Johnson v. Schultz

The Schultzes (defendants) contracted to purchase property from the Johnsons (plaintiffs), hiring attorney Donald Parker to conduct the closing. As part of the transaction, Parker drafted a property deed for the Johnsons. Prior to closing, Parker deposited into his trust account the funds provided by the Schultzes to cover the purchase price. On January 3, the deed to the property was executed and recorded. On that same day, Parker tendered a check to the Johnsons for the proceeds due. By the following day, however, Parker’s account contained insufficient funds as a result of his misappropriation. When the Johnsons attempted to cash the check, it bounced. The Johnsons brought suit, seeking rescission of the deed and recovery of title from the Schultzes. The trial court dismissed the Johnsons’ claim, concluding that the Johnsons must bear the risk of loss because at the time of Parker’s misappropriation, the Johnsons were the ones entitled to the funds. The Johnsons appealed, contending that the entitlement rule used by the trial court to determine allocation of the risk of loss was not applicable because the transaction was not an escrow, and that the Schultzes should bear the risk of loss because they had an attorney-client relationship with the wrongdoer. The Schultzes argued that in such case, the Johnsons must share the loss because Parker had also represented the Johnsons at closing.