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A Better Partnership
July 28, 2016

COA: Question of fact existed as to whether title insurer participated in a fraudulent scheme with bank’s funds

In the consolidated cases of Bank of America v. Fidelity National Title Insurance Co., Nos. 311798, 312426, 313797, 316538, the Michigan Court of Appeals reversed the order granting summary disposition to Fidelity National Title Insurance Co. (FNTIC) regarding Bank of America’s (BOA) breach of contract claims.  The cases arose from allegations of mortgage fraud against BOA, resulting in BOA filing breach of contract claims against its title insurer, FNTIC.  FNTIC had previously issued closing protection letters that promised to indemnify BOA for any actual losses arising from fraud or dishonesty in handling BOA’s funds or documents.  The trial court granted summary disposition to FNTIC on BOA’s breach of contract claims in each underlying action. 
In Nos. 311798 and 316538, BOA challenged the trial court’s grant of summary disposition.  In No. 311798, the Court of Appeals concluded that there is evidence establishing a genuine issue of material fact concerning whether BOA suffered actual loss arising out of the fraud or dishonesty of FNTIC.  The evidence indicates that FNTIC participated in arranging a flip transaction with BOA’s funds used to finance the second sale based on an inflated value of the property, and prepared the warranty deeds for both sales in the flip transaction.  Additionally, evidence shows that FNTIC prepared title commitments that listed the incorrect owner and a HUD-1 settlement statement that inaccurately disclosed a down payment.  These facts taken together support an inference that FNTIC was aware of and participated in a fraudulent scheme.  Furthermore, a genuine issue of material fact exists regarding whether BOA’s losses arose out of FNTIC’s fraud or dishonesty.  The Court of Appeals concluded that a trier of fact could find that a causal connection exists between FNTIC’s fraud and BOA’s losses.  Therefore, the trial court erred in granting FNTIC’s motion for summary disposition on BOA’s breach of contract claim. 
The Court of Appeals also held that the trial court erred in denying BOA’s motion for summary disposition concerning FNTIC’s counterclaims and affirmative defenses that were based on BOA’s allegedly deficient underwriting.  The court reasoned that FNTIC was unable to show that BOA’s underwriting practices were material to the terms of the closing protection letters, or provide any evidence that the parties shared and relied on a mutual mistake concerning BOA’s underwriting standards.   As a result, the Court of Appeals held that BOA is entitled to summary disposition with respect to the FNTIC’s counterclaim for rescission.  The Court of Appeals also held that BOA was entitled to summary disposition with respect to the portion of FNTIC’s declaratory judgment counterclaim asserting that BOA failed to provide prompt notice of its damages claims and that FNTIC was thereby prejudiced.  The court reasoned that FNTIC failed to demonstrate whether it was prejudiced by BOA’s delay in providing notice, and as a result, BOA’s summary disposition should have been granted.
BOA argued that the trial court in Nos. 311798 and 316538 erred in concluding that the full credit bid rule barred one or both of BOA’s breach of contract claims.  The Court of Appeals concluded that the full credit bid rule is inapplicable to a mortgagee’s claims against nonborrower third parties, and therefore, did not apply to BOA’s claims.

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