Late last month, in LEM2Q v. Guaranty National Title, 2016 Pa. Super. LEXIS 413 (July 28, 2016), the Superior Court of Pennsylvania found that a title insurance company had no duty to disclose to a lender about unrecorded loan documents which the title insurance company knew the existence of while serving as a closing escrow agent for the new loan transaction.
In the spring of 2007, C&V Investments loaned funds to Russell M. Meusy II, a real estate investor, and some of his companies in order to facilitate the purchase of a 234-unit property located in Reno, Nevada, the opinion said. For some unknown reason, C&V did not protect its interest as a creditor by requiring the recording of a mortgage against the property. Guaranty National Title Co. served as the closing agent for this loan transaction, the opinion said.
After closing took place, Meusy, by way of an unrelated company which had a separate ownership interest in the property, sought additional funding through a mezzanine loan from a lender collectively known as LEM, the opinion said. Soon thereafter, LEM invested $3 million in that company, the opinion said. Guaranty performed the duties of escrow agent and closing officer to the $3 million mezzanine loan, the opinion said. During the closing, Guaranty did not disclose about the existence of C&V’s prior unrecorded loans to Meusy and his other companies, the opinion said.
Shortly thereafter, Meusy and his other companies defaulted on all their obligations, including payments on the C&V loans and the mezzanine loan provided by LEM, the opinion said.
After that happened, LEM commenced a lawsuit against Guaranty, among others, in the Philadelphia Court of Common Pleas. In the lawsuit, LEM asserted that Guaranty, as the escrow agent to the mezzanine loan transaction, had a duty to disclose to LEM the existence of the unrecorded C&V loans. According to LEM, “if it had been informed of the existence of the C&V loans, which it characterizes as ‘usurious,’ it would have deemed an investment in the mezzanine loan transaction too risky to pursue” and “would not have agreed to fund the mezzanine loan transaction and would not have suffered the loss of its investment.”
The trial court eventually entered summary judgment in favor of Guaranty and against LEM, finding that Guaranty had no affirmative duty, under various contract and tort theories, to disclose to LEM about the existence of the unrecorded C&V loans.
LEM then appealed the trial court’s ruling to the Superior Court.
The Superior Court first addressed LEM’s core assertion on appeal that Guaranty had a duty to disclose to LEM the existence of the unrecorded C&V loans.
Agreeing with the trial court, the Superior Court concluded that Guaranty had no contractual duty to disclose the existence of the unrecorded C&V loans. In doing so, the Superior Court pointed out that the parties’ closing escrow agreement provides that Guaranty’s duties thereunder are purely administrative and no additional obligations are implied by the terms and conditions thereof and that nothing within it could be construed to affirmatively require Guaranty to disclose unrecorded loans encumbering the property as well as Meusy and his related companies.
The Superior Court also agreed with the trial court’s determination that no duty of disclosure arose in tort under the circumstances.
Citing to Sewak v. Lockhart, 699 A.2d 755 (Pa. Super. 1997) and Wilson v. Donegal Mutual Insurance, 598 A.2d 1310 (Pa. Super. 1991), the Superior Court emphasized that “where no affirmative duty of disclosure is owed, mere silence does not constitute fraud.”
Quoting its previous ruling in Janson v. Cozen & O’Connor, 676 A.2d 242 (Pa. Super. 1996), the Superior Court in LEM2Q, LLC noted that “the escrow agent under an escrow agreement is generally considered to be an agent (or trustee) for both parties—a special agency whose authority must be strictly construed, and who is bound by the terms of the escrow agreement.”
According to the Superior Court in LEM2Q, LLC, “the closing escrow agreement states that Guaranty’s duties as escrow agent “are only as herein specifically provided, and are purely ministerial in nature. … This agreement sets forth all the obligations of [Guaranty] with respect to any and all matters pertinent to the escrow contemplated hereunder and no additional obligations of [Guaranty] shall be implied.” Furthermore, the Superior Court in LEM2Q, LLC emphasized that the closing escrow agreement specifically “indicated that only items of record were to be disclosed” and, “thus, Guaranty complied with respect to the plain meaning of the escrow agreement regarding required disclosure.”
Relying upon this clear and unambiguous language contained in the closing escrow agreement, the Superior Court in LEM2Q, LLC, held that “Guaranty did not and could not owe any other duties to LEM.”
The Superior Court was also unpersuaded by LEM’s argument that Guaranty had a duty arising in tort to disclose the existence of the C&V loans.
This argument is presented as a fraudulent inducement claim based upon duties outlined in the Restatement (First) of Torts Section 529 and Restatement (Second) of Torts Sections 550 and 551.
Section 529 provides that “a statement in a business transaction which, while stating the truth so far as it goes, the maker knows or believes to be materially misleading because of his failure to state qualifying matter is a fraudulent misrepresenting.
Section 550, which is entitled ‘Liability for Fraudulent Concealment’, provides that “one party to a transaction who by concealment or other action intentionally prevents the other from acquiring material information is subject to the same liability to the other, for pecuniary loss as though he had stated the nonexistence of the matter that the other was thus prevented from discovering.”
Section 551, which is entitled ‘Liability for Nondisclosure’, provides “one who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question.” Under Section 551, “one party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated: matters known to him that the other is entitled to know because of a fiduciary or other similar relation of trust and confidence between them; and matters known to him that he knows to be necessary to prevent his partial or ambiguous statement of the facts from being misleading; and subsequently acquired information that he knows will make untrue or misleading a previous representation that when made was true or believed to be so; and the falsity of a representation not made with the expectation that it would be acted upon, if he subsequently learns that the other is about to act in reliance upon it in a transaction with him; and facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.”
The Superior Court pointed out that it had applied fraud claims premised upon Sections 550 and 551 in Youndt v. First National Bank of Port Allegany, 868 A.2d 539 (Pa. Super. 2005).
Citing to the Superior Court’s ruling in Youndt, “a fraudulent inducement claim asserts that ‘representations were fraudulently made and that but for them the party would never have entered into the agreement.”
The Superior Court in LEM2Q, LLC “noted that in a transaction involving an escrow, two separate contracts are consummated”, in that “the parties agree to the terms of the underlying contract” and then “because they have agreed to the underlying contract, they enter into a separate agreement with the escrow agent.”
In other words, the Superior Court in LEM2Q, LLC emphasized that “the escrow agreement is ‘entirely separate’ from the underlying contract.” The Superior Court in LEM2Q, LLC indicated that “LEM’s decision to invest $3 million in mezzanine loan funds … which constitutes the “underlying contract” in this matter, was made independently from Guaranty.”
Because LEM agreed to the underlying contract without Guaranty’s input, the Superior Court reasoned that “it cannot be said that LEM would not have done so ‘but for’ representations or omissions made by Guaranty.”
Furthermore, according to the Superior Court in LEM2Q, LLC, none of the duties set forth in the Restatement in which LEM relies upon could have been triggered with regard to the mezzanine loan transaction, since Guaranty was not a party to the transaction, as these duties to disclose or provide complete information apply only in the context of a business transaction between the parties.
In contrast, the Superior Court emphasized that “Guaranty was a party only to the escrow and thus had no duties toward LEM in the mezzanine loan transaction. In the separate escrow agreement contract, to which Guaranty was a party, the agreement itself conclusively sets forth Guaranty’s duties and must be strictly construed.”
As a result, the Superior Court found that Guaranty had no duty to disclose the C&V loans under the tort claims as well.
Reprinted with permission from the August 9, 2016 edition of The Legal Intelligencer © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.