RECENT TITLE INSURANCE AND ESCROW CASES

RECENT TITLE INSURANCE AND ESCROW CASES TEXAS LAND TITLE INSTITUTE SELF-STUDY PAPER San Antonio, Texas December 3-4, 2015 Previously presented at Ti...
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RECENT TITLE INSURANCE AND ESCROW CASES

TEXAS LAND TITLE INSTITUTE SELF-STUDY PAPER San Antonio, Texas December 3-4, 2015

Previously presented at Title Insurance Litigation Committee Annual Convention Meeting

JEREL J. HILL ATTORNEY AT LAW 1420-B STONEHOLLOW DRIVE KINGWOOD, TEXAS 77339 281-358-3560 (PHONE) 281-358-0030 (FAX) [email protected]

I.

Introduction

This year’s class of 125 cases had triumphs and disappointments for insurers and agents. Several courts continue to assist the FDIC in re-writing CPLs as open ended indemnities. There were some interesting damage cases – one involving pollution fears and loss of privacy concerns. There was a trio of cases on reinsurance of a large power plant project. Moreover, one buyer’s imaginative efforts to convert a building violation notice to gold fell flat. II.

INSURED vs. INSURER A.

Policy Terms 1. Who is the Insured? a.

b.

c.

d. e.

f.

2.

What is insured? a.

 

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Not the loan broker who paid large property tax bill. LJC Financial, LLC v. Alliant National Title Insurance Co., 2015 WL 1888282 and 2014 WL 7190872 (S. D. Tex). Party who had assigned mortgage and sister company who never held it were not insureds under loan policy. Stockton Mortgage Inc. v. Tope, 233 Cal. App. 4th 437 (2014). However, a Pennsylvania judge held that coverage did continue after the loan is sold. See Colonial Mortgage Service Co. v. Commonwealth Land Title Insurance Co., 2014 WL 6237852 (E. D. Pa.). Owner policy coverage terminated when Insured quitclaimed to related entity. Durbano & Garn Investment Co., LC v. First American Title Co., 330 P. 3d 119 (Utah Ct. App. 2014). Lender policy terminated upon release. RNT Holdings, LLC v. United General Title Insurance Co., 179 Cal. Rptr. 3d 175 (2014). Owner coverage survived conveyance of a portion of the property. First American Title Insurance Co. v. 273 Water Street, LLC, A. 3d (Conn. App. 2015) See also Weber Estates at II, C, 1, a, Spalding at II, C, 1, c below, and In Re Longview Power at V, A.

Access. One of three roads mentioned in access endorsement is closed part of the year by BLM. The lender policy covers this defect. However, 1

b.

c.

d.

e.

f.

 

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knowledge of insured or public records exclusions may apply. Commonwealth Land Title Insurance Co. v. Sun Valley Credit, LLC, 2015 WL 8070555 (D. Id). Access endorsement protected owner against loss of access by future lot owners via three listed roads? So sayeth Montana Supreme Court in Meadow Brook, LLP v. First American Title Insurance Co., 329 P. 3d 608 (Mont. 2014). Insured had legal access, but retaining wall along street impaired physical access. Summary judgment for Insurer. Opinion does not mention if there was a Schedule B exception for the wall. 43 Park Owners Group, LLC v. Commonwealth Land Title Insurance Co., 995 N. Y. S. 2d 148 (App. Div. 2014). Insured’s access via a 30 year license is sufficient. If it loses access in the future, it may have a claim. Opinion reviews several access cases from around the country. Fidelity National Title Insurance Co. v. Woody Creek Ventures, LLC, 2014 WL 1774821 (D. Colo.). Marketability. Lack of subdivision approval may make lots hard to sell, but title remains marketable. Security Service Federal Credit Union v. First American Title Insurance Co., 585 Fed. Appx. 591 (9th Cir. 2014). Trespass. Title policies do not cover injury by trespassers. See Chorches v. Stewart Title Guaranty Co., 48 F. Supp. 3d 151 (D. Conn. 2014) and CH Properties Inc., v. First American Title Insurance Co., 43 F. Supp. 3d 83 (Puerto Rico 2014). Notices. Building code violation notice not a title defect or lien. See Stockton Mortgage at II, A, 1, b. Disqualification for Future Federal Disaster Assistance was not a title defect. Buyer owns property, just cannot secure a government insured loan against it. Lemon-Pittman v. Commonwealth Land Title Insurance Co., 2014 WL 3498323 (E.D. La.). Calls to a point. Insurer missed 10 foot conveyance in 1924 deed. However, legal was metes and bounds that went to north line of city street. There was no coverage because Insured acquired property to street – just as it bargained. If loss was shortage in area, survey exception would have applied. Kraft v. Estate of Cooper, 330 P. 3d 639 (Or. App. 2014). Harmless error. Attachment to Schedule A of owner policy referenced 7 lots instead of one. Deed and other documents listed only one lot. OTP only insured the one lot. Demetrio v. Stewart Title Insurance Co., 3 N.Y.S. 3d 75 (App. Div. 2015).

2

g.

Personal Property. Insured bought two commercial buildings after foreclosure sale. Dispute arose over geothermal water supply system. Issue not covered by OTP because either (a) is personal property and (b) vendor’s claim cut off because it was not of record before foreclosure sale. Insured is thus a BFP as to the claim. Geo Finance, LLC v. University Square 2751, LLC, 2014 WL 7369940 (E. D. Mich.).

3. Exclusions a.

b.

c.

d.

e.

 

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Errors of Insured’s attorney created alleged title defect. Thus 3(a) applied. (Even if there was still a policy after lien was released.) See RNT Holdings at II, A, 1, d above. Interestingly, here attorney’s negligence was equated to alleged intentional tort of Insured in acquiring title. See Safeco Title Insurance Co. v. Moskopoulos, 116 Cal. App. 3d 658 (1981). Law firm Insured knew it was receiving second lien. Agent erroneously omitted first lien from loan policy. Held, 3 (a) applied to bar coverage for prior lien. First American Title Insurance Co. v. Lane Powell PC, 764 F. 3d 114 (1st Cir. 2014) (Retired Justice Souter sat on this panel). Lender made loans on 14 condo units in 2007. It told its attorney to hold $10,000 per unit from loan proceeds – apparently to protect against potential claim of first lienholder. Units foreclosed and lender resold all in 2008 and retained mortgage. Loan policies issued in 2007 and 2008 did not except to first lien. Insurer claimed 3(a) applied. Held, 3(a) might apply to 2007 policy, but does not apply to 2008 one. Apparently there was no evidence, that prior lien was discussed at later closing. First American Title Insurance Co. v. DJ Mortgage, LLC, 761 S. E. 2d 811 (Ga. App. 2014). Lender’s loan documents described it as second lien. Agent failed to except to first lien in loan policy. Lender agreed to second lien status as defined in 3 (a). Beneficial Mutual Savings Bank v. Stewart Title Guaranty Co., 36 F. Supp. 3d 537 (E. D. Pa. 2014). Existing lienholder (Hopper) executed subordination prior to closing. New lender discussed matter with Hopper and knew that no money was being paid to him. Borrower defaulted and new lender posted property for foreclosure. Hopper sued alleging the subordination was void for lack of consideration and/or due to new lender’s fraud. New

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f.

g.

h.

lender’s title insurer denied coverage based on 3(a) and 3 (b). Reversing summary judgment for Insurer, appellate court said new lender’s claim should go to trial. Risk that subordination was void based on new lender’s actions or its knowledge not of record need to be proven by the Insurer. Metropolitan National Bank v. Commonwealth Land Title Insurance Co., 456 S. W. 3d 61 (Mo. App. 2015). Saving the best 3(a) case for last. Seventh Circuit held construction lender “created” or “suffered” mechanics lien closing by continuing funding long after owners stopped contributing money and cost overruns were significant. Opinion features a scholarly review of five cases on this issue. Hopefully, it will become the leading case on this issue. BB Syndication Services, Inc. v. First American Title Insurance Co., 780 F. 3d 825 (7th Cir. 2015). Pending property tax litigation was not a title defect as of the closing date. Tax lien arose when litigation concluded closing. The tax lien, was consequently a post-policy date matter under Exclusion 3(d). Princeton South Investors, LLC v. First American Title Insurance Co., 97 A. 3d 1190 (N. J. Super. A. D. 2014). NOTE: Agent’s duty to disclose the pending litigation was not an issue in this case. Bank made two construction loans on adjoining lots. Borrower was to build four-plex on each lot. Location endorsements were issued. Borrower then built both four-plexes on one lot and parking lot on other lot. It then defaulted and bank made full credit bid at foreclosure sale. Then it made claim on loan policy because a four-plex not built on second lot. (Both lots subsequently resold by bank to one purchaser.) Trial court granted summary judgment to Insurer. On appeal, Idaho Supreme Court said the full credit bid did not terminate the loan policy. The opinion misconstrues Sections 7(a), 7(b), 2(c), and 9 of the 1992 ALTA policy. Basically, the full credit bid was not a payment. The court finds the location endorsement coverage was triggered, but does not discuss damages. Bank of Idaho v. First American Title Insurance Co., 329 P. 3d 1066 (Idaho 2014).

4. Exceptions a.

 

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Minor setbacks encroachment cured by city variance. Insured sued Insurer and real estate broker. Summary judgment for both defendants

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b.

c.

d.

B.

affirmed. Insured may have fear of future loss but he had not suffered one yet. Opinion does not say if Insurer obtained the variance. Ky v. GOB Construction, Inc., 2014 WL1717454 (La. App.). NOTE: Was there a survey exception in the owner policy? Schedule B exception to water charges prevented coverage for lien securing pre-policy date use. Lien recorded after closing. Timac Realty v. G&E Tremont LLC, 994 N.Y.S. 2d 91 (App. Div. 2014). Exception to servitude enforced. Pasha v. Commonwealth Land Title Insurance Co., 2014 WL 5510931 (Ky. App.). (Unpublished). Insurer was allowed to assert this defense even though initial denial based on Exclusion 3(c). The letter did include a “non-waiver” statement. Condo doc exception applied to association’s right of first refusal. IQ Holdings, Inc. v. Stewart Title Co., 451 S. W. 3d 861 (Tex. App.-2014, no writ yet).

Claims Procedure 1. Notice / Limitations a.

b.

c.

d.

 

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Insurer liable for pre-notice defense costs of Insured. The Insurer was aware of the title suit and “suffered” no prejudice due to [the Insured’s] late notice on request for “representation”. CH Properties, Inc. v. First American Title Insurance Co., 2014 WL 4417772 (D. Puerto Rico). Insured gave notice of claim. Insurer hired counsel to quiet title. A judgment voiding deed to borrower was entered in separate action. Insured was not a party to that lawsuit. Insured notified Insurer of that suit after judgment was final. Held, notice was not late. NOTE: Perhaps court felt insurer or retained counsel should have located second lawsuit. Also, it helped Insured that it was not a party to that action. Emigrant Mortgage Co., Inc. v. Commonwealth Land Title Insurance Co., 4 N.Y.S. 3d 491 (App. Div. 2015). Tender in final stages of settlement is sufficient in Oregon. Ventana Partners, LLC v. Lanoue Development, LLC, 340 P. 3d 107 (Or. App. 2014). Late notice limited Insurer’s liability to what claim could have been cured for if notice had been timely. CitiMortgage, Inc. v. Shapiro, 2015 WL 412869 (D. Mass.) NOTE: Interesting case-usually late notice bars claim entirely. Here there was no third party litigation, Insured just 5

e.

learned of sheriff’s sale in time to save property but did not do so itself or give Insurer notice. Limitations on loan policy claim began when prior lien was foreclosed. U.S. Bank National Association v. First American Title Insurance Corp., 570 Fed. Appx. 209 (3rd Cir. 2014). However, limitations on failure to defend starts when third party suit concludes, not upon insurer’s denial. See Feduniak v. Old Republic National Title Insurance Co, 2015 WL 632324 (N.D. Cal.) (Other opinions in this case reviewed at II, B, 2, g below). Limitations on OTP claim began on date of purchase. Shepard v. Holmes, 2014 WL 7338525 (Wash. App.). (Unpublished). (Buyer not told of consolidation deed, but it was of record on closing date. Hence, she could only sell four lots together.) However, limitations on agent not paying off lien did not start until Insured lender learned of agent’s breach. Bank of America, N.A. v. Chicago Title Insurance Co., 2014 WL 4435857 (N. D. Ill.) Limitations on investor’s claim against title agent began when they sued developer. Title agent disclosed more docs in second discovery request, but this did not extend limitations. Investors knew title company’s role when they sued developer. Krot v. Fidelity National Title Co., 2014 WL 7464084 (Tex. App.). Missouri court said limitations began when Insurer tendered appraised value of missed interest. See Spalding below at II, C, 1, C.

2. Duty to Defend a.

b.

c.

 

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Title insurer only has to defend covered claims. Seventh Circuit says “in for one, in for all” does not apply in Illinois. Philadelphia Indemnity Insurance Co. v. Chicago Title Insurance Co., 771 F. 3d 391 (7th Cir. 2014). See also First Clover Leaf Bank v. National Land Title Insurance Co., 2015 WL 392728 (Ill. App.) (Also applying Illinois law). Construing New Jersey law, a federal court held Insurer had to defend both covered and non-covered claims, but could seek appropriation of costs when the case is concluded. See Colonial Mortgage Service above at II, A, 1, b. Duty to defend met by hiring counsel two days before answer date. Insurer not liable for fees charged by firm Insured engaged. That firm had prepared pleading and discussed case with firm hired by Insurer. Ogden Plaza Garage Co. v. First American Title Insurance Co., 2014 WL 6704366 (N.D. Ill.) (Unpublished). 6

d.

e.

f.

g.

h.

 

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Insurer complied with loan policy when it pursued successful defense rather than paying Insured damages. Insurer recovered attorney’s fees from Insured in first party action. DAFCO LLC v. Stewart Title Guaranty Co., 331 P. 3d 491 (Id. 2014). A similar case this year was E.C.I. Financial Corp. v. First American Title Insurance Company of New York, 995 N.Y.S. 2d 100 (App. Div. 2014). Insured did not like proposed settlement. It engaged another attorney. Appellate court said this was not a breach of the Insured’s duty to cooperate terminating coverage. Insurer can proceed to resolve defect as it wishes. Opinion does not say if Insurer must pay fees of firm hired by the Insured. Breaux II v. Cozy Cottages, LLC, 151 So. 3d 183 (La. App. 2014). Insurer had no duty to defend Insured who was incidental defendant in declaratory judgment action filed by another insurer. See CH Properties above at II, B, 1, a, and II, A, 2, c. Insureds bought ocean side home in Pebble Beach, California. OTP did not except to open space easement in favor of California Coastal Commission (“CCC”). Insurer pursued negotiations with CCC for several years to remove or reduce easement. When negotiations failed, Insurer defended Insureds in administrative proceeding to restore natural state of property. Then, when CCC won administrative case, Insurer paid insured $1.5 million in damages. CCC then filed enforcement action because Insured had not complied with orders to restore the property to its natural state. Insurer refused to defend this action. Federal district court held that if Insurer’s actions under Section 4 (b) provoked the CCC’s enforcement action, Insureds could recover their defense costs in the enforcement action. NOTE: Was enforcement action caused by Insured’s behavior (non-compliance with CCC’s orders) rather than the Insurer’s actions under 4(b)? Feduniak v. Old Republic National Title Insurance Co., 2014 WL 6603253 (N.D. Ca.). Prior opinion in same case held Insured entitled to discover communications between Insurer and its retained counsel in subrogation suit against Insured’s sellers. See 2014 WL 3921372 (N.D. Ca.). NOTE: Another opinion in this case appears above at II, B, 1, e. Insureds can go to trial on claim Insurer was not reasonably diligent in waiting 20 months to file quiet title suit. Granelli v. Chicago Title

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i.

j.

Insurance Co., 2014 WL 2724459 (3rd Cir.) District Court opinion was discussed in the 2013 Outline. Condition 9(b) bars suit against Insurer for not diligently pursuing defense while third party suit is pending. JFK Enterprises, LLC v. Old Republic National Title Insurance Co., 2015 WL 556952 (M. D. Fla.). Insurer must pay cost to defend Insured in administrative law case concerning former railroad right of way. 212 Marin Boulevard, LLC v. Chicago Title Insurance Co., 2014 WL 8849641 (N.J. A.D.).

3. Claims Handling. Insured received $15,000.00 to settle easement claim. He signed settlement agreement and accepted endorsement adding easement to his OTP. When another round of litigation arose with neighbors, Insurer owed no duty to Insured. Settlement agreement and endorsement terminated Insurer’s liability. Chorches at II, A, 2, c above. 4. Subrogation a. b.

c.

d.

 

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Seller’s warranty liability not cancelled by buyer obtaining OTP. JV Properties, LLC v. SMR7, LLC, 2014 WL 7277393 (Nev.). Insurer could recover a portion of its loss (2/3rds) on simple AJ. Seller was former client of buyer, who had represented seller in suit resulting in AJ. Both seller and buyer signed escrow instructions stating there were no undisclosed liens. Subsequently, attorney sold to third party. Insurer eventually paid AJ to satisfy claim by third party. Attorney defended suit by Insurer stating it was aware of AJ when it prepared title search three years before the attorney’s purchase. Knowledge three years earlier does not mean it was still a lien three years later. It could have been released. Insurer was entitled to rely on the attorney’s statement in the escrow instructions. No one knows why jury’s award was 2/3rds of the Insurer’s payment to the AJ holder. First American Title v. Lyons, 2014 WL 3697248 (Cal. App.). (Unpublished). Parties that signed mechanic lien indemnity bond as part of construction loan closing, held liable to title insurer. Alleged negligence in disbursing construction loan was not a defense to liability under the bond. Commonwealth Land Title Insurance Co., v. Historic Ivy Tower, LLC, 2014 WL 3799607 (Minn. App.) Insurer bought prior lien, then released it. It then sued owners on their personal liability under the (formerly secured) note. California “one 8

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C.

form of action” rule prevented suit against the owners. Insurer’s error is missing lien influenced the court. Owners not expected to indemnify Insurer from its error. Lawyers Title Insurance Corp., v. Dedmore, 2014 WL 4354663 (Cal. App.). (Unpublished). Romero’s attorney did not get AJ released in their bankruptcy. Five years later, Romero sold property. AJ located but agent waived because it thought bankruptcy action released it. Then, Romero’s attorney bought AJ for $5,000 (to protect himself from malpractice claim) and made $30,000 claim against title insurer. Insurer paid attorney, but then, pursuant to its subrogation rights, sued sellers for breach of warranty. Insurer-Buyer prevailed. Reliance does not need to be shown for breach of warranty. Also, Insurer did not violate Texas “insuring around” regulation. It did not “willfully” delete the lien. Perhaps its agent was negligent, but did not omit the AJ to mislead anyone. NOTE: Subtitle here is: How to turn your malpractice event into a 600% profit. Romero v. Stewart Title Guaranty CO., 2015 WL 348870 (Tex. App.) For case to contrary on reliance issue, see Chicago Title Insurance Co. v. Bass, N.E. 3d (Ill. App. 2015).

Damages 1. Owner Policy a.

b.

 

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Damages for missed pipeline easement were determined by value with and without ($4,200) not cost to relocate pipeline ($574,000). Insured had conveyed one of two parcels to related entity, but court held it was still “insured” as to that parcel. Weber Estates Investments, LLC v. Chicago Title Insurance Co., 2014 WL 4793008 (Ill. App.). This missed pipeline was on a multi-million dollar 38 acre property along the California coast. Appellate court stated Insured’s expert could testify as to environmental threat of pipeline and loss of privacy caused by driveway used jointly with easement holder. Each item caused a 4% loss of value per the expert. The pipeline was part of a petrochemical facility next door whose lease was excepted to. Moreover, the significant lease income caused the fair market value of the 38 acres to increase. So the facility increased the value of 38 acres while also decreasing it due to explosion fears and loss of privacy? Also affirmed, without discussion, $305,362.00 in damages for bad faith. Gaviota Holdings, LLC v .

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c.

d.

Chicago Title Insurance Co., 2014 WL 7334429 (Cal. App.). (Unpublished). Insured (SLC) bought land for lake development in Missouri. He obtained owner policy for $1.7 million. As work progressed, he learned that third party (Estes) owned one acre in middle of proposed lake. Insurer valued lost acre at $10,000 and tendered that sum to SLC. Estes wanted $387,000. Development stopped, SLC ceased operation and assigned claim and deeded land to its shareholder, Spalding. (Fact that Spalding was not the insured not discussed in opinion). Spalding’s expert found damages of $4.1 million if property had been fully developed – even including land never owned by SLC or Spalding. Limitations issue was also in play. Did it start when Estes’ claim was discovered? If so, suit was barred under Missouri law. Jury awarded $1.1 million in damages for the lost acre and $110,000 for vexations refusal to pay, and $81,000 in attorney’s fees. Court of appeals affirmed. Limitations started when Insurer tendered $10,000 to SLC, not when the defect became known. It was up to jury to sort out the weakness in the expert’s testimony (!). Spalding v. Stewart Title Guaranty Co., 2014 WL 4694716 (Mo. App.). Title insurers payment of buyer’s attorneys did not preclude buyers from recovering the fees in action against purported lienholder. Dillon v. Southern Management Corporation Retirement Trust, 326 P. 3d 656 (Utah 2014).

2. Loan Policy a.

b.

c.

 

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In boat title case, Fifth Circuit found date to measure loss was the date prior lien was foreclosed. First American Bank v. First American Transportation Title Insurance Co., 759 F. 3d 427 (5th Cir. 2014). Loss under loan policy is FMV of collateral as of date claim made. First American Title Insurance Co. v. Patriot Bank, 2015 WL 2228549 (Tex. App.). Insured lender sued Insurer on one claim (borrower allegedly not in title – court found he was), but received damages another (missed prior lien). Court awarded as damages balance due on note up to loan policy amount. Insurer not liable for bad faith though since Insured did not make claim

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d.

for prior lien before filing suit. First Community Bank v. Commonwealth Land Title Insurance Co., 2014 WL 4720153 (M.D. La.). Mechanic lien claims paid by Insurer after Insured sued Insurer. Judgment then entered in Insurer’s favor since ML claims resolved. Court determined under Oregon law, Insured could not recover its attorney’s fees because it did not recover a money judgment against the Insurer. Insured’s counsel could have required fee stipulation be part of judgment. Triangle Holdings, II, LLC v. Stewart Title Guaranty Co., 337 P. 3d 1013 (Or. App. 2014).

3. Bad Faith. Trial court, upon remand, to determine if it was bad faith for Insurer to continue defense after it had strong evidence deed was forged. Insurer had paid policy limits after adverse trial court judgment. Opinion also discusses when communications between Insurer’s in house counsel and other employees may be privileged. Anastasi v. Fidelity National Title Insurance Co., 341 P. 3d 1200 (Haw. App. 2014). NOTE 1: What happened to “final determination”? NOTE 2: This is longest opinion of the year (40 pages). D.

Closing Protection Letter 1. Standing. FDIC has standing to sue under CPL if it says it does. FDIC. V. First American Title Insurance Corp., 2015 WL 1906139 (11TH Cir.) (“FDIC One”). See also FDIC v. First American Title Insurance Co., 2015 WL 418122 (E. D. Mich.) (“FDIC Two”) and FDIC v. Attorney’s Title Insurance Fund, 2014 WL 4384270 (S. D. Fla.) (“FDIC Three”). Loan assignment could reserve CPLs when assigning rest of loan packages. First American Title Insurance Co. v. Citizens Bank, 2015 WL 793427 (Tenn. App.) The court in Fifth Third Mortgage-MI, LLC v. First American Title Insurance Co. was at least willing to analyze the standing issue. 2015 WL 1069341 (Unpublished) (“Fifth Third”). 2. Late Notice. 90 day notice provision in Florida CPL satisfied if FDIC gave notice within 90 days after it learned third party made down payment – even if made five years after closing. FDIC One. A seven year delay was approved in FDIC v. Fidelity National Title Insurance Co., 2015 WL 2237877 (E.D. Mich.) (“FDIC Four”). Lender can argue one year limitation in Connecticut CPL was extended by closing agent’s fraudulent concealment. JPMorgan Chase Bank v. Old Republic National Title Insurance Co., 2015 WL 670871

 

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(Conn. Super.) (Unpublished). A South Carolina court did enforce the 90 day notice provision. Regions Bank v. Stewart Title Guaranty Co., 2015 WL 433486 (D.S.C.) (“Regions Bank”). 3. Misconduct. Agent’s fraudulent conduct may trigger CPL liability even if funds not mishandled. Fifth Third. 4. Lender’s Underwriting Negligence as a Defense. Rejected by district court is FDIC Two. See also FDIC Four. Impairment of subrogation rights defense recognized in Fifth Third. 5. Additional Property. Does CPL cover property not being insured by Insurer? See Regions Bank for an alarming rumination on the point – at least it was moot since case decided on notice issue. 6. Damages. Loan amount minus foreclosure proceeds in FDIC One. Loan amount minus “book value” paid by assignee in FDIC Three. 7. Bad Faith. Plaintiff cannot sue for bad faith under CPL because it is not an insurance contract. Bancorp Bank v. Lawyers Title Insurance Corp., 2014 WL 3325861 (E. D. Pa.). E.

Insurer’s Liability for Agent’s Acts 1. Commitment requirement that notice of building code violation be released was not a promise by the Insured or Agent that it would be released. The failure to except to the notice in the policy (because it was not released) was not a negligent misrepresentation by the Insurer. Stockton Mortgage, Inc. v. Tope, 183 Cal. Rptr. 3d 186 (2014). This case also discussed above at II, A, 1, b, and II, A, 2, d. NOTE: The investors tried everything their attorneys could think of to create insurer liability – but nothing worked. 2. A final bit of good news in this section – Insurer had duty and did cure title defect, but was not liable for agent’s failure to timely record the mortgage. E.C.I. Financial Corp. v. First American Title Insurance Company of New York, 995 N.Y.S. 2d 100 (App. Div. 2014).

 

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3. Plaintiffs placed escrow funds with Clear Title, a Florida title agent. Clear Title stole the funds. Plaintiffs sued its underwriter, Chicago Title, under respondent superior and for negligent supervision. Held, plaintiffs can proceed to trial on R.S. theory. Promotional material info on Chicago Title’s website may have led plaintiffs to belief Clear Title was Chicago Title’s agent when acting as escrow agent. However, Insurer had no tort duty to supervise Clear Title. Opinion cited Bluehaven Funding LLC v. First American Title Insurance Co, 594 F. 3d 1055 (8th Cir. 2010). Gondeck v. Clear Title and Escrow Exchange, LLC, 47 F. Supp. 3d 729 (N.D. Ill.). 4. Closing attorney deemed agent for Insurer for closing and policy issuance. The attorney faked the closing documents and stole the loan funds. See JPMorgan Chase Bank above at II, D, 2. 5. Agent issued loan policy on her own property contrary to her agreement with the Insurer. She did not pay existing lien. Trial court said Insurer liable even if Agent violated agency agreement. Agent had apparent authority to issue policy. FV–1, Inc. v. Commonwealth Land Title Insurance Co., 2015 WL 1611144 (M.D. Tenn.). 6. FDIC suit against Insurer can proceed on one of three fraudulent loans – there was fraudulent fully executed loan policy on that one. Other two files only had unmarked commitments. FDIC v. United General Title Insurance Co., 2014 WL 3611835 (E.D.N.Y.). III. Insurer vs. Agent A. Two cases featured insurers suing the agent’s depository bank. Both agents had systematically stolen from their escrow accounts. In the first case a Wisconsin federal judge held that discovery of the bank’s records would not violate the Bank Secrecy Act or Anti-Money Laundering Act. The Insurer’s loss was $3.5 million. The court examined the policy behind the federal acts and held disclosure would not violate them. Indeed, the agent was guilty and well aware it was being investigated. See First American Title Insurance Co. v. Westbury Bank, 2014 WL 4267450 (E.D. Wis. 2014). In the second case, a Georgia court denied the depository bank’s motion for summary judgment. It noted the bank was not only aware of the negative balances in the escrow account, it had learned the agent was

 

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creating fraudulent wire transfer confirmations. See First American Title Insurance Co. v. Eddings, 2014 WL 106691 (M.D. Ga.). B. Insurer sued borrower and his sister, the title agent, over failure to disclose unpaid contractor debt. Sister was dismissed. Appellate court affirmed trial court judgment for brother. He had no affirmative duty under Utah law to disclose the mechanics lien risk, so there was no fraud. Fidelity National Title Insurance Co. v. Worthington, 344 P. 3d 156 (Utah App. 2015). C. Agent’s debt to Insurer due to a claim was not dischargeable. Debtor failed to disclose in his schedules (1) that he had conveyed his interest in their home to his wife within a year of filing for bankruptcy and (2) the Insurer’s State court action to overturn the deed as a fraudulent conveyance. United General Title Insurance Co. v. Karanasos, 2014 WL 4388277 (E.D.N.Y.). D. Insurer cannot sue notary who took dead person’s acknowledgement for indemnification for fraud. Opinion is not clear if defendant was an employee of title agent. U.S. Bank, N.A. v. Commonwealth Land Title Insurance Co., 2015 WL 1291151 (S.D.N.Y). E. Limitations on Insurer’s claim against Virginia Agent’s CRESPA bond began on closing date when Agent did not close existing line of credit. First American Title Insurance Co. v. Star City Title & Settlement Agency, Inc., 2015 WL 2092814 (W.D. Va.). IV. Duties of Title/Escrow Agent A. Handling Escrow Funds 1. Insurer escrowed money for unreleased lien at closing. Borrower took no action to secure release. Instead he sued Insurer alleging lien was unenforceable. Held, for Insurer pursuant to terms of the indemnity agreement signed at closing. Moreover, Insurer could recover its attorney’s fees. Hopper v. Lawyers Title Insurance Corp., 2014 WL 1989689 (Cal App. 2014). (Unpublished). 2. Plaintiffs signed agreement to buy condo unit under construction in Mexico. They deposited $239,700.00 with California title agent. Funds  

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were released to party not specified in the escrow instructions. After securing judgment for the escrowed funds, Plaintiffs sought to recover attorney fees from agent. They argued language in escrow instructions allowing fees to escrow agent was reciprocal prevailing party fee agreement under California Civil Code §1717. This indemnity agreement was excepted from §1717 because the purpose was to protect the agent from disputes by the parties if the agent properly performed. That was not what occurred here. Rideau v. Stewart Title of California, Inc., 235 Cal. App. 4th 1286 (2015). 3. Stewart Title of Louisiana v. Chevron, U.S.A., Inc. was an earnest money dispute on a commercial contract. The agent interpled the $300,000.00 deposit, but only after it gave check to buyer’s agent who had deposited the funds, then stopped payment on the check. 2015 WL 1500656 (La. App. 2015). 4. Flagstar, warehouse lender, wired funds to title agent. Funds were relayed to escrow agent who stole them, thus prior liens were not paid. Flagstar had sent instructions to title agent. Trial court judgment for title agent affirmed. Title agent had no funding duty to Flagstar and jury found it was not negligent in failing (without instructions) to pay prior liens when funds passed through its account. Funds were apparently wired to title agent because escrow agent was blacklisted by Flagstar. Flagstar Bank, FSB v. Walker, 451 S.W. 3d 490 (Tex. App. -2014, no writ yet). 5. Entity disbursing construction funds not liable to third party buyers when developer failed to complete project. Armenta v. First American Fund Control, Inc., 2015 WL 1933186 (Cal. App.). B. Handling Documents 1. Agent could not recover from squirmy lienholders who may have feigned willingness to subordinate but never signed anything prior to closing. At least the lienholders could not recover their attorneys’ fees. Commonwealth Land Title Insurance Corp. v. Funk, 2015 WL 1870287 (Del. Super.). (Unpublished).

 

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2. Two escrow agents involved in closing were entitled to rely on pre-closing email from lienholder’s employee stating there was nothing owed. Buyer was party to the litigation and was awarded attorneys fees under Utah’s Reciprocal Fee Statute based on provision in lienholder’s deed of trust. Stommel v. LNV Corp., 2015 WL 417883 (D. Utah). 3. Agent filed partial release tendered to it by lienholder’s real estate agent as accommodation. Lienholder later sued alleging legal in partial release was altered before recording – thus losing priority to other liens filed before error in legal description was discovered. Appeals court affirmed judgment for Insurer. It only recorded release as accommodation, thus it did not have the duties of an escrow agent. Opinion also notes that the testimony showed the release, as originally tendered, may have had same defect as the one recorded. Kipperman v. First American Title Co., 2015 WL 301730 (Cal. App. 2015) (unpublished). C. Duty to Search Title a. Agent not liable in tort for erroneous legal description it provided. There is no tort duty to search in Idaho. Agent recovered fees from buyer who was seeking to exploit error in legal description. Cummings v. Stephens, 336 P. 3d 281 (Id. 2014) (There was interesting dissent on the attorney fee issue). b. Escrow agent had no duty to verify lien had been released. It released funds when title insurer was ready to insure without exception per the escrow agreement. Buyer’s suit for negligent misrepresentation (lien omitted) based on amended commitment failed. However, if agent made voluntary statement about the release in meetings with buyer and by emails, buyer could amend complaint and pursue negligent misrepresentation cause of action. Touch Stone AZ-Central Properties, L.L.C. v. Title Management Agency of Arizona, L.L.C., 2014 WL 1778356 (Ariz. App.) (Unpublished). (Opinion reviews leading Arizona cases on escrow agent duties.) c. There is no tort cause of action in Texas against agent for negligent title search. Economic loss rule also bars such an action. Dawkins v. First American Title Co., LLC, 2014 WL 4536288 (Tex. App.) (Plaintiff alleged that pre-foreclosure title report had negligently omitted federal tax lien against one of the borrowers. Plaintiff’s theory that agent would have found FTL if it had searched more variations of one of the borrower’s  

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name.) Likewise, there is no tort duty to search in New York. See Emigrant Mortgage at II, B, 1, a, above. d. Limitations barred suit against Arkansas agent for missed easement. Limitations began on date title search delivered. Brooks v. Terry Abstract Co., 2014 Ark. App. 212, 2014 WL 1327760 (2014) (unpublished). D. Closing Instructions 1. Seller could sue agent in tort for negligently handling §1031 tax free exchange. Agent was not familiar with construction exchanges. Economic loss doctrine did not bar tort action for “professional services” like agent provided. Kreisers Inc. v. First Dakota Title Limited Partnership, 852 N.W. 2d 413 (S. D. 2014). 2. Escrow instructions provided ALTA policy could be issued upon closing. Buyer declined to provide survey required for ALTA policy. Agent then issued interim binder. Buyer apparently planned to quickly resell the property. Buyer defaulted on loans and was foreclosed. It then sued agent for not issuing ALTA policy. Held, for agent. Policy form did not cause buyer’s loss. The failure to pay its loan did. Opinion discusses jury instructions in detail. Sean & Shenassa 26, LLC v. Chicago Title Co., 2014 WL 5500512 (Cal. App.). 3. California agent closed refinance and paid two several FTL’s against borrowers per IRS demand. Borrowers received almost $200,000.00 upon closing. They were aware all the IRS liens were not being paid. One year later a second refinance did not close because IRS demanded payment of all its liens. The property was subsequently foreclosed. Borrower-wife sued alleging agent had duty to pay all the IRS liens at closing. Trial court stated agent complied with its duty to issue loan policy without exceptions to IRS liens. No owner policy was issued at that closing. Borrower-wife’s loss caused by failure to pay mortgagee and IRS, not the agent’s actions. Edwards v. Escrow of the West, 2014 WL 4071223 (Cal. App.).

 

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E. Duty to Disclose 1. Title agent closed land development loan. It received no communication or instructions from lender. Only funds received by agent were for closing costs. Lender funded loan directly to borrower. Lender apparently ignored commitment that listed prior lien. After borrower defaulted and prior lienholder foreclosed, lender sued title agent alleging it had duty to warn lender that it was obtaining second lien. Following Illinois cases, Seventh Circuit held agent discharged its limited duty by following instructions. It had no obligations to warn the lender or request further instructions. Edelman v. Belco Title & Escrow, LLC, 754 F. 3d 389 (7th Cir. 2014). 2. Michigan sellers filed class action against three insurers and seven agents. They alleged defendants wrongfully collected full amount of State transfer tax at closing. They should have advised plaintiffs to ask for applicable exemptions. Motion to dismiss granted. Defendants had no duty to advise sellers how the exemptions applied. The information was State law and plaintiffs were presumed to know it. “Plaintiffs could have protected their rights by hiring counsel to represent them in the sale of their homes…” Listing the full amount due on the HUD-1’s was not a misrepresentation. It correctly stated the financial transaction and was not a guarantee that the amount was the least possible amount owed. Bushman v. American Title Company of Washtenaw, 2015 WL 1505977 (E.D. Mich.). 3. There were two odd Texas cases on escrow duties this year. The first one, Fontenot v. Land America Commonwealth Title of Houston, Inc., involved a claim that the agent’s employees should have advised him he was making a bad business decision in accepting a second lien for his seller finance note. In essence, the agent was not his “guardian angel” (Similar to Busman case above). He admitted he did not read the closing documents. Appellate court affirmed judgment for agent. The opinion reviewed expert testimony of three witnesses – one for the seller, one for the agent, and one for the attorney who drafted the loan documents. 2014 WL 4260114 (Tex. App.). The plaintiffs’ pleading in the second case, Dailey v. Thorpe, was even weaker. It is not clear, but it appears the plaintiffs sued the closer for fraud (she was related to on the buyers) because the buyers defaulted on

 

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the seller finance note. Of course the closer was not liable for whatever occurred after closing. 445 S.W. 3d 785 (Tex. App. - Houston [1st Dist.]. 4. See also IQ Holdings case at II, A, 4, d above. Court held agent had no duty to warn buyer that ROFR waiver by condo association listed buyer under prior contract that did not close. Condo association did not raise this issue. F. Duties to Third Parties 1. Escrow agent had no duty to third party (loan assignee) that did not provide escrow instructions. The plaintiff failed to notice the prior lien was listed on loan policy. Flagstar Bank, FSB v. Lawyers Title Co., 2014 WL 1725746 (Cal. App.). (Unpublished). 2. Escrow agent’s negligence would not be imputed to third party lienholders. Therefore, they could pursue equitable subrogation in lien priority dispute. Branscomb v. JPMorgan Chase Bank, NA, 223 Cal. App. 4th 801 (2014). V. Reinsurance A. First American issued $825 million loan policy on construction of West Virginia power plant. First American secured reinsurance from Old Republic and Stewart Title. After plant was completed, three contractors filed mechanic lien claims. The borrower, Longview, filed Chapter 13. The bankruptcy court has allowed the lender to assign its claim under the loan policy to the borrower. See In Re Longview Power, LLC 516 B.R. 282 (D. Del. 2014). Meanwhile, First American paid $41 million to one of the contractors and made demand on Old Republic and Stewart. Old Republic paid its share with a reservation of rights, then sued First American in Florida federal court. That court refused to dismiss Old Republic’s action. It held Old Republic could pursue causes of action for breach of contract and negligence in the underwriting of the power plant loan. Meanwhile, Stewart sued First American in Texas federal court. The federal court granted First American’s motion to transfer the case to the Florida court. The opinion notes that Stewart’s contract and tort claims are similar to Old Republic’s and based on the same reinsurance agreement. Old Republic National Title Insurance Co. v. First American Title Insurance Co., 2015 WL 1349817 (M.D. Fla.) and Stewart Title

 

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Guaranty Co. v. First American Title Insurance Co., 2015 WL 1393134 (S.D. Tex.). B. The trail goes like this: Bank of America >First American > Fiserv > Fiserv’s two towers of E&O carriers. Federal District judge reviewed challenges to experts employed by Fiserv and each of the two towers. Experts can testify about industry custom and practices, but not legal opinions. Fiserv Solutions, Inc. v. Endurance American Specialty Insurance Co., 2014 WL 1415339 (E.D. Wis.). VI. Government Regulations of the Title Industry A. Federal 1. Truth in Lending Act only requires written notice of intent to rescind within three years of closing. It does not require the borrower to file suit before the end of three years. Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015). 2. Homeowner sued subsidiary of PNC Bank alleging its unreasonably large mortgage insurance premium violated RESPA Section 8. District court held Freeman (132 S. Ct. 2034) only applied to 8(b). So case may proceed. White v. PNC Financial Services Group, Inc., 2014 WL 4063344 (E.D. Pa.). 3. Federal Court in Kentucky refused to dismiss Consumer Financial Protection Bureau (CFPB) action against law firm with nine affiliated title agents and one examiner. Court said the parties dispute whether or not the “safe harbor” requirements of 12. O.S.C §2607 (c) (4) have not been met. Therefore this case is not governed by the Sixth Circuit’s decision in Carter v. Welles – Bowen Realty, Inc., 736 F. 3d 722 (6th Cir. 2013). For example, the CFPB alleges that the affiliated agencies did not provide settlement services. NOTE: One examiner for nine companies indicates there is little value along with no capital investment from the real estate broker or lender ventures. CFPB v. Borders & Borders, PLC, 2015 WL 631196 (W.D. Ky.). 4. Recording fee markup and split of closing fee between parties who provided services does not violate RESPA. Violation of Georgia UPA by one of the parties is not relevant. Clements v. LSI Title Agency, Inc., 779 F. 3d 1269 (11th Cir. 2015). For similar case, see Wesolowski v. Title Source, Inc., 2014 WL 2154187 (N.D. Ga.).

 

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B. State 1. Minnesota attorney owned and was operating title company not licensed by State Department of Commerce (DOC). It filed an enforcement action against him. While it was pending, attorney filed lawsuit to enjoin the enforcement action. Appellate court held, attorney must exhaust his administrative remedies before suing the DOC. Wayne B. Holstad, PLC v. Commissioner, Department of Commerce, 2014 WL 802318 (Minn. App.). (Unpublished). 2. Attorneys cannot perform a witness only closing in Georgia. In Re Formal Advisory Opinion No. 13-1, 763 S. E. 2d 875 (Ga. 2014).

VII. Bankruptcy A. Title insurer paid debtor’s mortgage after State court found he acquired title by false pretenses, fraud, etc. Debt to title insurer not dischargeable under Bankruptcy Section 523 (a) (2) (A). Note: This was the second longest opinion I reviewed this year – 36 pages. In Re Wolf, 519 B.R. 228 (N.D. Ill. 2014). B. Marc S. Dreir was a New York attorney. He operated a Ponzi scheme through his law firm. The firm’s receiver filed a Chapter 11 bankruptcy in 2008. Alarmex had a claim against Dreir’s firm for sales proceeds. Bankruptcy court held that Alarmex must show that separate account was set up for its proceeds or otherwise has burden to trace them in Dreir’s accounts. The bankruptcy estate has no claim to them because they are not property of the estate. In Re Dreier LLP, 2014 WL 3866590 (S.D.N.Y.). C. Bankruptcy debtor could not obtain portion of his property free and clear after his bankruptcy schedules listed it as encumbered. Lien docs were inconsistent due to confusion over replat. Barron v. Wells Fargo Bank, N.A., 769 S. E. 2d 830 (Ga. App. 2015). D. See also Karanasos case at III, C above.

 

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VIII. Miscellaneous C. Top 20 1. Stockton, p. 1, 2, 12 2. 273 Water Street, p.1 3. Chorches, p. 2, 8 4. RNT, p. 1, 3 5. Woody Creek, p. 2 6. BB Syndication Services, p. 4 7. Bank of Idaho, p. 4 8. CitiMortgage, p. 5 9. Spalding, p. 6, 10 10. Philadelphia Indemnity, p. 6 11. Feduniak, p. 6, 7 12. Weber Estates, p. 9 13. Gaviota, p. 9-10 14. Regions Bank, p. 12 15. Flagstar, p. 15 16. Kipperman, p. 16 17. Kreisers, p. 17 18. Edelman, p. 18 19. Reinsurance Cases, p.19 20. Barron, p. 21

 

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