On February 27, 2007, the Indiana Court of Appeals in Dreibelbiss Title Company, Inc. v.
Morequity, Inc., addressed the liability of a title company whose closing
agent fails to follow the instructions of a prior lender in order to close a
line of credit.
Dreibelbiss Title Company issued a lender’s policy to
Morequity, Inc., which assured the lender for first priority. KeyBank held two prior mortgages on the
property, one of which was for a home equity line of credit. Dreibelbiss was to pay off the KeyBank
mortgages at closing. KeyBank sent
written instructions to the closing agent which specifically required written
authorization from the borrowers to close the line of credit. The agent sent the payoff for both loans, but
not the authorization from the borrowers. KeyBank did not release the lien and the borrowers continued to draw on
the line of credit. When they defaulted,
KeyBank foreclosed.
Morequity was listed as a subordinate lienholder on the
foreclosure complaint and answered with an admission to that effect. Dreibelbiss then entered into a consent
decree and judgment was entered against the borrowers. The proceeds from the sheriff’s sale were
insufficient to satisfy any part of the Morequity loan. The title company, Dreibelbiss, was not notified
of the foreclosure until five months after the judgment was entered. Morequity then sued Dreibelbiss for breach of
the title insurance policy. The case
raised two issues: (1) whether the failure to notify the title company of the
claim barred recovery by the insured lender, and (2) whether the Morequity lien
or the KeyBank lien had priority.
The Court first held that the failure of the closing agent
to follow the instructions of the prior lender to close the line of credit
constituted a “first material breach” of the policy, which effectively released
the insured lender from its obligation to promptly notify the title company of
the claim. The Court’s conclusion is
notable for its underlying assumption that the title company owed a duty to the
insured lender to obtain a first priority lien.
Having established the effectiveness of the title policy,
the Court then addressed the question of priority. Arguably, Morequity should have been
equitably subrogated to the rights of KeyBank to the extent of the payoff,
making KeyBank’s lien subordinate to the Morequity lien (since the additional
draws on the line of credit were made after Morequity obtained its lien). However, the Court did not agree. Citing to Liberty Mortg. Corp. v. Nat'l City Bank, 755
N.E.2d 639 (Ind. Ct. App. 2001), the Court held that the closing agent’s
failure to follow the instructions of the prior lender to close the line of
credit constituted “culpable negligence,” barring the application of the
doctrine of equitable subrogation.
Finally, in addressing the amount of damages, the Court held
that the lender’s recoverable damages were not limited by the policy
language. Instead, the title company was
liable for any and all damages which flowed from the breach of its duty to
exercise reasonable care, skill, and diligence. Again, although the insured lender’s claim was breach of contract, the
language of the Court’s decision was largely the language of tort law.
In addition to raising questions about the extent of a title
company’s extra-contractual duty to an insured lender, the Dreibelbiss holding is a warning to title insurers in cases where
the closing includes a payoff of a prior line of credit. Closing agents should scrupulously follow the
instructions given by the prior lienholder in order to insure that the line of
credit is closed. Typically, this
involves obtaining a letter from the borrower explicitly stating that the
borrower wishes the line of credit to be closed. Even if the prior lienholder does not include
such a requirement with the payoff memorandum, the closing agent would be well
advised to send such a letter in any case.
* * *
John Halstead, an Associate in our Merrillville,
Indiana office, concentrates his practice in civil litigation, title defense,
and mechanics liens. Prior to joining
Querrey & Harrow, he gained experience as a plaintiff's attorney in
personal injury, contract, and estate law, which provides him a view of
opposing perspectives in a lawsuit or in a contract dispute.
If you have any questions regarding this article, our mechanics lien law seminar, or any other matter, please contact John via jhalstead@querrey.com.
