FKB Client Advisory by Andrew R. Jones and Evan W. Bolla

12/12/2013

December 12, 2013: FKB Client Advisory by Andrew R. Jones and Evan W. Bolla.

Re: DLJ Mortgage Capital Inc. v. Thomas Kontogiannis, Chicago Title Insurance Company, et. al.: New York Court of Appeals holds that third-party purchasers of mortgages on the secondary market cannot rely on pre-closing documents to establish a proper conveyance or that recording of the underlying property occurred.

The New York Court of Appeals recently upheld an Appellate Division, First Department decision dismissing DLJ Mortgage Capital’s claim of fraud against Chicago Title Insurance Company. In a short opinion, the Court of Appeals held that, “as a matter of law, DLJ, as a third-party purchaser of mortgages on the secondary market, cannot rely on pre-closing documents to establish that a proper conveyance and recording of the underlying property occurred or that title insurance for the property was issued.” The Court continued that the Appellate Division correctly determined that any such reliance was unjustifiable.

The decision is of wide potential application to claims against attorneys, title agents, and other miscellaneous professionals.

The Underlying Litigation:

DLJ is a subsidiary of Credit Suisse who previously purchased billions of dollars of mortgages on the secondary market. Included in those mortgages were approximately $50 million in allegd “bad mortgages” purchased from mortgage lender Coastal Capital Corp. While Coastal Capital sold DLJ numerous legitimate mortgages several illegitimate, unrecorded mortgages were also sold to DLJ and others, including Washington Mutual, Co. Similar to a Ponzi scheme, the mortgages at issue, sometimes on properties that were yet to be built, were sold to straw buyers only for the mortgages never to be recorded with the appropriate County Clerk. Those mortgages would then be sold on the secondary market to entities such as DLJ and separate mortgages placed on the same properties. As the previous mortgages were never recorded, and subsequent mortgages were, DLJ and similarly situated entities lost priority under New York’s recording system.

However, discovery revealed that at no time did DLJ make use of New York’s Automated City Register Information System (“ACRIS”) or otherwise confirm that the mortgages it was purchasing and then selling on the secondary market were in fact recorded. Instead, DLJ claimed that it relied on various pre-closing documents, which indicated that the mortgage would be recorded and that proper title insurance would be issued. Chicago Title Insurance Company was alleged to have participated in the fraud upon DLJ and Chicago Title’s agent admitted to his involvement in the fraudulent scheme.

Chicago Title’s motion to dismiss was denied by Justice Ramos – New York County Supreme Court. Chicago Title successfully appealed, arguing that DLJ’s reliance on pre-closing documents as the basis for its belief that title insurance was issued and that the mortgages were recorded was insufficient to sustain a claim as a matter of law. The Court of Appeals adopted this
position rather than focusing on Chicago Title’s other arguments (which included that its agent was acting outside the scope of his authority).1

Practical Application/Impact.

This decision potentially has a direct impact on the myriad of litigation stemming from mortgage market failures in the middle and late 2000s. The opinion can be read to hold that reliance on documents such as HUD-1s or title reports prepared prior to, or possibly at, the closing are insufficient proof that the mortgage title was recorded or the title insurance was issued. The Court of Appeals’ implication is that purchasers on the secondary mortgage market had an affirmative duty to inspect post-closing documents that confirm title insurance was purchased or the mortgage recorded.

The decision is of wide potential applicability to claims against attorneys and title companies relating to unrecorded mortgages purchased on the secondary market. As large mortgage houses routinely failed to assure proper recordation in their rush to purchase and repackage mortgages for securitization purposes, many such mortgage entities are likely similarly situated to DLJ. Therefore, where a subsequent holder of a mortgage brings a claim against a professional for fraud, misrepresentation, or even a RICO violation, this decision provides a potential basis for pretrial dismissal where the mortgage purchaser failed to assure recordation and title insurance through post-closing documents.

To discuss the above or this area of law, generally, in more detail, please feel free to contact Andrew R. Jones.

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  1. 1 DLJ relied heavily on the prior Court of Appeals decision, DDJ Mgmt., LLC v. Rhone Group LLC, 15 N.Y.3d 147 (2010), for the proposition that reasonable reliance is a factual question to be determined by the fact-finder and a plaintiff may otherwise rely on written representations that certain facts are true. However, the Court of Appeals, in finding that DLJ’s reliance was not reasonable, reaffirmed the affirmative duty mortgage purchasers have to assure proper title.

COA Decision pdf

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