession and operated the tavern.
- Halling later signed a written “release” authorizing Donahue to pay the purchase price to Lechner; Donahue then delivered the deed to Halling and agreed to record it.
- Donahue did not remit the full purchase price to Lechner, but instead misappropriated the funds; her license was revoked, she was convicted of embezzlement, and a receiver took control of the deed and remaining assets.
- Lechner sued the Hallings for the purchase price or, alternatively, reconveyance; the trial court awarded title to the Hallings and required Lechner to pursue recovery through the receivership.

## Issues

1. When a broker/escrow holder embezzles sale proceeds after the buyer has deposited the full consideration and authorized release to the seller, which party bears the loss?
2. Whether an escrow existed on the evidence, and when the escrow conditions were fully performed so that the escrow holder held the funds for the seller rather than the buyers.
3. Whether physical delivery of the trailer was a condition precedent to completion of the escrow.

## Decision

- The Washington Supreme Court affirmed the judgment for the Hallings.
- The court held that an escrow relationship existed and that, by the time Halling executed the release authorizing payment to Lechner, the escrow conditions had been fulfilled.
- After fulfillment of the escrow conditions, Donahue held the funds for Lechner’s benefit; Donahue’s later embezzlement therefore created a loss that fell on Lechner, not the Hallings.
- Physical delivery of the trailer was not treated as a condition precedent where the buyers had delivered the trailer’s title documents and the parties agreed to delayed possession.
- The Hallings were entitled to delivery of the deed from the receiver and were not required to pay the purchase price a second time or rescind and reconvey.

## Legal Principles

- An escrow may be established by a writing and the parties’ conduct even without formal escrow instructions, if the conditions for holding and releasing funds and documents are sufficiently shown.
- Once escrow conditions are fully performed and the buyer authorizes release of funds to the seller, the escrow holder thereafter holds the purchase money for the seller; the escrow holder’s defalcation at that stage is allocated to the seller.
- A buyer who has fully performed by depositing the agreed consideration into escrow and authorizing its release is not liable to the seller for the same consideration if the escrow holder later embezzles it.
- Delivery of title documents and an agreed postponement of physical transfer can satisfy the parties’ contemplated performance, so that lack of immediate physical delivery does not necessarily prevent completion of escrow.

## Conclusion

Because the buyers completed performance and authorized release of the escrowed purchase price, the broker’s later embezzlement occurred while the broker held the funds for the seller, making the seller bear the loss and leaving the buyers’ title intact.


Lechner v. Halling, 216 P.2d 179 (Wash. 1950)