ATLANTA (Legal Newsline) - The Georgia Supreme Court has unanimously upheld a decision by the state's Court of Appeals that says a title insurance company is legally bound to issue the policy it had promised and cover a lender's losses that were caused by fraud.
In 2004, Thoughtforce International, Inc., Sam Dobrow, and Real Estate Solutions Providers, Inc., agreed to loan $106,000 to a man claiming to be Michael Shanahan.
In exchange for the loan, the lenders would receive a security deed giving them an interest in Shanahan's property in Alpharetta.
Prior to closing, the lenders received a commitment from Fidelity National Title Insurance Co. to insure the property against defects in the title as long as certain conditions were met.
A law firm that was Fidelity's agent issued the commitment and prepared the closing documents.
At the closing, the law firm checked Shanahan's identity, not knowing the man was an imposter and was using a fake ID.
The closing went forward, and the law firm gave the man the loan proceeds of $106,000, who in turn pledged the property as collateral. The law firm also paid Fidelity the insurance premium for the title policy, then forwarded the executed security deed to the county clerk.
The clerk recorded the deed and sent it back to the law firm.
Due to a backlog, the law firm had not yet issued the title insurance policy when the loan went into default.
At this time, the parties involved learned the man wasn't Shanahan, but someone else wanted by the FBI for mortgage fraud.
Because the real Shanahan had not executed the security deed, the lenders were unable to foreclose on the deed and sell the collateral to repay the loan.
Soon after learning of the fraud, Fidelity instructed the law firm not to issue the policy referenced in the commitment. When the lenders filed a claim with Fidelity shortly after, Fidelity denied it.
Meanwhile, two of the lenders transferred their interests in the security deed and the claim against Fidelity to Keyingham Investments.
That company then sued Fidelity for breach of contract for its failure to issue the policy as promised in the title commitment.
The trial court ruled in Fidelity's favor. The state's appeals court, however, reversed the trial court's decision.
In the Court's 5-page opinion, filed Oct. 18, Justice David Nahmias wrote that the appeals court got it right.
Fidelity had argued that a forged deed does not create an interest in the property and therefore it could not go forward with issuing the insurance policy.
"As properly recognized by the Court of Appeals in this case, Fidelity's argument ignores that one of the very purposes of title insurance is to protect a party from the consequences of forgery in the chain of title, which necessarily results in the party not receiving an interest in the land," Nahmias wrote.
The Court said unless there is specific language in the title insurance commitment that clearly excludes coverage for a forgery, "a commitment must be construed to provide coverage for forgeries."
Fidelity also argued that the document not only had to be signed, delivered and recorded, but it also had to create an interest in real property.
Again, the Court disagreed.
"This phrase can be read as requiring that the 'documents' that purport to create the insured interest, here the security deed, be satisfactory to Fidelity, not that they actually create an unassailable interest in the land," tje ruling says.
"Indeed, the phrase is nonsensical if interpreted to mean that a perfected interest in the land must be created by the deed alone, which could not create such an interest before it is 'signed' and 'delivered.'"
The Court concluded that "title insurance is fundamentally designed to protect against title defects, and a forged deed creates such a defect."
From Legal Newsline: Reach Jessica Karmasek by e-mail at firstname.lastname@example.org.