Pennsylvania Appeals Court To Title Insurer: OK To Stiff Refinancing Lender On Title Policy Claim Involving Theft Of Loan Proceeds Where Klepto Closing Agent Had Fiduciary Relationship w/ Victimized Bank
- A bank's title insurance policy does not cover losses due to misappropriated lien funds when the insurer was not involved in the transfer of funds, the Pennsylvania Superior Court has ruled.
In a Jan. 20 opinion, the Superior Court affirmed a ruling of the Butler County Court of Common Pleas, which concluded that Northwest Savings Bank was not entitled to coverage after The Closing Company of PA ["TCCPA"] misappropriated funds it received from Northwest to satisfy liens against a refinanced property. The trial court had granted a motion for summary judgment to Fidelity National Title Insurance Co., Northwest's insurer.
Senior Judge John L. Musmanno, in an unpublished eight-page opinion, largely agreed with the reasoning of Butler County Court of Common Pleas Judge S. Michael Yeager.
"It is undisputed that it was not Fidelity who entrusted the funds to TCCPA as its agent; rather it was Northwest who forwarded the funds to TCCPA, and directed TCCPA in the proper procedure to disburse or otherwise transfer the funds," Yeager wrote. "Unfortunately, Northwest seeks to be indemnified by a party that does not properly hold the fault or duty to do so."
Northwest entered into a mortgage loan agreement with Thomas and Lisa McIntyre in 2009 as the couple sought to refinance their home, Yeager's opinion said. The Closing Company of Pennsylvania was acting as Fidelity's policy issuing agent when it issued Northwest a commitment for title insurance on the McIntyres' loan. However, Yeager said in a footnote, the agreement between TCCPA and Fidelity was limited to countersigning and issuing title insurance commitments, and specifically disallowed TCCPA to receive funds in Fidelity's name.
After the commitment was issued to Northwest, Northwest sent money to TCCPA and instructed that the funds be used to pay off the McIntyres' mortgage loans. However, it was later found that TCCPA did not use the money for the mortgages, and Jeffrey Garbinski, a TCCPA officer, misappropriated the money.
In 2013, the mortgage lenders who were not paid commenced a foreclosure on the McIntyres' property, and Northwest sought protection from Fidelity against any losses that might result from the foreclosure. But Fidelity denied coverage, Yeager wrote.
Yeager determined that it was Northwest's responsibility to pay the pre-existing mortgages, and that Fidelity did not entrust the funds to TCCPA. Because Northwest and TCCPA had a fiduciary relationship, the opinion said, coverage was excluded.
"The principles of equity cannot dictate that the burden merely shifts to the insurance carrier where the closing agent was fraudulent but the insured is innocent," Yeager wrote. "In fact, such an insurance exclusion has previously been applied in cases concerning the fraud of closing agents."
***[Fidelity's attorney Francis Xavier Riley III] said underwriters routinely deal with a "misperception" that the title issuing agent is the insurer's agent for all purposes.
"The court's decision shows a recognition that the title's underwriter is not always in the best position … to protect against fraud," Riley said. ...
For the court ruling, see Northwest Savings Bank v. Fidelity National Title Insurance Company, No. 451 WDA 2016 (Pa. Super. January 20, 2017) (non-precedential decision).