Walsh Sec., Inc. v. Cristo Prop. Mgmt., Ltd.

• Decision Date: 17 April 2012
• Docket Number: Civ. No. 97–3496 (DRD).
• Citation: 858 F.Supp.2d 402
• Parties: WALSH SECURITIES, INC., Plaintiff, v. CRISTO PROPERTY MANAGEMENT, LTD., a/k/a G.J.L. Limited, et al., Defendants.
• Court: U.S. District Court — District of New Jersey

858 F.Supp.2d 402

WALSH SECURITIES, INC., Plaintiff,

v.CRISTO PROPERTY MANAGEMENT, LTD., a/k/a G.J.L. Limited, et al., Defendants.

Civ. No. 97–3496 (DRD).

United States District Court,

D. New Jersey.

April 17, 2012.

Stone & Magnanini LLP by Robert A. Magnanini, Esq., Amy Walker Wagner, Esq., Daniel Ian Mee, Esq., Jeffrey A. Shooman, Esq., Short Hills, NJ, for Plaintiff.

Fox Rothschild LLP by Edward J. Hayes, Esq., David H. Colvin, Esq., Philadelphia, PA, for Defendants Fidelity National Title Insurance Co. of New York and Nations Title Insurance of New York, Inc.

McCarter & English, LLP by David R. Kott, Esq., Sara F. Merin, Esq., Newark, NJ, for Defendant Commonwealth Land Title Insurance Company.

OPINION

DEBEVOISE, Senior District Judge.

This matter arises out of a mortgage fraud scheme that took place between April 1996 and June 1997. In the roughly fifteen years since the scheme—which involved multiple lawsuits and indictments—no one has quite gotten to the bottom of it. What remains are claims asserted by Plaintiff Walsh Securities, Inc. (“WSI”) against Defendants Commonwealth Land Title Insurance Company (“Commonwealth”), Fidelity National Title Insurance Co. of New York (“Fidelity”), and Nations Title Insurance of New York (“Nations”) (collectively referred to as “the Title Insurers”) for breach of contract, bad faith, and compensatory damages.

WSI now moves for summary judgment in its favor on certain claims for breach of contract. In addition, the Title Insurers move for summary judgment in their favor on a number of WSI's claims for breach of contract, as well as on its claim for bad faith and portions of its claim for compensatory damages. For the reasons set forth below, WSI's motion is DENIED, and the Title Insurers' motion is DENIED with respect to WSI's claims for breach of contract and compensatory damages, but GRANTED with respect to WSI's claim for bad faith.

I. BACKGROUND

WSI was a wholesale residential mortgage lender in the business of, among other things, purchasing subprime retail mortgage loans from other mortgage bankers or mortgage brokers, known as correspondents, and packaging those mortgage loans for use as securities in secured transactions, or reselling the loans to whole loan purchasers.¹ Robert Walsh is the president, Chief Executive Officer, and principal shareholder of WSI. James Walsh, Robert Walsh's brother, was the Vice President, Director of Underwriting and Operations at WSI, and a shareholder in the company. Betty Anne DeMola, the sister of Robert and James Walsh, was the National Sales Manager at WSI and a shareholder in the company.

In this case, WSI, as the mortgage loan wholesaler, purchased mortgage loans from a correspondent known as National Home Funding (“NHF”) by funding them at the time of their closing—a process called table funding. To table fund these mortgage loans, WSI drew on a $200 million warehouse line of credit with Greenwich Capital Markets, Inc. (“Greenwich Capital”). WSI then sold the mortgage loans to entities called whole loan purchasers, such as The Money Store and Cityscape Financial, or to a Trust on behalf of note holders in securities issued by WSI. WSI's sale of mortgage loans included representations and warranties requiring WSI to repurchase all loans found to be unmarketable or fraudulent.

A. The Mortgage Loans

This case involves approximately two hundred and twenty mortgage loans that WSI table funded between April 1996 and June 5, 1997. A relevant loan transaction begins with a licensed mortgage broker accepting a loan application from a consumer that wants to purchase real property (the “borrower”). The mortgage broker would gather all necessary documentation to obtain the loan and order an appraisal of the subject property by a licensed appraiser to determine its fair market value. The mortgage broker would then forward the loan package to WSI. If WSI was satisfied with the package, it would issue a commitment for the loan to the broker and begin preparing the loan documents.

At this point, WSI's closing department would issue closing instructions and transfer the loan funds to the escrow account of a closing attorney on the day of the closing, or shortly before that time. The closing attorney would have to certify that it had complied with WSI's closing instructions before releasing WSI's funds from his or her escrow account.

WSI's closing instructions required, among other things, (1) “[t]wo forms of acceptable identification from all borrowers;” (2) that “[n]o ... documents be executed by Power of Attorney unless authorized by Walsh Securities, Inc.;” (3) that the mortgage loan be recorded “in the First Lien position;” (4) that a full ALTA title policy be issued; and (5) that “[p]rior to disbursement [the closing attorney] must FAX HUD–1 ² to the [WSI] Closing Department.” (Magnanini Cert., Ex. C.)

None of the two hundred and twenty loans in this case was actually closed in WSI's name. Instead, WSI issued those loans in the name of NHF—which also brokered the loans—in order to limit WSI's exposure in case of wrongdoing on the part of NHF. WSI maintained the loans in NHF's name by assigning them to NHF. In doing so, WSI prepared the loan assignments and sent them to NHF for execution. Upon execution, NHF assigned the loans back to WSI, which would then execute an additional assignment of the loan documents in blank ³ for the benefit of the ultimate purchaser of the loan in the secondary market. WSI then transmitted both assignments—the assignment from NHF to WSI, and the in blank assignment from WSI—to the whole loan buyer for recordation.

B. The Title Policies

Prior to the closing, WSI would take out a title insurance policy ⁴ to protect against losses arising from defects in, or encumbrances on, the title to the real property subject to the mortgage loans that it was table funding. ⁵ In this case, WSI took out title policies from The Title Insurers. These title policies were brokered and issued on behalf of the Title Insurers by Coastal Title Agency, Inc. (“Coastal”) and Monmouth Title Agency, Inc. (“Monmouth”). The Title Insurers had agency agreements with Coastal and Monmouth.

WSI took out the title insurance policies in the following manner. First, WSI submitted a request for a title commitment to Coastal or Monmouth for a particular property. Upon receiving the request, Coastal or Monmouth was required to investigate and evaluate issues regarding title to, and judgments, taxes, and assessments on the property. All potential encumbrances and title defects were noted in the title commitment so that they could be rectified before the closing. After the closing, the closing attorney submitted documents indicating that there were no encumbrances on, or title defects in, the subject property, such as recorded deeds and mortgages, affidavits of title, and satisfaction of liens. Upon submission of these documents, Monmouth or Coastal issued a title insurance policy on behalf of the title insurer to WSI describing the insured property, insuring that the property was vested in fee simple in the buyer's name, and that the insured mortgage loan was recorded as a valid first lien on the property in the mortgage book of the county clerk's office. See (Magnanini, Ex. A.)

As such, the title policies at issue in this case insure, in pertinent part, against losses arising from:

1. Title to the estate or interest described [in the policy] being vested other than as stated therein;

2. Any defect in or lien or encumbrance on the title;

3. Unmarketability of the title;

* * * 5. The invalidity or unenforceability of the lien of the insured mortgage upon the title;

(Hayes Cert., Ex. E.)

The policies exclude, among other things, “Defects, liens, encumbrances, adverse claims or other matters: (a) created, suffered, assumed, or agreed to by the insured claimant” (“Exclusion 3(a)”). ( Id.)

The policies also provide the following:

The insured shall notify the [insurer] promptly in writing ... (ii) in case knowledge shall come to an insured hereunder of any claim of title or interest which is adverse to the title to the estate or the lien of the insured mortgage, as insured, and which might cause loss or damage for which the [insurer] may be liable by virtue of this policy or (iii) if title to the estate or interest or the lien of the insured mortgage, as insured, is rejected as unmarketable. If Prompt notice shall not be give to the [insurer], then as to the insured all liability of the [insurer] shall terminate with regard to the matter or matters for which prompt notice is required.

* * *

Upon written request by the insured and subject to the [limitations of the title policy] ... [the insurer], at its own cost and without unreasonable delay, shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien, or encumbrance or other matter insured against by this policy....

The [insurer] shall have the right, at its own cost, to institute and prosecute any action or proceeding or to do any other act which in its opinion may be necessary or desirable to establish the title to the estate or interest, as insured, or to prevent or reduce loss or damage to the insured. The [insurer] may take any appropriate action under the terms of this title policy, whether or not it shall be liable hereunder, and shall not thereby concede liability or waive any provision of this policy.

( Id.)

C. The Closing Service Protection Letters

In conjunction with each title policy, Coastal or Monmouth issued WSI a Closing Service Protection Letter (“CPL”)—an agreement to indemnify a lender for a closing attorney's malfeasance or failure to comply with the WSI's closing instructions—in NHF's name on behalf of the title insurer. The CPL provides coverage for “actual loss incurred ... in connection with” the closing of the...