August 1, 2016
by Regina M. Slowey
Orlans Associates, P.C.
USFN Member (Michigan)
On April 13, 2016 the Michigan Supreme Court handed down an opinion in Bank of America, NA v. First American Title Insurance Company, which resulted in a ruling favorable to lenders.
The main issues in the case were threefold: (1) whether the full credit bid rule, as a matter of law, precludes lenders or their assigns from contract claims against non-borrower third parties; (2) whether closing instructions issued to title closing agents constitute a distinct contract between the closing agent and the lenders, unmodified by a closing protection letter (CPL) issued by the agent’s underwriter; and (3) whether the change in wording of the closing protection letter by one word — “in” — is enough to broaden the scope of possible actions required to be indemnified by the underwriter.
Most importantly, to the extent that it conflicts with Bank of America v. First American, the Michigan Supreme Court overruled precedent established in New Freedom Mortgage Corporation v. Globe Mortgage Corporation, 281 Mich. App. 63 (2008). The New Freedom case held that when a mortgagee takes title to a property pursuant to a full credit bid, the mortgagee (or any assigns) are barred from pursuing claims against non-borrower third parties, including actions of fraud or breach of contract against a closing agent or its underwriter via a CPL.
In Bank of America v. First American, the Michigan Supreme Court held that no justification exists to alter the rights and remedies between a mortgagee and non-borrower third parties. Thus, the lender is free to bring an action for damages resulting in the breach of the closing instructions to the closing agent, and for indemnification pursuant to the terms of the closing protection letter issued by the agent’s underwriter.
The Court went on to strengthen the lender’s ability to enforce its rights via closing instructions to the closing agents, ruling that closing instructions are contracts upon which a breach of contract action may lie and, further, that the closing instructions are not altered or truncated by the underwriter’s CPL. This was in direct contradiction to the lower court’s ruling.
Finally, the Court decided that the wording of the closing protection letter should be scrutinized. In the subject case, the underwriter had a broader liability than the underwriter in New Freedom. In New Freedom, the Court stated that the underwriter was not liable because the CPL stated that the insurer was liable only for “fraud or dishonesty of the issuing agent in handling the funds or documents in connection with the closings, which the Court took to limit the liability of the agent to the actions directly connected to handling the funds.”
In contrast, the CPL at issue in Bank of America v. First American Title Insurance Company indicated that the insurer was liable for “fraud or dishonesty of the issuing agent handling the funds or documents in connection with the closings.” The simple lack of the word “in” broadened the liability so that the insurer may become liable for any damages caused by the dishonesty of the agent, despite the fact that the agent did not misappropriate the funds.
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