January 20, 2009
Kimberly Mauer

 

I represent lenders. In virtually any capacity, for virtually any legal need, I represent lenders, but mostly, I represent lenders in loan transactions. In every transaction where real estate is a portion of the collateral for the loan, and where the lender has decided that it wants a loan policy of title insurance, I will be asked the same question by my lender: “What is a closing protection letter and do I really need one?”

To all of my lending clients out there, this one is for you!

In Mtge. Network, Inc. v. Ameribanc Mtge. Lending, L.L.C., 177 Ohio App.3d 733, 2008-Ohio-4112, the Tenth District Court answered this question.

Starting in July of 2000, Mortgage Network, Inc. (“Network”) entered into a contract with Ameribanc Mortgage Lender, L.L.C. (“Ameribanc”) to purchase bundles of loans secured by first mortgages. The mortgages for these loans were to be insured with title policies issued by Buckeye Land Title (“Buckeye”), as agent for Ohio Bar Title (“Ohio Bar”). Buckeye was owned by Brenda J. Davis. (Brenda’s husband, Michael, eventually became the sole shareholder of Buckeye.) Network received from Ohio Bar a closing protection letter, which provided that Ohio Bar acknowledged that Buckeye was its agent and agreed that Ohio Bar would reimburse Network for any actual losses incurred in connection with any closing conducted by Buckeye. The letter then went on to provide that it would continue to be effective until cancelled by written notice of Ohio Bar.

In June 2001, Buckeye resigned as an agent of Ohio Bar, apparently due to an audit that Ohio Bar had threatened against Buckeye’s escrow accounts. Ohio Bar did not notify Network that Buckeye was no longer its agent.

Network continued to purchase the loans after Buckeye had resigned as an agent of Ohio Bar; indeed, it purchased another 41 loans. After June of 2001, Network never received a full title commitment or policy from Ohio Bar, and Ohio Bar never received the premiums that Network had paid to Buckeye for the title policies. Buckeye, and, in some cases, another company controlled by Michael Davis, Ameribanc Escrow Company, closed the loans with Network.

Michael Davis and his companies, Buckeye and Ameribanc, defrauded Network, Ohio Bar, and others by failing to use money that it was provided for the purpose of paying off existing mortgage loans and failing to remit premiums to Ohio Bar so that title insurance would be issued.

Eventually, Network lost over $6,000,000 as a result of title claims. Network sued Ohio Bar under the terms of the closing protection letter.

At the trial court, Ohio Bar prevailed. The trial court granted summary judgment for Ohio Bar finding that (i) Ohio Bar did not receive premiums for the 41 loans and therefore received no consideration for its promise of protection in the closing protection letter; (ii) the closing protection letter only applied to closings conducted by Buckeye, and not by Buckeye’s sister company, Ameribanc; and (iii) there were no valid commitments for title insurance issued since Buckeye did not provide Network with a complete policy jacket—just the schedules that would be included in the jacket.

On appeal, the court of appeals reversed and remanded the case back to the trial court for further proceedings.

Closing Protection Letter Not Supported by Consideration: As any law student could tell you, insurance policies are contracts. Contracts are not enforceable unless supported by consideration. Therefore, the trial court concluded, since Ohio Bar did not receive the policy premium, the closing protection letter could not be enforced against it. The appellate court, however, stated that the trial court erroneously viewed the issue of consideration. Network had paid the premiums. It paid them to Buckeye, which is believed to be an agent of Ohio Bar. If Ohio Bar had advised Network that Buckeye was no longer an agent, then the result might been different, but, as it was in determining whether Network’s claims could survive a summary judgment motion, consideration was paid for the promise.

The Closing Protection Letter applied to Buckeye not Ameribanc: Ohio Bar knew that Michael Davis closed loans through Buckeye and through Ameribanc even prior to June of 2001. It never objected to this practice. Since both Buckeye and Ameribanc were both controlled by him, they should be viewed as alter egos of him. Again, this issue cannot be determined on summary judgment.

The Policy Jacket was not provided to Network, Which is Required for a Valid Commitment: Ohio Bar contended that Buckeye would have had to provide the jackets in order to issue a valid title commitment; without the required jackets, there were no valid title commitments. The court disposed of this argument as well stating that Buckeye was Ohio Bar’s apparent agent, and therefore, Buckeye’s failure to follow the proper procedure should be attributed to the principal, Ohio Bar.

In short, since there was a closing protection letter that Ohio Bar had issued to Network indicating that Buckeye was Ohio Bar’s agent, and which, by its terms, indicated that it was valid until Ohio Bar revoked the letter, Ohio Bar should have notified Network that Buckeye was no longer its agent, in order for a summary judgment to be appropriate here.

Please note that since the time of this case, Ohio law regarding title insurance has changed. It used to be that a closing protection letter was good for all transactions prepared by a given agent of a title insurer and the closing protection letter remained valid until the title insurer notified the insured that this was no longer true. These are no longer available. Now a closing protection letter must be offered to the owner of the real estate and the lender with each transaction for a nominal fee, but the closing protection letter is valid only for that particular transaction.