OPINION
This matter arises out of a mortgage fraud scheme that took place between April 1996 and June 1997. In the roughly fifteen years since the scheme — which involved multiple lawsuits and indictments— no one has quite gotten to the bottom of it. What remains are claims asserted by Plaintiff Walsh Securities, Inc. (“WSI”) against Defendants Commonwealth Land Title Insurance Company (“Commonwealth”), Fidelity National Title Insurance Co. of New York (“Fidelity”), and Nations Title Insurance of New York (“Nations”) (collectively referred to as “the Title Insurers”) for breach of contract, bad faith, and compensatory damages.
WSI now moves for summary judgment in its favor on certain claims for breach of contract. In addition, the Title Insurers move for summary judgment in their favor on a number of WSI’s claims for breach of contract, as well as on its claim for bad faith and portions of its claim for compensatory damages. For the reasons set forth below, WSI’s motion is DENIED, and the Title Insurers’ motion is DENIED with respect to WSI’s claims for breach of contract and compensatory damages, but GRANTED with respect to WSI’s claim for bad faith.
I. BACKGROUND
WSI was a wholesale residential mortgage lender in the business of, among other things, purchasing subprime retail
In this case, WSI, as the mortgage loan wholesaler, purchased mortgage loans from a correspondent known as National Home Funding (“NHF”) by funding them at the time of their closing — a process called table funding. To table fund these mortgage loans, WSI drew on a $200 million warehouse line of credit with Greenwich Capital Markets, Inc. (“Greenwich Capital”). WSI then sold the mortgage loans to entities called whole loan purchasers, such as The Money Store and Cityscape Financial, or to a Trust on behalf of note holders in securities issued by WSI. WSI’s sale of mortgage loans included representations and warranties requiring WSI to repurchase all loans found to be unmarketable or fraudulent.
A. The Mortgage Loans
This case involves approximately two hundred and twenty mortgage' loans that WSI table funded between April 1996 and June 5, 1997. A relevant loan transaction begins with a licensed mortgage broker accepting a loan application from a consumer that wants to purchase real property (the “borrower”). The mortgage broker would gather all necessary documentation to obtain the loan and order an appraisal of the subject property by a licensed appraiser to determine its fair market value. The mortgage broker would then forward the loan package to WSI. If WSI was satisfied with the package, it would issue a commitment for the loan to the broker and begin preparing the loan documents.
At this point, WSI’s closing department would issue closing instructions and transfer the loan funds to the escrow account of a closing attorney on the day of the closing, or shortly before that time. The closing attorney would have to certify that it had complied with WSI’s closing instructions before releasing WSI’s funds from his or her escrow account.
WSI’s closing instructions required, among other things, (1) “[t]wo forms of acceptable identification from all borrowers;” (2) that “[n]o ... documents be executed by Power of Attorney unless authorized by Walsh Securities, Inc.;” (8) that the mortgage loan be recorded “in the First Lien position;” (4) that a full ALTA title policy be issued; and (5) that “[pjrior to disbursement [the closing attorney] must FAX HUD-1
B. The Title Policies
Prior to the closing, WSI would take out a title insurance policy
WSI took out the title insurance policies in the following manner. First, WSI submitted a request for a title commitment to Coastal or Monmouth for a particular property. Upon receiving the request, Coastal or Monmouth was required to investigate and evaluate issues regarding title to, and judgments, taxes, and assessments on the property. All potential encumbrances and title defects were noted in the title commitment so that they could be rectified before the closing. After the closing, the closing attorney submitted documents indicating that there were no encumbrances on, or title defects in, the subject property, such as recorded deeds and mortgages, affidavits of title, and satisfaction of liens. Upon submission of these documents, Monmouth or Coastal issued a title insurance policy on behalf of the title insurer to WSI describing the insured property, insuring that the property was vested in fee simple in the buyer’s name, and that the insured mortgage loan was recorded as a valid first lien on the property in the mortgage book of the county clerk’s office. See (Magnanini, Ex. A.)
As such, the title policies at issue in this case insure, in pertinent part, against losses arising from:
1. Title to the estate or interest described [in the policy] being vested other than as stated therein;
2. Any defect in or lien or encumbrance on the title;
3. Unmarketability of the title;
* * *
5. The invalidity or unenforceability of the lien of the insured mortgage upon the title;
(Hayes Cert., Ex. E.)
The policies exclude, among other things, “Defects, liens, encumbrances, adverse claims or other matters: (a) created, suffered, assumed, or agreed to by the insured claimant” (“Exclusion 3(a)”). (Id.)
The policies also provide the following: The insured shall notify the [insurer] promptly in writing ... (ii) in case knowledge shall come to an insured hereunder of any claim of title or interest which is adverse to the title to the estate or the lien of the insured mortgage, as insured, and which might cause loss or damage for which the [insurer] may be liable by virtue of this policy or (iii) if title to the estate or interest or the lien of the insured mortgage, as insured, is rejected as unmarketable. If Prompt notice shall not be give to the [insurer], then as to the insured all liability of the [insurer] shall terminate with regard to the matter or matters for which prompt notice is required.
Upon written request by the insured and subject to the [limitations of the title policy] ... [the insurer], at its own cost and without unreasonable delay, shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien, or encumbrance or other matter insured against by this policy....
The [insurer] shall have the right, at its own cost, to institute and prosecute any action or proceeding or to do any other act which in its opinion may be necessary or desirable to establish the title to the estate or interest, as insured, or to prevent or reduce loss or damage to the insured. The [insurer] may take any appropriate action under the terms of this title policy, whether or not it shall be liable hereunder, and shall not thereby concede liability or waive any provision of this policy.
(Id.)
C. The Closing Service Protection Letters
In conjunction with each title policy, Coastal or Monmouth issued WSI a Closing Service Protection Letter (“CPL”) — an agreement to indemnify a lender for a closing attorney’s malfeasance or failure to comply with the WSI’s closing instructions — in NHF’s name on behalf of the title insurer. The CPL provides coverage for “actual loss incurred ... in connection with” the closing of the mortgage “when conducted by the ... above named Attorney and when such loss arises out of:”
1. Failure of the ... Attorney to comply with your written closing instructions to the extent that they relate to: (a) the title to said interest in land or the validity, enforceability and priority of the lien of said mortgage on said interest in land including the obtaining of documents and disbursements or funds necessary to establish such title or lien; or (b) the collection and payment of funds due you; or
2. Fraud or misapplication by the ... Attorney in handling your funds in connection with the matters set forth in numbered paragraph 1 above.
(Magnanini Cert., Ex. A.) The CPL incorporates all the terms and conditions of the corresponding title policy. See (id.) In addition, it states: “THIS LETTER DOES NOT APPOINT THE ABOVE
The closing attorney named in a given CPL is known as an Approved Attorney-i.e. an attorney chosen by the title insurer that does not have a disciplinary record with the bar or “a negative claims history or lack of cooperation.” (Magnanini Cert., Ex. B at 83:5-20.) Stanley Yacker, Esq. and Anthony M. Cicalese, Esq. were Approved Attorneys chosen by the Title Insurers to close the mortgage loans that are the subject of this case. As such, they were the named attorneys in the CPLs.
D. The Fraud
In contrast to the typical mortgage loan transaction described above, the two hundred and twenty mortgage loans in this case fell victim to a mortgage fraud scheme. According to WSI, the fraudulent scheme was carried out in the following manner. William Kane, an employee of NHF and the mastermind of the scheme, would purchase a piece of property in a low income area through a company that he owned, such as Cristo Property Management, Inc. (“Cristo”) or Oakwood Properties and sell it — oftentimes before having title to it — for a significantly inflated value. In doing so, Mr. Kane’s co-conspirators would locate a straw buyer and arrange for the property to be appraised at an inflated value.
At that point, Mr. Kane’s company would prepare a mortgage loan application for the straw buyer and submit it to WSI. The application would contain a number of false items of information to ensure that WSI would approve the loan, including (1) an inflated appraisal value, (2) escrow letters stating that the buyer had made a down payment, (3) indication of a second mortgage on the property
At the closing, WSI would transfer the loan proceeds to Mr. Yacker or Mr. Cicalese’s
In deposition and elsewhere, Mr. Yack-er, Mr. Cicalese, and Ms. King admitted to their knowledge and participation in the fraudulent scheme. In deposition, Mr. Yacker admitted that the closings he performed for Mr. Kane were “typically [] double closing[s]” in that “there was a
They testified that oftentimes (1) the straw buyers were not present for the closings; (2) closings were conducted without ever meeting or seeing the straw buyer; (3) a co-conspirator would sign loan documents on behalf of the straw buyer; (4) the closing documents were falsely notarized or forged; (5) Mr. Kane himself would fill out loan applications; (6) closing documents were purposefully not recorded
Furthermore, Mr. Yacker admitted to, among other things, (1) devising the aforementioned Joint Venture Deeds; (2) delegating nearly all closing responsibilities to Ms. King; and (3) allowing his attorney trust account to be controlled by Mr. Kane and Ms. King, who dispersed WSI’s funds among various co-conspirators pursuant to Mr. Kane’s instructions. Both Mr. Yacker and Mr. Cicalese admitted that the HUD-1 Settlement Statements supplied in accordance with WSI’s closing instructions contained false information regarding (1) who prepared and signed those documents, (2) the existence of second mortgages, and (3) the disbursement of loan proceeds. Ms. King testified that both Mr. Yacker and Mr. Cicalese knew that, on many occasions, Cristo sold properties it had yet to purchase, and the proceeds from those sales were used to purchase the properties.
A number of properties subject to the fraudulent scheme were designated as rental properties. Thus, to keep the scheme going, Capital Assets made mortgage and other payments from rent proceeds. However, many of those properties were never renovated to serve as rentals. Thus, Capital Assets also made payments on older mortgage loans using proceeds from newly closed mortgage loans.
To further facilitate the scheme, Mr. Kane asked Robert Agel, the owner of Coastal, to ensure that WSI, for its own benefit, was provided with title commitments indicating that there were no outstanding issues regarding title to the properties or the validity of the mortgage liens. Mr. Agel ultimately discovered that Mr. Kane was selling properties before his company purchased them, but nonetheless continued to issue fraudulent title commitments and did not inform WSI of the fraud. In addition, Coastal accepted
E. Issuance of the Title Policies, Title Commitments, and CPLs During the Time of the Fraud
WSI sets forth a timeline of the fraudulent scheme with respect to three properties
On October 14, 1996, Coastal issued two different title commitments on 1507 Summerfield Avenue, Asbury Park, New Jersey, on behalf of Commonwealth, for two different purchasers. These commitments maintained virtually identical file numbers: CT-18721 and CT-18721(A). CT-18721 was issued to Cristo, while on the same day, CT-18721(A) was issued to Pamela Ricigliano, a straw buyer, and NHF, its successors, and assigns. CT-18721 identifies The Secretary of Housing and Urban Development as the fee simple owner of 1507 Summerfield Avenue as of October 14, 1996, while CT-1872RA) identified Cristo as the fee simple owner of the property as of the same day. Moreover, CT-18721 stated that what was required to create an insurable interest in 1507 Summerfield Avenue was a deed from the Secretary of Housing and Urban Development to Cristo, while CT-18721(A) required a deed from Cristo to the straw buyer and a mortgage by the straw buyer. Thus, it is clear Cristo did not own 1507 Summerfield Avenue as of October 14, 1996 — the date of the title commitment.
On October 30, 1996, Coastal issued a CPL on 1507 Summerfield Avenue. On November 25, 1996, the owner
On December 27, 1996, Mr. Yacker prepared a deed under which Ms. Ricigliano gave Capital Assets a sixty percent interest in 1507 Summerfield Avenue. On April 9, 1997, Coastal recorded that deed and intentionally failed to record the mortgage beforehand, so that the mortgage could not be recorded in the first lien position on the property. That same day, Commonwealth issued a title policy stating
With respect twenty-one properties, WSI submits copies of (1) a deed from the owner of the property to Cristo; (2) a deed from Cristo to a straw buyer for a vastly inflated amount; (3) a portion of a title commitment on the property issued by Coastal; (4) a Joint Venture Deed between the straw buyer and Capital Assets prepared by either Mr. Yacker, Mr. Cicalese, or Ms. King; and (5) a mortgage loan for the property from NHF to the straw buyer — for an amount far greater than the value of the property — that was recorded either concurrently or shortly after the Joint Venture Deed. See (Wagner Cert., Ex. 10(A)-(U).)
F. NHF’s Knowledge of and Participation in the Fraud
The Title Insurers present undisputed evidence of NHF’s knowledge of, and participation in the fraudulent scheme. Specifically, Mr. Kane, an employee of NHF, testified that Robert Skowrenski, II, NHF’s owner, had full knowledge of the fraudulent scheme and participated in it to his benefit. In addition, WSI details NHF’s involvement in the scheme in its proof of loss statement submitted to its fidelity insurer in support of a claim for coverage for losses arising out of NHF’s involvement in the fraudulent scheme.
G. WSI’s Knowledge of and/or Participation in the Fraud
The Title Insurers present a mountain of evidence to suggest that Robert Walsh and James Walsh knew about the aforementioned fraud and even participated in it. Specifically, they present (1) testimony from Kellie O’Neill, a loan processer at WSI who participated in the fraud, and Richard DiBenedetto, an appraiser for Cristo who participated in the fraud, among others, indicating their belief that Robert and James Walsh were aware of and participated in the fraud; (2) testimony and other evidence that Betty Ann DeMola, Robert and James Walsh’s sister and an employee of WSI, and Anthony D’Apolito, a WSI employee who worked with Ms. DeMola, participated in the fraud; and (3) testimony that, upon discovering the circumstances under which WSI had been table funding mortgage loans, Robert Walsh denied that WSI was engaged in fraud.
The title insurers also submit a January 6, 1997 letter from Don Lawson of Greenwich Capital, addressed to Robert Walsh, alerting him of seventeen mortgage loans that Mr. Lawson believed to be fraudulent. See (Merin Cert., Ex. S.) The letter states (1) that those loans involved “[a]ppraisals substantially overstating the property condition or failing to report items which negatively impact value” and that “Appraisers are not noting improvements or reasons for valuation increases versus recent sales”; (2) the loans were the subject of “[concurrent property sales (e.g. flips)” and “unseasoned refinancing with large valuation increases;” (3) that “inaccurate, or possibly fraudulent documentation ... frequently masks the actual nature of a loan transaction;” and (4) that after the loans were closed, “certain types of documentation problems, closing agent performance problems, and borrower and/or broker misrepresentation and possibly fraud are occurring.” (Id.)
On January 31, 1997, WSI issued a Quality Control Memorandum — which was copied to Robert and James Walsh— regarding the loans that Mr. Lawson found troubling. See (Merin Cert., Ex. U.) The memo states that Veronica R. Gonzalez-Lehman of WSI’s Quality Control Department met with Mr. Lawson on
The Title Insurers further submit testimony that, upon receiving notice that certain mortgage loans were going to be audited by Greenwich Capital, Ms. DeMola orchestrated a mass cleansing of WSI’s flies regarding those loans. Ms. O’Neill, who participated in the cleansing, testified that Robert Walsh was, at times, present in a conference room where it was taking place. In addition, Ms. DeMola organized a campaign to make properties that were being audited by Greenwich Capital appear as if they were being lived in, even though they were unoccupied.
H. WSI’s Claims for Coverage
On July 28, 1997, WSI put Commonwealth on notice of coverage claims for one hundred and thirteen mortgage loans under the CPLs. (Merin Cert., Ex. F.) On August 12, 1997, Commonwealth issued a letter stating that it was “unable to assess [WSI’s] claim as [its] letter does not provide any detail about how the closing attorneys violated the closing instructions, how such violations caused a loss to [WSI] or the amount of the loss.” (Merin Cert., Ex. G.) The letter further stated that Commonwealth would respond to WSI’s claims upon receipt of this information. (Id.) On September 5, 1997, WSI sent a letter to Commonwealth setting forth the general nature of the fraudulent scheme that was facilitated by Mr. Yacker and Mr. Cicalese. See (Merin Cert., Ex. H.) On September 29, 1997, Commonwealth sent a letter to WSI stating that in order to process WSI’s claim, it needed information regarding WSI employees’ knowledge of, and participation in, the fraudulent scheme giving rise to WSI’s claims under the CPLs. See (Merin Cert., Ex. I.) WSI never provided this information and instead, as discussed below, sued the Title Insurers for coverage under the CPLs.
I. WSI’s Losses from the Fraud
i. Litigation and Repurchasing of Fraudulent Loans
The fraudulent mortgage loans at issue in this case were sold and purchased by whole loan purchasers, such as the Money Store and Cityscape Financial, pursuant to agreements requiring WSI to repurchase all loans found to be fraudulent. Consequently, WSI repurchased many of these loans.
At some point after the fraud was revealed, a number of plaintiff straw buyers sued Cristo, NHF, Capital Assets, and various Monmouth County clerks for rescission and cancellation of certain fraudulent mortgages that were table funded by WSI. On February 5, 1999, the Chancery Division of the New Jersey Superior Court, Monmouth County, entered an Order granting summary judgment and default judgment in favor of the plaintiffs’ claims, resulting in the rescission and cancellation of documents relating to thirty-two mortgages.
In addition, Cityscape brought an action against WSI in the Southern District of New York for damages arising from WSI’s refusal to repurchase a number of fraudulent mortgage loans pursuant to a Master Agreement for Sale and Purchase of Mortgages. See (Wagner Cert., Ex. 13.) On June 8, 2000, the court, among other things, granted a motion for partial summary judgment submitted by Cityscape with respect to thirty-two of those loans. See (Id.) On October 20, 2000, the court awarded Cityscape $4,732,568.93 in damages for WSI’s failure to repurchase those loans.
ii. Loss of Merger and Diminution in Value
In 1997, WSI and Resource Bancshares Mortgage Group (“RBMG”) were in discussions regarding a merger between the two companies. On April 18, 1997, Walsh Holding Co., Inc. (“Walsh Holding”), Robert Walsh, and RBMG entered into a merger agreement. See (Merin Cert., Ex. D.) According to the agreement, Walsh Holding would merge with a RBMG merger subsidiary, rendering Walsh Holding the surviving corporation, although it would be renamed BCA.
The merger was revealed in the press on April 21, 1997. See (Shooman Cert., Ex. 7.) According to one article, BCA “will be among the nation’s largest full-service correspondent mortgage lenders, combining RBMG’s strong national presence in the agency — eligible segment of the mortgage marketplace with Walsh’s position as a leading originator in the subprime and home equity market.” (Id.) “Indeed, [t]he combination of RBMG’s 3,200 and Walsh’s I, 500 approved account relationships will create a unique and powerful full-service mortgage lender.” (Id.) However, both RBMG and Walsh Holding “will maintain their separate corporate identities for marketing purposes.” (Id.)
On November 3, 1997, after the fraud became public, WSI and RBMG agreed to terminate the merger due to the fraud and WSI’s inability to repurchase all the fraudulent mortgage loans that it transferred to the secondary market, which rendered WSI unable to produce accurate financial statements for 1996 and 1997. WSI continued to lose revenue and ultimately filed for bankruptcy.
J. Litigation by WSI
On July 17, 1997, WSI filed a Complaint against a host of parties, setting forth RICO and common law fraud allegations. On November 7, 1997, WSI filed an Amended Complaint, adding additional parties, factual allegations, and causes of action against NHF for breach of contract and against the Title Insurers for breach of the CPLs. On July 10, 2009, after two additional amendments, WSI filed a Fourth Amended Complaint adding, among other things, claims against the Title Insurers for breach of the title policies regarding thirty-nine mortgage loans, bad faith delay/denial of WSI’s insurance claims, and declaratory judgment in favor of coverage under the CPLs and title poli
II. DISCUSSION
WSI now moves for summary judgment in favor of its coverage claims on sixty-six of the approximately two hundred and twenty fraudulent mortgage loans, pursuant to Federal Rule of Civil Procedure 56(a). In doing so, WSI argues that (1) Mr. Yacker and- Mr. Cicalese’s admissions of fraud trigger liability under the CPLs; and (2) the joint venture deeds to Capital Assets, and the recordation of those deeds prior to the corresponding mortgages, trigger coverage under the title policies for thirty-nine mortgage loans.
The Title Insurers, in contrast, move for summary judgment against WSI’s coverage claims on twenty-nine mortgage loans that were not recorded before the tax foreclosure sales on the corresponding properties. In doing so, they argue that, in failing to ensure the recordation of those mortgages, WSI assumed the risk of a title defect under the title policies. In addition, the Title Insurers move for summary judgment on WSI’s claim for damages arising out of diminution of WSI’s value and the failed merger with RBMG, arguing that those two events were wholly unforeseeable when considering the breach of an individual CPL or title policy. Finally, the Title Insurers move for summary judgment against WSI’s claim for bad faith because they had a fairly debatable reason for denying and investigating WSI’s claim for coverage.
A. Standard of Review
Summary judgment is proper where “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). For an issue to be genuine, there must be “a sufficient evidentiary basis on which a reasonable jury could find for the non-moving party.” Kaucher v. County of Bucks,
The party moving for summary judgment has the burden of showing that no genuine dispute of material fact exists. Celotex Corp. v. Catrett,
B. WSI’s Coverage Claims
WSI argues that it is entitled to summary judgment in favor of its coverage claims with respect to sixty-six mortgage loans because the Title Insurers (1) breached the terms of the CPLs by failing to indemnify WSI for Mr. Yacker’s and Mr. Cicalese’s fraud involving those loans; and (2) breached the terms of the title policies by failing to indemnify WSI for unmarketable title as a result of the Joint Venture Deeds giving Capital Assets a sixty percent interest the properties subject to the mortgage loans. The Title Insurers counter that (1) WSI fails to provide evidence of fraud regarding each of the sixty-six mortgage loans; (2) WSI lacks standing to pursue its breach of contract claims because it fails to present evidence that it currently holds the sixty-six mortgage loans; (3) WSI fails to show that Mr. Yacker’s and Mr. Cicalese’s conduct is covered by the language of the CPLs; (4) WSI’s and NHF’s knowledge of, and involvement in, the fraudulent scheme bars recoveiy under the CPLs and title policies. The Title Insurers further argue that they are entitled to summary judgment against WSI’s breach of contract claims under the title policies with respect to twenty-nine mortgage loans because those claims arise out of WSI’s failure to ensure recordation of the assignment of those loans to from NHF to WSI.
i. Necessity of Individualized Evidence
The Title Insurers argue that, because each CPL and corresponding title policy constitutes a single contract, WSI must provide evidence of fraud with respect to each mortgage loan for which recovery is sought under its corresponding CPL and title policy. Citing to Corwin v. Lawyers Title Ins. Co.,
In Corwin, the plaintiff sued a title insurer on behalf of a class of persons who had not received a discount in the purchase of title policies on their property in exchange for showing that they had previously been issued a title policy in connection with that property.
On the other hand, where certain transactions are subject to a scheme whose common elements trigger coverage under insurance policies issued in connection with those transactions, a plaintiff need not detail each aspect of the scheme with respect to each individual transaction. See Chassen v. Fidelity Nat’l Financial, Inc., No. 09-291,
WSI submits admissions from Mr. Yack-er, Mr. Cicalese, and Ms. King, showing that they knew of and participated in a mortgage fraud scheme affecting a number of transactions between 1996 and 1997, which involved, among other things, (1) dual title commitments to conceal the fact that title had not been vested in the seller of the property; (2) an inflated appraisal value of the property resulting in an inflated mortgage loan funded by WSI; (3) a straw buyer who was not a bona fide purchaser of the property; and (4) a Joint Venture Deed giving a sixty percent interest in the property to Capital Assets, which was recorded before the mortgage lien. However, none of these admissions makes clear that one or more of these elements of the scheme applied to the sixty-six loans for which WSI seeks coverage under their corresponding CPLs and title policies. Thus, the Court cannot grant summary judgment in favor of WSI based solely on these admissions.
However, with respect twenty-one of the sixty-six mortgage loans closed by Mr. Yacker or Mr. Cicalese, WSI presents evidence of (1) a deed from the owner of the property to Cristo; (2) a deed from Cristo to a straw buyer for a vastly inflated amount; (3) a title commitment on the property issued by Coastal; (4) a Joint Venture Deed between the straw buyer and Capital Assets prepared by either Mr. Yacker, Mr. Cicalese, or Ms. King; and (5) a mortgage loan for the property from NHF to the straw buyer — for an amount far greater than the value of the property — that was recorded shortly after the Joint Venture Deed. See (Wagner Cert., Ex. 10(A)-(U)); (Magnanini Cert., Ex. A(6, 7, 13, 15, 35, 38, 40-42, 46-49, 51-56, 60, 61.)) This evidence, combined with the aforementioned admissions by Mr. Yacker, Mr. Cicalese, and Ms. King, makes clear that each of these twenty-one mortgage loans was subject to (1) an inflated appraisal value of the corresponding property, resulting in an inflated mortgage loan; (2) a straw buyer who was not a bona fide purchaser of the property; and (3) a Joint Venture Deed giving a 60% interest in the property to Capital Asserts that was recorded shortly before the mortgage loan. Thus, to the extent WSI can show that one or more of these elements trigger coverage under the CPLs and title policies in this case, it need not provide the details of the fraud with respect to each of the twenty-one loans.
ii. Coverage under the CPLs
In general, “[cjlosing protection letters make [title insurers] contractually responsible for their issuing agents and approved attorneys’ closing errors, fraud, and dishonesty.” 2 Title Ins. Law § 20:11; see also James Bruce Davis, 36 Tort & Ins. L.J. 845, 845 (“A closing protection letter is an agreement by a title insurance company to indemnify a lender ... for loss caused by a settlement agent’s [or approved attorney’s] fraud or dishonesty or by the agent’s [or attorney’s] failure to follow the written closing instructions.”).
CPLs are integral to title insurance policies.
Here, the CPLs provide coverage for “actual loss incurred ... in connection with” the closing of the mortgage conducted by the named closing attorney that arises out of the attorney’s failure “to comply with” WSI’s closing instructions “to the extent that they relate to: (a) the title to [the specified] interest in land or the validity, enforceability and priority of the lien of the [specified] mortgage on [the specified] interest in land ... or (b) the collection and payment of funds due to [WSI].” (Magnanini Cert., Ex. A.) The CPLs further provide coverage for the closing attorney’s “[fjraud or misapplication ... in handling [WSI’s] funds in connection with ... (a) the title to [the specified] interest in land or the validity, enforceability and priority of the lien of the [specified] mortgage on [the specified] interest in land ... or (b) the collection and payment of funds due to [WSI].” (Id.)
The Title Insurers contend that Mr. Yacker’s and Mr. Cicalese’s participation in the aforementioned fraudulent scheme does not trigger coverage under the CPLs because their conduct did not affect the validity, enforceability, or priority of the lien of the mortgages owned by WSI or the collection and payment of funds due to WSI.
In taking out a title insurance policy to insure a valid and enforceable mortgage with first-lien status, the lender’s reasonable expectation is that the policy will insure (1) that the borrower is “a bona fide mortgagor with the financial capacity to make the mortgage payments;” (2) that the mortgage is “a first-lien on the property subject to foreclosure, if necessary;” and (3) “the right to seek recovery of a
Here, there is no dispute that twenty-one mortgage loans that were closed by Mr. Yacker and Mr. Cicalese, and for which WSI was issued CPLs to protect against their fraud, were subject to a fraudulent scheme involving (1) a straw buyer and (2) an inflated appraisal value of the property — resulting in a mortgage loan for an amount far greater than the value of the property, with full knowledge and participation by Mr. Yacker and Mr. Cicalese. This scheme deprived WSI of a borrower who was a bona fide purchaser and, in turn, WSI’s right to pursue deficiency proceedings after foreclosure — a right that it would almost certainly have had to exercise because the value of those twenty-one mortgage loans greatly exceeded the value of their corresponding properties.
However, the Court cannot grant summary judgment in favor of WSI’s coverage claims under the CPLs for those loans because, as discussed below, there is a factual question concerning whether WSI knew of and/or participated in the fraudulent scheme. In addition, there is a factual question as to whether WSI sustained actual losses from the fraud that affected the mortgages’ validity and enforceability. To be sure, WSI sold the mortgages to whole loan purchasers pursuant to agreements requiring WSI to repurchase loans found to be unmarketable or fraudulent. Consequently, WSI would only have sustained actual losses if it repurchased the twenty-one aforementioned mortgage loans. While WSI presents evidence that it was required to repurchase thirty-two mortgage loans from Cityscape, it is unclear whether that repurchase included the twenty-one mortgage loans that were subject to the aforementioned fraudulent scheme.
iii. Coverage under the Title Policies
The title policies in this case provide coverage for losses arising from,
WSI argues that it is entitled to summary judgment in favor of its claims for coverage under the title policies because the Joint Venture Deeds conveying a sixty percent interest in thirty-nine properties to Capital Assets rendered (1) title to those properties being vested in an entity other than that stated in Schedule A of the title policies — i.e. the named borrower; (2) title to those properties unmarketable; and (3) WSI’s mortgage lien on the properties unenforceable as to the sixty percent interest conveyed to Capital Assets. The Title Insurers argue that it is entitled to summary judgment against WSI’s title claims with respect to twenty-nine of the thirty-nine properties at issue because those claims result from WSI’s failure to ensure the recordation of assignments of the mortgage liens on the properties from NHF or another entity to WSI. According to the Title Insurers, WSI’s failure to ensure recordation of those assignments deprived WSI of its right to foreclose on the twenty-nine properties, thereby causing its loss.
The Title Insurers’ position is largely beside the point. While WSI’s failure to ensure the recordation of assignments from NHF may have divested WSI of its right to foreclose on certain properties, the major loss claimed by WSI, and previously discussed, resulted from having to repurchase mortgage loans (1) where the borrower was not a bona fide mortgagor, and (2) that were issued for an amount far greater than the value of their corresponding properties. Thus, even if WSI had ensured recordation of every assignment from NHF and was able to foreclose on every property, it would nonetheless have sustained significant losses because it would only be able to recover a small portion of the mortgage loans through foreclosure and remain unable to seek the balance from the straw buyers, who had no bona fide interest in the properties. See discussion in Section B(ii), supra.
And while there remains a factual question regarding which mortgage loans WSI repurchased, see Section B(ii), supra, there is no dispute that WSI had to repurchase mortgage loans from Cityscape due, in part, to the fact that the Joint Venture Deeds rendered title to their corresponding properties unmarketable.
The Title Insurers further argue that WSI is not entitled to coverage under the title policies because it failed to give timely notice of its claims and therefore prejudiced the Title Insurers’ right to bring an action to quiet title to those properties subject to a Joint Venture Deed in order to restore marketable title to them. According to the Title Insurers, WSI first
The record is clear, however, that WSI put the Title Insurers on notice of the fraudulent scheme, including the Joint Venture Deeds, in 1997. See (Amended Compl. 58(i).) Accordingly, WSI provided the Title Insurers prompt notice of “claim[s] of title or interest which [are] adverse to the title to the estate or the lien of the insured mortgage, as insured, and which might cause loss or damage for which the [the Title Insurers] may be liable” under the title policies. (Hayes Cert., Ex. E.) The Title Insurers therefore had the opportunity under the title policies to exercise “the right, at its own cost, to institute and prosecute any action or proceeding or to do any other act which in [their] opinion may be necessary or desirable to establish the title to the state or interest, as insured, or to prevent or reduce loss or damage to the insured.” (Hayes Cert., Ex. E.) Consequently, the Title Insurers’ motion for summary judgment against WSI’s title claims is denied.
To be sure, WSI’s motion for summary judgment in favor of its title claims is also denied for the same reasons for denying its motion for summary judgment in favor of its claims under the CPLs, namely the factual questions concerning (1) whether WSI repurchased the mortgage loans that were subject to a Joint Venture Deed; and (2) whether, as discussed below, WSI had knowledge of the fraudulent scheme giving rise to its claims.
C. Bars to Coverage
i. WSI’s Knowledge of andlor Participation in the Fraud
The Title Insurers argue that WSI’s claims for coverage under the CPLs and title policies is barred under Exclusion 3(a) because WSI had knowledge of the fraudulent scheme and participated in it. Exclusion 3(a) bars coverage for “defects, liens, encumbrances, adverse claims or other matters ... created, suffered, assumed or agreed to by the Insured Claimant.” (Hayes Cert., Ex. E.) In the context of such an exclusionary clause, the term “created” has been interpreted to mean “the idea of knowledge, the performance of some affirmative act by the insured, a conscious or deliberate causation.” Feldman v. Urban Commercial, Inc.,
New Jersey courts have not interpreted the terms “assumed” or “agreed to.” However, in the oft-cited case of American Savings and Loan Ass’n v. Lawyers Title
WSI counters that (1) the evidence submitted by the Title Insurers of WSI’s knowledge of the fraud is not specific enough to satisfy the requirements of Rule 9(b); (2) knowledge of and participation in the fraud by lower level employees cannot be imputed to WSI when those employees were acting for their own benefit and at the expense of WSI; and (3) there is no indication of actual knowledge on the part of Robert or James Walsh that would allow the Title Insurers to disclaim coverage.
Under common law agency principles, “a principal is deemed to know facts that are known to its agent.” NCP Litig. Trust v. KPMG LLP,
Here, there is no dispute that those WSI employees who participated in the fraud— namely Ms. DeMola, Ms. O’Neill, and Mr. D’Apolito — did so for their own benefit. Indeed, Mr. D’Apolito and Ms. O’Neill received kickbacks from Mr. Kane in exchange for their participation, while Ms. DeMola benefited because she was paid a commission for each loan issued by WSI. In other words, Ms. DeMola helped issue the fraudulent mortgage loans in order to increase her commissions and sales numbers. Further, there can be little doubt that issuing invalid mortgage loans on unmarketable properties are actions adverse to WSI’s interests as a mortgage lender.
Nonetheless, there is remains a factual dispute as to whether WSI had actual knowledge of the fraudulent scheme. Specifically, the January 6, 1997 letter from Greenwich Capital to Robert Walsh detailing several critical elements of the fraudulentscheme, and WSI’s continuing to table fund mortgage loans after that time using Coastal and its closing attorneys creates a factual dispute as to whether WSI created, suffered, or assumed the risk associated with the fraudulent loans in this case that would bar coverage under Exclusion 3(a). Consequently, as previously discussed, this factual dispute bars summary judgment in favor of WSI’s claims for coverage under the CPLs and title policies.
ii. NHF’s Involvement in the Fraud
The Title Insurers argue that WSI’s coverage claims are also barred un
Under the Uniform Commercial Code (“UCC”), a holder in due course is “one who takes a negotiable instrument for value, in good faith and without notice of any defense or claim against it.” Carnegie Bank v. Shalleck,
Thus, if WSI can show that it is a holder in due course of the mortgage loans assigned to it by NHF, it will be able to pursue its claims for coverage under the CPLs and title policies free and clear of all defenses to coverage that the Title Insurers would otherwise assert against NHF.
There is no dispute that the mortgage loans in this case are unconditional promises to pay NHF a fixed sum of money with interest, in installments, and with full payment due at a definite time. As such they are negotiable instruments under the UCC.
The UCC defines “Good faith” as “honesty in fact in the conduct or transaction concerned.” N.J.S.A. 12A:1-201(19). “[G]ood faith is determined by looking to the mind of the particular holder who is claiming to be a holder in due course, not what the state of mind of a prudent man should have been.” Breslin v. New Jersey Investors, Inc.,
WSI cannot satisfy the good faith requirement of the holder in due course doctrine because, as discussed below, there is a factual question as to whether WSI had actual knowledge of the fraudulent scheme. Thus, on the current record, WSI cannot qualify as a holder in due course and, as a result, is subject to the same bars to coverage that would be asserted against NHF.
D. WSI’s Bad Faith Claims
WSI asserts claims for bad faith based on the Title Insurers’ (1) unreasonable denial of coverage under the CPLs and title policies and (2) unreasonable delay in processing WSI’s coverage claims under the CPLs and title policies. The Title Insurers are entitled to summary judgment on both.
To prevail on a bad faith claim based on unreasonable denial of coverage, “a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” Pickett v. Lloyd’s,
“In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.” Id. at 481,
E. WSI’s Damages Claims
The Title Insurers contend that they are entitled to summary judgment against WSI’s claim for damages resulting from its diminution in value and the failed merger between Walsh Holding and RBMG because (1) those two events are not the foreseeable result of a breach of a single CPL or title policy; and (2) WSI does not have standing to seek damages for the failed merger with RBMG because only WSI’s shareholders, not WSI itself, would have benefited from the merger. Both contentions are unavailing.
i. Foreseeability
“Judicial remedies upon breach of contract fall into three general categories: restitution, compensatory damages and performance.” Donovan v. Bachstadt,
Here, the Court must consider the damages flowing from the breaches of the approximately two hundred and twenty CPLs and title policies at issue in this case, as opposed to those resulting from the breach of a single CPL and title policy. The record makes clear that WSI, as a wholesale mortgage lender, took out a CPL and title policy to insure each mortgage loan that it issued. Consequently, there is little doubt that, upon issuing WSI a CPL and title policy for an individual mortgage loan, the Title Insurers and WSI understood that WSI might seek similar CPLs and title policies from them for future mortgage loans.
As a result, at the time WSI and the Title Insurers entered into one of the CPLs and title policies in this case, a jury could reasonably find that the parties should have reasonably contemplated that a fraudulent scheme affecting hundreds of mortgage loans would give rise to substantial losses. And to the extent that WSI is entitled to coverage under the CPLs and title policies for those losses, a jury could reasonably find that the Title Insurers’ failure to indemnify WSI would foresee-ably hinder its ability to (1) offset its losses and (2) repurchase the fraudulent mortgage loans from the secondary market, thereby causing WSI to be in a state of
ii. Standing
“It is generally accepted that [a] corporation is an entity distinct from its shareholders with rights and liabilities not the same as theirs individually and severally.” 1 Fletcher Cyc. Corp. § 25 (2012). Thus, “[a] corporation, and not' its officers, shareholders, or creditors, may sue to recover corporate property or recover damages for injuries done to it.” 9A Fletcher Cyc. Corp. § 4469 (2012). In contrast, “[a] corporation ordinarily cannot sue where the subject of the cause of action are rights belonging to a shareholder or shareholders, or to the corporation’s officers.” Id.
The Title Insurers argue that WSI lacks standing to seek damages arising out of the failed merger between Walsh Holding and RBMG because WSI was not a party to the merger agreement and therefore suffered no injury as a result of its rescission. The Title Insurers liken this case to Design Strategies, Inc. v. Davis,
Here, however, the evidence suggests that WSI was harmed from the failed merger between Walsh Holding and RBMG. While WSI was not a party to the merger agreement, the agreement contemplated the sale of its corporate assets to RBMG — specifically providing for the sale of “all the property rights, privileges, powers and franchises of [Walsh Holding],” which includes WSI, its main operating subsidiary, to RBMG to become RBMG’s “direct wholly owned subsidiary.” (Merin Cert., Ex. D.) Indeed, the intent of the merger agreement was to combine “RBMG’s strong national presence ... with Walsh’s position as a leading originator in the subprime” mortgage market, as well as the two companies’ “approved account relationships!,] [to] create a unique and powerful full-service mortgage lender.” (Shooman Cert., Ex. 7.) Furthermore, both RBMG and Walsh Holding would “maintain their separate corporate identities for marketing purposes.” (Id.)
Thus, it is clear that WSI was set to benefit enormously from the merger, as it would have been able to continue to continue its subprime lending operations through Walsh Holding, while taking advantage of RBMG’s national reach and substantial account relationships. Consequently, WSI has standing to claim damages from the failed merger between Walsh Holding and RBMG.
III. CONCLUSION
For the foregoing reasons, WSI’s Motion for Summary Judgment is DENIED. The Title Insurers’ Motion for Summary Judgment is DENIED with respect to
The Court will enter an order implementing this opinion.
Notes
. WSI is the "primary operating subsidiary” of Walsh Holding Company, Inc. (Shooman Cert., Ex. 7.) In April 1996, WSI became a successor in interest GF Mortgage Corp through a leveraged buyout.
. HUD-1 is shorthand for a HUD-1 Settlement Statement' — a standard form in which closing agents are required to set forth an accounting of all transactions related to the closing of a federally regulated mortgage loan. See Martinez v. Wells,
. A mortgage assignment “in blank” is a means by which a mortgage owner can assign a mortgage without naming the ultimate buyer. Such assignments are common in the mortgage loan securitization process.
. The policies were issued in NHF's name because the insured loans were closed in NHF’s name.
. The tide policies in this case used standard language from the 1992 form policy of the American Land Title Association. See (Hayes Cert., Ex. E); (Magnanini Cert., Ex. A.)
. The second mortgage was to show that the named buyer was a bona fide purchaser.
. Mr. Kane used Mr. Yacker to conduct fraudulent closings until early 1997, when a dispute arose between them. After that point, Mr. Kane began using Mr. Cicalese to conduct his closings.
. Mr. Kane paid Ms. King's salary during that time.
. Mr. Yaclcer’s and Mr. Cicalese’s failure to ensure recordation of certain documents — -for example, a mortgage lien on a particular property in the first lien position — is to be distinguished from WSI's aforementioned failure to ensure recordation of a loan assignment from NHF to WSI.
. These properties include 1507 Summer-field Avenue, 104 West End Avenue, and 1032-1034 Bangs Avenue.
. Mr. Agel of Coastal admitted to issuing dual title commitments in order to conceal that Cristo had yet to purchase the property and ensure that WSI would table fund the mortgage loan to the straw buyer in exchange for having a valid first lien on the property.
. While the CT-18721 title commitment suggests that HUD was the owner of 1507 Summerfield Avenue, the deed to Cristo indicates that William B. Hill was the owner of the property.
. WSI never put the Title Insurers on notice of its claims for coverage under the title policies, per se, until July 10, 2009, the date of the Fourth Amended Complaint.
. Two of those mortgages were repurchased by WSI.
. WSI ultimately repurchased the thirty-two loans as part of a settlement.
. The agreement specifically provides that "all the property rights, privileges, powers and franchises of [Walsh Holding] and Merger Sub shall vest in [Walsh Holding] as the Surviving Corporation.... [T]he Surviving Corporation shall be a direct wholly owned subsidiaxy of RBMG.” (Merin Cert., Ex. D.)
. Indeed, the CPLs in this case incorporate all the terms and conditions of their corresponding title policies. See (Magnanini Cert., Ex. A.)
. The Title Insurers also argue that the agency disclaimer in the CPLs bars WSI’s claim seeking coverage for Mr. Yacker and Mr. Cicalese’s acts as closing attorneys. The Title Insurers’ attempt to write around their agency relationship with Mr. Yacker and Mr. Cicalese is unavailing, and this court has found similarly with respect to such attempts. See Chassen v. Fidelity Nat’l Financial, Inc., No. 09-291,
. In other words, WSI would be unable to enforce its rights against a straw buyer with no bona fide interest in a property on which WSI forecloses. Indeed, as previously noted, the Chancery Division of the New Jersey Superior Court found a number of fraudulent mortgages table funded by WSI to be unenforceable against a number of straw buyers. See (Wagner Cert., Ex. 12.)
. In addition, the other forty-five mortgage loans for which WSI seeks coverage would be covered by the language of the CPLs to the extent that WSI can show that those loans involved (1) a straw buyer and (2) an inflated appraisal value of their corresponding properties resulting in an inflated value of the loans. See discussion in Section B(i), supra.
. This factual question implicates yet another factual question regarding whether those loans were, in fact, reassigned to WSI in order to establish standing to seek coverage under the CPLs.
. Moreover, there can be little doubt that a Joint Venture Deed giving Capital Assets a 60% interest in a property renders title to that property unmarketable. See Keown v. West Jersey Title & Guaranty Co.,
. The Title Insurers further argue that prompt notice would have allowed them to cure any defect in the enforceability of mortgage liens, which would have restored WSI’s right to foreclose on the properties. However, as previously discussed, restoring WSI's right to foreclose would not have prevented the losses in this case.
. The Title insurers contend that the fraudulent scheme was intended to benefit WSI because WSI was looking to merge with RBMG, and the more loans issued by WSI, the more attractive WSI appeared to RBMG. While there is evidence that Ms. DeMola participated in the fraud with the partial intent of facilitating a proposed merger between WSI and RBMG, it is undisputed that she was a shareholder in WSI and testified that she stood to benefit from the merger. Thus, no reasonable juror could find that Ms. DeMola participated in the fraud to benefit WSI, as opposed to herself.
. Indeed, the title policies in this case provide that insurance extends to “the owner of the indebtedness secured by the insured mortgage and each successor in ownership of the indebtedness ... (reserving, however, all rights and defenses as to any successor that the [insurer] would have had against any predecessor insured, unless the successor acquired the indebtedness as a purchaser for value without knowledge of the asserted defect, lien, encumbrance, adverse claim or other matter insured against by this policy as affecting title to the estate or interest in the land).” See (Magnanini Cert., Ex. A); (Hayes Cert., Ex. E.)
. "[T]he mortgage is mere 'incident' or ‘accessory’ to the debt and when the debt is embodied in a negotiable instrument the quality of negotiability is necessarily imparted to the accompanying mortgage.” Carnegie Bank,
. There is no issue of delay with respect to WSI's claims for coverage exclusively under the title policies, as those claims were made for the very first time on July 10, 2009, in WSI's Fourth Amended Complaint.