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Fiduciary duty, negligence and accounting causes of action dismissed in mortgage fraud action

Federal Deposit Insurance Corporation, as Receiver for AmTrust Bank v. The Mortgage Zone, Inc., et al., United States District Court Eastern District of New York, October 12, 2010

AGF&J member Barry Jacobs and associate Shari Sckolnick obtained an order dismissing claims against an agent of a title insurance company in a wide-ranging mortgage fraud action before United States District Judge Thomas C. Platt. Plaintiff sought to recover funds it extended in 19 first and second mortgage loans on 14 properties, located primarily in Brooklyn, New York. Plaintiff alleged that AGF&J’s client had failed to record mortgages and deeds for the properties, and negligently issued title commitments (i.e., promises to issue title insurance protecting the insured when there are undiscovered liens or encumbrances on real property) and/or failed to obtain title insurance for them. AGF&J brought forward an indemnification agreement between the defendant and the plaintiff’s agent, the closing attorney, as evidence that the defendant had advised plaintiff of problems with title. The Court agreed that the claims failed for many reasons. The defendant had advised the plaintiff’s agent that the properties were encumbered, and consequently, since it had no duty to remedy title problems, and no duty to communicate directly with the plaintiff, it had not breached a duty to the plaintiff. Moreover, the Court imputed the knowledge of plaintiff’s agent to the plaintiff, so that it effectively knew that the properties were uninsurable. Having no fiduciary duty with regard to the title commitments, the defendant could not have a fiduciary duty with respect to recording the deeds and mortgages. As a further consequence, plaintiff was not entitled to an accounting, both because of the lack of fiduciary duty and the absence of allegations of any misappropriation or conversion of funds.

The Court went on to find that negligence claims were also insufficient, as the failure to obtain title insurance was not the proximate cause of the plaintiff’s loss. Title insurance would not have protected plaintiff’s interests, above all because the defects in title occurred after the insurance was to be issued. By the same token, however, claims for negligent failure to record deeds and mortgages had to await development of a record as to whether there was, in fact, any common law duty to do so.

A copy of the Court's Decision is available upon request.