It is ABSOLUTELY taking place outside of the escrow system! You are buying BTC with USD ... there is no way to do that in the escrow system. I'm sorry that you were scammed and it sucks, but that is why a lot of people warn others to get their bitcoins from trustworthy exchanges rather than from vendors here. There are some reputable btc vendors here, but the amount of MP scams going on makes it a really, really risky way to get your coins.