From the September, 2003 issue of The Title Insurance Law Newsletter
When the lender instructed the escrowee that its mortgage was to be a first lien, but the title company not related to the escrowee missed two mortgages in the gap, the escrowee was liable to the lender for the full amount of the mortgage loan it closed. The court said the closer had no right to delegate the job of searching title.
Progressive Closing & Escrow, Inc. was hired by Old West Annuity and Life Insurance Company to close a $357,500 loan on a forty-acre parcel in Oklahoma. Progressive hired an independent abstractor to do a gap search before closing. The abstractor missed two mortgages recorded just before Old West's loan closed. Old West foreclosed, but got nothing from the property, because there was no equity. Old West sued Progressive in federal court for the amount of its loan. The trial court gave judgment to Old West for its loan balance. The Tenth Circuit Court of Appeals affirmed.
Old West's escrow instructions contained this rather standard condition:
You are authorized to disburse funds on the Borrower's behalf and to record all instruments when you comply with the following:
*This loan must record in a 1st lien position prior to the Loan Commitment expiration date.
The court found that this created a clear duty not to close the loan unless Old West was guaranteed a first lien position.
Progressive argued that the fault lay with the abstractor, not itself as closer:
Progressive contends it was relieved of its duty to perform under the contract because a supervening event made performance impracticable, namely, a competing lien was filed before Old West's was recorded.
Progressive further argues this supervening event occurred through no fault of its own because the third party abstractor informed it that title was clean.
The court disagreed. It was skeptical about whether or not Progressive even called the abstractor for a title update. It noted that the abstractor testified that it does not give the kind of oral update that Progressive claims it received, and that Progressive did not pay a fee for such a search.
In any event, the court said, Progressive could not get off the hook if the abstractor made a mistake.
[T]he risk of a competing lien was precisely the type of foreseeable event contemplated by the parties, and precisely why Old West instructed Progressive not to close or fund the loan unless Old West's loan would be recorded in a first lien position.
Progressive's argument that it is not at fault because it received a verbal report of a clean gap search from a third party abstractor is also unavailing. Ordinary principles of contract law recognize that an obligor cannot free itself of contractually created duties by delegating them to another, without the consent of the persons to whom it is obligated.
Old West did not consent to any delegation of Progressive's obligations under the contract to the third-party abstractor. Progressive's argument that it did not assume a duty to perform a gap search is disingenuous. It agreed under the contract to provide a title insurance commitment, and acknowledged it was required by the title commitment to perform a gap search.
More to the point, it assumed a duty not to close or fund the loan unless the first lien position condition was met, and it failed in that duty. In short, the district court correctly ruled that Progressive breached its contract as a matter of law.
The final issue was the amount of Old West's damages. The trial court held Progressive liable for the entire loan balance. The appeals court agreed.
Progressive breached the contract by funding the loan when it had not met the pre-conditions for doing so. Returning those funds to Old West most directly compensates it for the damages proximately caused by the loss of those funds.
This decision puts a spotlight on the "first lien" instruction, perhaps for the first time. The opinion might have been tolerable for real-life escrow businesses if the Tenth Circuit had simply ruled that Progressive was negligent by failing to get an update of title. Since the court did not pin its decision to that finding, the decision is too broad. It suggests that an escrowee has strict liability for a third party abstractor's failure to discover a recorded lien. Further, the decision does not come to grips with what liability the escrowee should have for a priming lien that is hidden in the recording gap. All in all, it is fortunate that this decision is not published.
Old West Annuity and Life Ins. Co. v. Progressive Closing & Escrows, Inc., 2003 WL 21872555 (10th Cir.) (unpublished).
