Midwest Update - FDIC v. Chi. Title Ins. Co.

FDIC v. Chi. Title Ins. Co., 2016 U.S. Dist. LEXIS 174661 (N.D. Ill. 2016)

The Northern District of Illinois (the "District Court") denied the Plaintiff FDIC’s motion for partial summary judgment and Defendants Chicago Title Insurance Company and Chicago Title and Trust Company’s motion for summary judgment and for judgment on the pleadings because there remained genuine issues of material fact that needed to be resolved at trial.

This case concerned an escrow agent’s alleged participation in a series of fraudulent “flip” real estate transactions. The flip transactions were designed to allow the purchasers of the properties, who had borrowed money from Founders Bank (“Founders”), to circumvent Founders’ requirement that they make a down payment on the properties. The purchasers ultimately defaulted to the detriment of Founders. Consequently, Plaintiff Federal Deposit Insurance Corporation (“FDIC”), acting as receiver for Founders, sued Defendants Chicago Title Insurance Company and Chicago Title and Trust Company (together, “Chicago Title Entities”) for their conduct as the escrow agents for four flip transactions.

The four transactions (each a “Subject Transactions”) all followed a similar pattern. Founders extended a loan (each a “Loan”) for the purchase of a property (each a “Subject Property”). The Purchaser of each Subject Property (each a “Purchaser”) was a different limited liability corporation. A condition for each Loan was that the applicable Purchaser would pay 20% of the purchase price for the Subject Property. Founders then deposited with Chicago Title Entities approximately 80% of the stated purchase price for the Subject Property, with the balance paid to Chicago Title Entities by the applicable Purchaser. The Chicago Title Entities were then supposed to disburse the funds according to the escrow title instructions provided by Founders for each transaction. Instead, in each transaction, Chicago Title Entities disbursed a significant portion of the deposited funds to other entities that the FDIC claims were closely related to the Purchasers. Then, Chicago Title Entities transferred funds roughly corresponding to the amount of Founders’ deposits into a separate escrow trust; those funds were then used to close on the Subject Properties with the actual sellers. In essence, the alleged scheme was designed to allow the Purchasers to obtain the Subject Properties with no down payment and with Founders’ loan proceeds paying for the entire purchase. Each Purchaser would inflate the stated purchase price of each Subject Property to the point that Founders’ 80% deposit would cover the actual purchase price of such Subject Property. Each Purchaser would front 20% of the stated purchase price to Chicago Title Entities, but Chicago Title Entities would distribute that amount back to such Purchaser through entities that were closely related to such Purchaser.

The Purchasers all defaulted on the Loans. Founders then instituted legal actions seeking foreclosure on each Subject Property. Founders obtained a Judgement of Foreclosure and Sale (“JOF”), which provided that each Subject Property would be sold at a public sale upon the continued failure to satisfy all amounts due. Founders acquired each Subject Property as the highest bidder at public auction via credit bid. The sale of each Subject Property was approved by the state foreclosure court, which also awarded deficiency judgments against the buyers. After learning about the double closings and having spent money on construction on the Subject Properties, Founders sold each of the Subject Properties at a loss. The FDIC, acting as a receiver for Founders, then instituted the current lawsuit.  The FDIC claimed that Chicago Title Entitles acted negligently and breached contractual and fiduciary duties in their role as closing agents. The FDIC contended that in each of the four Subject Transactions, Chicago Title Entities violated the escrow trust instructions that they were contractually obligated to follow. The claims ultimately stemmed from the FDIC’s allegation that Chicago Title Entities wrongly disbursed funds to entities without approval. Chicago Title Entities responded that they simply followed the escrow trust instructions as written. The instructions directed Chicago Title Entities to pay the Seller “pursuant to Buyer/Seller escrow instructions.” Chicago Title Entities contended that for each Subject Transaction, they were directed by the buyer and seller to pay the other entities part of the sale proceeds and to segregate part of the sale proceeds into a separate escrow trust. Before the Court was the FDIC’s motion for partial summary judgment on its breach of contract claim and Chicago Title Entities’ motion for summary judgment on the FDIC’s breach of contract and negligence claim. The District Court denied all motions.

The Northern District of Illinois:

In regards to the FDIC’s motion for partial summary judgment, the District Court stated that the critical question was whether Chicago Title Entities disbursements to other individuals and entities were made pursuant to the Buyer/Seller escrow instructions. The District Court noted that neither side brought to the District Court’s attention any evidence on whether the sellers of the Subject Properties were aware of the disbursements to the other parties and individuals. On the record, the District Court found that there was a genuine issue of material fact as to whether Chicago Title Entities properly disbursed the funds pursuant to “Buyer/Seller escrow instructions,” and consequently whether Chicago Title Entities violated the escrow trust instructions. Thus, the District Court denied the FDIC’s motion for partial summary judgment on its breach of contract claims.

The District Court then went on to discuss Chicago Title Entities motion for partial summary judgment on the FDIC’s breach of contract and negligence claims. The District Court also rejected both arguments and denied Chicago Title Entities’ motion.  In the claim for breach of contract, Chicago Title Entities contended that the FDIC could not show that the alleged breach proximately caused the alleged losses because there were other intervening factors, such as the condition of the buildings, the failure of Founders to obtain anything from the guarantors, and the economic downturn. The District Court determined that on the current record, summary judgment based on the issue of proximate causation would be inappropriate. The District Court first found that it was not clear that the condition of the buildings was unforeseeable such as to break the chain of causation. The District Court determined that a factfinder could conclude that some of Founders’ losses due to the Subject Properties’ deteriorated conditions were a foreseeable result of Chicago Title Entities’ alleged conduct. Second, the District Court found the appeal to Founders’ inability to collect from the guarantors unavailing. The District Court found that the fact that guarantors of a fraudulent transaction would not in fact be able to guarantee the losses of that fraudulent transaction was entirely within the realm of reasonably foreseeable results. Finally, the District Court found that there was a genuine factual issue as to whether at least some of the losses that Founders incurred were not attributable to the economic downturn. Ultimately, the District Court concluded, what impact the economic downturn had on the values of the Subject Property and what part it played in Founders’ losses were questions for the factfinder, not ones appropriate for resolution at summary judgment.

In regards to the negligence claim, Chicago Title Entities argued that the FDIC was barred from recovery for negligence because its claim was predicated entirely on violations of contractual obligations and Chicago Title Entities had no extra‑contractual duties to Founders. Generally, the economic loss doctrine prohibits recovery in tort for failure to perform contractual obligations. However, there is an exception to the doctrine for violations of extra‑contractual duties, even where the parties’ relationship was created by contract.

The District Court did not agree with Chicago Title Entities’ contention, and stated that Illinois law holds that an escrow agent has a fiduciary duty to the party making the deposit and the party for whose benefit the deposit is made. The fiduciary duty, including the duty to exercise reasonable care, does not arise solely from the terms of the contract and therefore it is an extra‑contractual duty outside the scope of the economic loss doctrine. The District Court further rejected Chicago Title Entities’ argument that an escrow agent’s obligations under Illinois law are limited to following the escrow instructions and that Chicago Title Entities thus did not have any extra‑contractual duties. The District Court noted that the case law Chicago Title Entities cited failed to support their position. Rather, the cases Chicago Title Entities cited did not limit the duties of the escrow agent to following the instructions of the agreement. Accordingly, the District Court concluded that Chicago Title Entities had an extra‑contractual, fiduciary duty to Founders to exercise reasonable care in managing the disbursement of funds from the escrow trust. As such, the District Court denied Chicago Title Entities’ motion for summary judgment on the FDIC’s negligence claim.