Landrecs.com – Land Title Consulting & Education

Chicago Title, one of the Fidelity companies, recently filed a lawsuit against an attorney in New Jersey claiming that it was malpractice for him to rely on a title commitment he ordered for his client in the course of representing him in a purchase transaction.  I guess nothing in this industry should surprise me anymore, but I had to read this article twice just to make sure I wasn’t missing something.  What does it say for the title industry when the nation’s largest underwriter, controlling about 45% of the market share, sues an attorney who ordered its product for relying on its accuracy?

An article on Law.com, Insurer Blames N.J. Lawyer for Blot on Title, chronicles the events that led to this very bizarre legal malpractice claim.  It began in 2001 when the estate of a man who died in 1999 sold a six-unit apartment complex to Danton Properties, LLC.  Danton hired Commonwealth Land Title, which is ironically now also a Fidelity Company, which issued a policy without any exception as to federal estate taxes.  Commonwealth apparently relied on the executor who certified that there were no estate taxes due.

In 2002, Danton sold the property to John Jhang, who was represented by attorney Albert Birchwale.  Birchwale ordered title work from Vested Title Inc., which searched the property and obtained a title commitment from Chicago Title. 

Apparently, nobody was aware that the executor of the estate that sold the property to Danton had failed to pay estate taxes.  In 2007, the IRS sued the executor to recover $2.7 million in back taxes and it filed an IRS lien on the property in question.

Chicago Title paid $300,000 to settle on behalf of Jhang, its insured, but they maintained their third-complaint against Birchwale alleging malpractice. 

Here’s how Birchwale erred, according to an expert for Chicago Title, Stuart Reiser of Shapiro & Croland in Hackensack:

He should have noted from the title binder he reviewed before the closing that there had been an estate in the chain of owners within the preceding 10 years. Had he done so, Birchwale would have seen there was no Estate Tax Closing Letter in the record of that previous transaction and no exception to a federal lien in the Jhang’s title binder.

And that would have prompted him to take action. "Armed with such knowledge, defendant should then have requested additional information or documents from the seller or their attorney which would have demonstrated that the estate taxes were either paid or unpaid," Reiser said.

Birchwale could have asked the seller for a closing letter from the IRS, a release from any liens, an affidavit of no taxes due, a bond for any unpaid estate taxes, an escrow of funds to pay taxes or an indemnification agreement, Reiser said.

Is Chicago Title really saying: "Hey attorneys, we want your referral work, but if you rely on our agents we may sue you for malpractice?"  Worse… is Chicago admitting that they don’t do a very thorough title examination?  That is certainly the way I read its comments.

The title agent’s review wasn’t dispositive, Reiser added. In northern New Jersey, where title agents merely report on the status of title through research of public documents, lawyers are "obligated to exercise a greater degree of care than that which could or should be expected of a title agent," Reiser said.

Sure, Birchwale could have taken it upon himself to make a review of the probate records beyond the Chicago Title commitment, but isn’t that why he hired Vested Title?  It seems rather disingenuous for Chicago to make the argument that Birchwale could have taken additional steps, but for some reason its agent couldn’t or shouldn’t be expected to do the same.  Birchwale put it best when he asked, "If lawyers are going to be held accountable for what title professionals are supposed to do, why should homeowners pay for searches and coverage?"

I’m just a small independent title agent – I’m certainly not in the same league as the nation’s largest underwriter.  Still, I know that when an estate appears in the course of a title examination I need to make sure that there aren’t any outstanding estate tax liabilities.  Somehow, I think that my underwriter expects that of me… but, I don’t write for Fidelity. 

Several experts quoted in the article, not surprisingly, disagreed with Chicago’s expert.  It is routine practice for attorneys to rely on the title company to search the title.  It seems rather elementary to me that Birchwale represented his client’s interests rather well – he ordered title insurance for him and reviewed the title company’s commitment.  In the event of defect, such as this one, his client’s interests are protected by the policy.

If the client’s interests are protected, how can that be malpractice?  Birchwale didn’t represent Chicago Title – he did not owe any duty to Chicago to discover and correct its agent’s negligence.

This case underscores the importance of knowledgeable, experienced title professionals in the title insurance industry.  Despite Chicago’s expert’s claim that "title agents merely report on the status of title through research of public documents," there is much, much more to a thorough title examination than this.  Aggregating documents is only the beginning; an experienced title examiner must also know the legal consequences of the documents and court proceedings such as probate.  Not only must the examiner know the effects of legal documents, they must also recognize when certain documents are missing – like the IRS Closing Letter that was not found here. 

Of course, the downside to being a knowledgeable, experienced title professional is that we can’t sue our customers for relying on our work. 

Chicago Title voluntarily dismissed the case, but it has not altered its opinion that the suit had merit.  I guess everyone is entitled to their opinion.

Robert A. Franco
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Errors and omissions insurance for abstractors is very expensive, at least in relation to the depressed fees that are prevalent in the industry.  Unfortunately, working without it is not an option for many abstractors.  Some states require abstractors to carry E&O insurance, and even if the state does not, many clients do.  Beyond that, it is rather foolish to incur the amount of potential liability that we do without some form of protection.

Recently, I was informed of an abstractor that crossed the line from foolish to criminal.  As ill-advised as it is to operate without E&O insurance, it is far worse to represent to clients that you have coverage when you don’t.  Especially when in the process you forge a declarations page and pass it off as your own.  Issuing false certificates or proofs of insurance is insurance fraud.

An abstractor in Kentucky apparently contacted another abstractor in Illinois and told her that she had a couple of orders for her, but first she needed a copy of her E&O insurance.  Like most of us would, the Illinois abstractor sent a copy of her declarations page to the Kentucky abstractor.  The orders never materialized.

At some point, the Kentucky abstractor was asked for proof of insurance by one of their clients, a Vendor Management Company (VMC) in Kentucky.  She sent a copy of a declarations page that showed a different company as the insured and when the VMC inquired about the apparent discrepancy, she told them that she was covered under this named insured’s policy.  The VMC contacted the named insured and was told that this was not the case.  When confronted, the Kentucky abstractor said that she had sent the wrong certificate by mistake and promptly sent a new declarations page.

Though the new declarations page showed the correct information, the diligent VMC contacted the agent who purportedly issued the policy to verify the coverage.  The agent found no record of issuing insurance to the Kentucky abstractor.  After an investigation, the agent discovered that it had only issued one policy that matched the limit of liability and expiration date shown on the declarations page and it was issued to the Illinois abstractor.  Upon speaking with the Illinois abstractor, the agent found out that the Kentucky abstractor had requested her declarations page under the guise of sending her work. 

It soon became apparent that the Kentucky abstractor had cut and pasted her company name onto the declarations page as the named insured, and that she changed the policy number to attempt to hide their forgery. 

The agent has reported the fraud to the Kentucky Department of Insurance.  Until some official action is taken, I won’t mention any names.  However, I think this is an important warning for clients who routinely require proof of E&O insurance.  When there is any doubt about the authenticity, it would be wise to verify the coverage with the issuing agent.

Nobody knows how many other clients have received bogus declarations pages from this Kentucky abstractor… or how many other abstractors may have purpetrated a similar scheme in an attempt to avoid paying for E&O insurance.  Let this serve as a warning to everyone how easy it is forge proofs of insurance… and how easy it is to get caught.  Make no mistake about it – this is insurance fraud!

There is no evidence here that any claim has been filed on the abstractor’s work. However, a claim can surface at any time.  What a mess that would be.  There would be no coverage on the forged E&O policy and the abstractor would most likely be personally liable for the claim.  Unfortunately, that will be of little help to the client who was duped – an abstractor who couldn’t afford to pay for their own E&O policy won’t likely have any assets to pay restitution. 

Personally, I hope the Kentucky Department of Insurance takes this matter very seriously and seeks to prosecute the Kentucky abstractor for insurance fraud. 

Robert A. Franco
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