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March 2009	Vol. 2, No. 3

Real Estate and Title Insurance News

Escrow

Court Upholds Use of Title Indemnity Deposit Agreements

A case that pitted banking giant Fifth Third Bank (Fifth Third) against Attorneys' Title Guaranty Fund, Inc. (ATG) ended in buttressing the title industry's use of title indemnity deposit agreements (TID) to insure over title defects. Fifth Third Bank v Attorneys' Title Guaranty Fund, Inc., Case No. 03 C 4926 (N.D. Ill 2008). The case involved the sale of commercial real estate by Fifth Third. Fifth Third obtained title to the property through a deed in lieu of foreclosure after the prior owner had defaulted on two loans made by Fifth Third. Fifth Third then accepted an offer to buy the property for $11,775,000. The failed project was in mid-construction at the time Fifth Third took title and, therefore, there were many title issues (mechanic's liens and other mortgages) to be cleared up. One mortgage turned out to be problematic and Fifth Third elected to close without settling the dispute. To do so, they deposited $1,500,000 and a mortgage release with ATG to induce ATG to insure over the mortgage.

After the money was deposited, ATG issued a loan policy. The purchaser's loan went into immediate default and the mortgagee initiated foreclosure proceedings. As part of this process, the mortgagee made a claim on its policy and demanded that ATG remove the prior mortgages of record. Fifth Third opposed this, contending that the indemnity agreement would not allow ATG to do so until Fifth Third had settled its dispute with the prior mortgagee. ATG disbursed the deposit to discharge the mortgage and recorded Fifth Third's mortgage release.

Fifth Third then brought suit against ATG, alleging, inter alia, breach of contract and breach of fiduciary duty seeking recovery of the entire $1,500,000 deposit. The allegations were based on Fifth Third's belief that ATG had violated the TID by not allowing Fifth Third extended time to establish priority over the other lien. It based its argument on a handwritten addition to ATG's form agreement's clause setting forth the period of the deposit, which stated as follows: "as demonstrated by Fifth Third Bank to diligently prosecute and pursue resolution of priority issues." Fifth Third claimed this required ATG to hold the deposit as long as it continued to pursue the action to establish priority.

The court ruled in ATG's favor as a matter of contract construction. The court held that the language of the TID agreement gave ATG wide discretion in handling the funds, only limited by the clauses of the contract. The relevant language in ATG's form that defines ATG's discretion in using the deposit states as follows:

The court also found the handwritten addition to the agreement in question ambiguous. Because of this, the court could not read the contract to require ATG to hold the funds for as long as Fifth Third pursued its cause. Finally, the court held that at the time ATG paid off the mortgage the date ATG was contractually obligated to hold the funds for had passed; therefore, ATG acted properly.

Further, the court found strictly as a matter of contract construction ATG was entitled to attorney fees in the amount of $536,000. The relevant form language for that issue states as follows, "in case of litigation involving this Agreement, the costs and attorneys' fees of ATG may be paid or retained by ATG out of the Deposit. If the Deposit is insufficient, the costs and attorneys' fees shall be paid by the undersigned."

TID Clarified

A TID agreement is most often used when the title insurance is to be issued over an exception in the policy. Generally the seller places the money with an agent to be held for a specified amount of time or until the defect is cleared up. The agreement determines what is to be done with the money, when it is to be returned or when it is to be disbursed. The TID agreement gives the agent a wide range of discretion once a specified holding date has passed. After that date, the agent generally can return the funds, disburse, or continue to hold the funds as necessary. However, the agreement's language is the ultimate determinate and it could call for the refunds to be immediately returned or disbursed on the specified date. To understand the intricacies of a TID it maybe helpful to compare it to a real estate related escrow agreement.

Real Estate Related Escrow Agreement

The most common real estate escrow involves the depositing of money or a deed with an agent until certain conditions are met. The escrow agreement controls every aspect of the transaction. If properly written, the escrow agent merely follows the terms of the agreement. Issues appear when the agreement it is not quite clear what the agent should do in a given situation. This is complicated by the fact that an escrow agent has fiduciary duties to all parties of the escrow agreement and is to act as an independent party. However, often the escrow agent is an agent/attorney of one of the parties. In this situation the agent has a dilemma between his or her duty to the client and his or her duty as an escrow agent. This situation can end in costly litigation and liability for the escrow agent.

One common problem is when the two parties claim two different events occurred. For example, one party may claim the contract was performed and the other party claim it was terminated. This was exactly what occurred in McBride v Commercial Bank of Champaign. In that case the court found that because the bank owed a fiduciary duty to both parties, and the escrow agreement did not stipulate what do in this situation, its only option was to interplead both parties to court. McBride v Commercial Bank of Champaign, 101 Ill App 3d 760, 428 NE2d 739 (4th D 1981). Instead the bank returned all the documents to the seller on the seller's word that the contract had been terminated (the bank had a long standing relationship with the seller). By doing this, the bank exposed itself to litigation and possible liability. This is just one of the pitfalls of trying to be impartial in an escrow matter.

Generally speaking, an escrow agent is put in the delicate position of having fiduciary duties to both parties. This is further complicated when an attorney representing one of the parties chooses to act as the escrow agent. This is because the duty to act impartially towards the parties to the escrow agreement may end up being in conflict with the attorney's duty to be a zealous advocate for his client. See Mike Hoover, Adm. Director of Minnesota Offices of Lawyers Professional Responsibility, Attorney as Escrow Agent, BENCH AND BAR OF MINN. (Oct. 1981). This occurred in Crosby v Kendall. In this case, Crosby, an attorney, acted as an escrow agent for multiple real estate transactions involving Samuel Les Caldwell. At trial an expert testified that many of the documents required by the escrow agreement were not in Mr. Crosby's files even though he had released the money to Mr. Caldwell. Crosby v Kendall, et al, 545 S.E.2d 385 (Ga. App. 2001). Further, Mr. Crosby admitted to having never or very rarely met with the plaintiffs (various parties to the escrow agreement) but frequently met with Mr. Caldwell and maintained an attorney-client relationship with Mr. Caldwell. Mr. Crosby would have been liable for his actions in derogation of the escrow agreement regardless of his relationship with Mr. Caldwell. His relationship with Mr. Caldwell exposed him to further punitive damages in the matter, which an impartial escrow agent would not have faced. The title indemnity deposit agreement when applicable does not suffer from the uncertainty of being a fiduciary of multiple competing parties.

The TID

TIDs are usually used in a situation where a title insurer is asked to insure over an exception that otherwise would be in the policy. Commonly TID's refer to either deleting the exception from the policy or insuring against loss by reason of the exception. After the provision that defines the exception that is to be insured over, there are three other vitally important clauses in the standard TID. Although there are many TID forms, to make the discussion of the TID easier this article will focus on ATG's TID agreement in particular. The first clause, and the most unique clause to a TID, states that the "deposit shall be under the absolute control of ATG to indemnify ATG as provided in this agreement." The second clause gives the ATG's agent the discretion to use the deposit in such manner and in such amount to reimburse anyone who may have removed the exception and to reimburse ATG for any and all loss, costs, damages, attorneys' fees, and expenses of every kind ATG may incur by reason of the title insurance policy on account of the exception insured over.

The other clause in the agreement that was of note in the Fifth Third case was the fee-shifting clause. This clause called for any costs and attorneys' fees of litigation involving the agreement to be paid out of the deposit and if the deposit was insufficient for the costs to be paid by the undersigned. This clause is of note because the judge found as a matter contract interpretation ATG was entitled to attorneys' fees in the matter because it was a suit involving the agreement. Because of this ATG was awarded attorneys' fees in excess of the deposit.

The first two clauses make the TID very different from an escrow. The two clauses do away with the multiple fiduciary duties that an escrow agent would normally have. The person accepting the deposit for ATG only has a duty to ATG and is to act in the best interests of ATG in exercising his or her discretion of how and when to release the deposited funds.

TID and Ethics

Although a TID clarifies the murky role of the person holding the deposit it does not make it any less fraught with ethical issues for an attorney to consider. The ethical issues for an attorney are most obvious when the attorney representing one of the parties to a real estate transaction chooses to act as the deposit holder. In that instance the ethical issues are clear. A conflict of interest occurs whenever an attorney's independent judgment on behalf of a client may be affected by the loyalty to another party. In re LaPinska, 72 Ill 2d 461, 463, 381 NE2d 700, 21 Ill Dec 373 (Ill 1978). Acting as the deposit holder requires the attorney to act in the best interest of ATG when deciding what to do with the deposited money, the best interest of ATG and the attorney's client may not always be the same and often can be in stark contrast. Therefore, in this situation there would be an obvious conflict of interest. A slight variation on the Fifth Third conflict illustrates how this ethical quandary commonly arises. In the actual case, ATG's Escrow Department held the deposit so there were no conflicts of interest. On the other hand, had the ATG member attorney who handled the property sale for Fifth Third also acted as the deposit holder under the TID, there would have been a conflict of interest. On one hand, he would have had his client's interest to look out for. The interests of his clients would be best served by holding off on paying out the deposit and giving it more time to negotiate a better settlement. On the other hand as the deposit holder, he would have been obligated to act in ATG's best interest, which would arguably be best served by paying off the claim and having the mortgage released. It would be nearly impossible for the attorney to be a zealous advocate for his client and also honor his duty as the deposit holder. This is not only a hard spot for an attorney to be put in, but one that exposes that attorney to possible litigation.

A conflict of interest does not always require an attorney to withdraw from the matter. After full disclosure and discussion of the conflict and consent by the client, an attorney may continue to represent parties with divergent interests. Rogers v Robson, Masters, Ryan, Brumond and Belum, 74 Ill App 3d 467, 473, 392 NE2d 1365, 30 Ill Dec 320 (3rd D 1979). Because of this it is not improper for an attorney to be the deposit holder while also representing one of the parties involved in the real estate transaction, while there is no current direct conflict. However, it may be sound practice to avoid this situation because the rule against representing conflicting interests was not only enacted to protect clients from fraudulent attorneys, but also to protect honest practitioners from having to choose between reconciling conflicting interests and protecting rights which [they] should represent strongly. Scheffki v Chicago, Milwaukee, St. Paul and Pacific Railroad Co., 1 Ill App 3d 557, 562, 274 NE2d 631 (1st D 1971). To avoid this problem, ATG's Escrow Department is available to hold title indemnity deposits for ATG member attorneys. This allows the attorneys to avoid the issues surrounding conflicts of interest between their clients and ATG. The Escrow Department acts in the best interest of ATG as defined in the TID and the attorney can continue to zealously represent his or her client's position.

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[Last update: 3-18-09]