The 7th U.S. Circuit Court of Appeals recently held that a seller’s attorney who acted as the seller’s representative and the owner of a title agency used in fraudulent transactions was personally liable for a mortgage fraud scheme.

In Fifth Third Mortgage Co. v. Ira Kaufman (7^th U.S. Circuit Court of Appeals, No. 18-3295), the attorney represented the seller, 4725 S. Michigan LLC (“4725 S. Michigan”), in the sale of thirteen units in a twenty-six-unit development. The attorney’s title company, Traditional Title Co. LLC (“Traditional Title”) conducted the closings for nine of the thirteen units. Fifth Third Mortgage (“Fifth Third”) acted as the lender for some of the purchases.

Unbeknownst to Fifth Third, 4725 S. Michigan had recruited straw buyers for the units in a mortgage fraud scheme with multiple lenders.  The scheme required the straw buyers to submit fraudulent loan applications, providing misinformation about the buyer’s employment status, income and a statement that the buyers would reside in the units, even though the same buyers purchased multiple units in the development.

The closing instructions provided to Traditional Title by Fifth Third required Traditional Title to notify the bank of any misrepresentations that would influence Fifth Third’s decision to close. Fifth Third also required notice from Traditional Title, and for Traditional Title to suspend the closing, if the buyers violated the owner occupied requirement.

 After the fraud was discovered, Fifth Third filed seven claims of fraud against the attorney in his capacity as the seller’s attorney. Fifth Third alleged that the seller’s attorney knew of the fraud scheme and that the buyers made false representations on their loan applications.

The attorney testified he was unaware of the fraud scheme and his role as seller’s attorney did not include reviewing the buyer’s loan application or Fifth Third’s closing instructions. Other parties testified that the attorney knew about the misrepresentations and the fraud scheme.  The trial court entered a judgment against the attorney.

On appeal, the attorney argued that the trial court erred in finding him personally liable for his activities conducted in his capacity as the owner of the title agency, an LLC company. The appellant court held that the attorney was sued in his individual capacity and that he was substantially involved in the fraud scheme.

This case acts as important reminder that if an attorney is aware or suspects the transaction is fraudulent, the attorney must discontinue representation. Also, it is good practice for a seller’s attorney to personally interact with his or her client instead of working through a middleman or representative.