Tuesday, May 30, 2023


            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:

  1. 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.
  1. 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?
  1. 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?
                                                                                    Stuart A. Lautin, Esq.*


* 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.


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