California's Free Pass For Fraud

By
Services for Real Estate Pros with Professional Assurance, Ltd.

As an attorney specializing in lender loss recovery in instances of mortgage fraud, I was

shocked recently to learn that California has long held that title companies, acting as

settlement agents, have no significant fiduciary liability to lenders.  More specifically,

when California settlement agents conduct a closing, they are under no obligation to

disclose to a lender any suspicion that a party to the closing is perpetrating a fraud, or

engaging in suspect or illegal practices surrounding the transaction.

 

You can imagine my surprise when I confirmed this statement, made to me by legal

counsel to a major title agency out West which had sent an agent to conduct a closing

where monies were received and disbursed involving parties not present nor having any

disclosed connection to the transaction.  As I was investigating a first payment default,

leading to a repurchase demand by an investor to my bank client, I was engaging in the

type of grass roots investigatory procedures that help build a case for loss recovery,

through a lawsuit or negotiated settlement.

 

Sure enough, counsel for the settlement agent was correct.  California's courts have given

escrow companies a free pass to look the other way when fraud is taken place right in

front of them.  In Vournas v. Fidelity National Title Insurance Company, decided in

1999, the California Court of Appeals held that a closing agent has "no general duty to

police the affairs" of a lender, nor to "disclose to one escrow party its suspicion that the

other escrow party may be perpetrating a fraud or engaging in sharp practices in the

transaction." 

 

In an earlier case in 1968 which is still good law, Lee v. Title Ins. & Trust Co., the court

said that where an illegal "flip" transaction took place, the closing agent had "no

fiduciary duty to go beyond the escrow instructions, and notify each party...of any

suspicious fact or circumstance...which could conceivably affect such party even though

the act or circumstance is not related to the specific escrow instructions."

           

In another often cited case when closing agent acts or failures to act are challenged,

Axley v. Transmedia Title Ins. Co., a California court told a bank that had suffered losses

from fraud, that "a closing agent has no duty of reasonable care and diligence" to advise

the bank of a possible risk to its security position, as when multiple deeds or mortgage

instruments are filed, clouding title or impairing lien position. 

 

The consequence of this body of legal opinions is that banks who lend in California and

expect that their interests are being served by the closing agent handling their funds, are

sadly mistaken.  Furthermore, lenders can take little comfort in closing protection letters

issued to cover the closing ceremony.  Those letters almost universally limit a claim for

damages to acts or omissions by an escrow agent that impair the enforceability of a

mortgage instrument.  Thus, unless you can prove that a closing agent did something that

would prevent a successful foreclosure action, a claim for coverage under a CPL will not

prevail.  Where a lender has a claim for identity fraud, where illegal and improper

property flips occur at closing, or even where there are unusual financial transactions at

the closing table, the CPL, in most instances will not cover a lender's losses.  Remember

too, that a closing protection letter is like a policy of insurance, money is not simply

turned over when a claim is made, but only after investigation and every effort to find

exclusions and limit recovery.

 

The burden, then, falls upon a lender in California (and everywhere) to carefully

investigate the background, experience, and trustworthiness of closing agents.  Before

you wire your next six figure mortgage proceeds, you need to ask whether or not you

really know to whom you are sending your funds, and who will look out for your

interests, including the proper recording of your mortgage instrument and the return of a

properly executed, original mortgage note.

 

As someone who has campaigned for tighter controls at real estate closings, a ceremony

that has not changed considerably in the past century, I can only hope that the latest

mortgage failures are a wake up call, in California and around the country.  A lender's

closing agent, the only representative who attends and controls the lender's proceeds,

must be considered carefully and chosen wisely.

 

Comments (5)

Anonymous
Jack Payne
To me the ultimate shock was when I discovered that 90%--yes, 9 out of every 10--escrow web sites on the internet are bogus.
Feb 24, 2008 10:26 AM
#1
Anonymous
foolish one
There is a massive mortgage fraud on-going in Southern California. Will cause over $1 Billion in damages. I personally lost over $500,000. The perpetrators are James B. Duncan, Andrea Duncan, Hendrix Montecastro, Anthony Contreras, Maurice McLeod, Steve Kayden, Helen Montecastro, Charlie Choi, Paul Sluss, Ross Leonard, John Ranic, Bridgett Holbrook, Chris Oetting, Draper Mitchell, Connie Duron, Alicia Snowder, Terri Aime, Kris Smith, Krystal Fingers, Brandy Montecastro, Bayani Montecastro, Chris Mosqueda, Melissa Shields, and Anthony Conteras. They operate under many shell companies, Stonewood Consulting, Pacific Wealth Management a NV LLC, Inland Coast Capital, The Henson Group, Success Strategies, Coast Wealth Management, Total Return Fund, Jovane Investments, Cathedral Capital Partners, Palm Valley Advisors, Blushed Boutique, and many many others.
Beware of them. They have damaged well over 1000 victims and still counting.
See our victim website to understand their schemes
http://www.coreclient.110mb.com/ See the Foundation we have set up so that there is NOT ONE MORE VICTIM! http://www.caff.110mb.com/   .
Feb 26, 2008 11:31 AM
#2
Anonymous
lou
our lawsuit has entered a 3rd year .were in shock atwhat theyve done .our home is now in forclosure and closing  was done with 3 different closing statements and not a hud 1 and not one signature and at least 15 more fraudulant actions. option one and mdmortgage who recently joined inland to offer a whole new variety of  fraudulant products.
Mar 31, 2008 05:52 PM
#3
Anonymous
lou
our lawsuit has entered a 3rd year .were in shock atwhat theyve done .our home is now in forclosure and closing  was done with 3 different closing statements and not a hud 1 and not one signature and at least 15 more fraudulant actions. option one and mdmortgage who recently joined inland to offer a whole new variety of  fraudulant products.
Mar 31, 2008 05:52 PM
#4
Fred Griffin Tallahassee Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

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