No Indemnification for Notary Misconduct
At a loan closing, the notary engaged by
Bank’s settlement agent allegedly fraudulently acknowledged the signature of an
imposter posing as the named borrower. When foreclosure proceedings began, the
Bank found out the named borrower had died a month before the closing. Faced
with an invalid lien, the Bank tendered a claim under its title insurance
policy. Following denial of the claim, Bank filed a breach of contract action
in federal court.
Title Insurer then filed a third-party
complaint (TPC) against the notary and the law firm by whom he was engaged,
seeking indemnity for damages under NY Executive Law §135. The TPC defendants
moved for dismissal and the court granted the motion. US Bank National Association v. Commonwealth Land Title Insurance Company, No 13-Civ-7626 (S.D.N.Y. March 23, 2015).
The Court found itself bound by New York
case law denying indemnification “where the underlying action is one for breach of
contract, … because the defendant, if found liable to the plaintiff in the
underlying action, will have necessarily participated in the wrongdoing by
breaching the contract.”
In addition to the faulty
notarization, Commonwealth alleged that U.S. Bank's mortgage broker and several
of its employees submitted false credit reports, false employment
verifications, and a false property appraisal in order to induce U.S. Bank to
make the loan and that some of the TPC defendants submitted a false HUD-1 after
the closing, knowingly omitting the payment of proceeds to a third party who is
believed to have laundered the funds.
The Court acknowledged the dismissal could “result in injustice to
Commonwealth should Commonwealth be found liable to U.S. Bank purely as a
result of third parties' fraud or misconduct and through no fault of its own.”
Indeed, in a lengthy footnote, the Court suggested arguments by which Commonwealth
might prevail over a statute-of-limitations defense to “pursuing
direct claims against the third-party defendants, either for violation of Exec.
Law § 135 or more generally for fraud.”