Judgment obtained in favor of underwriter for losses due to agency fraud

Bill Sauerwein and Trent Bond concluded a major fraud case against a title agency and obtain a $3.5m judgment. Hein Schneider & Bond P.C. represented a national title insurance underwriter against a real estate title and closing agency formerly based in Springfield, Missouri that misappropriated escrow funds from hundreds of its customers. On behalf of our client, we investigated the fraud, petitioned to shut down the agency, enjoined its check kiting and banking activity, and sued to recover losses paid to insureds. Today, in a hearing conducted by Trent Bond, the court entered a judgment the amount of $3.5 million dollars against the agency and its individual owners in favor of our client.

Title News for Missouri & Illinois

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Trent Bond Wins at Trial

Trent Bond successfully tried a case on behalf of a lender that was insured under a policy of title insurance, where the mortgage or deed of trust was lost and the borrower had claimed he had not signed the deed of trust, although he had accepted the loan funds.  Trent filed suit for quiet title pursuant to Missouri’s lost deed law seeking a judgment that its copy of the deed of trust was a true and accurate copy of the lost original and sought to encumber the borrower’s property with a first priority lien.  The Defendants sought to avoid the mortgage altogether and argued that they did not sign the closing documents.  Defendants’ argument was controverted by the testimony of a handwriting expert and ultimately, with the aid of an advisory jury, the Court found that the Defendants signed the deed of trust and intended to encumber their property with it.  The trial was held in Christian County, Missouri.

John Hein scores a victory on appeal for a national title insurance underwriter.

To collect losses paid by an insurer as a result of a builder’s mechanics lien claims, John Hein won the right on appeal to pursue collection against the individual owner of the company by piercing the corporate veil. The Trial Court awarded judgment but denied the Creditor’s Bill against the individual owner. John obtained a reversal in part from the Missouri Court of Appeals Eastern District. The Appellate Court allowed the insurer to pierce the corporate veil on remand and to pursue claims against the individual owner of the homebuilder corporation for negligent misrepresentation, fraudulent misrepresentation, negligent concealment, and fraudulent concealment, and to pursue its Creditor’s Bill.

The full opinion can be found here.

Sarah Holdener presented on Legal Descriptions, Title Insurance and Surveys in Real Estate Transactions.

Sarah Holdener recently presented at a continuing education seminar on Legal Descriptions, Title Insurance and Surveys in Real Estate Transactions for NBI Seminars in Clayton, Missouri. Contact Sarah if you would like a copy of her presentation materials.

Bill Sauerwein successful on appeal on behalf of purchaser of foreclosed property.

The Southern District of Missouri Court of Appeals issued its opinion in favor of Bill Sauerwein’s client, Treadwell Enterprises, Inc., in a case filed originally in Greene County, Missouri – The Bank of Missouri vs.  South Creek Properties, LLC, et. al. There, former owners of property sought to unwind a foreclosure and sale of property to Treadwell by maintaining that the Trustee under a Deed of Trust acted wrongfully and by asserting that the deed received by Treadwell was invalid. The former owners contended that the Trustee failed to follow fundamental procedures and that the Southern District’s previous opinion in Winters v. Winters, 820 S.W. 2d 694 (Mo. App. S.D. 1991) required that the sale and deed be set aside. In its written opinion, the court adopted Sauerwein’s arguments that the Trustee who foreclosed and sold the property to Treadwell acted in accordance with the law, that Winters did not require that the deed be set aside, and that the sale and Trustee’s Deed were valid. The court’s opinion can be found here.

Illinois Appellate Court invalidates mortgage where lender was not properly licensed under the Residential Mortgage License Act

In a case of first impression in Illinois, the Appellate Court for the Second District of Illinois has determined that a mortgage made by an entity lacking authorization to conduct business under the Residential Mortgage License Act (205 ILCS 635/1-1 et seq.) is void as against public policy.  First Mortgage Company, LLC v. Daniel Dina and Gratziela Dina, 2014 IL App (2d) 130567 (March 31, 2014).

The Plaintiff, First Mortgage Company, LLC, filed a foreclosure complaint relating to property in North Barrington, Lake County, Illinois, naming as defendants Daniel Dina, the property owner and borrower, and Gratziela Dina, who had also signed the mortgage.  According to the Complaint, the lender was an entity identified as FMCI.  Defendants, the Dinas, appeared through counsel and asserted that Plaintiff, First Mortgage Company, LLC was neither the mortgagee nor the successor in interest to the mortgagee and that Plaintiff lacked standing.  Plaintiff moved for summary judgment in which it provided evidence of a merger between FMCI and Plaintiff.

The Dinas missed their deadline to respond to the motion for summary judgment, sought additional time and filed a proposed response asserting that neither entities were licensed to do business in Illinois or licensed under the RMLA. The circuit court granted Plaintiff’s motion for summary judgment and entered judgment for foreclosure.

On appeal, the appellate court relied on Illinois law relating to other licenses and sister-state law concerning statutes analogous to the License Act to reach its determination that a License Act violation results in an unenforceable contract. The court further concluded that because the mortgage contract would be void as a matter of public policy, any technical flaw in the way the defendants raised the defense did not result in a forfeiture of the defense.

The court’s opinion made clear that where a mortgage has been assigned to another entity who then seeks to enforce its terms through foreclosure, it is the licensure status of the original mortgagee that is relevant. Under the License Act, “[n]o [nonexempt person or entity] shall engage in the business of brokering, funding, originating, servicing or purchasing of residential mortgage loans without first obtaining a license from the [Secretary]. Opinion ¶16; 205 ILCS 635/1-3(a).  Thus it is the original mortgagee’s status, not plaintiff’s that is relevant here. Id.

In reaching its decision, the court relied on the rationale stated in Chatham Foot Specialists, P.C. v. Health Care Service Corp., 216 Ill 2d 366 (2005):

It is well settled that ‘courts will not aid a plaintiff who bases his cause of action on an illegal act.’ More specifically, ‘courts will not enforce a contract involving a party who does not have a license called for by legislation that expressly prohibits the carrying on of the particular activity without a license where the legislation was enacted for the protection of the public, not as a revenue measure.’

The Second District concluded, therefore, that a mortgage made by an entity lacking authorization to conduct business under the RMLA is void and against public policy.  The court noted that although the Dinas did not properly raise the defense, under the circumstances they did not forfeit the defense as a matter of public policy, and stressed that it is within the court’s power and discretion to sua sponte consider whether an agreement is unenforceable as against public policy, even if no party raised the point. The court vacated the foreclosure judgment and remanded to the circuit court to permit the Plaintiff to respond to the Dinas’ defense.

Mechanics Liens Paid by Insurer May be Nondischargeable

In First Am. Title Ins. Co. v. Speisman (In re Speisman), 2013 Bankr. LEXIS 2967; 2013 WL 3779366 (U.S. Bankr. N.D. IL, July 19, 2013), the U.S. Bankruptcy Court for the Northern District of Illinois recently denied a debtor’s motion to dismiss the adversary complaint of a title insurance underwriter that alleged it had been required to satisfy $75,000 in mechanics liens under a title insurance policy the debtor procured through false representations.  The insurer’s complaint alleged that debtor induced it to issue a title insurance policy by knowingly executing a statement at closing to the effect that no contracts had been given or were outstanding that had not been fully performed or satisfied, knowing such statement to be false.  The insurer relied on debtor’s statement in closing and disbursing a refinance loan, and issuing a title insurance policy to debtor’s lender, and sought to prevent dischargeability of debtor’s liability for insurer’s satisfaction of the mechanics lien debt.  The debtor sought dismissal on the basis that the insurer’s amended complaint failed to allege he personally received any “money, property, services or an extension, renewal, or refinancing of credit” as a result of his fraud, as required by 11 U.S.C. § 523(a)(2)(A).  The Bankruptcy Court disagreed, held no such allegation was necessary, and denied debtor’s motion to dismiss.

In reaching its decision, the Court relied on In re Dallam, 850 F.2d 446 (8th Cir. 1988), an Eighth Circuit Appellate decision with a very similar factual basis.  In Dallam, the court found a debt nondischargeable where the debtor, a builder of expensive homes, procured a title insurance policy with an affidavit stating that all persons furnishing labor, services and material in construction of the house had been paid.  In reliance on this statement, the insurer issued a policy.  Subsequently fifteen contractors submitted claims to the purchasers and the insurer settled those claims.  When the debtor filed bankruptcy the insurer asserted it was owed a non-dischargeable debt for settlement of the lien claims.  While the bankruptcy court permitted dismissal of the complaint, the Court of Appeals reversed noting that the debtor’s business had benefited from the predicament in which it had placed the insurer since the amounts the insurer paid extinguished debtor’s liability for the same debts.  Debtor thus obtained payment of her business debts by knowingly making a false statement in order to induce the insurer to rely on it and the insurer did rely on the statement, causing its monetary loss.

Dischargeability and Recoupment

The Bankruptcy Court’s holding in this case highlights an additional tool available to claims and recoupment counsel, in circumstances such as these, where an insurer has been made to pay as a result of the false representations made by an owner in a closing statement or affidavit in order to induce the close of escrow.  Should an owner file bankruptcy, an insurer can apply to the Bankruptcy Court to declare a debt nondischargeable through an adversary proceeding, if it can be shown that the insurer’s payment under the policy, or the policy itself, was secured by false pretenses, false representation or actual fraud.

Contact  Bill Sauerwein or Sarah Holdener if you have any questions about this case or for assistance with your real property and title insurance related issues.

New Penalties for Unlawful Clouding of Title in Illinois

Illinois recently amended Section 720 ILCS 5/32-13 of the Illinois Criminal Code to create a felony level offense resulting from the creation of a cloud on title that either (a) has a value in excess of $10,000, or (b) results from a second or subsequent offense, due to the recording or filing of a document which you know to be without a basis in legitimate legal theory.  A “cloud on title” is defined by the statute as “an outstanding claim or encumbrance that, if valid, would affect or impair the title of the owner of an estate in land and on its face has that affect, but can be shown by extrinsic proof to be invalid or inapplicable to that estate.”  The amendment to the statute, which previously only carried a Class A misdemeanor penalty, goes into effect on January 1, 2014.

Protection for Attorneys

The statute contains an exception for an attorney, licensed to practice in Illinois, who in good faith files a lien on behalf of a client believing that the validity of the lien is supported by law, a decision of the court, or by a good faith argument for extension, modification or reversal of an existing decision of a court relating to the validity of the lien. Despite this protection, there is some speculation that the threat of severe criminal penalties will have a chilling effect on the filing of good faith liens, and even those which previously would have been filed by counsel.

 The Language of the Statute

Unlawful clouding of title.
(a) Any person who intentionally records or files or causes to be recorded or filed any document in the office of the recorder or registrar of titles of any county of this State that is a cloud on the title of land in this State, knowing that the theory upon which the purported cloud on title is based is not recognized as a legitimate legal theory by the courts of this State or of the United States, commits the offense of unlawful clouding of title.
(b) Unlawful clouding of title is a Class A misdemeanor for a first offense if the cloud on the title has a value that does not exceed $10,000. Unlawful clouding of title is a Class 4 felony if the cloud on the title has a value that exceeds $10,000, or for a second or subsequent offense
(c) In addition to any other sentence that may be imposed, the court shall order any person convicted of a violation of this Section, or placed on supervision for a violation of this Section, to execute a release of the purported cloud on title as may be requested by or on behalf of any person whose property is encumbered or potentially encumbered by the document filed. Irrespective of whether or not a person charged under this Section is convicted of the offense of unlawful clouding of title, when the evidence demonstrates that, as a matter of law, the cloud on title is not a type of cloud recognized or authorized by the courts of this State or the United States, the court shall forthwith direct the recorder or registrar of titles to expunge the cloud.
(c-5) This Section does not apply to an attorney licensed to practice law in this State who in good faith files a lien on behalf of his or her client and who in good faith believes that the validity of the lien is supported by statutory law, by a decision of a court of law, or by a good faith argument for an extension, modification, or reversal of existing court decisions relating to the validity of the lien.
(d) For purposes of this Section, “cloud on title” or “cloud on the title” means an outstanding claim or encumbrance that, if valid, would affect or impair the title of the owner of an estate in land and on its face has that effect, but can be shown by extrinsic proof to be invalid or inapplicable to that estate.

View the Act and Legislative History here.


Companion legislation gives Recorder of Deeds Power to Review Instruments for Fraud or Unlawful Cloud on Title and Refer to an ALJ

The Illinois Legislature also recently passed PA98-99 into law as 55 ILCS 5/3-5010.5, on July 19, 2013.  This Act established a “Fraud Referral and Review Process” for deeds and instruments the Recorder of Deeds believes are fraudulent, unlawfully altered, or intended to unlawfully cloud or transfer the title of any real property.  Under the new statute, if the Recorder of Deeds believes a document is fraudulent, the Recorder may refer the instrument to a county administrative law judge for review.  If the ALJ finds by clear and convincing evidence that the document is fraudulent, the ALJ must issue a judgment to that effect with a notation that the fraudulent document may not affect the chain of title to the property in any way.

This Act is effective immediately and is mandatory in counties with a population of greater than 3 million (Cook County). Other counties may adopt the procedure 90 days after notice to the public.

Read the full Act here.

Contact Sarah Holdener or Bill Sauerwein if you have any questions about these statutes or for assistance with your real property related issues.

Judgment obtained by Bill Sauerwein and Trent Bond affirmed by Court of Appeals

A judgment obtained by Bill Sauerwein and Trent Bond on behalf of a group of homeowners has been affirmed by the Missouri Court of Appeals. In issuing its lengthy opinion, the court of appeals held that correction of the homeowners’ vesting deeds was permitted and proper, even to the detriment of a mechanics’ lien judgment creditor whose sought to attach and enforce its judgment against the homeowner’s property.  The execution on the judgment was quashed and the lien claimant was permanently enjoined from executing against the property in satisfaction of his judgment against the original developer. Read the full opinion at Missouri Land Dev. I, LLC v. Raleigh Dev., LLC, Missouri Court of Appeals, ED99258 (June 28, 2013).