Sam Higgins continuously owned one
parcel of real property for the last 50 years. A deed was recorded on August 8,
2017, whereby Higgins conveyed it to CETA Invest Austin.
CETA then agreed to sell it to
Juanita William for $200k.
On September 20, 2017, William
offered to assign her purchase right to Houndstooth Capital for a $5k profit,
and a contract was executed between William, CETA, and Houndstooth. Evidently the
owner of Houndstooth thought that the asset was undervalued by $100k. Closing was
scheduled for September 29, 2017, but was delayed when the title agent
discovered in the County records a Memo of Purchase and Sale.
William explained that she had previously
assigned purchase contracts on the target asset and adjacent properties,
heirship issues had been discovered, a previous assignee backed out of the
deal, so William elected to find another buyer.
Houndstooth approached the title
agent with this issue, and was assured that the target asset had no heirship
issues.
The deal closed on October 6, 2017.
The title agent had obtained a title commitment from WGF National Title
Insurance Company. At Closing, the title agent produced a document to be
executed by Houndstooth which provided that the agent may be unable or unwilling
to issue an Owner Title Policy even though a premium had been paid, as a final
down-date search could result in adverse findings.
Houndstooth delivered $205k to the
agent’s escrow account, as required by the contract. A Deed from CETA to
Houndstooth was executed, and the agent wired the sale proceeds to CETA.
Bank of America alerted the title
agent, one week after Closing, that CETA was attempting to withdraw all of the
closing proceeds from an account that had been recently opened. Which created a
fraud alert. So BoA stopped payment on the withdrawal request.
On October 18, 2017, the title agent
informed Houndstooth that no title policy would be issued, the premium paid for
the title policy would not be returned, and the escrowed funds would not be
reimbursed, all because the chain of title had been questioned based on BoA’s
fraud warning.
On October 27, 2017, Higgins (recall
that he had owned the realty for the last 50 years) signed a Fraud Affidavit
stating that the deed transferring the real estate to CETA was a forgery.
Subsequently, BoA sent $64k to the
title agent who, in turn, sent it to Houndstooth one year after receipt by the
agent. The US Secret Service recovered an additional $70k and returned that
amount to Houndstooth, leaving Houndstooth to suffer a $71k loss.
Houndstooth sued the title agent and
WFG for breach of contract, fraud, breach of fiduciary duties, negligence, and
violations of the Insurance Code. The trial court rendered judgment that Houndstooth
take nothing on its claims.
Houndstooth appealed.
After disposing of claims related to
fraud, negligence, breach of contract, and others, the Court of Appeals
analyzed the issue of fiduciary duty. The Court reported that the agent’s
duties were limited to the Closing and proper disbursal of earnest monies. Those
duties did not extend to title investigation or title defect disclosure.
The Court then reviewed the
obligations of the title insurer, WFG. In this case and although title
underwriters can also perform escrow duties, WFG merely acted as a title
insurer. As such, WFG never became a fiduciary to Houndstooth.
The title agent and underwriter win
again. See Houndstooth Capital Real Estate v. Maverick Title of Texas and
WFG National Title Insurance Company; Case No. 03-21-00093-CV; Texas Court
of Appeals, Third District at Austin; February 28, 2023: https://law.justia.com/cases/texas/third-court-of-appeals/2023/03-21-00093-cv.html.
Questions / Issues:
- Presumably a Lender would require detailed escrow
instructions to be signed by the title agent or escrow officer, prohibiting
the underwriter to deny coverage after Closing. But how does the Buyer seek
protection from this? Sophisticated commercial purchasers will also use escrow
instructions, but my sense is that virtually all of the closings in which buyers
do not engage lawyers will potentially leave such buyers exposed to fraud
and negligence claims.
- It is not uncommon for parties to allow a title
agent to hold funds, but on the day of closing demand that the escrow
holder transfer all funds to the national title insurance company for escrow
disbursement that day. Would that have given this buyer better protection?
- Is this a situation where the State legislature or
Insurance Commissioner needs to step up, perhaps to allow the agent to
sell an additional endorsement for an added modest fee that would provide both
escrow and title coverage after the premium is paid but before the
policies are issued?
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
