Opinion ID: 8414601
Heading Depth: 2
Heading Rank: 2

Heading: Underlying Complaints and Procedural History

Text: In the fall of 2008, Chicago Abstract was underwater and failing fast. Records were out of order. Transactions were askew. Employees were unsupervised. Most alarming, an outside audit uncovered a significant shortfall in the agency’s escrow account. In this unfolding crisis, without the benefit of a comprehensive investigation and with only a hazy understanding of the facts, First American and two lenders that had done business with Chicago Abstract sought help in court. On November 5, 2008, First American sued Chicago Abstract and its two members, Michael Rons and Steve Knupp, in the Circuit Court of Cook County. First American alleged that Chicago Abstract had facilitated escrow closings for “irregular and suspicious” real estate “flip” transactions using First American’s insurance policies and closing protection letters. A “flip” or A-B-C transaction involves an investor (B) who buys discounted property from a defaulting homeowner or foreclosing lender (A) using a short-term unsecured loan and then immediately “flips” the property by selling to a third-party buyer (C) for a higher price. Assuming both sides of the transaction close, the investor (B) pays off the short-term loan and pockets the profits. First American’s complaint accused Chicago Abstract of executing “flip” transactions “contrary to the spirit and purpose” of its agency contract. First American added that Chicago Abstract was not maintaining proper documentation; that Chicago Abstract had commingled escrow funds belonging to property owners, investors, and lenders; and that Chicago Abstract may have misappropriated some of those funds. First American sought emergency injunctive relief, up to and including appointment of a receiver, as well as damages for breach of contract. Several weeks later, 1st Funding Source, LLC, a private capital firm, intervened in the First American action. 1st Funding had agreed to finance the A-B side of four “flip” transactions for which Chicago Abstract served as title agent. For each transaction, Chicago Abstract was authorized to disburse the short-term loan proceeds only on condition that both sides (A-B and B-C) had irrevocably closed. Chicago Abstract allegedly breached its agreement with 1st Funding by disbursing the proceeds before ensuring that the B-C transaction closed. 1st Funding pled counts for breach of contract, breach of fiduciary duty, and negligence. Finally, on Christmas Eve 2008 — less than two months after First American filed suit — Coastal Funding brought a separate action in the Circuit Court of Cook County against Chicago Abstract, First American, and a person named Donnel Thomas (elsewhere spelled “Donell”). Like 1st Funding, Coastal Funding had supplied short-term financing for “flip” transactions for which Chicago Abstract served as title agent. Back in October 2008, Coastal Funding had wired $1,370,000 into Chicago Abstract’s general escrow account with the expectation that the funds would be segregated in a fiduciary trust account. According to Coastal Funding, Chicago Abstract breached its fiduciary duty and committed the tort of conversion by “misappropriating” those funds. Coastal Funding also alleged that Donnel Thomas duped it into participating in a Ponzi scheme using Chicago Abstract’s services and that the “flip” transactions — which it had believed were lawful and legitimate — were mere stages of the scheme. Chicago Abstract tendered the three underlying complaints to TIAC “for defense and indemnification” on February 3, 2009. On July 8, 2009, Chicago Abstract, operating by then under receivership, notified TIAC of two potential claims by First American for missing escrow funds. In letters dated July 31 and August 13, 2009, TIAC denied coverage for the underlying suits and the potential claims. The denial letters cited policy exclusions (a) and (j) and asserted that the policy did not cover the remedies that the state court plaintiffs sought. TIAC reiterated its coverage position without explanation in a letter dated August 12, 2011. The state-court litigation proceeded without TIAC’s involvement. In 2011, the state court entered two orders granting default judgment against Chicago Abstract on six counts of Coastal Funding’s then-controlling complaint. In 2013, First American and 1st Funding reached a settlement agreement that had the effect of resolving 1st Funding’s claims against Chicago Abstract. First American has not settled with Chicago Abstract. In 2014, Coastal Funding filed its fourth amended complaint in state court. 1 Chicago Abstract defaulted. Shortly after that, in an about-face, TIAC appointed counsel to defend Chicago Abstract in the Coastal Funding action. The state court then entered an order vacating the default, though the parties dispute whether that order also vacated the prior default judgments. (That’s a question for the state courts; we do not consider it here.) Around the same time that it began defending in state court, TIAC filed this action for a declaration of non-coverage on the bases of exclusions (a) and (j), as well as a third defense no longer at issue. Claimants First American and Coastal Funding appeared as defendants in the federal action. Coastal Funding filed a counterclaim seeking a declaration that TIAC breached its duty to defend Chicago Abstract. On the parties’ cross-motions for summary judgment, the district court granted judgment in favor of the Claimants, finding TIAC in breach and holding that TIAC is estopped from asserting any defenses to coverage. Title Industry As surance Co. v. Chicago Abstract Title Agency, No. 14 C 1906, 2015 WL 5675544, at -7 (N.D. Ill. Sept. 24, 2015). This appeal followed.