Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—E.D. Pa.: Title company not liable to real estate sellers in foreclosure avoidance scheme, (Sep 18, 2013)

By Edward L. Puzzo, J.D.

Individuals, who had been victimized in a fraudulent mortgage rescue scheme involving the sale of their homes to third parties, had no claim under the Pennsylvania unfair trade practices law against the title insurer used in those transactions, the federal district court in Philadelphia has ruled (Duffy v. Lawyers Title Insurance Co., September 17, 2013, Stengel, L.).

Anona Duffy and other plaintiffs had been victims of a fraudulent “mortgage rescue” scheme which had resulted in criminal prosecutions. The scheme, presented by individuals who claimed to be able to help the plaintiffs avoid the loss of their homes in foreclosure, involved refinancing their homes under a third party’s name, allowing the plaintiffs to remain in the homes as lessees, with the intention of later buying back their homes from the “straw” parties and refinancing the mortgage in the plaintiffs’ names in order to restore their credit. As part of the transactions that conveyed the properties to third parties, title insurance was purchased from Lawyers Title, now known as Fidelity Title.

Plaintiffs brought claims against Fidelity Title, alleging fraud and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL) for their involvement in the scheme.

Purchasers under the Unfair Practices and Consumer Protection Law. The issue of whether the UTPCPL permits a person, who was attempting to refinance his home and whose home’s equity was allegedly used by one entity to purchase title insurance from a third party, to bring suit against that third party is an issue of first impression, the court stated.

Fidelity Title argued that the plaintiffs did not qualify as purchasers under the UTPCPL. The HUD-1 settlement statements in each transaction had shown that title insurance premiums were paid from buyer’s funds, whereas plaintiffs had been sellers in these transactions. The third parties buying the homes from plaintiffs, it was argued, had actually been the purchasers of the title insurance, which insured those third parties and their lenders.

Plaintiffs responded that the funds used to pay settlement expenses at closing, including title insurance, came from their equity in the homes. They argued that even though they are not the insureds or the beneficiaries of the title insurance policies, they were entitled to protection under the UTPCPL as purchasers because they were third-party payors of the title insurance premiums.

The court ruled for Fidelity Title. Although the plaintiffs’ equity may have been used indirectly to fund all the costs associated with settlement, this fact alone did not make them purchasers under the UTPCPL, the court stated. Plaintiffs admitted that they had no idea title insurance was even being purchased as part of the transactions. Further, the court continued, the seller of property has no need to be protected by title insurance, nor does a seller have any reason to purchase a policy for a property which will be purchased by another party. It was the buyers and the lenders that benefitted from the title insurance policy.

Indeed, most of the settlement expenses in these transactions, including hazard insurance and real estate taxes as well as title insurance premiums, were valid and legitimate expenses and were not the source of plaintiffs’ losses, the court continued. Those losses were attributable to fraudulent liens added to the settlement, which reduced the cash owed to seller to zero.

The policy behind the UTPCPL is to ensure the fairness of market transactions. Here, the title company had no bargaining power over plaintiffs because it did not sell any good or service to them. The indirect transfer of funds to a buyer who used those funds to purchase title insurance did not give rise to a cause of action under the UTPCPL, the court ruled.

The case is Civil Action No. 11-4503.

Attorneys: Stuart A. Eisenberg (McCullough Eisenberg LLC) for Anona Duffy. Lauren P. McKenna (Fox Rothschild LLP) for Lawyers Title Insurance Co.

Companies: Lawyers Title Insurance Co.

Cases: StateUnfairTradePractices PennsylvaniaNews