Federal Deposit Insurance Corporation v. Fidelity National Title Insurance Company, 2:14-cv-13706

Background

FDIC, as receiver for Washington Mutual Bank (WaMu), sued Fidelity National Title (successor to Lawyers Title) for failing to indemnify WaMu under 24 Closing Protection Letters (CPLs) issued for 2007 mortgage closings.
The loans were part of a straw-buyer/fraud scheme run by broker Firas Bachi; Metro-West Title Agency (a Lawyers Title issuing agent) handled closings and allegedly prepared false HUD-1 statements.
CPLs at issue indemnify WaMu for losses arising from (1) the issuing agent’s failure to follow written closing instructions and (2) fraud or dishonesty of the issuing agent in handling funds/documents; CPLs contain some exclusions but say nothing about lender underwriting standards.
Fidelity counterclaimed for rescission and declaratory relief, arguing WaMu’s failure to follow “objectively reasonable underwriting standards” (and gross negligence) voids or limits CPL coverage; it also asserted related affirmative defenses.
FDIC moved to dismiss those counterclaims/defenses; Fidelity moved for summary judgment on FDIC’s claims asserting untimely notice and prejudice from delay. Court heard argument and ruled.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Validity of rescission claim based on WaMu’s underwriting negligence	CPLs govern; WaMu’s underwriting is irrelevant to CPL coverage and cannot support rescission	CPL issuance was induced by WaMu’s implicit promise to use reasonable underwriting; gross negligence precludes recovery	Rescission claim dismissed: underwriting standards are not material to CPLs as written; negligence does not defeat indemnity here
Viability of affirmative defenses premised on WaMu negligence (estoppel, assumption of risk, ratification, in pari delicto, causation, bad faith)	These defenses are not applicable because CPLs indemnify WaMu for agent misconduct regardless of WaMu’s underwriting misconduct	Defenses should survive because WaMu’s conduct contributed to the loss	Defenses based on WaMu negligence dismissed; defenses not based on negligence (laches, waiver) left intact pending further development
Declaratory judgment counterclaim duplicative or premised on negligence	Declaratory relief is appropriate to define parties’ rights	DJ claim merely duplicates defenses or rests on contributory negligence theory	Declaratory judgment claim dismissed as duplicative/superfluous or based on invalid theory
Fidelity’s summary judgment: CPLs barred by lack of prompt notice / prejudice from delay	FDIC failed to give timely notice (loans closed in 2007; claim made in 2014) and Fidelity was prejudiced by lost records	FDIC promptly presented claim after learning facts at agent’s deposition (Sept. 22, 2014) and sent claim letter that day; Fidelity failed to show it was entitled to summary judgment	Fidelity’s summary judgment denied: it did not carry burden to show untimeliness or prejudice; court refused to consider a new laches argument raised in reply

Key Cases Cited

Fifth Third Mortg. Co. v. Chicago Title Ins. Co., 758 F. Supp. 2d 476 (S.D. Ohio 2010) (underwriting obligations not part of CPL/policy where policy is silent)
JPMorgan Chase Bank, N.A. v. First Am. Title Ins. Co., 795 F. Supp. 2d 624 (E.D. Mich. 2011) (lender negligence irrelevant to title insurer’s indemnification obligations under CPL)
Fifth Third Mortg. Co. v. Chicago Title Ins. Co., 692 F.3d 507 (6th Cir. 2012) (appellate treatment affirming district court’s approach)
Klann v. Hess Cartage Co., 50 Mich. App. 703 (Mich. Ct. App. 1973) (general rule: contracts cannot disclaim liability for gross negligence in some contexts)
Custom Data Solutions, Inc. v. Preferred Capital, Inc., 274 Mich. App. 239 (Mich. Ct. App. 2006) (elements required to rescind a contract for fraudulent inducement)
Bituminous Cas. Corp. v. J & L Lumber Co., 373 F.3d 807 (6th Cir. 2004) (declaratory judgment should not duplicate defenses or counterclaims)