On May 23, 2013, the Colorado Court of Appeals released its opinion in Fidelity National Title Co. v. First American Title Insurance. This case involves a real property title company (“Agent”) that was ultimately held liable for damages incurred by a title insurance underwriter (“Underwriter”) when the Agent inappropriately disbursed funds at a closing. The Colorado Court of Appeals found that under the contract between the Agent and Underwriter, the Agent was obligated to insure that proper distribution took place at closing. By failing to pay off the prior lienholder with the disbursements, Agent breached its obligation and was therefore liable to the Underwriter. This opinion also clarifies what constitutes a “payoff statement” and what Title Agents can and cannot rely on in processing new title commitments.
In 2007 Agent wrote a title commitment to Brown Financial, LLC (“Brown”) for a loan to a developer of real property. Brown assigned the deed of trust to Academy Bank (“Academy”) and the title commitment insured Academy’s position as first lienholder on the property. Two months later, Agent issued another title commitment for the same Underwriter on the same parcel of real property to Colorado East Bank & Trust (“CEB&T”). The commitment drafted by Agent for CEB&T’s also named it as a first lienholder on the real property at issue.
In preparing the second closing, Agent’s due diligence revealed the first closing with Brown and the fact that Brown had assigned the deed of trust to Academy. Agent acquired a letter from Brown stating that Brown was not owed funds from the closing and that it would provide Agent with the original promissory note marked paid in full within 14 days of the closing. Agent did not acquire any such letter from Academy. At the second closing, Agent distributed the funds to the developer without insuring that Academy’s interest was paid off.
Academy began foreclosure proceedings on the parcels in 2009 and CEB&T sought to enjoin the foreclosure. Academy asserted a claim against Underwriter under its title policy as Academy’s position had not been paid or released. CEB&T similarly asserted claims against the Underwriter to enforce its position as first lienholder. Underwriter paid CEB&T $986,000 plus attorneys’ fees and costs so that it could resolve its claims at foreclosure.
Subsequently, Underwriter brought claims against Agent alleging that it breached the contract between the parties by negligently processing the CEB&T closing. Despite Agent’s arguments to the contrary the trial court found (and the Colorado Court of Appeals upheld the finding) that Agent breached its contractual obligations to Underwriter by failing to insure that Academy’s interest was paid and/or released during the second closing. Agent argued that Brown’s letter constituted a “payoff statement” and that Agent was entitled to rely upon such a letter in processing the closing. However, the Colorado Court of Appeals ruled that under C.R.S. § 38-35-124.5 a “payoff statement” had to come from the holder of the indebtedness (in this case Academy), and therefore, the letter from Brown did not qualify as a “payoff statement” upon which Agent could rely.
The Colorado Court of Appeals also ruled against the Agent’s arguments that Underwriter failed to properly notify it of the claim pursuant to the contract. The Court of Appeals determined that Agent had not suffered any “actual prejudice” due to any deficiency in Underwriter’s notice and, therefore, any such deficiency failed to protect Agent from liability. Agent also raised, for the first time, an argument that its liability was contractually limited to $500. Although mentioned in pretrial pleadings, the Colorado Court of Appeals ruled that Agent had failed to properly raise this issue at trial and refused to address it in this opinion. Ultimately, each of the trial court’s findings were upheld by the Court of Appeals.
To read the full text of this case, visit the Colorado Bar Association's website, here.
 2013 WL 2286947 (Colo. Ct. App. 2013)