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Home > Underwriting > Title News > Fifteen Volume Seven

SERIES: Fifteen VOLUME: Seven DATED: July, 2000

~COURT HOLDS THAT NO LIABILITY EXISTS UNDER A LOAN POLICY WHEN THE LOAN FUNDS SECURED ARE STOLEN BY INSURED MORTGAGEE'S CLOSER~

A recent Appellate Division decision, Fidelity National Title v. Consumer Home Mortgage (Appellate Division, 2nd Department, decided May 26, 2000), has held that when loan funds are never delivered to the borrowers because of being stolen by the attorney appointed as settlement agent for the lender, the mortgages insured were invalid and the title insurer who issued title insurance commitments in connection with the closing was entitled to a judgment declaring its loan title policy void and unenforceable.

The Court summarized the facts in the case as follows:

"The defendant, Consumer Home Mortgage, Inc... is in the business of lending money for the purchase of residential homes, with those loans secured by mortgages. In order to fund the mortgage loans it offers, Consumer entered into interim loans from lending institutions known as 'warehouse banks', and upon the closing of each loan, Consumer then sold the loan and mortgage to so-called 'secondary market investors' such as the federal national Mortgage Association... and Fleet Mortgage Corp...
During 1996, Consumer entered into mortgage commitments, agreeing to loan money to several prospective buyers of residential property. The loans were to be secured by a note and mortgage as a lien on each of the subject properties to be purchased. Prior to closing, the prospective buyers obtained Loan Policies of Title Insurance from the plaintiff Fidelity National Title Insurance Company of New York... for the benefit of Consumer as mortgagee, insuring the validity and enforceability of the lien of each proposed mortgage. Also prior to closing, Consumer designated the defendant law firm Ferrara & Associates, P.C., and the defendant attorney Perry Ferrara... to act as its so-called 'settlement service provider'. Consumer then authorized the warehouse banks to wire the interim loan funds into an escrow account held by Ferrara, and authorized Ferrara to supervise the execution of loan documents at the closings and issue checks to the appropriate parties.
In October 1996, the closings took place at Ferrara's offices, as designated, at which time the prospective buyers received deeds to the properties to be purchased, and in turn, they delivered to Consumer the respective notes and mortgages, in addition to the Loan Policies of Title Insurance. Shortly thereafter, all parties were notified that the checks drawn on the escrow account of Ferrara had been dishonored for insufficient funds. Fidelity refused to record the mortgages for lack of consideration, and moved for a declaration of the rights and obligations of all the parties. Consumer moved for summary judgment declaring that the loan policies were valid and enforceable, and demanded coverage from Fidelity for the loss incurred."

The Court held as follows in declaring Fidelity's policies void and unenforceable:

"Contrary to Consumer's contentions, title insurance insures against loss regarding title to the land, not the underlying debt... Moreover, where as here, the underlying debt has not been satisfied, the mortgage it was meant to secure must fail... Thus, the court properly determined that where there is no underlying debt, there is no valid mortgage, and that the loan policies purportedly insuring said mortgages were not valid or enforceable.
Furthermore, coverage was properly denied pursuant to the exclusionary provision in the loan policy in which Fidelity expressly excluded coverage for any loss which Consumer 'created, suffered, assumed or agreed to'. Here, Consumer admittedly designated Ferrara as its settlement service provider by directing the funds earmarked for the mortgage loans to an escrow account maintained by Ferrara, and by authorizing Ferrara to perform certain duties on Consumer's behalf at the closings. Where a loss is caused by the fraud of a third party, in determining the liability as between two innocent parties, the loss should fall on the one who enabled the fraud to be committed... Thus, the actions of Ferrara were properly imputed to Consumer. As such, Consumer created the loss which is excluded from coverage."

~ JOHN C. McGUIRE ~

John C. McGuire, former Monroe Director and Executive Vice President for Operations died Wednesday, July 19th in Syracuse at the age of 85. Mr. McGuire began in the title business in 1933 with the Syracuse Title & Guaranty Company which was merged into Monroe in 1949. He was appointed Syracuse Office Manager in 1956, in 1958 he was elected a Director of Monroe and in 1983 was appointed Monroe's first Operations and Corporate Development Officer. In addition to his work with Monroe, he was also very active in dozens of community service organizations throughout the Syracuse area.

~ JOSEPH M. OVERFIELD ~

Joe Overfield, former Abstract Supervisor and Manager in Monroe's Buffalo office passed away on Thursday, July 20th at the age of 84. Mr. Overfield first joined Monroe in 1937 as a title researcher and, except for service as an Army Aircorp Weatherman in India during World War II, he worked continuously at Monroe and headed our Buffalo abstract operations up to his retirement in 1983. After his retirement he continued for 8 additional years as an officer of Monroe and consultant. In addition to his work at Monroe, Mr. Overfield was known throughout the Buffalo area as the historian of the Buffalo Bisons baseball club and his book "The 100 Seasons of Buffalo Baseball" was published in 1985. He was a charter member of the Buffalo Baseball Hall of Fame Committee and was inducted himself in 1994.

~ MARGARET M. GORMAN ~

Margaret M. Gorman, wife of retired longtime Monroe Title Examiner Richard Gorman and mother of Monroe's former Lyons Office Manager, Michael Gorman, passed away on July 25th at the age of 81. Mrs. Gorman was a member of Saint Mary's of the Lake Church and its Altar Rosary Society and was also a TWIG member of the Meyers Community Hospital. Everyone at Monroe is saddened to hear of Mrs. Gorman's passing and we extend our condolences to both Dick and Mike.

~ JEAN VERNAM ~

We are also saddened to learn of the recent passing of Jean Vernam, formerly of Monroe's Rochester office. Mrs. Vernam began her extended tenure at Monroe in May, 1940 as a title insurance typist and worked with the Rochester staff on a full-time basis until her retirement in 1980. Jean continued to help out on a part-time basis as a title insurance typist in Rochester until 1990.

~ ELAINE LOCK ~

Elaine Lock, formerly of Monroe's Syracuse office, has also recently passed away. She began at Monroe in March of 1965 in the financial area, was appointed an Assistant Treasurer of the Corporation in 1969 and served as Monroe's bookkeeper in Syracuse until her retirement in April 1982.


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