In First Am. Title Ins. Co. v. Speisman (In re Speisman), 2013 Bankr. LEXIS 2967; 2013 WL 3779366 (U.S. Bankr. N.D. IL, July 19, 2013), the U.S. Bankruptcy Court for the Northern District of Illinois recently denied a debtor’s motion to dismiss the adversary complaint of a title insurance underwriter that alleged it had been required to satisfy $75,000 in mechanics liens under a title insurance policy the debtor procured through false representations.  The insurer’s complaint alleged that debtor induced it to issue a title insurance policy by knowingly executing a statement at closing to the effect that no contracts had been given or were outstanding that had not been fully performed or satisfied, knowing such statement to be false.  The insurer relied on debtor’s statement in closing and disbursing a refinance loan, and issuing a title insurance policy to debtor’s lender, and sought to prevent dischargeability of debtor’s liability for insurer’s satisfaction of the mechanics lien debt.  The debtor sought dismissal on the basis that the insurer’s amended complaint failed to allege he personally received any “money, property, services or an extension, renewal, or refinancing of credit” as a result of his fraud, as required by 11 U.S.C. § 523(a)(2)(A).  The Bankruptcy Court disagreed, held no such allegation was necessary, and denied debtor’s motion to dismiss.

In reaching its decision, the Court relied on In re Dallam, 850 F.2d 446 (8th Cir. 1988), an Eighth Circuit Appellate decision with a very similar factual basis.  In Dallam, the court found a debt nondischargeable where the debtor, a builder of expensive homes, procured a title insurance policy with an affidavit stating that all persons furnishing labor, services and material in construction of the house had been paid.  In reliance on this statement, the insurer issued a policy.  Subsequently fifteen contractors submitted claims to the purchasers and the insurer settled those claims.  When the debtor filed bankruptcy the insurer asserted it was owed a non-dischargeable debt for settlement of the lien claims.  While the bankruptcy court permitted dismissal of the complaint, the Court of Appeals reversed noting that the debtor’s business had benefited from the predicament in which it had placed the insurer since the amounts the insurer paid extinguished debtor’s liability for the same debts.  Debtor thus obtained payment of her business debts by knowingly making a false statement in order to induce the insurer to rely on it and the insurer did rely on the statement, causing its monetary loss.

Dischargeability and Recoupment

The Bankruptcy Court’s holding in this case highlights an additional tool available to claims and recoupment counsel, in circumstances such as these, where an insurer has been made to pay as a result of the false representations made by an owner in a closing statement or affidavit in order to induce the close of escrow.  Should an owner file bankruptcy, an insurer can apply to the Bankruptcy Court to declare a debt nondischargeable through an adversary proceeding, if it can be shown that the insurer’s payment under the policy, or the policy itself, was secured by false pretenses, false representation or actual fraud.

Contact  Bill Sauerwein or Sarah Holdener if you have any questions about this case or for assistance with your real property and title insurance related issues.