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Federal Deposit Insurance Corporation v. Fidelity National Title Insurance Co.

United States District Court, E.D. Michigan, Southern Division

May 12, 2015

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Washington Mutual Bank, Plaintiff,
v.
FIDELITY NATIONAL TITLE INSURANCE COMPANY, Successor by Merger to Lawyers Title Insurance Corporation, Defendant.

OPINION AND ORDER

JOHN CORBETT O'MEARA, District Judge.

Before the court are Plaintiff's motion to dismiss counterclaims, filed January 12, 2015, and Defendant's motion for summary judgment, filed February 18, 2015. The court heard oral argument on April 16, 2015, and took the matter under advisement.

BACKGROUND FACTS

Plaintiff Federal Deposit Insurance Corporation ("FDIC") filed this action as receiver for Washington Mutual Bank ("WaMu"). Defendant Fidelity National Title Insurance Company is successor by merger to Lawyers Title Insurance Corporation ("Fidelity"). Lawyers Title issued closing protection letters ("CPLs") to WaMu in connection with twenty-four mortgage loan closings in 2007. A CPL is an indemnity agreement in which the title insurance company agrees to indemnify the lender for losses related to the title company's agent's misconduct at closing. See JP Morgan Chase Bank, N.A. v. First American Title Ins. Co., 795 F.Supp.2d 624, 628-29 (E.D. Mich. 2011).

Subsequently, it was discovered that the twenty-four mortgage loans at issue were obtained as part of a fraudulent scheme orchestrated by mortgage broker Firas Bachi. Bachi purchased distressed properties in 2007 and placed them in the names of straw sellers. Bachi then caused the properties to be sold to straw buyers at significantly inflated prices. The purchases by the straw buyers were financed by mortgage loans from WaMu. As the mortgage broker, Bachi submitted false loan applications and supporting information to WaMu.[1]

The closing, title, and escrow services for the straw transactions were performed by Metro-West Title Agency. Metro-West was an authorized issuing agent of Lawyers Title (now Fidelity). WaMu's closing instructions required Metro-West to prepare a HUD-1 Settlement Statement for each transaction. FDIC alleges that Metro-West prepared false HUD-1s to conceal the true nature of the straw transactions from WaMu.

FDIC alleges that Fidelity is liable for the conduct of Metro-West under the CPLs and that Fidelity has breached the CPLs by failing to indemnify FDIC for its losses as a result of the fraudulent loans.

In response to FDIC's complaint, which sets forth twenty-four breach of contract counts, Fidelity has filed counterclaims for rescission (Count I) and declaratory judgment (Count II). FDIC seeks dismissal of Fidelity's counterclaims and certain affirmative defenses. Fidelity has filed a motion for summary judgment, seeking dismissal of all of FDIC's claims.

LAW AND ANALYSIS

I. FDIC's Motion to Dismiss

In its counterclaim seeking rescission, Fidelity contends that WaMu did not observe "objectively reasonable underwriting standards" when approving the subject loans. Fidelity alleges that its "agreement to issue CPLs to WaMu... was based upon the assumption that WaMu would employ objectively reasonable underwriting standards before approving and funding the transactions." Counterclaim at ¶ 44. Fidelity further alleges that it "did not agree to assume the risk of loss attributable to WaMu's failure to employ objectively reasonable underwriting standards." Id. at ¶ 52. According to Fidelity, WaMu acted recklessly in approving high-risk loans to unqualified applicants.

FDIC argues that Fidelity's counterclaim for rescission should be dismissed because the theory that a lender must follow "objectively reasonable underwriting standards" is not relevant to whether the lender may recover for breach of contract under a CPL. In other words, WaMu's alleged negligence or recklessness in making the loans is not at issue; the issue is whether the terms of the CPLs were breached.

In order to rescind a contract based upon fraudulent inducement, a party must show:

(1) the defendant made a material representation; (2) the representation was false; (3) when the defendant made the representation, the defendant knew it was false, or made it recklessly, without knowledge of its truth and as a positive assertion; (4) the defendant made the representation with the intention that the plaintiff would act upon ...

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