DLJ Mortgage Capital, Inc., Appellant,v.Thomas Kontogiannis, et al., Defendants, Chicago Title Insurance Company, Inc., et al., Respondents.BriefN.Y.November 13, 2013To Be Argued by: M. DARREN TRAUB New York County Clerk’s Index No. 104675/10 New York Supreme Court Appellate Division – First Department DLJ MORTGAGE CAPITAL, INC., Plaintiff-Respondent, – against – THOMAS KONTOGIANNIS, GEORGIA KONTOGIANNIS, LISA DIPINTO a/k/a LISA KONTOGIANNIS a/k/a LISA POLLATOS, ANNETTE APERGIS, CHLOE KONTOGIANNIS, ADAM DIPINTO, ELIAS APERGIS, JOHN T. MICHAEL, JONATHAN RUBIN, MICHAEL A. GALLAN, ESQ., TED DOUMAZIOS, ESQ., THOMAS F. CUSAK, III, ESQ., STEPHEN P. BROWN, ESQ., STEPHEN A. MARTINI, CARMINE CUOMO, COASTAL CAPITAL CORPORATION d/b/a THE MORTGAGE SHOP d/b/a CLEARLIGHT MORTGAGE, EDGEWATER DEVELOPMENT, INC., GROUP KAPPA CORP., LORING ESTATES LLC, PARKVIEW FINANCIAL CENTER, INC. d/b/a PARKVIEW FINANCIAL, INC. d/b/a PARKVIEW CENTER, INC., CLEAR VIEW ABSTRACT LLC, TRIUMPH ABSTRACT, INC., BOND & WALSH CONSTRUCTION COMPANY, INTERAMERICAN MORTGAGE CORP., HALIFAX GROUP LLC, PLAZA REAL ESTATE HOLDINGS, INC. and WASHINGTON TITLE INSURANCE COMPANY, INC., Defendants, CHICAGO TITLE INSURANCE COMPANY, INC. and UNITED GENERAL TITLE INSURANCE COMPANY, INC., Defendants-Appellants, DOE’s 1 through 100 inclusive, Defendants. REPLY BRIEF FOR DEFENDANT-APPELLANT CHICAGO TITLE INSURANCE COMPANY, INC. HERRICK, FEINSTEIN LLP Attorneys for Defendant-Appellant Chicago Title Insurance Company, Inc. 2 Park Avenue New York, New York 10016 (212) 592-1400 dtraub@herrick.com Printed on Recycled Paper TABLE OF CONTENTS TABLE OF AUTHORITIES .......................................................................... ii PRELIMINARY STATEMENT ..................................................................... ! ARGUMENT .................................................................................................. 5 I. DLJ ADMITS THAT IT DOES NOT STATE A CLAIM UNDER THEORIES OF ACTUAL AUTHORITY AND RESPONDEAT SUPERIOR ................................................................ 5 II. THE COMPLAINT DOES NOT STATE A CLAIM UNDER THE DOCTRINE OF "APPARENT AUTHORITY" .......................... 7 1. DLJ Does Not Allege Any Affirmative or Misleading Conduct on The Part of Chicago Title ........................................ 7 2. The Cases Relied Upon By DLJ in Support of its Claim Are Not Controlling or Applicable Here ....................... 12 III. DLJ'S RELIANCE ON THE CERTIFICATES OF TITLE WAS PER SE UNREASONABLE AS A MATTER OF LAW ........ 21 1. DLJ Purchased the Fraudulent Mortgages in Reliance Solely Upon the Certificates of Title ........................................ 21 2. DLJ's New Allegations Do Not Save Its Fraud Claim ............ 25 IV. THE "RED FLAGS" IN THE LOAN FILES FORECLOSE DLJ'S FRAUD CLAIM .................................. 29 CONCLUSION ............................................................................................. 35 1 TABLE OF AUTHORITIES Federal Cases Fidelity Nat 'I Title Ins. Co. v. Cole Taylor Bank, No. 11 Civ. 4497 (MGC), 2012 WL 2814001 (S.D.N.Y. July 10, 2012) ................................................................................... 25 In re Dreier LLP, 450 B.R. 452 (Bankr. S.D.N.Y. 2011) ............................................................... 19 Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91 (2d Cir. 1997) ................................................................................. 32 State Cases Brookfield Clothes, Inc. v. Tandler Textiles, Inc., 78 A.D.2d 841, 443 N.Y.S.2d 161 (1st Dep't 1980) ..................................... 8, 12 Citibank v. Chicago Title Ins. Co., 214 A.D.2d 212, 632 N.Y.S.2d 779 (1st Dep't 1995) ................................. 24, 29 Countrywide Home Loans, Inc. v. LaFonte, No. 14265/01, 2003 WL 1389089 (N.Y. Sup. Ct. Feb. 13, 2003) ..................... 15 DDJ Mgmt., LLCv. Rhone GroupLLC, 15 N.Y.3d 147, 905 N.Y.S.2d 118 (2010) ................................................... 33, 34 Duane Thomas LLC v. 62 Thomas Partners, LLC, 300 A.D.2d 52, 751 N.Y.S.2d 441 (1st Dep't 2002) ................................... 31, 34 Ford v. Unity Hosp., 32 N.Y.2d 464, 346 N.Y.S.2d 238 (1973) ....................................................... 4, 8 Forest Park Coop., Inc. v. Com. Land Title Ins. Co., No. 29912/2010, 2011 WL 2138257 (N.Y. Sup. Ct. May 19, 2011) ................ 16 11 Hallock v. State of N.Y., 64 N.Y.2d 224,485 N.Y.S.2d 510 (1984) ......................................................... 19 Hatton v. Quad Realty Corp., 100 A.D.2d 609, 473 N.Y.S.2d 827 (2d Dep't 1984) ........................................ 20 HSA Residential Mortg. Servs. ofTex., Inc. v. Stewart Title Guar. Co., 7 A.D.3d 426, 776 N.Y.S.2d 791 (1st Dep't 2004) ........................................... 15 Kirschner v. KPMG LLP, 15N.Y.3d446,912N.Y.S.2d512(2010) ....................................... 13, 18,19,20 Luna! Realty, LLC v. DiSanto Realty, LLC, 88 A.D.3d 661,930 N.Y.S.2d 619 (2d Dep't 2011) .......................................... 33 Mandor v. Lawyers Title Ins. Corp., 28 N.Y.2d 739, 321 N.Y.S.2d 120 (1971) ............................................... 4, 22, 29 McGarry v. Miller, 158 A.D.2d 327, 550 N.Y.S.2d 896 (1st Dep't 1990) ......................................... 8 Meyerson v. Lawyers Title Ins. Corp., 39 A.D.2d 190,333 N.Y.S.2d 33 (1st Dep't 1972), aff'd, 33 N.Y.2d 704, 349 N.Y.S.2d 675 (1975) ....................................................... passim News Am. Marketing, Inc. v. Lepage Bakeries, Inc., 16 A.D.3d 146, 791 N.Y.S.2d 80 (1st Dep't 2005) ........................................... 19 Parlato v. Equitable Life Assur. Soc y of U.S., 299 A.D.2d 108, 749 N.Y.S.2d 216 (1st Dep't 2002) ........................... 12, 13, 14 UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87, 773 N.Y.S.2d 385 (1st Dep't 2001) ................................... 30, 33 Valassis Commun., Inc. v. Weimer, 304 A.D.2d 448, 758 N.Y.S.2d 311 (1st Dep't 2003) ....................................... 23 Zigbarra v. Falk, 143 A.D.2d 901, 533 N.Y.S.2d 536 (2d Dep't 1988) .......................................... 9 ... 111 Miscellaneous J. Bushnell Nielsen, Title & Escrow Claims§ 6.2 (Second Edition 2011) .................................................................................. 24, 27 J. Bushnell Nielsen, Title & Escrow Claims§ 13.1 (Second Edition 20 11 ) ........................................................................................ 25 lV PRELIMINARY STATEMENT As set forth in Chicago Title's initial brief, DLJ, a sophisticated player in the secondary mortgage market, seeks to hold Chicago Title, a title insurance underwriter, liable for the allegedly fraudulent acts of a limited agent, Clear View Abstract and its principal Doumazios, based on Doumazios' involvement in an alleged mortgage fraud scheme that resulted in DLJ purchasing fraudulent mortgages. 1 Notably, DLJ does not seek to recover under a title insurance policy because, as DLJ acknowledges, the subject mortgages are not insured. Therefore, DLJ is forced to concoct a claim against Chicago Title that its limited agent, whom DLJ never had any contact or communications with, fraudulently prepared pre-closing documents that were contained in third-party Loan Files. DLJ claims that it relied on these pre-closing documents as evidence that the subject loans had in fact closed, even though the documents establish no such thing, which induced DLJ into believing that the transactions were "legitimate." These "relatively straightforward facts" (Opp. Brief at 1 ), do not state a claim for 'Unless otherwise indicated, all capitalized terms have the same meaning as defined in Chicago Title's initial brief or DLJ's Opposition Brief ("Opp. Brief') filed in connection with this appeal. HF 7637328 v.2 #01119/0148 09/14/2012 10:58 AM fraud against Chicago Title and are precisely the circumstances under which New York Courts dismiss such pleadings. DLJ' s Opposition Brief is more noteworthy for the concessions it makes and for what it explicitly fails to claim or contest, rather than for anything actually stated therein. Among other things: • DLJ abandons its arguments of actual authority and respondeat superior, conceding for the first time that "these theories are irrelevant and should be disregarded since DLJ does not seek to hold the Title Insurers liable under either of these theories;" (Opp. Brief at 13) • DLJ abandons several of its arguments made to the lAS Court, which the lAS Court relied upon in rendering its decision, and now only asserts that the doctrine of "apparent authority" somehow renders Chicago Title liable for the fraudulent acts of Clear View Abstract or Doumazios; • DLJ does not claim that it ever communicated with Chicago Title or that Chicago Title made any representations to DLJ; • DLJ does not claim that it ever communicated with Clear View Abstract or Doumazios in connection with DLJ's purchase of the subject mortgages; • DLJ does not claim that Chicago Title engaged in any affirmative conduct in connection with the transaction at issue; • DLJ admits that the loan files did not contain any title insurance policies or indicia that that such policies had actually been paid for; • DLJ does not explain why they failed to inquire regarding the numerous "red flags" contained in the Loan Files; and 2 • Most significant, DLJ does not contest that the sole document it claims to have relied on, a certificate of title, is actually a pre- closing document that is not an indication that a loan ever closed, much less that a title insurance policy was purchased or issued. Instead, although DLJ admits it never communicated with Chicago Title or its agent, and that Chicago Title did not benefit in any way from the alleged fraud, DLJ claims that by virtue of certain "indicia of title" in the Loan Files, which were fraudulently prepared by Clear View Abstract, Chicago Title somehow cloaked Clear View Abstract with the apparent authority necessary to perpetrate "massive mortgage fraud." That is the full extent of the allegations contained in the Complaint against Chicago Title. As set forth in detail herein and in Chicago Title's initial brief, DLJ's allegations do not state a claim for fraud against Chicago Title-the title insurance underwriter. First, although DLJ made arguments relying on the doctrines of actual authority and respondeat superior to the lAS Court, and the lAS Court relied on such arguments in rendering its decision, DLJ now admits that these arguments "are irrelevant and should be disregarded." (Opp. Brief at 13). Second, the Complaint fails to state a claim against Chicago Title pursuant to the doctrine of"apparent authority." The well-settled law in New 3 York, which DLJ does not dispute, is that to establish liability under this doctrine, DLJ must show that it "relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal-not the agent." Ford v. Unity Hosp., 32 N.Y.2d 464, 473, 346 N.Y.S.2d 238, 244 ( 1973) (emphasis added). The Complaint, as well as any argument in opposition to Chicago Title's motion to dismiss, does not allege any such conduct on the part of Chicago Title. In fact, DLJ admits that it never communicated at all with Chicago Title. Third, DLJ cannot establish reasonable reliance as a matter of law. The Complaint alleges that DLJ relied on unmarked, pre-closing certificates of title in forming its "belief' that the "transactions were legitimate." That reliance, however, is belied by the face of the document itself, which states that it cannot be relied upon by DLJ for any purpose, and the case law in New York that expressly recognizes that a certificate of title does not indicate that a loan closing took place or that the loan is insured by a title insurance policy. Mandor v. Lawyers Title Ins. Corp., 28 N.Y.2d 739, 321 N.Y.S.2d 120 (1971). Moreover, DLJ, a sophisticated purchaser of mortgages on the secondary market, fails to explain why it needlessly ignored obvious "red flags" contained in the Loan Files that indicated that 4 the loans were fraudulent. Certainly, a simple phone call to Chicago Title inquiring about the absence of title policies in the Loan Files could have uncovered the entire mortgage fraud. These derelict due diligence failures preclude DLJ from asserting reasonable reliance as a matter of law. In denying Chicago Title's motion to dismiss, the lAS Court committed reversible error by ignoring critical documentary evidence and well-settled case law, assuming facts that are not contained in the Complaint or record and incorrectly finding Chicago Title's motion to be "premature." For these reasons, the lAS Court's decision should be reversed and Chicago Title's motion to dismiss granted in all respects. ARGUMENT I. DLJ ADMITS THAT IT DOES NOT STATE A CLAIM UNDER THEORIES OF ACTUAL AUTHORITY AND RESPONDEAT SUPERIOR Recognizing the glaring weaknesses in its position, DLJ now abandons its argument made to the lAS Court that Chicago Title is liable under theories of respondeat superior or "actual authority." Rather, DLJ concedes that liability cannot be imputed to Chicago Title under these doctrines: 5 As for the doctrines of respondeat superior and actual authority, these theories are irrelevant and should be disregarded since DLJ does not seek to hold the Title Insurers liable under either of these theories. (Opp. Brief at 13). But to the lAS Court, DLJ did seek to hold Chicago Title responsible pursuant to its agent's purported actual authority. Indeed, this concession of defeat comes now, despite the fact that it had been DLJ's lead argument, which the lAS Court relied on in denying Chicago Title's motion to dismiss: MR. AMATO: The two title insurance agents were contractual agents of the three title insurance companies ... But the bottom line is, Your Honor, that we are suing the title insurance companies on the principal agency theory. We are asserting in our cause of action against the title insurance companies that the title insurance companies [}as principals, cloaked the title insurance agents with first actual authority. There were actual written contracts where these two gentlemen -- R.l8 (emphasis added). MR. AMATO: That is the plaintiff in that case. That is precisely what is going on here. We have three title insurance companies who had contractual agents. They are not saying that they weren't agents. They are their agents. As a matter of law, there is no dispute that there was actual authority here for these agents to go out there and do the things that these people did, to do a search 6 for title, to come up with a commitment, to issue a title policy under certain terms and conditions, to go to a closing, to execute and receive payments. And these two title agents, Mr. Doumazios and Mr. Brown, and Mr. Doumazios admitted to it, he used his position as an authorized agent to defraud us. And in that process, he takes our money. We are the victim of that scheme. R.48-49 (emphasis added). See also Opp. Brief at 1 (Doumazios "misused his actual authority to issue title commitments"); R.737-39; R.439, 930. Thus, after making these arguments to the lAS Court, DLJ has now abandoned its argument of actual authority and expressly concedes that liability cannot be imputed to Chicago Title under the doctrine of respondeat superior. Now, DLJ contends that the only theory by which Chicago Title may be held liable is pursuant to the doctrine of "apparent authority." R.l4. For the reasons stated below, however, any claim made under apparent authority likewise fails as a matter of law. II. THE COMPLAINT DOES NOT STATE A CLAIM UNDER THE DOCTRINE OF "APPARENT AUTHORITY" 1. DLJ Does Not Allege Any Affirmative or Misleading Conduct on The Part of Chicago Title DLJ does not dispute that in order to establish apparent authority, the plaintiff must show that the facts leading to that conclusion emanate from 7 the principal and not from the agent. (Opp. Brief at 14-15). "The representations, declarations or conduct of the agent are not proof of authority." Brookfield Clothes, Inc. v. Tandler Textiles, Inc., 78 A.D.2d 841, 842, 443 N.Y.S.2d 161, 162 (1st Dep't 1980). Rather, "the existence of apparent authority depends upon a factual showing that the third-party relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal-not the agent." Ford v. Unity Hasp., 32 N.Y.2d 464, 473, 346 N.Y.S.2d 238, 244 (1973) (emphasis added); McGarry v. Miller, 158 A.D.2d 327, 328, 550 N.Y.S.2d 896, 897 (1st Dep't 1990) ("a principal is not liable for the acts of an agent in excess of any actual authority unless it is demonstrated that the party reasonably relied on such misrepresentations because of some misleading conduct on the part of the principal"). In the instant case, DLJ does not assert that Chicago Title, or its agent for that matter, made any representations to DLJ directly. Moreover, the Complaint does not allege that Chicago Title engaged in any misleading conduct or performed any "overt acts" necessary to state a claim under the doctrine of apparent authority.2 2 DLJ argues that the issue of "apparent authority" is a factual question that cannot be decided on a pre-answer motion to dismiss (Opp. Brief at 15). While that contention may be true in circumstances where the pleading alleges sufficient affirmative conduct on the 8 Indeed, DLJ's 198 page Complaint with over 630 paragraphs contains only one paragraph in which DLJ alleges that Chicago Title "was responsible for the appearance of authority" in its agent to commit the alleged "fraudulent scheme": R.494, 994. Chicago Title was responsible for the appearance of authority in Clear View Abstract and T. Doumazios, Esq. to act as the title agent in connection with closings of many of the 95 Fraudulent Transactions by, among other things, (1) permitting them to hold themselves out as Chicago Title's agent [i.e., actual authority]; and (2) providing them with form certificates for title insurance, which, among other things, expressly identify Chicago Title; bear the company's logo and signature of its President and Corporate Secretary; and contain a Chicago Title title number and/or policy number. Similarly, m their Opposition Brief, DLJ contends that the only purported "overt acts" Chicago Title engaged in to cloak its agent with apparent authority were (1) entering into the agency agreement [i.e., actual part of the principal to raise a factual question, which is plainly not the case here, where DLJ alleges no such conduct on the part of Chicago Title. Indeed, where the Complaint on its face does not allege adequate conduct on the part of the principal, Courts do not hesitate to dismiss the case on the pleadings. See Zigbarra v. Falk, 143 A.D.2d 901, 902, 533 N.Y.S.2d 536, 537-38 (2d Dep't 1988) (explaining that "plaintiffs fail to allege the manner in which [the principals] communicated, by words or conduct, anything which would indicate that [agent] was selling modular homes on their behalf ... " and dismissing complaint on the pleadings "due to the complaint's failure to allege sufficient factual circumstances to establish [agent's] apparent authority"). 9 authority]; and (2) providing the agent with title insurance documentation. (See Opp. Brief at 16-17). These bare allegations do not meet the standard of alleging that Chicago Title cloaked its agent with apparent authority to perpetrate the alleged "fraudulent scheme." First, DLJ does not allege that it had any contact or communications with Chicago Title, much less that Chicago Title made some statement or representation that gives rise to apparent authority. Indeed, there is nothing in the Complaint suggesting that anyone at DLJ ever tried to communicate with Chicago Title for any reason at all, let alone in connection with the transactions at issue. This fact alone is fatal to DLJ' s claim. Second, DLJ likewise does not allege that it ever spoke to Chicago Title's limited agent, Clear View Abstract and Doumazios. DLJ only alleges that it reviewed third-party Loan Files in connection with its purchase of the fraudulent loans, which contained certificates of title that "specifically identified Clear View Abstract and T. Doumazios, Esq. as either authorized agents and/or persons to whom questions concerning these documents should be directed." R.494, 995. The fact that DLJ never even communicated with the alleged agent further precludes it from asserting a claim for fraud against Chicago Title. 10 Third, the documents DLJ claims to have relied upon--certificates of title-were prepared by the agent, not Chicago Title. Chicago Title did not supply the agent with these documents, nor does DLJ allege that they did. In fact, DLJ admits that the certificates of title were prepared by Clear View Abstract and Doumazios, not Chicago Title: DLJ would not have purchased the 18 fraudulent mortgages (see Exhibit 15 annexed hereto), without Chicago Title certificates of title (incorporated herein by reference) fraudulently prepared by Clear View Abstract and T. Doumazios, Esq., as agents of Chicago Title. R.494, 995. See also Opp. Brief at 1 (Doumazios "misused his actual authority to issue title commitments"). Even more fatal to DLJ's claim is that DLJ was not entitled to rely on the documents as indicia of a closing, because that is not the purpose of a certificate of title. Rather, the sole purpose of a certificate of title is to list the liens and encumbrances on the property that need to be cleared before or at closing as a precondition for a title policy to be issued. Doumazios created this list on behalf of Clear View Abstract to enumerate the various items that needed to be cleared on the properties before Clear View Abstract had the authority to issue a title insurance policy. At the actual closing, a closing 11 agent would "mark up" the document to omit the encumbrances that have been cleared. Thus, the certificates of title themselves are not fraudulent documents. To the contrary, these documents are true and accurate indications of the liens and other title impediments that needed to be resolved at closing before a title policy could be issued. Certainly, a list prepared by Doumazios that sets forth preconditions for his authority to issue a title policy, cannot constitute the requisite "misleading conduct" on the part of Chicago Title for DLJ to state a claim under the doctrine of "apparent authority." Moreover, the fact that the certificates of title were not marked is actually an indication that a closing did not occur. According to the settled case law in New York, this is simply not enough to impute liability to Chicago Title. See Brookfield Clothes, 78 A.D.2d at 842, 443 N.Y.S.2d at 162 ("[t]he representations, declarations or conduct of the agent are not proof of authority."). 2. The Cases Relied Upon By DLJ in Support of its Claim Are Not Controlling or Applicable Here DLJ relies primarily on three cases for its position that Chicago Title can be held liable for the acts of its limited agent. See Parlato v. Equitable Life Assur. Soc y of U.S., 299 A.D.2d 108, 749 N.Y.S.2d 216 (1st Dep't 12 2002); Meyerson v. Lawyers Title Ins. Corp., 39 A.D.2d 190, 333 N.Y.S.2d 33 (1st Dep't 1972), aff'd, 33 N.Y.2d 704, 349 N.Y.S.2d 675 (1975); Kirschner v. KPMG LLP, 15 N.Y.3d 446, 912 N.Y.S.2d 512 (2010). Each case, however, actually demonstrates why liability does not attach to the principal, Chicago Title, as a matter of law. DLJ relies heavily on Parlato for the proposition that a principal may, under certain circumstances, be held liable for the fraudulent acts of its agent under the doctrine of"apparent authority." (Opp. Brief at 13-15, 18, 21, 23). Tellingly, however, DLJ fails to discuss, let alone mention, any of the facts of Parlato. This is because Parlato is wholly distinguishable from the instant case. In Parlato, defendant Equitable's agent had been managing Parlato's account for a period ofyears. See 299 A.D.2d at 110,749 N.Y.S.2d at 219. Rather than depositing entrusted funds into her account, the agent instead converted the funds for his own use. See id. Parlato's sister, Perry, also used the agent to open an account for her at Equitable, but he never actually opened one. See id. at 111, 749 N.Y.S.2d at 219. Instead, the agent converted all funds entrusted to him by the sister under the guise that he would be depositing said funds into her "account" and that he would manage 13 the account for her benefit. After Equitable terminated the agent's employment in July of 1992, the agent continued to accept funds from both plaintiffs for their accounts and converted the funds while still acting as a purported agent of Equitable. See id. Significantly, Equitable never gave either sister notice of its agent's termination. See id. In finding Equitable liable to Parlato only, the Court explained that because the agent opened actual investment accounts during the time he was still an authorized agent of Equitable, Equitable's failure to provide notice that his authority had been revoked by Equitable "created an appearance of authority on which plaintiff reasonably relied." !d. at 114, 116-17, 749 N.Y.S.2d at 221, 223-24. With respect to the sister's claim, however, the Court held that since the agent never opened an investment account for her, Equitable was not under any obligation to notify her of its agent's termination and the agent's fraud could not be attributed to Equitable. Thus, unlike Parlato's claim, Equitable's failure to give notice to the sister did not cloak its agent with apparent authority to act on their behalf. The sister's claim was, therefore, dismissed. See id. Thus, the issue in Parlato was whether the agent, following the termination of his actual authority, was cloaked with apparent authority to act at all on behalf of the principal. The agent's mere ability to act in that 14 capacity, in and of itself, equipped him with the capability to commit fraud. Those are far from the circumstances present in this case. Here, there is no dispute that Clear View Abstract was authorized to act on behalf of Chicago Title for extremely limited circumstances: issuing a title policy at closing if all the necessary preconditions have been satisfied. See R.815-24. Thus, the legal issue here is whether Chicago Title-who did not communicate with, nor mislead DLJ-can be held liable to DLJ when its agent commits a "massive mortgage fraud." New York courts have consistently answered this issue with a resounding "no." See e.g., HSA Residential Mortg. Servs. ofTex., Inc. v. Stewart Title Guar. Co., 7 A.D.3d 426, 427, 776 N.Y.S.2d 791, 791 (1st Dep't 2004) ("plaintiff [did not] allege any words or conduct by the title insurers that could have caused plaintiff to believe that their function involved more than the issuance of title insurance policies, such as might warrant holding them responsible for the misappropriated mortgage funds under the doctrine of apparent authority"); Countrywide Home Loans, Inc. v. LaFonte, No. 14265/01, 2003 WL 1389089, at *3 (N.Y. Sup. Ct. Feb. 13, 2003) (dismissing claims against title underwriter and explaining that "[ e ]ssential to the creation of apparent authority are words or conduct of the principal, communicated to a third 15 party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction"); Forest Park Coop., Inc. v. Com. Land Title Ins. Co., No. 29912/2010, 2011 WL 2138257 (N.Y. Sup. Ct. May 19, 2011) (same). Meyerson is similarly inapplicable, but instructive as to why there is no apparent authority here. See 39 A.D.2d 190, 333 N.Y.S.2d 33. In Meyerson, the title agent issued a phony title report, upon which plaintiffs relied in funding a loan. Plaintiffs sued the title insurance company under a theory of apparent authority, i.e., through the title company's overt acts and misleading conduct regarding the fraudulent transaction at issue, the title company cloaked its agent with apparent authority. In finding the title company liable, the Court focused on the misleading, affirmative misconduct on the part of the title company that led plaintiffs to believe that the agent was authorized to act on the title company's behalf for the transaction at issue: In all fairness, nobody who received this report, unless he were otherwise warned, would have any reason to doubt that he was dealing with the [title company], through a representative. Accordingly, in his efforts to secure the report of the title search, the plaintiffs' attorney, Friedman, testified that he telephoned the [title company] and inquired about the report and he was referred to [its agent] for 16 same. Surely, if the [title company] did not regard [its agent] as authorized to act for it, then was not that the time to disclaim knowledge of the transaction and the responsibility for same? It must be remembered that the transaction was given a number by the [title company], earlier in the negotiations, and it was with reference to this numbered transaction that Friedman inquired of the [title company] as to the whereabouts of the title report. If there was no relationship between the [title company] and [its agent], which would entitle the latter to act as agent for the former, then why would they have referred Friedman to [its agent]? !d. at 191-92, 333 N.Y.S.2d at 34. Thus, in Meyerson, the Court focused on the affirmative conduct of the principal that cloaked its agent with apparent authority, including (1) assigning a policy number to the fraudulent transaction; (2) communicating with the plaintiff regarding the phony title report; and (3) referring plaintiff directly to its agent concerning inquiries on the phony title report. As discussed above, here, Chicago Title never made any representations or similar statements to DLJ. Moreover, the title report in Meyerson was actually fraudulent on its face, as opposed to the true and accurate content of the certificates of title in this case. Unlike in Meyerson, DLJ does not allege that it had any contact 17 whatsoever with Chicago Title or its agent. The mere existence of true and accurate unmarked certificates of title in the Loan Files certainly does not impute liability to Chicago Title under the doctrine of apparent authority. See id. at 196, 333 N.Y.S.2d at 38 ("if he had so much as looked at the [certificate of title], he could [not] have believed that it constituted a policy"). Finally, DLJ's reliance on Kirschner is similarly misplaced. In Kirschner, the president and CEO of a corporation orchestrated a succession of loans that concealed hundreds of millions of dollars of uncollectible debt from the public and regulators thus creating a false-positive picture of the corporation's financial condition. See 15 N.Y.3d at 457-58, 912 N.Y.S.2d at 512-13. The issue there was whether the "adverse interest exception" applied to the misconduct of the "corporate insider." See id. at 462, 467, 912 N.Y.S.2d at 515, 519 (explaining that corporate officer's/insider's interests are "often deliberately aligned with the corporation's interests"). The Court held that the corporate officer's fraudulent conduct is imputed to the corporation. The Kirschner holding, however, was within the context of liability imputed to corporations for the acts of their corporate officers, which has no 18 relevance here. See id. at 465, 912 N.Y.S.2d at 517-18 ("Corporations are not natural persons. [O]f necessity, [they] must act solely through the instrumentality of their officers or other duly authorized agents. A corporation must, therefore, be responsible for the acts of its authorized agents even if particular acts were unauthorized ... like a natural person, a corporation must bear the consequences when it commits fraud") (quotations and citations omitted). Unlike in Kirschner, where the Court was specifically addressing liability for "corporate acts" (id. at 466, 912 N.Y.S.2d at 519), here, Clear View Abstract was not a corporate officer or employee of Chicago Title, nor was its conduct considered to be "corporate acts" of Chicago Title. Rather, Clear View Abstract's limited authority was confined to and defined by the terms of its Agency Contract with Chicago Title (i.e., it was authorized only to solicit and issue title insurance policies on behalf of Chicago Title). See R.815-24. These facts, which are uncontested, do not fall within the "corporate agency" reach of Kirschner.3 3 Other cases cited by DLJ on this point are likewise inapposite. See Hallock v. State of NY, 64 N.Y.2d 224, 225, 485 N.Y.S.2d 510, 512 (1984) (unique circumstance of whether client cloaked his attorney with apparent authority to settle a litigation by entering into an "open court" stipulation of settlement which, the Court explained, are "not lightly cast aside," especially in light of affirmative and misleading conduct by client); In re Dreier LLP, 450 B.R. 452, 454 (Bankr. S.D.N.Y. 2011) (discrete issue of "whether a client is bound when his attorney forges the client's signature to a settlement he never authorized"); News Am. Marketing, Inc. v. Lepage Bakeries, Inc., 16 A.D.3d 19 Even if Kirschner were controlling here, which it is not, the "adverse interest exception" discussed therein, requires dismissal of this action. Indeed, a corporation is not responsible for the fraudulent acts of its agent when "the agent totally abandoned his principal's interests and [is] acting entirely for his own or another's purpose ... where the insider's misconduct benefits only himself or a third party." !d. at 466-67, 912 N.Y.S.2d at 519 (emphasis in original). Here, DLJ alleges throughout its Complaint that Clear View Abstract and Doumazios perpetrated a "fraudulent scheme" upon DLJ for their own benefit. Not once in its 198 page Complaint does DLJ contend, nor can it, that Chicago Title knew about-much less benefited from-the alleged "fraudulent scheme." Indeed, Chicago Title received no benefit from the fraud. Accordingly, pursuant to the reasoning in Kirschner, Chicago Title is not liable for the alleged fraudulent acts of its 146, 147-48, 791 N.Y.S.2d 80, 82 (1st Dep't 2005) (issue in sale of goods/UCC case was "whether the consequences of a default by an agent, acting for a disclosed principal, should be borne by the principal or the vendor engaged by the agent to supply goods and services to the principal"). DLJ also cites to cases that actually bolster Chicago Title's position. In Hatton v. Quad Realty Corp., 100 A.D.2d 609, 610, 473 N.Y.S.2d 827, 829 (2d Dep't 1984), the Court noted that, in determining the issue of an agent's authority to act, "the key is foreseeability of the tortious conduct by the agent." Certainly, perpetration of a massive and complex mortgage fraud scheme is not "foreseeable conduct" that could bind Chicago Title. 20 limited agent because Chicago Title did not participate in or benefit from the "fraudulent scheme."4 The allegations in the Complaint plainly do not give rise to liability against Chicago Title under the doctrine of "apparent authority." Accordingly, the lAS Court's ruling should be reversed and the action dismissed with prejudice as against Chicago Title. III. DLJ'S RELIANCE ON THE CERTIFICATES OF TITLE WAS PER SE UNREASONABLE AS A MATTER OF LAW 1. DLJ Purchased the Fraudulent Mortgages in Reliance Solely Upon the Certificates of Title In a transparent and improper effort to manufacture a factual question, DLJ now makes new allegations against Chicago Title that are not contained in its Complaint. Specifically, in its Opposition Brief, DLJ asserts that in forming its "belief' "that the transactions were otherwise legitimate," it relied, not only on the certificates of title in the Loan Files, but "on a number of documents" which, in DLJ's words "created a strong indicia that title 4 DLJ devotes an entire section of its Opposition Brief to arguing that the Title Insurers are somehow liable for the full amount of DLJ's damages. (Opp. Brief at 26-29). Not only is DLJ's position on damages incorrect as a matter of law, as set forth in co- appellant United General's brief, but the issue of damages was not before the lAS Court and is therefore not properly before this Court on appeal since the issue of damages is irrelevant at this early stage in the litigation. 21 insurance had been, or would be, procured and that the transactions were legitimate." (Opp. Brief at 35). These "other documents," however, are mere window dressing to try and cloud the issues and divert the Court's focus from the only documents DLJ alleges it relied on in its Complaint-the certificates of title: DLJ would not have purchased the 18 fraudulent mortgages (see Exhibit 15 annexed hereto), without Chicago Title certificates of title (incorporated herein by reference) fraudulently prepared by Clear View Abstract and T. Doumazios, Esq., as agents of Chicago Title. R.494, 995 (emphasis added). DLJ, a sophisticated player in the secondary mortgage market, cannot, as a matter of law, rely on unmarked certificates of title in forming its "belief' that these were "legitimate transactions." Mandor, 28 N.Y.2d 739, 321 N.Y.S.2d 120 (rejecting a claim that a report of title is evidence oftitle insurance coverage). Remarkably, DLJ argues that "[i]t does not matter what the documents said," and that they relied on "the very existence of these documents" in forming their belief that closings took place and title insurance policies would ultimately be procured. (Opp. Brief at 9 n.9). DLJ's position, however, is contrary to the settled law in New York requiring that 22 any reliance be "reasonable" as "essential to a claim for fraud." Valassis Commun., Inc. v. Weimer, 304 A.D.2d 448, 449, 758 N.Y.S.2d 311, 312 (1st Dep't 2003). DLJ admits that no title insurance policies were in the Loan Files. (R.21 ). Thus, DLJ only relied on the certificates of title. But all DLJ or its agent had to do was merely read the certificates of title to know that they cannot be relied upon as indicia of title insurance being issued. See Meyerson, 39 A.D.2d at 196, 333 N.Y.S.2d at 38 (Steuer, J., dissenting) (explaining that a certificate of title cannot be relied upon for believing actual insurance was issued because "if he had so much as looked at the document, he could [not] have believed that it constituted a policy"). If it actually read the certificates of title, DLJ would have immediately been alerted to the fact that closings never took place and that the transactions were questionable, at best. The certificates of title state, on their face: After the closing of the transaction, in conformance with the requirements and procedures of the Company [Chicago Title], the Company [Chicago Title] will issue the policy and except (i) all loss or damage by reason of the estates, interests, defects, objections, liens, encumbrances and other matters set forth in Schedule B herein that are not disposed of to the satisfaction of the 23 Company [Chicago Title] prior to such closing or issuance of the policy (ii) any questions or objection coming to the attention of the Company [Chicago Title] before the date of closing, or if there be no closing, before the issuance of the policy. R.554 (emphasis added). See also Citibank v. Chicago Title Ins. Co., 214 A.D.2d 212, 219, 632 N.Y.S.2d 779, 783 (1st Dep't 1995) (explaining that a "commitment for title insurance," is a pre-closing document "which enables [the prospective insured] to decide whether to cure the defect and conclude the transaction or proceed no further") (emphasis added); (Opp. Brief at 9) (admitting that the title commitment merely indicates that a policy will be issued "at some point in time"). The certificates of title themselves are not fraudulent documents. To the contrary, these documents are true and accurate indications of the liens and other title impediments that needed to be resolved at closing. In fact, because they were unmarked, DLJ should have immediately realized that closings on the mortgages had not even occurred as none of the "industry standard" closing markings appeared on the documents. See J. Bushnell Nielsen, Title & Escrow Claims Guide § 6.2 (Second Edition 2011) ("it is common in many states [including New York] for title company closers to 24 mark up the title insurance commitment at closing"). Indeed, at the closing, the title closer "marks up" the certificate of title which reflects the liens and encumbrances that have been resolved and commits to all required coverage in the ultimate title policy. See id. § 13.1, n. 7. Shortly after the closing, a title policy is issued in conformance with the mark-up. See id. Thus, these certificates of title could not have been an indicator to DLJ that closings took place, let alone that these were "legitimate transactions." Even if these certificates of tittle were marked, which they were not, they still could not be relied upon by DLJ for the existence of title insurance policies. Fidelity Nat'/ Title Ins. Co. v. Cole Taylor Bank, No. 11 Civ. 4497 (MGC), 2012 WL 2814001, at *5 (S.D.N.Y. July 10, 2012) ("Although Johns and Lee furnished marked-up title commitments, these did not create valid title insurance policies because the preconditions for issuance were not satisfied"). Accordingly, DLJ's reliance on the certificates of title was not reasonable as a matter of law. 2. DLJ's New Allegations Do Not Save Its Fraud Claim Although the Complaint alleges that DLJ relied solely on the certificates of title (R.494, 995), DLJ now veers outside the Complaint, 25 arguing that the following "facts" created a "strong indicia that title insurance had been, or would be, procured and that the transactions were legitimate": (a) Doumazios' attendance at closings; (b) Title insurance documentation in the Loan Files consisting of recertification commitments and certificates of title; (c) Form HUD-ls contained in the Loan Files; (d) General industry practice that a title agent attends closings and procures title policies thereafter; (e) Doumazios' authority to procure title msurance and his representations that he in fact would do so; (f) The payments made to Doumazios at the closings; and (g) Doumazios authority to use Chicago Title msurance documentation. (Opp. Brief at 35-36). Even if the Court were to consider these "facts"-some of which are nowhere to be found in the record-DLJ still does not adequately allege reasonable reliance as a matter of law. First, there is absolutely no evidence in the record, nor does DLJ cite to any, that Doumazios attended closings. In fact, there is nothing in DLJ's Complaint or the Loan Files to indicate that he did. The evidence in actuality 26 indicates, contrary to DLJ's unsupported assertions, that no closings ever took place. As explained above, the fact that the certificates of title were unmarked should have alerted DLJ to the probability that closings did not take place. Indeed, it is at the closing that a title agent, pursuant to "industry standards," would in fact mark up a certificate of title. See J. Bushnell Nielsen, Title & Escrow Claims Guide § 6.2. Second, the purported "recertification commitments" contained in the Loan Files are, as DLJ explains, nothing more than updated title commitments or certificates of title. (R. 7 40-41 ). Thus, for the reasons stated herein regarding certificates of title, the recertification commitments likewise cannot form the basis for DLJ' s reasonable reliance. Regardless, DLJ does not cite to, nor does the record contain any of these purported "recertification commitments" relating to Chicago Title.5 Moreover, the Form HUD-1 's should not be considered in assessing DLJ's reliance claim against Chicago Title as they are not title documents and have no relation to title insurance. Therefore, these allegations, which are not contained in 5 Even though the certificates of title were "unmarked," DLJ contends that the record contains marked-up "recertification commitments" as evidence that closings took place. (Opp. Brief at 35, n.8). This contention is misleading, if not disingenuous. Indeed, the only document DLJ points to in support ofthis statement is a certificate of title issued by Washington Title Insurance Company, who is not a party to this appeal. The only relevant documents for purposes of this appeal-the Chicago Title certificates of title- are entirely unmarked. (R.541, 591). 27 DLJ's claim against Chicago Title, are just further proof that DLJ has simply proscribed its own unreasonable and incorrect meaning to the loan and title documents in the Loan Files. Finally, contrary to DLJ's unsupported assertions, there are no allegations in the Complaint (or anywhere in the record) that Doumazios ever spoke to or made any representations whatsoever to DLJ. Moreover, the fact that Doumazios had limited authority (pursuant to the Agency Contract) to issue title insurance policies on behalf of Chicago Title, is irrelevant to the issue of the reasonableness ofDLJ's reliance. The allegations that DLJ asserts in its Opposition Brief, which are not alleged in its claim against Chicago Title, are actually belied by the undisputed documentary evidence contained in the record. DLJ is a sophisticated buyer of mortgages on the secondary market and, as such, must be treated as having industry knowledge regarding the purpose and legal import of basic documents contained in a loan file. To the extent that DLJ did not have accurate knowledge as to what these documents meant, a simple phone call to Chicago Title would have not only resolved this issue, but also could have uncovered the entire mortgage fraud. Instead, DLJ chose to proscribe its own meaning that is contrary to the face and legal import of 28 the documents themselves. And the meamng DLJ proscribes to these documents has already been expressly rejected by this Court. See Mandor, 28 N.Y.2d 739, 321 N.Y.S.2d 120. Citibank, 214 A.D.2d at 214, 632 N.Y.S.2d at 780 (explaining that the commitment is "preliminary to the issuance of [a title] policy"). Therefore, at its heart, not only is DLJ seeking to hold a title company responsible for what DLJ alleges to be fraudulent acts outside the agency relationship, but DLJ, a sophisticated player in the secondary mortgage market, also seeks to have the Court countenance DLJ's unreasonable reliance on documents which--on their face and according to New York case law-may not be relied upon, and hold Chicago Title liable for DLJ' s own incompetence. Accordingly, DLJ's fraud claim fails as a matter of law. IV. THE "RED FLAGS" IN THE LOAN FILES FORECLOSE DLJ'S FRAUD CLAIM As set forth in detail in Chicago Title's initial brief, the Loan Files contained numerous glaring "red flags" which even the most limited due diligence would have easily uncovered, including: (i) there were no title insurance policies in the Loan Files; (ii) the certificates of title which DLJ 29 allegedly relied upon were unmarked, indicating that no closings ever took place; (iii) the pre-closing certificates of title are dated after the closing date indicated on the HUD-1 forms; and (iv) a simple online "ACRIS" search of the New York County City Register's Office would have revealed that the underlying deeds and mortgages were not recorded. DLJ makes two arguments to try and overcome these flagrant due diligence failures. First, DLJ argues that the question of its due diligence and reasonable reliance is a factual inquiry not properly determined on a motion to dismiss. (Opp. Brief at 38). Second, DLJ contends that, irrespective of the red flags, it has conducted enough due diligence to satisfy its burden under New York law to establish reasonable reliance. I d. Both of these contentions are wholly without merit. As for the first issue, New York Courts consistently dismiss fraud claims on the pleadings in circumstances, like here, where a sophisticated party's due diligence failures preclude them from asserting reliance as a matter of law. See UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87, 88, 773 N.Y.S.2d 385, 386 (1st Dep't 2001) (affirming grant of motion to dismiss fraud claim and explaining that "[i]f plaintiffs had requested and carefully reviewed these documents during their 30 due diligence, they would have been apprised of the clearance issue before making their investment decision. Accordingly, plaintiffs cannot claim to have justifiably relied on the statements ... "); Duane Thomas LLC v. 62 Thomas Partners, LLC, 300 A.D.2d 52, 53, 751 N.Y.S.2d 441, 442 (1st Dep't 2002) (dismissing fraud claim since plaintiff could have discovered the defect "by making additional relevant inquiries and exercising ordinary intelligence"). Indeed, in rendering its decision, the lAS Court failed to consider the well-settled case law permitting dismissal of claims like this one at the pleadings stage: R.27. Now, you are asking me to, and I don't know if I can do this, to assume as a matter of law, that a sophisticated lender like, you know, or a sophisticated purchaser of mortgages, like DLJ, would have known that the title file should have contained the title policy, and that the fact that it didn't contain the title policy was a red flag. As set forth above, however, the settled case law directs dismissal of fraud claims on the pleadings in instances such as this one, where the plaintiffs reliance is patently unreasonable as a matter of law. Accordingly, 31 this Court should reverse the erroneous ruling of the lAS Court on the issue of reliance and dismiss DLJ' s fraud claim against Chicago Title. Rather than try and explain-away the red flags, DLJ's Opposition Brief skirts the issues by detailing the minimal due diligence efforts DLJ did allegedly conduct through its custodian. (Opp. Brief at 38-42). None of the purported due diligence described by DLJ, however, even touches upon DLJ's outright failure to discover and inquire about the various red flags listed above. The reason is obvious-DLJ has no explanation. For example, the fact that title insurance policies were not present in the Loan Files, a fact admitted to by DLJ (R.21 ), is something that, with a simple inquiry to the title insurers by DLJ, could have uncovered the entire fraud. Tellingly, DLJ does not even mention the absence of title policies even once in this section of its Opposition Brief. See id. DLJ, a sophisticated purchaser of mortgages on the secondary market, cannot assert reasonable reliance as a matter of law in light of its blatant due diligence failures. See Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 98 (2d Cir. 1997) ("[w]here sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are 32 particularly disinclined to entertain claims of justifiable reliance"); UST Private Equity, 288 A.D.2d at 88, 773 N.Y.S.2d at 386. In its Opposition Brief, DLJ relies on DDJ Mgmt., LLC v. Rhone Group LLC, 15 N.Y.3d 147, 905 N.Y.S.2d 118 (2010) and Luna/ Realty, LLC v. DiSanto Realty, LLC, 88 A.D.3d 661, 930 N.Y.S.2d 619 (2d Dep't 2011 ), for the proposition that by conducting some due diligence, DLJ is thereby excused from making further inquiry regarding the red flags. These cases, however, demonstrate precisely why DLJ's failure to take additional steps was unreasonable as a matter of law. In DDJ Mgmt., plaintiff and defendant, sophisticated business entities, had numerous conversations throughout the negotiation process whereby plaintiff received assurances from defendant as to the alleged misrepresentations. Most critically, ''plaintiffs made a significant effort to protect themselves against the possibility of false financial statements: they obtained representations and warranties to the effect that nothing in the financials was materially misleading." !d. at 156, 905 N.Y.S.2d at 123 (emphasis added). The Court held that in light of these communications, representations and warranties received from the defendant, the law did not obligate plaintiff to inquire further. !d. Similarly, in Luna/ Realty, as DLJ 33 quotes in their Opposition Brief, "plaintiffs received negotiated assurances as to the accuracy of the [statements]." (Opp. Brief at 39). Here, not only did DLJ not receive any assurances, but DLJ does not allege having a single communication, whether orally or in writing, with, either Chicago Title or Doumazios. All DLJ alleges to have done was conduct a review of the third-party Loan Files through its custodian. New· York law commands that, in light of the glaring "red flags" contained in the Loan Files, DLJ should have inquired further. See Duane Thomas LLC, 300 A.D.2d at 53, 751 N.Y.S.2d at 442. Indeed, had it made a simple phone call to Chicago Title, DLJ could have uncovered the entire mortgage fraud. DLJ did not even undertake this modicum of due diligence. Accordingly, DLJ is unable to establish reasonable reliance as a matter of law and its fraud claim against Chicago Title must be dismissed with prejudice. 34 CONCLUSION For all the foregoing reasons, as well as those detailed in its initial brief, Chicago Title respectfully requests that this Court reverse the lAS Court's decision and order and grant Chicago Title's motion to dismiss. Dated: New York, NY September 14,2012 By: .Jakoby M. arren Traub Adam J. Stein 2 Park Avenue New York, NY 10016 (212) 592-1400 Counsel for Defendant Chicago Title Insurance Company 35 APPELLATE DIVISION- FIRST DEPARTMENT ·PRINT SPECIFICATIONS STATEMENT I hereby certify pursuant to 22 NYCRR § 600.10 that the foregoing brief was prepared on a computer using Microsoft Word. Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Line spacing: Double Word Count. The total number of words in this brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of citations, proof of service and this statement, is 6998. Dated: New York, NY September 14, 2012 By: ur G. Jakoby M. Darren Traub Adam J. Stein 2 Park Avenue New York, NY 10016 (212) 592-1400 Counsel for Defendant Chicago Title Insurance Company 36