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Rachel Dollar, the editor of Mortgage Fraud Blog, is an attorney and Certified Mortgage Banker who handles litigation for lending institutions and secondary market investors. She is an author and a nationally recognized speaker on the topic of mortgage fraud. Ms. Dollar is a shareholder with the law firm of Smith Dollar, PC, is licensed to practice law in California and maintains offices in Santa Rosa, California. Email Ms. Dollar
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Lender Seeks Declaratory Judgment as to Scope of Coverage
USMoney Source, Inc, d/b/a Soluna First, sought declaratory judgment from the United State District Court in Atlanta, Georgia, as to the scope of an insurer’s obligation to defend and indemnify an insured. The Defendant, American International Specialty Lines Insurance Company, argued that coverage was not required. The court ultimately agreed with American International and granted its summary judgment motion, thereby denying coverage to USMoney.
According to the opinion: The Defendant issued a Mortgage Bankers/Mortgage Brokers Errors and Omissions policy to Plaintiff for the policy period of May 27, 2005 to May 27, 2006. Both parties stipulated that the Policy contains a $1,000,000.00 policy limit and a $50,000.00 deductible. The Policy obligates the Defendant: To Pay on behalf of the Insured [USMoney] all sums which the Insured shall become legally obligated to pay as Damages resulting from any Claim(s) first made against the Insured and reported to the Insurer [American International] during the Policy Period, or extended reporting period (if applicable), for any Wrongful Act of the Insured or any other person for whose actions the Insured is legally responsible, but only if such a Wrongful Act occurs on or after the Retroactive Date and before the end of the Policy Period and occurs solely in the rendering of or failure to render Professional Services, as defined herein.
The Policy defines “Wrongful Act” as “any actual or alleged breach of duty, neglect, error, misstatement, misleading statement or omission committed solely in the Insured’s Professional Services, as defined herein.” The Policy defines “Professional Services” as “the origination, sale, pooling and servicing of mortgage loans secured by real property.” The Policy contains several coverage exclusions, including one which provides that the Policy “does not apply to any Claim ... arising out of any defective deed or title.”
On April 25, 2005, TierOne Bank and Plaintiff entered into a revised and modified Line of Credit and Security Agreement, pursuant to which TierOne extended to Plaintiff a $10,000,000.00 line of credit for the purpose of providing a sort of bridge funding for loans made by TierOne until the loans could be sold in the secondary market.
On February 24, 2006, Plaintiff submitted to TierOne a funding request for a loan in the amount of $391,950.00, to be secured by real estate located in Odenton, Maryland. In response to the request, TierOne advanced $391,950.00 to Plaintiff.
On April 5, 2006, Plaintiff submitted to TierOne a funding request for a loan in the amount of $747,500.00, to be secured by real estate located in Seattle, Washington. In response to the request, TierOne advanced $747,500.00 to Plaintiff.
On April 5, 2006, Plaintiff submitted to TierOne a funding request for a loan in the amount of $812,500.00, to be secured by real estate located in Seattle, Washington. In response to the request, TierOne advanced $812,500.00 to Plaintiff.
TierOne subsequently learned that its three loans to Plaintiff were not secured by valid and enforceable first liens on the subject properties. Plaintiff was unable to obtain good title to the subject properties because of various fraudulent and other wrongful activities of persons not party to this action.
At least two individuals involved in the fraudulent mortgages have been criminally charged with conspiracy and wire fraud. See the May 1, 2006 descision, United States v. Hawkins & Skeins.
On June 9, 2006, TierOne filed suit against Plaintiff in the United States District Court for the District of Nebraska. See the 2007 case, TierOne Bank v. U.S. Money Source, Inc., (the Nebraska Action). TierOne alleged that Plaintiff breached the Line of Credit Agreement, was negligent in its submission of funding requests for the three loans, and negligently misrepresented facts in the submission of its funding requests. TierOne sought damages in the full amount of the three unsecured loans.
Plaintiff forwarded the complaint in the Nebraska Action to Defendant. On January 17, 2007, Defendant sent to Plaintiff a letter denying coverage under the Policy, on the basis of the policy exclusions for actions arising out of defects of title, fraud, and any participation or prior knowledge of Plaintiff in the mortgage fraud.
On March 23, 2007, Plaintiff filed this action seeking a declaratory judgment that Defendant is obligated to defend and indemnify Plaintiff in the Nebraska Action.
On October 3, 2007, the United States District Court for the District of Nebraska entered judgment in favor of TierOne. The Court found that Plaintiff had breached the Line of Credit Agreement, negligently misrepresented that the three loans were secured by valid first liens on the subject real estate, and was negligent in its failure to assure that the three loans were secured by valid first liens. The Court found Plaintiff liable for $1,625,630.71.
Both USMoney and American International moved for summary judgment. The only issues before the Appellate Court are (1) whether the Policy applies, and if so; (2) whether the Policy’s exclusions bar Plaintiff’s claim.
Defendant initially contends that Plaintiff’s claim is not covered by the Policy because the three loan transactions at issue in the Nebraska Action were not adequately secured by real property. Defendant argues that “Professional Services” is defined in the Policy as “the origination, sale, pooling and servicing of mortgage loans secured by real property.” Because the three mortgage loans at issue were not, in fact, secured by real property, Plaintiff was not providing “Professional Services” as defined by the Policy.
The Court disagred. The Policy unambiguously covers Plaintiff for claims made against it for Wrongful Acts made in the rendering of or failure to render Professional Services, subject to the Policy’s exclusions. The undisputed facts in this case show that Plaintiff intended to create mortgage loans secured by real property and that, unbeknownst to Plaintiff, fraudulent activities by third parties prevented it from obtaining good title to the properties. At least at this step of inquiry, Plaintiff was performing “Professional Services” when it committed the “Wrongful Acts” underlying the Nebraska Action. Whether Plaintiff is entitled to defense and indemnification for suit based on those wrongful acts is not a question of the whether the Policy applies in the first instance, but rather whether, as Defendant argues, Plaintiff’s claim falls within one of the Policy’s coverage exclusions.
Defendant argues that the Policy excludes coverage for the claims brought against Plaintiff by TierOne because the claims “aris[e] out of ... defective title"--an exclusion in the Policy. The Court agreed with this argument.
Defendant argues that the claims asserted against Plaintiff in the Nebraska action are excluded under the Policy because, but for the lack of marketable title, the claims could not exist. That is, had Plaintiff obtained good title to the three subject properties, it could not have been subject to liability for breach of contract, negligent misrepresentation, and negligence.
The Court agrees that the claims asserted against Plaintiff by TierOne “arose out of” a defect in title and are excluded under the Policy. If Plaintiff had acquired valid marketable title to the three subject properties, it would have satisfied its contractual and common law duties to TierOne. The basis of TierOne‘s lawsuit was the absence of marketable title on the properties. That is, the suit would not have been filed but for the defective titles at issue. In accordance with Georgia courts’ construction of the phrase “arose out of,” in an insurance policy context, TierOne‘s claims against Plaintiff “arose out of” the defects in title because they were caused specifically by the defects of title and because the claims could not exist unless the titles were defective.
Plaintiff argues that the exclusion does not apply because Plaintiff’s conduct did not cause the defective titles at issue in this matter. Georgia courts do not inquire into whether an insured’s conduct caused the policy exclusion but rather whether circumstances caused the policy exclusion. Indeed, Georgia courts have often analyzed whether negligence claims against an insured were barred under policy exclusions based on intentional acts of third parties, consistently affirming that an insured does not need to cause a policy exclusion for it to apply.
How is it possible that the lender, Tier One, funded on loans for which there was no guarantee by the title company and/or closer for coverage? Since when do we fund a lender’s money if we cannot perfect the recording of lien information. I am confused.
Posted by on 01/24 at 04:24 AM
The Closing Agent (Attorney) was part of the fraud scheme. He provided a bogus title report and E & O policy.
Al of online research reflected the Sellers name but come to find out, he filed the Quit Claim Deeds a few years prior to this transaction. In other words, he stole the Borrowers property without them knowing it.
Posted by on 02/18 at 09:26 AM
What this article doesn’t say is that there is a good case to reverse the decision in regards to the declaratory judgment against USMS. It’s not a defective Title Issue. Anyone one can see that - It was down and out fraud.
Failed Mortgage Firm Trustee Allowed $50,000 in Fees Union Leader
U.S. Bankruptcy Court Judge J. Michael Deasy will approve $50,000 in legal fees for the trustee of failed mortgage brokerage businesses Financial Resources Mortgage Inc. and CL&M Inc.
Bend Oregon Event to Help Homeowners Prevent Foreclosures Oregon.Gov
As part of an ongoing effort to help homeowners avoid foreclosure, state agencies are organizing a foreclosure-prevention event in Bend on Saturday, March 27, 2010.
Shelbyville Man Gets 2-Year Sentence For Loan Fraud Chattanoogan.Com
Prosecutor Gary Humble said the lost was approximately $2.3 million in the mortgage fraud involving hundreds of homes in the Shelbyville area.
Lend America, VP Ashley Banned from FHA Housing Wire
Michael Ashley, the embattled former vice president of Federal Housing Administration (FHA)-backed mortgage originator Lend America, and the company he worked for, were permanently banned from doing business in the industry last week.
Countrywide Tries to Pin Blame on Insurer Court House News
Countrywide Home Loans demands $111 million from Triad Guaranty Insurance, claiming Triad is trying to blame mortgage lenders for the insurer's role in the housing bubble and collapse.
Investors Say They Were Swindled in Property Scheme Fox 13 Now
Utah Division of Consumer Protection is joining forces with a few investors who claim they have been cheated by an agency called "Utah Mini Ranches.
Greenfield Man Accused of Housing Scam The Republic
A former real estate agent conned at least eight people by renting them properties actually owned by a federal agency and then running off with their deposits, prosecutors said.
Appraisal Institute Opposes Obama Administration's Plan for Homeowner 'Short Sales' PR News Wire
Citing concerns about increased mortgage fraud, four organizations representing more than 35,000 real estate appraisers today voiced their opposition to changes to an Obama administration program that will encourage "short sales" of homes.
Ownership Rights to Get Another Look TBO.Com
State lawmakers may beef up protections of property owners' rights by rewriting a law this spring that is at the center of a case of alleged fraud in Pasco County.
Thursday, February 18, 2010 F. Jeffrey Miller Trial Continued Testimony
As reported by Anne Mitchell, who viewed the trial:
Angela Parenza worked for Jeff Miller as the office manager for 7 or 8 years beginning in 1998. Parenza was indicted along with Miller and pled guilty to conspiracy to commit bank fraud and money laundering. Parenza testified that Miller or his contractors allegedly preferred to build all the...
Wednesday, February 10, 2010 F. Jeffrey Miller Trial Coverage Continued - Witness Testimony
Steve Middleton Testimony - Coverage Provided by Anne Mitchell
The Government continued in its cross examination of Steve Middleton. He was shown several HUD-1 statements involving sales of homes located in Overland Park, KS, and Olathe, KS. The HUD statements each allegedly showed line items of payments to (James) Moser & Associates, LLC's...
Monday, February 01, 2010 F. Jeffrey Miller Trial Coverage - Continued Witness Examination
According to Anne Mitchell, who is present in court for the trial:
Next Witness: Kelly Sanford
Kelly Sanford of the Federal Reserve was a short witness for the Government. Sanford manages electronic payments between banks and member financial institutions. He was shown copies of wire transfers and asked whether they coincided with the counts in...
Wednesday, January 27, 2010 F. Jeffrey Miller Trial - Prosecution Witnesses Continued
According to Anne Mitchell, who is viewing the trial:
January 13, 2010
Witness: Rick Hayes
Rick Hayes testified that on the day that he closed on his Miller Enterprise home, he received a phone call from the Kansas Banking Commission informing him that his loan was fraudulent. After the Hayes responded to a classified ad, they met with John...
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The information and notices contained on Mortgage Fraud Blog are intended to summarize recent developments in mortgage fraud cases and mortgage banking matters nationwide. The posts on this site are presented as general research and information and are expressly not intended, and should not be regarded, as legal advice. Much of the information on this site concerns allegations made in civil lawsuits and in criminal indictments. All persons are presumed innocent until convicted of a crime. Readers who have particular questions about mortgage banking, mortgage fraud matters or who believe they require legal counsel should seek the advice of an attorney. The creators, editors and sponsors of Mortgage Fraud Blog do not intend to create a confidential relationship or an attorney-client relationship by communication via or arising from this site.
Rachel Dollar, the editor of Mortgage Fraud Blog, is an attorney and Certified Mortgage Banker who handles litigation for lending institutions and secondary market investors. She is an author and a nationally recognized speaker on the topic of mortgage fraud. Ms. Dollar is a shareholder with the law firm of 
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