Every time any actual property modifications palms or will get refinanced, the closing sometimes occurs by some type of third-party escrow. The vendor indicators the switch or mortgage paperwork and provides them to a trusted third occasion, the “escrowee.” The customer or new lender provides the escrowee some cash. The escrowee then makes certain the closing situations are happy and data the paperwork. Lastly, the escrowee releases the acquisition value or mortgage proceeds and everybody lives fortunately ever after.
This all works very well so long as the escrowee doesn’t take the cash and run. Typically that occurs, although, as proven in a latest Washington State case.
There, the events used a small native escrow firm to deal with the closing of a brand new mortgage meant to refinance an outdated mortgage. The brand new lender wished consolation that the escrow firm would correctly deal with the mortgage proceeds and the closing. Lengthy earlier than closing, the lender demanded a “closing safety letter,” a affirmation from Commonwealth Land Title Insurance coverage Firm, a nationwide title insurance coverage firm, that the lender’s funds and the closing can be correctly dealt with by the “Settlement Agent.” The closing safety letter recognized the Settlement Agent as one other title insurance coverage firm, Ticor Title Firm.
When the time got here to shut, the small native escrow firm instructed the lender to not wire funds to Ticor Title Firm, however as an alternative to wire funds to the small native escrow firm, presumably for comfort, velocity, and ease to facilitate the closing. The lender complied. The small native escrow firm then stole the cash.
The lender finally obtained a coverage of title insurance coverage protecting the lender’s mortgage, as if it had been recorded and correctly funded. On its face, that coverage insured the lender that it held a legitimate lien. However, as a result of the small escrow firm had stolen all the cash from the closing, the premium for the coverage had by no means been paid.
The lender sued Ticor and Commonwealth underneath the closing safety letter and the title insurance coverage coverage. The lender misplaced on each counts.
The court docket simply rejected the lender’s declare towards Commonwealth Title underneath the closing safety letter. That’s as a result of the CPL recognized Ticor Title Firm because the Settlement Agent coated by the CPL. The CPL didn’t say something concerning the small escrow firm. When the lender determined to wire funds to the small escrow firm slightly than to Ticor Title Firm, the lender misplaced the safety that the CPL would have delivered.
In claiming underneath the title insurance coverage coverage, the lender argued that the coverage insured the lender because the holder of a legitimate mortgage lien. If the lender didn’t maintain a legitimate mortgage lien as a result of the mortgage proceeds by no means went to the borrower, the lender thought that was a danger coated by the title insurance coverage coverage. The court docket didn’t agree, as a result of nobody had ever paid the premium on the title insurance coverage coverage, so the coverage by no means grew to become efficient.
The case teaches a few small classes—and one bigger one—for contributors in actual property transactions.
As the primary small lesson, if a celebration to an actual property transaction goes to the difficulty of acquiring a closing safety letter, they need to be certain they wire funds to the Settlement Agent recognized within the CPL, and to not another person. Because the second small lesson, anybody acquiring title insurance coverage ought to be certain their title insurance coverage premium is definitely paid. With out that, a really spectacular wanting coverage of title insurance coverage might give them nothing quite a lot of sheets of paper with which to wrap fish.
Because the bigger lesson, little screwups can occur, just like the little screwups that occurred right here. They will then change into huge screwups. These screwups would have been prevented totally if the lender had insisted on having a direct association with a nationwide title insurance coverage firm for the dealing with of escrowed funds. The lender wouldn’t have needed to take any dangers of the sort that ended up arising on this explicit case. Thought of from one other perspective, it typically helps to observe a well-known historic authorized precept: “Preserve it easy, silly.”