A recent California District Court case, FDIC v. First American Title Insurance Company, 2011 U.S. Dist. LEXIS 94842, highlights the risks involved in closing instructions.
The facts of this case are as follows:
IndyMac, F.S.B. (IndyMac) was the lender to Steven Darling for the purchase and mortgage of a single family home in Southern California on August 17, 2007. D.J. Bushway (Bushway), an escrow officer at First American Title Insurance Company (First American), was the settlement agent for the transaction.
IndyMac sent to First American Closing Instructions that contained the following provision:
You are not authorized to close this loan if:
10. A transaction becomes known to you on or before the date of closing that involves the borrower(s) or if you have knowledge of a transaction involving the subject property in the last 180 days. Notify the lender, in writing, of the additional transaction to verify that it has been considered in our loan approval decision.
First American signed the Closing Instructions, but attached a Funding Letter stating the following:
In acting as settlement agent for this transaction, First American Title Company will perform only those functions customarily handled by settlement agents processing loans in the geographic area where the land is located and will not accept responsibility for the performance of any other matters addressed in your closing instructions. Funding of this loan shall be considered your acceptance of the First American Title Company position, your confirmation that all your conditions have otherwise been satisfied and your direction to First American Title Company to close the loan and to have the loan policy issued.
At around the same time as this transaction, Bushway helped the borrower to purchase two additional properties. First American did not inform IndyMac of the existence of the two mortgage loans on those additional properties.
IndyMac's loan to the borrower went into default after two payments.
The FDIC, as Receiver for IndyMac, sued First American for breach of contract based upon First American's execution of the Closing Instructions and its failure to notify IndyMac of the other transactions. The FDIC argued that First American knew of those other two transactions because Bushway was involved in all three of the transactions. The FDIC claimed that IndyMac would not have entered into the subject loan had it known of the other transactions.
First American asserted that the Funding Letter constituted a rejection of the Closing Instructions, or, alternatively, that the Funding Letter modified the Closing Instructions. First American contended that IndyMac accepted those modifications because IndyMac received the Funding Letter prior to funding the loan, and thereafter funded the loan, and because the Funding Letter stated that the act of funding the loan constituted acceptance of the terms of the Funding Letter. First American also argued that its failure to notify IndyMac about the other purchases by the borrower was consistent with the Funding Letter's terms, because the custom in Southern California is not to report knowledge of other transactions.
The Court held that First American entered into a contractual relationship by signing the Closing Instructions. It held that First American was obligated to comply with the Closing Instructions and that the Funding Letter did not modify those instructions. The Court also held that, even if the Funding Letter modified the terms of the contract, First American would still have been obligated to report its knowledge of other transactions by the borrower.
The Court based its holding on the following, among other factors:
*California Law requires escrow holders to carefully comply with lender's closing instructions.
*The Closing Instructions stated: "[y]ou are not authorized to close this transaction unless
you can strictly comply with these instructions."
*The Closing Instructions contained specific requirements for their modification, which included the delivery of a writing executed by an authorized agent of IndyMac. First American did not comply with the provisions for modifying the Closing Instructions.
*First American signed the Closing Instructions without any indication of its conditional acceptance on the Closing Instructions. First American did not cross out any terms, indicate on the Closing Instructions the existence of the Funding Letter, or specify what provisions were not agreed upon.
*The language of the Funding Letter was vague, broad, and ambiguous.
*Any negligence on the part of IndyMac in its investigation or underwriting of the loan was not a defense to the breach of contract.
Considerations by Settlement Agents:
(1) You should be familiar with your jurisdiction's requirements regarding closing instructions.
(2) If you are unable to comply with an aspect of the closing instructions, do not assume that a unilateral action on your part will effectuate a modification. You should comply with the closing instructions' requirements for their modification or obtain written acceptance of a revision from an authorized representative of the lender.
(3) There has been a growing trend by lenders to attempt to expand responsibilities under closing instructions beyond normal closing work. If you receive closing instructions containing terms that you believe are unusual, onerous or overreaching such that they potentially expand responsibility beyond normal risks or customary tasks, and if you are unable to obtain the lender’s written agreement to modify such terms, please contact your counsel. The foregoing is not an assessment of the case cited above.
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