Arizona Appellate Court Affirms Judgment for Title Insurance Company and Escrow Agent in Lenders’ Fraud Action

The Arizona Court of Appeals recently affirmed a lower court’s order dismissing claims against a title insurance company and an escrow agent and held that they were not liable for the property purchasers’ purported fraud against the lenders.  See C & G Farms Inc v. First Am. Title Ins. Co., 2018 WL 1281847 (Ariz. Ct. App. Mar. 13, 2018).  In the case, the plaintiff lenders allegedly reached an agreement with the borrowers whereby the borrowers would purchase a 40-acre lot through a loan from the lenders, and the lenders later would make a second loan to pay off the first loan and subdivide the property.  Nonetheless, pursuant to the closing instructions from the real estate agent, the borrowers ended up purchasing five separate properties through five separate loans from the lenders.  The borrowers defaulted, and the lenders foreclosed on four of the five properties.  The lenders then brought an action against the title insurance company and the escrow agent in which they alleged, among other things, that defendants had breached their fiduciary duty by not detecting the fraud, that the title insurance company should have informed them that the borrowers’ purported plan to subdivide the property was illegal and never would have happened, and that the lenders’ loss here was covered by the title insurance policy.  After a bench trial, the trial court entered a ruling against the lenders on all counts.

On appeal, the Court affirmed the trial court’s decision.  First, it held that the trial court did not err in dismissing the breach of fiduciary duty claim.  Both the title insurance company and the escrow agent complied with the escrow instructions “which did not present facts that a reasonable escrow agent would perceive as evidence of fraud.”  Second, the Court affirmed that the title insurance company had no duty to apprise the lenders of Arizona subdivision laws, and that lenders had failed to show any reliance on any representation made by the title insurance company.  Finally, the Court held that the lenders’ “lost benefit of their bargain” was not covered under the title insurance policy because there was no evidence the lenders’ title was ever challenged or that any actual loss occurred.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Dylan Goetsch at dgoetsch@riker.com.