Florida Federal Court Holds That Title Insurance Company Owed No Duty of Care to Sellers in Connection with Short Sale

The United States District Court for the Southern District of Florida recently held that a third-party defendant title insurance company was entitled to summary judgment on the defendant sellers’ claim for negligence in connection with a short sale, on the ground that the insurer owed no duty to the defendant sellers.  See Merger to Bac Home Loans Servicing LP v. Zaskey, 2016 WL 4761857 (S.D. Fla. 2016).  In the case, the defendant sellers participated in a short sale of a residential property, and another third-party defendant acted as the closing agent.  After the closing, however, the closing agent allegedly failed to transfer the monies to the mortgagee on the property.  Upon realizing the issue over a year later, the insurer, who had issued a title policy to the purchasers of the property, obtained the proceeds and tried to convince the mortgagee’s successor servicer to accept the proceeds and discharge the mortgage.  Although the servicer initially claimed that it did not have any record of approving a short sale, it eventually agreed to accept the proceeds and record the satisfaction.  The sellers then brought a negligence claim against the title insurance company, arguing that it had a duty to have the mortgage discharged in a timely manner and inform the sellers of the issues in recording the satisfaction, and that it had breached that duty.  The title insurance company moved for summary judgment, and the court granted it.

In dismissing the sellers’ claim for negligence against the insurer, the court determined that the sellers failed to establish that the insurer owed them a duty of care, or that any such duty was breached.  The court rejected the sellers’ argument that the insurer “wrongfully retained” the short sale proceeds and failed to “properly advise” the sellers of any issues.  Further, the funds at issue were not the sellers’ funds, because they were paid by the purchaser to satisfy the mortgage.  The court held that the insurer owed a duty “only to its insured,” and the insurer’s only duty was to remove the mortgage from the chain of title, which it ultimately did.  The court also rejected the sellers’ argument that by accepting the short sale proceeds after becoming aware of the closing agent’s failure to disburse same, the insurer created a “foreseeable zone of risk” that the sellers would suffer damages if the insurer failed to immediately notify them that it had come into possession of the short sale proceeds and failed to immediately transfer the short sale proceeds to the servicer.  The court declined to broadly construe or expand the “foreseeable zone of risk” standard for establishing a duty owed to third persons, and found that nothing done by the insurer could have prevented the harm allegedly suffered by the sellers.  Further, it held that “even if a legal duty existed, there is no ultimate liability due to the absence of any causal link between the alleged ‘failure to communicate’ and the failure to ‘immediately’ make the unpaid mortgage disappear[.]”  Accordingly, the insurer was entitled to summary judgment on the sellers’ claim for negligence.  

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