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

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

January 3, 2017

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, United States District Judge.

         Before the court are the parties' cross-motions for summary judgment. The court heard oral argument on November 17, 2016, and took the matter under advisement. For the reasons explained below, the parties' motions are denied.

         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. The parties have filed cross-motions for summary judgment.

         LAW AND ANALYSIS

         I. Standard of Review

         Summary judgment is appropriate if “there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). When reviewing a motion for summary judgment, the facts and any reasonable inferences drawn from the facts must be viewed in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).

         II. Fidelity's Liability under the CPLs

         The FDIC contends that there is no genuine issue of material fact that Metro-West was aware of the fraudulent scheme perpetrated by Bachi. As a result, the FDIC argues that Fidelity is liable for breach of contract under the CPLs. Fidelity contends that there is insufficient evidence that Metro-West knew about and participated in the fraudulent scheme. Fidelity further argues that the FDIC should not recover under the CPLs because (1) the FDIC failed to give prompt notice of the claims; (2) the claims are barred by laches; (3) the language of the CPLs does not trigger Fidelity's liability under these facts; (4) the FDIC cannot recover under the CPLs for loans that were discharged; and (5) the FDIC knowingly and voluntarily impaired Fidelity's right to subrogation as a result of the delay in filing its claims.

         A. Metro-West's Knowledge of the Fraudulent Scheme

         From April to September 2007, Metro-West closed twenty-four separate WaMu mortgage loan transactions (to twelve borrowers) originated by First Choice Finance and Bachi. For each transaction, WaMu required the borrower to submit a down payment of approximately $25, 000 at closing. Prior to each closing, WaMu provided Metro-West with written closing instructions that required Metro-West to prepare HUD-1s reflecting the receipt of the down payments from the borrowers, and that prohibited secondary financing. For each transaction, Metro-West signed the closing instructions and provided WaMu a HUD-1 certifying that the required down payment (“cash to ...


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