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Illinois Federal Court Dismisses Negligent Misrepresentation Claim Against Title Insurance Company Banner Image

Illinois Federal Court Dismisses Negligent Misrepresentation Claim Against Title Insurance Company

Month: February 2019

Illinois Federal Court Dismisses Negligent Misrepresentation Claim Against Title Insurance Company

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The United States District Court for the Northern District of Illinois recently dismissed an insured owner’s negligent misrepresentation claim against a title insurance company arising out of a title commitment and policy that omitted liens and contained an incorrect legal description.  See Wheaton Theatre, LLC v. First Am. Title Ins. Co., 2018 WL 6573222 (N.D. Ill. 2018).  Plaintiff purchased the property at issue in 2012.  In connection with the purchase, defendant issued a title commitment and title insurance policy.  In 2013, plaintiff discovered unpaid sanitary district liens on its property dating from 2010.  In 2014, plaintiff discovered that a portion of the property included in the commitment and policy’s legal description was dedicated to the City in 1948 and was not owned by plaintiff.  Plaintiff sent defendant a letter demanding that defendant pay plaintiff’s attorneys’ fees incurred in connection with clearing the lien, as well as additional damages for plaintiff’s loss of the portion of the property owned by the City.  The parties could not agree on a settlement amount, and plaintiff brought this action.  Among other claims, plaintiff made a claim of negligent misrepresentation and defendant moved to dismiss.

The Court granted the motion to dismiss.  Illinois law prohibits plaintiffs from recovering for solely economic losses under a theory of negligence with three exceptions:  (i) personal injury or property damage resulting from a tortious event; (ii) where damages are caused by intentional misrepresentations; and (iii) “where the plaintiff’s damages are proximately caused by a negligent misrepresentation by a defendant in the business of supplying information for the guidance of others in their business transactions.”  Plaintiff claimed its negligent misrepresentation claim fell under this third category.  The Court disagreed, finding that an Illinois Supreme Court decision already addressed this type of claim in First Midwest Bank, N.A. v. Stewart Title Guar. Co., 218 Ill. 2d 326 (2006), where the Supreme Court found that “a title insurer is not in the business of supplying information when it issues a title commitment or a policy of title insurance and, accordingly, the negligent misrepresentation exception to the . . . doctrine does not apply.”  The Court here further rejected plaintiff’s claim that its case was distinguishable from First Midwest because, according to plaintiff, defendant provided it with “something more akin to an abstract of title than a title commitment and policy based on the amount it paid for the policy and miscellaneous ‘title services,’ the language of the Commercial Sales Contract . . . and the degree to which it relied on those documents.”  The Court found that this was not pleaded in the complaint and, therefore, dismissed the negligent misrepresentation claim.

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

California Appellate Court Dismisses Claim Against Title Insurer for Violating Elder Abuse Statute

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A California appellate court recently affirmed a decision dismissing a complaint against a title insurance company, finding that that title insurance company owed no duty to a third-party landowner and could not be liable to the landowner for issuing a title insurance policy on the landowner’s property after the property was wrongfully conveyed from the landowner.  See Carr v. Chicago Title Ins. Co., 2018 WL 6521029 (Cal. Ct. App. 2018).  Plaintiff brought this action against the defendant title insurance company alleging a violation of California’s elder financial abuse statute.  According to the complaint brought by plaintiff’s guardian ad litem, a convicted fraudster moved in with plaintiff and, in 2013, somehow convinced plaintiff to convey his home to an LLC created and solely owned by the fraudster.  The deed stated that “[t]he grantors and the grantees in this conveyance are comprised of the same parties who continue to hold the same proportionate interest in the property[.]”  The fraudster then sought a refinance loan, and the lender asked defendant for a preliminary title report.  Defendant issued a report stating that plaintiff still owned the property, subject to the 2013 deed, and that it needed further documentation from the LLC.  Eventually, and after receiving the LLC’s operating agreement showing that the fraudster was the sole member, defendant issued the policy.  Defendant also provided documents to the escrow officer stating plaintiff was to receive the loan proceeds, although all proceeds went to the fraudster.  In 2015, the property was sold in a foreclosure sale and plaintiff brought this action.  Among other allegations, plaintiff claimed defendant previously had produced documents pursuant to a subpoena in the fraudster’s criminal action and should have known he was a fraudster at the time it issued its preliminary title report and policy.  Defendant filed a demurrer to the complaint, and the trial court dismissed the action.

On appeal, the Court affirmed.  It found that, for a party to be found liable for assisting a fraud under the elder abuse statute, plaintiff was required to show that defendant knowingly assisted in carrying out the fraud.  Here, plaintiff’s allegations were simply that defendant should have caught the “red flags” surrounding the transaction.  More importantly, the Court found that “the statutes and case law governing title insurance establish that [defendant] did not owe a separate duty to [plaintiff] with respect to [defendant’s] role and conduct in the loan at issue here, including any duty to further investigate [the fraudster’s] role in the loan transaction.”  Specifically, “a title insurance policy, once issued, [does not] impose a duty of care regarding the condition of title on the title insurer toward its own insured, or any third party.”  Accordingly, the Court affirmed the dismissal of the complaint, finding that the complaint “misconstrues the purpose of title insurance, which is to protect the insured party (here [the lender]) through a contract of indemnity, not to offer any protection to the non-insured borrower or landowner.”

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

Florida Court Applying New York Law Holds Purchase & Sale Agreement of Future Receivables Not Usurious Loan Despite Personal Guarantees

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A Florida court recently applied New York law and held that a purchase & sale agreement of a pharmacy’s future receivables could not be voided as a usurious loan even though the pharmacy’s principals signed personal guarantees securing the agreement.  See EBF Partners, LLC v Burklow Pharmacy, Inc., 2018 WL 6620582 (Fla.Cir.Ct. 2018).  In the case, plaintiff paid the defendant pharmacy $425,000 to purchase $586,500 of future receivables.  In connection with the agreement, the pharmacy’s principals signed personal guarantees. After the pharmacy defaulted under the agreement, plaintiff brought this action seeking to collect the full amount due from the pharmacy and the individual guarantors.  Defendants argued that the agreement was actually a usurious loan transaction and that it could not be enforced.  Plaintiff moved for summary judgment.

The Court, applying New York law, granted the motion.  Although the pharmacy’s principals were required to execute guarantees, the Court found that this fact alone did not make the agreement a loan.  Under the agreement, the pharmacy had the right to request that plaintiff reconcile its debits with the pharmacy’s actual receipts so that the debits from the pharmacy did not exceed 15% of its receipts.  More importantly, neither the agreement nor the guarantees required repayment under all circumstances.  If the pharmacy went bankrupt or simply ceased operations without a default under the agreement, defendants would not owe anything to plaintiff.  The guarantees only applied if the pharmacy defaulted under the agreement, such as if it transferred or sold its assets.  Accordingly, the agreement was not a usurious loan and, because the pharmacy had sold its assets, the pharmacy and guarantors were liable for the full amount of the contract.

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

New York Court Denies Motion to Extend Lapsed Notice of Pendency

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The New York Supreme Court, Kings County, recently denied a party’s motion to extend a notice of pendency, finding that the party had let a prior notice expire and the party was barred from filing a new notice despite the fact that there had been a substitution of parties in the action.  See 25-35 Bridge St. LLC v. Excel Auto. Tech Ctr. Inc., 62 Misc. 3d 1210(A) (N.Y. Sup. Ct. 2019).  Plaintiff 25-35 Bridge Street LLC’s predecessor brought this action in 2003 and Defendant filed a notice of pendency against the subject property.  Defendant continued to extend the notice of pendency every three years.  In 2011, Defendant brought an Order to Show Cause based on the fact that the original plaintiff had sold the property without giving notice to Defendant and then passed away.  The Court agreed to substitute Plaintiff into the action and, in 2012, issued an order amending the caption to reflect Plaintiff’s substitution and extending the notice of pendency for another three years.  Defendant did not extend the notice when it expired in 2015, and instead filed a new notice in 2016.  In 2018, Defendant brought the present motion to extend the 2016 notice of pendency.

CPLR 6516 states that, outside of a foreclosure exception not present in this case, “a notice of pendency may not be filed in any action in which a previously filed notice of pendency affecting the same property had been cancelled or vacated or had expired or become ineffective.”  Plaintiff argued that Defendant’s 2016 notice of pendency was void ab initio based on this statute and that it could not renew a void notice.  Defendant argued that the substitution of a new party as plaintiff meant that it could file a new notice of pendency in 2016.  The Court agreed with Plaintiff and denied the motion.  The Court held that “[t]he addition of or substitution of new parties to the same action is ‘more a change of form than of substance’ that does [not] warrant the filing of a successive notice of pendency” and that the 2016 notice was void ab initio and could not be extended.

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

New Jersey Appellate Court Holds County Recorders Are Not Authorized to Charge a Convenience Fee for Electronic Recording

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In a decision approved for publication, New Jersey’s Appellate Division held on February 11, 2019 that county registers or clerks may not “charge a ‘convenience fee’ for the electronic filing of documents concerning real property.”  See New Jersey Land Title Ass’n v. Rone, 2019 WL 508858 (N.J. Super. Ct. App. Div. Feb. 11, 2019).  N.J.S.A. 46:26-1 states that the fees “for entering, filing, recording, registering, indexing, copying and certifying copies of all deeds and instruments [affecting real property] . . . shall be the fees prescribed and fixed by” N.J.S.A. 22A:4-4.1.  N.J.S.A. 22A:4-4.1 enumerates fees for the recording of different documents, but does not include a fee for accepting electronic filings.

In 2016, the Essex Register began charging a $3.00 convenience fee for “the electronic filing of documents for recordation with the Essex County Register of Deeds & Mortgages.”  The New Jersey Land Title Association (the “Association”) then brought this action seeking to enjoin the Essex Register from charging the fee and to return all fees it collected.  In 2017, the trial court granted the Essex Register’s motion for summary judgment and denied the Association’s motion, dismissing the action with prejudice.  The trial court held that the Government Electronic Payment Acceptance Act (the “GEPAA”) and other regulations authorized this fee.  See N.J.S.A. 40A:5-43; N.J.A.C. 15:3-9.3.

On appeal, the Appellate Division reversed.  First, it found that N.J.S.A. 46:26-1 and N.J.S.A. 22A:4-4.1 set forth the only fees that can be charged for the recording of electronically-submitted documents to county clerks or registers, and neither statute allows for this fee.  “In short, neither N.J.S.A. 46:26-1 nor N.J.S.A. 22A:4-4.1 allow a register or clerk to charge a surcharge or convenience fee for accepting an electronically-filed document. . . . If a fee is not listed in N.J.S.A. 22A:4-4.1, it cannot be charged.”  Second, the Court rejected the Essex Register’s argument that the GEPAA authorizes this fee.  The GEPAA allows local government units to set processing fees for payments made via credit card or other electronic fund transfers.  See N.J.S.A. 40A:5-45.  The $3.00 convenience fee is not a charge for electronic payments, but for the electronic submission of documents.  “The Essex Register is charging the $3 convenience fee to offset the cost of maintaining a web-based system to accept electronically-filed documents. The $3 fee is not being used to offset processing charges or discount fees for the use of a card payment system or electronic funds transfer system.”

Third, the Court found that the regulations of N.J.A.C. 15:3-9.1 to -9.3 also do not allow for this charge.  N.J.A.C. 15:3-9.3 requires only that all county recorders begin accepting documents electronically by May 1, 2017.  The Court further found that “the only additional fees that can be collected [under these regulations] are processing fees related to accepting electronic payment.”  Fourth, the Court found that the Essex Register is not entitled to collect the fee under the doctrine of quantum meruit.  “[T]he Legislature has established a uniform schedule of fees to be charged by county registers or clerks for the filing of documents affecting real property. Accordingly, a filer would not reasonably expect to have to make a payment beyond those statutory fees.”  Finally, the Court stated that “[i]f county registers or clerks believe their offices are incurring costs that are not covered by the fees set forth in Title 22A, their recourse is to petition the Legislature to provide some means to address those costs, by allowing the collection of an additional fee or in some other manner.”  Based on these holdings, the Court remanded the case for further proceedings on the Association’s claim of disgorgement of fees collected.

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

Obtaining Environmental Insurance: Three Areas for Negotiation

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The environmental insurance marketplace has evolved over the decades it has been in existence.  Our experience over the last few years shows that the market is active, with carriers willing to be innovative in order to remain competitive.  Because environmental policies are written on a manuscript basis, meaning the policy is written on a custom basis to include coverage or conditions not included in a standard policy, policyholders have an opportunity through negotiation to obtain the best policy possible to suit their needs.  The following are three areas where we are seeing flexibility and creativity in the carrier’s underwriting that address our client’s specific needs.

Known Pollution Conditions – Pollution policies generally do not cover cleanup costs for conditions known at the time the policy is issued.  How these known conditions are defined in the policy is critical to the scope of coverage provided.  Accordingly, working with the underwriter so that the policy defines known conditions as narrowly as possible is worth the effort.  Toward this end, providing the underwriter with a detailed summary or chart outlining each known condition, its location on the property, the media impacted (e.g., soil or groundwater) and the specific contaminants identified is particularly helpful in negotiating this aspect of the policy.

Coverage for Conditions Discovered During Redevelopment – Many environmental insurance policies contain an exclusion for contamination discovered when demolishing existing structures or during the course of capital improvements.  Thus, for clients who are purchasing (or selling) property for redevelopment, this exclusion may effectively operate to bar coverage.  While subject to more underwriting scrutiny, we have had success in limiting the exclusion to contaminants found in building materials rather than a broad exclusion for any contamination discovered during redevelopment.  Carriers also are willing to entertain providing coverage for contamination discovered during redevelopment if such a claim is subject to a higher deductible or self-insured retention than other coverages afforded by the policy.

Named Insureds and Additional Insureds – Insurance is often purchased in order to allocate risk between parties to a real estate transaction.  These transactions involve multiple parties, each with their own interests (e.g., the buyer and the seller and their affiliates, as well as even potential future owners of a property that is being redeveloped).  These parties all generally want to have the benefits of coverage under the policy.  Not all parties, however, should have or are entitled to the same coverage.  Accordingly, it is important to carefully consider which entities receive the broadest rights under the policies (typically referred to as a “named insured”) and which parties have other insured status (typical referred to as an “additional insured”).  This issue is further complicated by the fact that not all policies define a “named insured” and an “additional insured” in the same way.  Accordingly, it is important to understand the rights, duties and privileges provided by the policy to each category of defined insureds to ensure proper coverage is extended to the appropriate parties.  This may involve discussions with the underwriter about the interests of each party.

Procuring appropriate insurance can make the difference in whether a deal is done.  Accordingly, best practice includes consulting with professionals experienced in procuring coverage (including both brokers and attorneys) to identify which carriers have an appetite and are willing to be creative in their underwriting to meet the needs of the deal as well as to negotiate with the carrier to develop policy terms that cover the risks for which the insurance is purchased.  

For more information, please contact the author Alexa Richman-La Londe at alalonde@riker.com or any attorney in our Environmental Practice Group.

Virginia Federal Court Denies Title Agent’s Motion to Dismiss Title Insurer’s Action

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The United States District Court for the Western District of Virginia recently denied a title agent’s motion to dismiss a claim brought by Stewart Title Guaranty Company (“Stewart”) for the breach of an agency agreement and, in doing so, did not accept the agent’s argument that the underlying claims should have been excluded under Exclusion 3(a).  See Stewart Title Guar. Co. v. Closure Title & Settlement Co., LLC, 2019 WL 97045 (W.D. Va. Jan. 3, 2019).  In the case, the agent issued two title insurance policies for the same lender to secure first priority deeds of trusts on two properties.  Stewart underwrote both policies.  However, the lender made a mistake in preparing the deeds of trusts and the deeds named the incorrect grantor.  When a subsequent lender commenced a foreclosure proceeding on one of the properties, Stewart was forced to pay almost $200,000 in attorneys’ fees and settlement funds in litigating the insured lender’s interest in the properties.  Stewart then brought this action against the agent alleging a breach of the parties’ agency agreement.  The agent filed a motion to dismiss, arguing:  (i) the Court does not have diversity jurisdiction because Stewart’s damages do not exceed $75,000 under the terms of the agency agreement and the voluntary payment doctrine; and (ii) Stewart failed to state a claim.

The Court denied the agent’s motion to dismiss.  Under the terms of the agency agreement, the agent’s liability is capped at $2,500 unless the loss is caused by the agent’s “negligence or fraud.”  The agent argued that this cap applied to defeat diversity jurisdiction because the complaint does not allege negligence or fraud.  The Court disagreed, holding that “[w]hile the complaint does not explicitly allege ‘negligence’ by name, it plainly alleges nonconformity with industry standards.”  Additionally, the Court noted that there is some uncertainty in the Fourth Circuit as to whether a limitation of liability clause can be considered at a Rule 12(b)(1) stage, and for these reasons the agency agreement could not be read to divest the Court of jurisdiction.

More importantly, the Court rejected the agent’s claim that Stewart’s damages could not have exceeded $75,000 because, according to the agent, Stewart’s payment of attorneys’ fees and settlement funds was voluntary.  The agent argued that because the insured lender had prepared the defective deeds of trust, the claims were barred under Exclusion 3(a) of the policy which excludes title issues “created, suffered, allowed or agreed to” by the insured.  The Court did not agree and stated, “[n]either the Fourth Circuit nor the Supreme Court of Virginia has squarely addressed how courts should interpret ‘Exclusion 3(a)’ provisions. But the Fourth Circuit has intimated in an unpublished opinion that it would join the majority view that defects caused by the insured’s mere negligence are not sufficient to trigger an Exclusion 3(a) provision.”  Based on this, the Court found that the agent had not met its burden of establishing the payments were voluntary or that Stewart’s damages were less than $75,000.  Finally, the Court held that Stewart sufficiently alleged the elements of a breach of contract claim in that it alleged that the agent failed to conform with “recognized underwriting practices” by not realizing the obvious errors in the deeds of trust.

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

Sixth Circuit Holds Law Firm Liable Under the FDCPA for Not Cancelling Foreclosure Ads in Newspaper or Cancelling Foreclosure Sale Upon Receiving Letter Disputing Debt

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The United States Court of Appeals for the Sixth Circuit recently reversed a lower court and held that a debt collector law firm violated the Fair Debt Collection Practices Act (“FDCPA”) when it did not stop foreclosure ads from appearing in the newspaper after it received a letter from the debtor disputing the debt.  See Scott v. Trott Law, P.C., 2019 WL 169237 (6th Cir. Jan. 11, 2019).  On September 20, 2016, the defendant law firm sent a debt collection letter to the debtor under the FDCPA informing him that the law firm was going to foreclose on the debtor’s home due to missed mortgage payments.  On October 5, the law firm arranged to have a notice of foreclosure sale published in the newspaper for four consecutive weeks, arranged to have the newspaper post the notice at the debtor’s home, and scheduled a sheriff’s sale.  On October 11, the law firm received a letter from the debtor disputing the debt.  Under the FDCPA, “[i]f the consumer notifies the debt collector in writing within the thirty-day period . . . that the debt, or any portion thereof, is disputed . . . the debt collector shall cease collection of the debt. . .” until it can verify the debt and send the verification to the debtor.  15 U.S.C. § 1692g(b).  Although the law firm stopped its own collection efforts upon receipt of the letter, the newspaper printed the notice of foreclosure sale three more times and posted the notice at the debtor’s home.  The debtor also had to obtain an injunction staying the sheriff’s sale, which the law firm did not cancel.  The debtor brought this action arguing, among other things, that the law firm had violated the FDCPA by not stopping the newspaper from advertising and posting the sale notice, and by not canceling the sale.  The District Court granted the debt collector’s motion for summary judgment, finding that the law firm had not itself conducted any collection efforts after receiving the letter and had no duty to cancel the ads, stop the newspaper from posting the notice, or cancel the sale.

On appeal, the Court found that the law firm had violated the FDCPA.  Although the law firm did not engage in any more collection efforts, it already had “set into motion all the requirements to satisfy Michigan foreclosure law and the FDCPA.”  “Ostensibly, [the law firm] is suggesting that even though [the debtor] sent a Dispute Letter, the foreclosure sale could have still occurred because [the law firm] itself had ‘ceased.’ This reading of the statute produces a result contrary to the plain intent of the FDCPA and this circuit’s case law.”  Accordingly, the Court reversed the District Court’s determination that the law firm had not violated the FDCPA.

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

Eleventh Circuit Reverses District Court, Allows RESPA Claim to Proceed

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The United States Court of Appeals for the Eleventh Circuit recently reversed a lower court and held that the plaintiff borrowers were entitled to pursue their claims under the Real Estate Settlement Procedures Act (“RESPA”) based on a servicer’s alleged improper response to their QWR.  See Ranger v. Wells Fargo Bank N.A., 2018 WL 6523213 (11th Cir. Dec. 11, 2018).  In 2012, the lender initiated a foreclosure suit against the borrowers based on the servicer’s claim that the borrowers had missed their mortgage payments.  In 2014, the borrowers sent the servicer a QWR under RESPA contending that any allegation that they were derelict in making their payments was false.  In response, the servicer confirmed its finding that the borrowers had missed payments.  In 2015, however, the trial court in the foreclosure action found that the lender was not entitled to foreclose, dismissed the action, and awarded the borrowers some of their attorneys’ fees.  Six months later, the servicer sent the borrowers a letter again claiming they owed over $100,000 on their loan.  The borrowers responded with another QWR and immediately filed a lawsuit alleging violations of RESPA, among other claims.  The trial court dismissed the borrowers’ RESPA allegations, finding that they had not sufficiently alleged damages and, to the extent they had, they did not assert a connection between the RESPA violation and the damages.

On appeal, the Court affirmed in part and reversed in part.  The Court first acknowledged that a borrower claiming that a servicer violated its QWR responsibilities must show both actual damages and a causal link between the violation and the damages.  In this case, the Court found that the borrowers had sufficiently pleaded damages based on emotional distress, the payment of additional fees and higher interest, and damage to the borrowers’ credit score.  The Court further found that the borrowers linked these alleged damages with the servicer “insist[ing] upon pressing forward with the foreclosure, even after the 2014 QWR, even after the state court dismissed the foreclosure suit, and even after Plaintiffs sent the 2015 QWR.”  Nonetheless, the Court found that the borrowers had not alleged enough of a link between their claim of attorneys’ fees damages and the alleged RESPA violations, in large part because they had been awarded fees as part of the foreclosure dismissal and “[n]o matter what, if Plaintiffs were dissatisfied with their recovery in state court, they had to appeal that through the state system.”  Accordingly, the Court reinstated the RESPA claim as it pertains to non-attorneys’ fees damages.

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

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