Federal Deposit Insurance Corporation, as Receiver for Washington Mutual Bank v. Fidelity National Title Insurance Company, Successor By Merger To Lawyers Title Insurance Corporation
OPINION AND ORDER denying 59 Motion for Summary Judgment; denying 69 Motion for Summary Judgment. Signed by District Judge John Corbett O'Meara. (WBar)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
FEDERAL DEPOSIT INSURANCE
CORPORATION, as Receiver for
Washington Mutual Bank,
Case No. 14-13706
Hon. John Corbett O’Meara
FIDELITY NATIONAL TITLE INSURANCE
COMPANY, Successor by Merger to
Lawyers Title Insurance Corporation,
OPINION AND ORDER
Before the court are the parties’ cross-motions for summary judgment. The
court heard oral argument on November 17, 2016, and took the matter under
advisement. For the reasons explained below, the parties’ motions are denied.
Plaintiff Federal Deposit Insurance Corporation (“FDIC”) filed this action as
receiver for Washington Mutual Bank (“WaMu”). Defendant Fidelity National
Title Insurance Company is successor by merger to Lawyers Title Insurance
Corporation (“Fidelity”). Lawyers Title issued closing protection letters (“CPLs”)
to WaMu in connection with twenty-four mortgage loan closings in 2007. A CPL
is an indemnity agreement in which the title insurance company agrees to
indemnify the lender for losses related to the title company’s agent’s misconduct at
closing. See JP Morgan Chase Bank, N.A. v. First American Title Ins. Co., 795 F.
Supp.2d 624, 628-29 (E.D. Mich. 2011).
Subsequently, it was discovered that the twenty-four mortgage loans at issue
were obtained as part of a fraudulent scheme orchestrated by mortgage broker Firas
Bachi. Bachi purchased distressed properties in 2007 and placed them in the
names of straw sellers. Bachi then caused the properties to be sold to straw buyers
at significantly inflated prices. The purchases by the straw buyers were financed
by mortgage loans from WaMu. As the mortgage broker, Bachi submitted false
loan applications and supporting information to WaMu.1
The closing, title, and escrow services for the straw transactions were
performed by Metro-West Title Agency. Metro-West was an authorized issuing
agent of Lawyers Title (now Fidelity). WaMu’s closing instructions required
Metro-West to prepare a HUD-1 Settlement Statement for each transaction. FDIC
alleges that Metro-West prepared false HUD-1s to conceal the true nature of the
straw transactions from WaMu.
For his role in the scheme, Bachi pleaded guilty to one count of bank fraud in
2013. See Case No. 13-20276 (E.D. Mich.).
FDIC alleges that Fidelity is liable for the conduct of Metro-West under the
CPLs and that Fidelity has breached the CPLs by failing to indemnify FDIC for its
losses as a result of the fraudulent loans. The parties have filed cross-motions for
LAW AND ANALYSIS
Standard of Review
Summary judgment is appropriate if “there is no genuine issue as to any
material fact and . . . the moving party is entitled to a judgment as a matter of law.”
Fed. R. Civ. P. 56(c). When reviewing a motion for summary judgment, the facts
and any reasonable inferences drawn from the facts must be viewed in the light
most favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986). See also Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 252 (1986).
Fidelity’s Liability under the CPLs
The FDIC contends that there is no genuine issue of material fact that Metro-
West was aware of the fraudulent scheme perpetrated by Bachi. As a result, the
FDIC argues that Fidelity is liable for breach of contract under the CPLs. Fidelity
contends that there is insufficient evidence that Metro-West knew about and
participated in the fraudulent scheme. Fidelity further argues that the FDIC should
not recover under the CPLs because (1) the FDIC failed to give prompt notice of
the claims; (2) the claims are barred by laches; (3) the language of the CPLs does
not trigger Fidelity’s liability under these facts; (4) the FDIC cannot recover under
the CPLs for loans that were discharged; and (5) the FDIC knowingly and
voluntarily impaired Fidelity’s right to subrogation as a result of the delay in filing
Metro-West’s Knowledge of the Fraudulent Scheme
From April to September 2007, Metro-West closed twenty-four separate
WaMu mortgage loan transactions (to twelve borrowers) originated by First Choice
Finance and Bachi. For each transaction, WaMu required the borrower to submit a
down payment of approximately $25,000 at closing. Prior to each closing, WaMu
provided Metro-West with written closing instructions that required Metro-West to
prepare HUD-1s reflecting the receipt of the down payments from the borrowers,
and that prohibited secondary financing. For each transaction, Metro-West signed
the closing instructions and provided WaMu a HUD-1 certifying that the required
down payment (“cash to close”) was paid by the borrower. Metro-West also
notarized affidavits for WaMu in which each borrower swore that the borrower
paid the required down payment from his or her own funds.
For each transaction, Lawyer’s Title issued a title insurance policy and a
CPL. The issuing agent was Metro-West. A title insurance policy protects against
defects in title. “Comparatively, the closing protection letter contains the
underwriter’s promise to reimburse the addressee if loss results from an agent’s
failure to follow closing instructions to apply settlement funds in an honest
fashion.” JP Morgan Chase Bank, 795 F. Supp. 2d at 629. Specifically, the CPLs
[Lawyers Title], subject to the Conditions and Exclusions
set forth below, hereby agrees to reimburse [WaMu] for
actual loss incurred by [WaMu] in connection with said
closing when conducted by [Metro-West] and when such
loss arises out of:
(2) Fraud or dishonesty of [Metro-West] in handling
[Wa-Mu’s] funds or documents in connection with said
Pl.’s Ex. 1.
On September 25, 2008, WaMu was closed by the Office of Thrift
Supervision, and the FDIC was appointed receiver. The FDIC transferred
substantially all of WaMu’s assets to JPMorgan Chase Bank, including the loans at
issue in this case at their “book value.” According to the FDIC, the total book
value of the subject loans is $70,778. Lawyers Title merged into Fidelity in 2010,
and Fidelity assumed all rights, assets, and liabilities of Lawyers Title.
In July 2014, the FDIC discovered criminal filings against Bachi that
referred to the WaMu loans closed by Metro-West. A grand jury had indicted
Bachi in April 2013, charging him with bank fraud. According to the indictment,
Bachi “would cause” Metro-West to prepare fraudulent HUD-1s that stated that the
borrowers made down payments at closing, when in fact these payments were not
made. After Bachi pleaded guilty, the government filed a sentencing memorandum
stating that Bachi “supervised” the “owners of a licensed title company” in the
scheme. The “title company” is Metro-West.
Based upon this information, the FDIC took the deposition of the
owner/president of Metro-West, Sarah Fawaz, on September 22, 2014. Fawaz
personally closed six of the transactions at issue. At the deposition, Fawaz invoked
her Fifth Amendment privilege against self-incrimination and refused to answer
questions related to the transactions. FDIC then issued a claim notice to Fidelity
under the CPLs. Shortly thereafter, FDIC filed this action.
During discovery, the FDIC deposed four of the borrowers (Mercedes
Colon, Francisco Marquez, Jeff Haddad, and Ramon Abreu), who accounted for
eight of the loans at issue. Each testified that they paid no money to close the eight
transactions, which were closed by Metro-West. The FDIC also discovered that
the down payments for borrowers Jonathan Sanchez, David Alcantara, Martha
Mones, Francisco Sanchez, and Adjevi Wilson (nine loans) were paid by third
The FDIC also took the deposition of Robert Guthrie, who was an
incorporator/officer of Metro-West and who personally closed five of the subject
loans. Like Fawaz, Guthrie invoked his Fifth Amendment privilege against selfincrimination in response to questions about the transactions. Because both
Guthrie and Fawaz took the Fifth, the FDIC argues that it is entitled to an adverse
inference that Metro-West was complicit in Bachi’s fraudulent scheme.
The FDIC may indeed be entitled to an adverse inference that Metro-West
was complicit in Bachi’s fraudulent scheme. A jury could reasonably conclude
that Metro-West dishonestly or fraudulently handled WaMu’s funds or documents,
thus triggering Fidelity’s liability under the CPLs. See Bank of America v.
Fidelity Nat. Title Ins. Co., __ N.W. 2d __, 2016 WL 3430535 (Mich. App. 2016)
(“FNTIC”) (coverage under CPL triggered when closing agent “had knowledge
and participated in the fraudulent scheme”). This does not mean, however, that the
FDIC is entitled to summary judgment in its favor. In a similar case involving
CPLs issued by Fidelity, the Michigan Court of Appeals found that the issue of
whether the closing agent’s fraud or dishonesty caused the lender’s losses was for
the trier of fact to decide. See id. Here, the evidence is not “so one-sided” that
summary judgment in the FDIC’s favor is warranted. See West Hills Farms, LLC
v. ClassicStar Farms, Inc., 727 F.3d 473, 484 (6th Cir. 2013) (summary judgment
with respect to fraudulent intent appropriate when the evidence is “so one-sided
that no reasonable person could decide the contrary”). For example, the checks
and loan files, including the HUD-1s, do not contain facial irregularities or
indications of fraud. See Ex. N, Declaration of Orlando Villalba, ¶ 3; Ex. L,
McCullough Dep. at 68-69, 95-97. The court will deny the FDIC’s motion for
summary judgment on liability.
The FDIC’s Delay in Giving Notice of Claims
Fidelity argues that the FDIC’s claims are barred as a result of the delay in
giving notice under the CPLs. The CPLs require claims to be made “promptly”
and when “the failure to give prompt notice shall prejudice the Company, the
liability of the Company hereunder shall be reduced to the extent of such
prejudice.” Def.’s Ex. N (CPLs). Fidelity asserts that WaMu had notice of
potential fraud regarding the transactions at issue as early as October 2007. At that
time, loan notes showed that WaMu suspected five of the loans to be fraudulent.
See Def.’s Br. at 10. Bachi was indicted for bank fraud in April 2013; the FDIC
notified Fidelity of its claim in September 2014, after it took the deposition of
Metro-West’s Sarah Fawaz.
Fidelity has not shown that the FDIC should have been aware of its CPL
claims prior to September 2014. Although WaMu may have investigated some of
the loans as fraudulent, there was no indication prior to Bachi’s indictment and
Fawaz’s deposition that Metro-West may have been aware of the fraud.
Fidelity contends that it has been prejudiced by the passage of time, because
relevant documents have been destroyed, including Metro-West’s closing files, the
mortgage broker’s files, WaMu’s memos and fraud investigative files, and MetroWest’s bank records showing the disbursements of the loan funds. Fidelity has not
explained, however, how the missing documents have prejudiced its ability to
defend this case. See FNTIC, at *10 (“[A]n insurer must establish what is in fact
lost by the missing evidence, how this prejudices its position, and why information
available from other sources is inadequate.”). Further, the question of prejudice is
generally left to the trier of fact. Id. See also West Bay Exploration Co. v. AIG
Specialty Agencies, Inc., 915 F.2d 1030, 1037 (6th Cir. 1990).
Fidelity also claims that the FDIC’s claims are barred by laches. For laches
to apply, Fidelity must prove (1) a lack of diligence by the FDIC and (2) prejudice.
Regents of Univ. of Michigan v. State Farm Mut. Ins. Co., 250 Mich. App. 719,
734 (2002). As discussed above, Fidelity has not demonstrated a lack of diligence
on the FDIC’s part or prejudice as a matter of law.
Encompassed in Fidelity’s “delay” argument is that the FDIC “knowingly
and voluntarily impaired the value” of Fidelity’s right of subrogation. The CPLs
provide that “Liability of the Company for such reimbursement shall be reduced to
the extent that you have knowingly and voluntarily impaired the value of such right
of subrogation.” Fidelity argues that the FDIC purposely waited until the last
minute (the last day before the statute of limitations ran) before filing this suit,
precluding Fidelity from filing suit against the wrongdoers. Fidelity has not
presented evidence that the FDIC “knowingly and voluntarily” impaired its right of
subrogation. The court will deny Fidelity’s motion as to this issue.
Discharge of Mortgages
Fidelity also argues that the FDIC is barred from recovering under sixteen of
the CPLs because the mortgages securing these loans were discharged. The CPLs
contain the following condition (Condition D):
Liability under this letter is limited to the amount of the
loan policy of title insurance to be issued, and is subject
to all of the terms, conditions, and provisions contained
therein. Any payment of loss under this letter shall
constitute a payment under the policy.
Def.’s Ex. D (CPL). As Fidelity reads this provision, the terms and conditions of
the title policy limit its liability under the CPL. Under the title policy a discharge
of the mortgage reduces the amount of insurance “pro tanto” or terminates the
liability of the company. See Def.’s Ex. CC at ¶ 9. This is because an insurer’s
liability under the title insurance policy continues only so long as the insured
retains an interest in the mortgage. Fidelity argues, accordingly, that a discharge of
the mortgage also terminates its liability under the CPL.
Fidelity’s interpretation is at odds with the fact that the CPL and title policy
are separate contracts that protect against entirely different risks. Under Fidelity’s
interpretation, a lender would need to retain an interest in the mortgage in order to
recover under the CPL. This interpretation is not supported by the case law. See
JP Morgan Chase Bank, 795 F. Supp. 2d at 628-29 (FDIC may bring CPL claim
even through it no longer owns the related title policy); FATCO, 499 Mich. at 8689 (full credit bid after foreclosure releases borrower from debt but does not bar
claim under CPL); FDIC v. Attorneys’ Title Ins. Fund, Inc., 2014 U.S. Dist.
LEXIS 126471 (S. D. Fla. Sept. 3, 2014) (“The fact that the title insurer limits its
liability under the CPL to the amount of the underlying insurance policy does not
make the documents inseparable.”). Moreover, in order for a lender to suffer an
“actual loss” under a CPL, it would need to receive less than the loan amount for
the underlying property, thereby extinguishing its interest. See FATCO, 499 Mich.
at 98; JP Morgan Chase, 750 F. 3d at 584 (damages for breach of CPL equal the
total amount of the loan minus the book value received after sale). Yet Fidelity
argues that once the lender’s interest is extinguished (thereby allowing its “actual
loss” to be calculated), it is absolved of liability.
The language of Condition D is more reasonably interpreted as limiting the
amount of liability under the CPL to the loan amount under the title policy, and to
avoid double recovery under the title policy and CPL. At most, Fidelity has
highlighted an ambiguity in the CPL language, which is to be construed against it.
See Fifth -Third Mortgage-Mi v. Hance, 2011 Mich. App. LEXIS 1715 at *14-15
(Sept. 29, 2011) (in the absence of extrinsic evidence regarding the parties’ intent,
disputed ambiguous terms are construed against the drafter).
The FDIC contends that the proper formula for measuring its damages is
subtracting the “book value” of the subject loans from the total value of the loans
at the time of WaMu’s failure. See JPMC, 750 F.3d at 583-84. Fidelity takes issue
with the FDIC’s calculation of actual loss, noting that it does not take into account
proceeds from insurance claims or foreclosure sales. The FDIC has not explained
why such proceeds should not be considered when determining its actual loss. The
court finds that the FDIC has not sustained its burden of demonstrating that it is
entitled to summary judgment on damages.
IT IS HEREBY ORDERED that Plaintiff’s motion for summary judgment
and Defendant’s second motion for summary judgment are DENIED.
s/John Corbett O’Meara
United States District Judge
Date: January 3, 2017
I hereby certify that a copy of the foregoing document was served upon
counsel of record on this date, January 3, 2017, using the ECF system.
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