FDIC can proceed on a claim under a CPL even where it has previously sold the Title Insurance Commitment

In JPMorgan Chase Bank, N.A. v. First Am. Title Ins. Co., 12-2094 (6th Cir. Apr. 24, 2014), one of First American’s agents issued a title policy and a closing protection letter (CPL) to Washington Mutual Bank (WaMu) on a $4 million dollar loan. In the CPL, First American agreed to indemnify WaMu for actual losses arising from the agent’s fraud or dishonesty in connection with the closing. First American later discovered that the subject transaction was fraudulent. It obtained title to the property and negotiated to sell it to WaMu to cover WaMu’s losses. Before that could happen federal regulators closed WaMu, and the FDIC became the Receiver. The FDIC entered into a Purchase and Assumption Agreement (P & A Agreement) with JPMorgan Chase Bank (Chase) whereby the FDIC sold nearly all of WaMu’s assets to Chase, including the title insurance commitment issued to WaMu. First American filed suit seeking a declaration that it had fulfilled its obligations under the title insurance commitment by tendering a deed to the property to Chase. The FDIC intervened stating a claim for breach of the CPL. Subsequently, First American and Chase through a Receiver sold the property leading to a stipulated order of dismissal with prejudice of Chase’s claims against First American and First American’s claims against Chase. Thereafter, only the FDIC and First American remained parties to the suit. After a jury trial, the FDIC was awarded $2,263,510.78 in damages under the CPL and First American appealed. On appeal, the Sixth Circuit rejected First American’s argument that CPLs cannot be severed from related title insurance commitments. Relying on a state court decision it found that a CPL can support a breach of contract claim independent of a related title insurance policy. The CPL is an indemnity agreement and not an insurance policy. In a CPL, the underwriter agrees to indemnify the lender for any problems that arise from the closing agent’s failure to properly apply the funds, as set forth in the closing instructions, and the title insurance commitment. (citations omitted). Conversely, a title insurance policy insures only that the title to such property is unencumbered by unknown liens, easements, and the like which might affect the property’s value. (citations omitted). The Circuit Court agreed that the protections under the instant CPL are not supplemental or ancillary to the Title Policy. So the FDIC’s subsequent sale of the loan and title insurance commitment from the transaction to Chase did not prevent the FDIC from bringing a breach of contract claim on the CPL because the CPL explicitly granted to WaMu and its successors and/or assigns as their interest may appear. Conversely, no language in the CPL provides that WaMu would lose its indemnification rights if it subsequently sold the [assets]. The court also rejected the argument that a stipulation signed by the FDIC and Chase concerning ownership of the CPL, and the P&A Agreement, transferred the CPL at issue here from the FDIC to Chase, depriving the FDIC of standing to sue. The court found that First American lacked standing to raise an argument based on the P&A Agreement.

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