Settlement Agent Malfeasance
A recent Federal Court case may shake up closing practice in upstate New York.
In Fidelity National Title Insurance v. Cole Taylor Bank, No. 11 Civ. 4497 (MGC)
(U.S. Dist. Ct., S.D.N.Y., July 10, 2012), the court held that a title insurer was not liable for the defalcation and malfeasance of one of its policy-writing agents. The Agent had been contacted by the Illinois-based Cole Taylor Bank to perform settlement services in connection with loan refinancings in the Albany area. The case revolved around two specific instances in which the Agent prepared title insurance commitments and proceeded to close each loan in accordance with detailed instructions provided by the Bank and previously accepted, in writing, by the Agent. At each closing, the commitments were “marked up.” Post-closing, the Bank discovered that prior loans had not been paid off and that the monies earmarked for that purpose had been stolen by the Agent. The Bank made claims against Fidelity only to learn that the Agent had not remitted the policy premiums to Fidelity, the mortgages had not been recorded and the policies had never been issued.
The Bank sought to hold Fidelity liable on the basis of apparent authority in the Agent to act on behalf of Fidelity. Fidelity pointed out that its agreement with the Agent explicitly prohibited the Agent from providing settlement services on Fidelity's behalf. More importantly, the Bank was unable to show that Fidelity had made any representations to the Bank that established apparent authority. In addition, testimony by the Bank’s own expert witness established that customary upstate closing practice did not establish apparent authority. Indeed, the expert testified that the “closing instructions from the lender to the settlement agent have nothing to do with the title agent.” And, that “when [the Agent] stole the loan proceeds, it did so as a settlement agent.”
The coup de grâce came in the Court’s finding that the Agent was legally the Bank’s agent, whose conduct could be imputed to the Bank. As a result, any liability that might have arisen under the marked up commitments was barred by Exclusion 3(a) of the ALTA policy, which excludes coverage for "[d]efects, liens, [and] encumbrances" that are "created, suffered, assumed, or agreed to by the Insured Claimant."
All the reported New York case law on this issue appears to emanate from the First and Second Departments. Since the dual-agency practice (settlement and title) is primarily an upstate custom, it will be interesting to see where the Third or Fourth Departments come down on similar fact patterns in the future.