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Professional liability policy may cover foreclosure fraud

An Ellicott City title company has moved a step closer to recovering more than $100,000 it paid to settle a civil action by the Office of the Maryland Attorney General, which accused it of participating in a scheme to defraud Maryland homeowners facing foreclosure.

Cornerstone Title & Escrow Inc. settled the 2008 action, without admitting liability, after Evanston Insurance Co. refused to provide it with a defense. Evanston claimed there was no possibility the state’s claims would be covered; a federal judge later agreed, citing several exclusions in its professional liability policy.

However, the 4th U.S. Circuit Court of Appeals reversed that ruling last week, saying the exclusions for wrongful disclosures and misrepresentation did not cover all the allegations against Cornerstone, and thus did not remove Evanston’s duty to defend its insured.

The appeals court remanded the case back to U.S. District Court to consider the effect of a different exclusion, dealing with dishonesty and deliberate wrongful acts, which the judge did not address last year.

Not about the money

In granting summary judgment for Evanston last year, U.S. District Judge William M. Nickerson cited policy provisions (n), which excluded coverage for claims alleging illicit “profit or advantage,” and (x), which denied coverage for alleged acts of “conversion.”

Reversing that ruling Wednesday, the 4th Circuit said the attorney general’s allegations did not necessarily involve “profit or advantage” to Cornerstone, nor conversion by the company.

“Put another way: The attorney general could have succeeded on its claims against Cornerstone without showing that Cornerstone received a single dollar or any other advantage, legal or illegal,” Judge G. Steven Agee wrote for the 4th Circuit.

“In fact, many of the claims for which Cornerstone was allegedly jointly and severally liable did not involve money at all, but instead alleged wrongful disclosures and misrepresentations,” Agee added.

“Among other things, the attorney general sought to hold Cornerstone responsible for acts such as failing to make statutory disclosures, recording deeds prematurely, and making misleading statements about the services that the defendants provided. These claims do not arise from theft, conversion, misappropriation, or any of the other acts described in exclusion (x), and consequently require coverage under the policy.”

Unaddressed exclusion

On remand, the remaining question will be Evanston’s unaddressed claim based on policy provision (a), which excludes coverage for claims “arising out of any dishonest, deliberately fraudulent, malicious, willful or knowingly wrongful act or omissions committed by or at the direction of” Cornerstone.

Cornerstone’s lawyer, Stephan Y. Brennan, said Thursday that the (a) exclusion denies coverage for actual intentional or knowing wrongdoing, not mere allegations. Thus, Evanston was contractually bound to provide a defense for Cornerstone, he added.

“The policy covers non-intentional violations … by Cornerstone,” said Brennan, of Iliff, Meredith, Wildberger & Brennan P.C. in Pasadena. “We’re certainly fully prepared to take that up again with Judge Nickerson.”

Evanston’s attorney, Paul N. Farquharson, declined to comment on the case. He is with Semmes, Bowen & Semmes in Baltimore.

Under the alleged scheme, Cornerstone provided settlement services to false foreclosure consultants who convinced 13 troubled homeowners to sell them their homes and rent them back, thus turning the former owners into tenants. The consultants then told the homeowners that the sales checks were consumed by closing fees and related charges, according to the attorney general’s allegations.

Cornerstone allegedly delivered the checks directly to the consultants, deliveries the company never disclosed to the homeowners, in violation of the Maryland Consumer Protection Act. The attorney general’s office alleged that due to its participation in the scheme, Cornerstone was also liable for the consultants’ allegedly fraudulent acts, which violated Maryland’s Protection of Homeowners in Foreclosure Act.

Once they owned the properties, the consultants allegedly charged the old owners a monthly rental fee large enough to drive them out of the homes, ending their promised opportunity to repurchase the properties.

Faced with the attorney general’s allegations, Cornerstone asked Evanston in vain to provide a legal defense. It settled with the state in September 2009 and later sought indemnification for the $100,100 payment.

Cornerstone filed suit against Evanston in U.S. District Court on March 9, 2012, seeking compensation for the cost of hiring counsel to fight the allegations, the $100,100 settlement and consequential damages.

The federal court ruled for Evanston in January 2013, and Cornerstone filed the appeal decided Wednesday.

Judges Henry F. Floyd and Stephanie D. Thacker joined Agee’s unpublished opinion in the case, Cornerstone Title & Escrow Inc. v. Evanston Insurance Co., US4th No. 13-1318.


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