420 N.Y.S.2d 954, 957 (N.Y. Sup. Ct. 1979); 55 N.Y. Jur. § 2.
Any loss suffered before the condition for delivery is satisfied is borne by the depositary or grantor -- in this case, LCC. "The incidents of ownership remain in the person depositing the property into escrow until the conditions of the escrow agreement are fulfilled." Pan Trading, 422 F. Supp. at 349, citing Alexander v. Quality Leather Goods Corp., 150 Misc. 577, 269 N.Y.S. 499 (N.Y. Sup. Ct. 1934). By contrast, any loss incurred after the condition is met falls on the grantee -- in this case, 99 Commercial. See 30A C.J.S. §§ 3, 5. None of this supports plaintiff's suggestion that an agreement executed by an escrow agent prior to compliance with the conditions set forth in the escrow agreement is enforceable only against a grantor like LCC. Once funds or documents are deposited with the escrow agent, the grantor loses control over the instruments, and the grantee does not obtain title until the condition is satisfied. Pan Trading, 422 F. Supp. at 349. In a very real sense, ownership is held in stasis, the instrument available neither to grantor nor grantee, awaiting disposition by the agent in accordance with the terms of the agreement. Absent dissolution of the trust by consent of both parties, abandonment of a claim against the trust, violation of a condition by the grantee, or compliance with the conditions, the escrow continues in effect. 28 Am Jur 2d Escrow § 11.
In complying with its fiduciary duties, an escrow agent must follow the instructions of the parties, Farago, 262 N.Y. at 233; 55 N.Y. Jur. 2d, Escrows § 19; 30A C.J.S. § 10, and is bound to take whatever steps are necessary to fulfill its duties. Helman v. Dixon, 71 Misc. 2d 1057, 338 N.Y.S.2d 139 (N.Y. Civ. Ct. 1972). Moreover, an agreement entered into by an agent pursuant to authority granted by the agency agreement or by instruction of the parties is valid and enforceable. 30A C.J.S. § 10. The escrow agent is, in effect, agent to both parties, see George A. Fuller Company, 760 F. Supp. at 386; Asher, 49 Misc. 2d at 477, 267 N.Y.S.2d at 934; and Farago, 262 N.Y. at 233, 186 N.E. at 684, and holds the instruments for both parties. Accordingly, the escrow agent acts for both parties and, by definition, on behalf of both parties.
The final question, therefore, becomes whether the Customer Agreement executed by the escrow agents was within the scope of the agents' fiduciary duties and whether the authority granted by the parties was sufficient to bind them to an arbitration agreement that the escrow agents signed.
C. Agency Principles
It is axiomatic that agents with proper authority can enter into contracts with third persons on behalf of their principals. 2A C.J.S. Agency, § 174. Whether an agent has authority to enter into a contract with a third party is determined "from all the facts and circumstances of the case, in view of the object which the agent is appointed to accomplish." Id. Written consent is not necessary; the principal's spoken words or general conduct suffices, particularly when they lead the agent to conclude that the principal desires that the agent act in a particular way. Restatement (Second) of Agency § 26 (1958).
Under New York law, an agent's authority may be express, implied or apparent. An agent enjoys implied authority to enter into a transaction when verbal or other acts by a principal reasonably give the appearance of authority to the agent. Greene v. Hellman, 51 N.Y.2d 197, 204, 433 N.Y.S.2d 75, 80, 412 N.E.2d 1301 (1980). In apparent authority cases, the words or conduct are communicated to a third party so as to lead the third party to believe that the agent acts with authority granted by the principal. Ford v. Unity Hosp., 32 N.Y.2d 464, 472-73, 346 N.Y.S.2d 238, 244, 299 N.E.2d 659 (1973). Reliance on implied or apparent authority is acceptable so long as it is reasonable from the circumstances surrounding the transaction. See, e.g., Di Russo v. Grant, 28 A.D.2d 847, 281 N.Y.S.2d 513, 514 (2d Dep't 1967).
On the basis of the above principles of law, this Court concludes that the escrow agents in this case executed the Customer Agreement in accordance with their duties, binding both 99 Commercial and LCC to arbitration and permitting the Defendants to rely on the Agreement to bind the Plaintiffs.
It is undisputed that after consulting with Defendants, McLain opened the Commercial Account with Bear Stearns. It is also undisputed that, at all times, Plaintiffs were aware that the monies would be placed at Bear Stearns for investment in the Funds recommended by Defendants. The escrow agents, complying with the instructions of the escrow agreement and with Plaintiffs' explicit consent at the closing, invested the escrow funds with Bear Stearns. As part of the investment process, the escrow agents signed the Customer Agreement. The escrow agreement undeniably authorized the investment of the escrow funds and Plaintiffs acquiesced in the placement of the monies with Bear Stearns. There is nothing in the record to suggest that a customer agreement containing an arbitration clause with a clearing house is unusual or out of the ordinary course of business for the securities investment world. In fact, the evidence proves the contrary. Bear Stearns routinely sends customer agreements containing an arbitration clause when accounts are opened. The agent's acts in executing the Customer Agreement were eminently reasonable and fully within the scope of the duties which they were entrusted to execute. The escrow agents had both express and apparent authority to act on behalf of both 99 Commercial and LCC and could and did bind both to the arbitration provision of the Customer Agreement. Thus, the Plaintiffs must submit their Escrow Account claims to arbitration.
As to the Commercial Account, plaintiffs are correct that the cases cited by the Defendants are distinguishable from the facts of this case. There simply has been a dearth of persuasive evidence presented that Plaintiffs either received an executed customer agreement for the Commercial Account or that they engaged in a course of dealing sufficient to suggest a contract implied in law. Nonetheless, Plaintiffs must also submit their Commercial Account claims to arbitration because the Escrow Account Customer Agreement explicitly requires arbitration of disputes involving all of a customer's accounts "whether entered prior to, on or subject to the date hereof." The escrow agents acted for Plaintiffs and the plain meaning of the agreement they signed for Plaintiffs binds the Plaintiffs to arbitration of all of their account transactions with Bear Stearns and their brokers, regardless of when an account was opened. See, e.g., Coffey v. Dean Witter Reynolds, Inc., 891 F.2d 261, 262-63 (10th Cir. 1989); Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693 F.2d 1023, 1028 (11th Cir. 1982).
The agreement executed by Plaintiffs' escrow agents binds Plaintiffs to arbitration. Therefore, Defendants' motion for an order to compel arbitration and to stay this action until the termination of arbitration proceedings pursuant to 9 U.S.C. § 3 is hereby GRANTED. The parties are, however, required to submit status reports on the progress of the arbitration every six months. The first report is due on July 7, 1993.
January 14, 1993
New York, New York
© 1992-2004 VersusLaw Inc.