Colo. Appeals Ct: OK For Title Insurer To Thwart Undisclosed Mortgage Holder's F'closure Attempt, Stiff It On Claim Where Payoff Funds Were Properly Paid To Authorized Servicing Agent Who Subsequently Stole The Cash; Insurer's Failure To Obtain Note, Lien Release At Closing Not Fatal

Colorado attorny Jim Flynn writes in the Colorado Springs Gazette:

• Title insurance is a unique insurance product in that the insurance company has almost total control over the risks it insures. This is because what the title insurance company insures is the accuracy of its own search of the public records and the correctness of the closing services it provides.
  
  Contrast this to the company that insures, say, your car. There the insurance company has no control over people crashing into you, rocks flying through your windshield, carjackings, etc.)
  
  Although claims under title insurance policies are rare, when they occur, the cost of the insurance will prove to have been money well spent. A case decided in 2011 by the Colorado Court of Appeals demonstrates the point.(1)
  
  In this case, Brenda Armijo purchased a house from Kimberly Poladsky. Poladsky had a mortgage on the property that needed to be paid off at the closing. The mortgage was owned by a company called Dakota Lending. However, Dakota Lending had borrowed money from Citywide Bank and had used Poladsky’s mortgage as collateral for this loan. Therefore, the original of the promissory note Poladsky had signed was not held by Dakota Lending; it was locked up in a drawer at Citywide Bank.
  
  Dakota Lending nonetheless continued to collect the payments on the Poladsky mortgage. And Citywide had not filed anything in the real estate records showing it had an interest in this mortgage.
  
  At the closing of the sale from Poladsky to Armijo, Armijo paid the purchase price to the title insurance company. The title insurance company in turn paid Dakota Lending the amount still owing on the Poladsky mortgage. Dakota Lending should then have paid Citywide, obtained the original promissory note, marked the note paid and sent the note on to the title insurance company so the Poladsky mortgage could be released. Instead, Dakota Lending’s owner stole the money.
  
  Since Citywide hadn’t been paid and still had the original Poladsky note, it started a foreclosure against Armijo’s property. Armijo thereupon filed a claim under her title insurance policy and said: “Fix this please.” The title insurance company dutifully went into action to stop the foreclosure and Armijo’s problem was over.
  
  But the title insurance company’s legal work had just begun.
  
  The title insurance company could have simply paid Citywide what it was owed. However, its position was that Dakota Lending had acted as Citywide’s agent when it collected the payoff for the Poladsky mortgage. And a payment to an agent constitutes a payment to the principal.
  
  Thus, the title insurance company argued, Citywide had been paid and had no right to foreclose. The fact that its agent stole the money was Citywide’s problem, not the title insurance company’s problem. Citywide argued that, since it still had possession of the original Poladsky note, it should be protected from Dakota Lending’s fraud and it should be able to foreclose.
  
  Both the trial court and the Court of Appeals sided with the title insurance company and concluded that possession of an original promissory note, once a sacred concept in the law, didn’t count for much in this circumstance and the title insurance company had no duty to obtain possession of the original note before giving the mortgage payoff to Dakota Lending.
  
  Citywide still has a claim against the thief, but good luck with that. Since he’s in prison, his current income is quite limited.

Source: Money & the Law: The role of title insurance.

For the Colorado appeals court ruling, see Citywide Banks v. Armijo, ___ P.3d ___ (Colo. App. 10CA1458, Oct. 13, 2011) (principal may be bound by agent's actions if agent acts pursuant to either actual   or apparent authority).

(1) The background facts of the case, lifted from the appeals court ruling, are set forth below:

• In 2003, Dakota Lending, LLC (Dakota) executed a promissory note to Bank in exchange for a revolving line of credit that allowed Dakota to borrow up to $4 million. Dakota used this line of credit to finance its business of buying, selling, and holding real estate mortgages. As security for Dakota's revolving line of credit, Bank took assignments of the promissory notes and deeds of trust that Dakota financed or acquired in its course of business.
  
  In 2007, Kimberly Poladsky and RE Services, LLC (collectively, RE Services) executed a promissory note (Note) payable to Jaguar Mortgage Company. The Note was secured by a deed of trust that encumbered the property at issue here. After a series of transfers Dakota acquired the Note. Dakota then assigned all of its rights and interest in the Note and accompanying deed of trust to Bank. While Bank held the Note, it allowed Dakota to service the loan and to retain for itself periodic payments made on the Note.
  
  In 2008, RE Services sold the property to Armijo. Title insurance was purchased from Stewart Title, which conducted the closing of the transaction. Stewart Title obtained a payoff statement from Dakota. At closing, Armijo tendered the purchase price, and Stewart Title accepted those funds as closing agent.
  
  Stewart Title did not demand production of the Note at closing, and did not attempt to determine the identity of the Note holder.
  
  Bank alleges that Stewart Title also failed to obtain a release of the deed of trust at closing.
  
  Stewart Title issued a check payable to Dakota for the amount listed on the payoff statement. However, Dakota never tendered the payoff funds to Bank.
  
  Dakota is now defunct and its managers are under criminal indictment. Bank, which still holds the Note, has declared the Note to be in default.
  
  Bank brought this action against Armijo to foreclose its lien on the property based on the unpaid Note balance. After a bench trial, the trial court, in a detailed and well-reasoned order, determined that Dakota was Bank's agent and had authority to receive the payoff of the Note. It therefore concluded that Bank was not entitled to foreclose on the property.