DLJ Mortgage Capital, Inc., Appellant,v.Thomas Kontogiannis, et al., Defendants, Chicago Title Insurance Company, Inc., et al., Respondents.BriefN.Y.November 13, 2013HERRICK New 'iORt< N EWARK ]j) Rt NCETON ARTHUR G. JAKOBY PARTNER Direct Tel 212.592.1438 Direct Fax 212.545 3340 I. August 20, 2013 VIA FEDERAL EXPRESS Judges of the Court of Appeals New York State Court of Appeals 20 Eagle Street Albany, NY 12207 fax: (516) 571.0163 Re: DLI Mortgage Capital, Inc. v. Kontogiannis, et al. APL2013 -00 138 lAS Court Index No.: 104675/20 10 Your Honors: Defendant-Respondent Chicago Title Insurance Company, Inc. ("Chicago Title") respectfully submits the following written arguments in opposition to Plaintiff-Appellant DLJ Mortgage Capital Inc.'s ("DLJ") submission pursuant to Rule 500.11(c) of this Court's Rules of Practice. Chicago Title adopts and incorporates by reference herein its (i) Appellant's Brief to the Appellate Division, First Department (the "Appellate Division"), dated May 10, 2012; (ii) Reply Brief to the Appellate Division, dated September 14, 2012; and (iii) Brief to the Appellate Division in opposition to DLJ's motion to reargue, or, alternatively, leave to appeal to this Court, dated March 14, 2013. Based on these submissions, Chicago Title respectfully requests that this Court affirm the decision and order of the Appellate Division, dated January 15, 2013 (the "Order," DLJMort, Capital, Inc. v. Koniogiannis,102 A.D.3d 489, 959 N.Y.S.2d 18 (1st Dep't 2013)), which unanimously dismissed DLJ's claim against Chicago Title. PRELIMINARY STATEMENT Through this action, DLJ, a sophisticated institutional player in the secondary mortgage market, seeks to hold Chicago Title, a title insurance underwriter, liable for the allegedly fraudulent acts of a limited title agent, based on the agent's involvement in a "mortgage fraud scheme" that resulted in DLJ purchasing fraudulent mortgages. In its Amended Complaint (the "Complaint"), wherein DLJ details, for several hundred paragraphs, the intricacies of this purported scheme, DLJ does not allege that Chicago Title: (i) knew about the fraud; (ii) benefitted from the fraud; or (iii) had any contact or communications with DLJ. And most critically, DLJ does not allege that Chicago Title engaged in any conduct whatsoever in connection with the transactions at issue. 2 PARK AVENUE, NEW YORK, NY toot6 IRE 212.92.1400 FAX 212.5921500 www.herrick.com HERR IC K August 20, 2013 Page 2 DLJ concedes that when it reviewed the loan files for the fraudulent loans (the "Loan Files"), before it decided to purchase the "fraudulent" loans, these Loan Files did not contain a single title insurance policy issued by either Respondent Chicago Title or United General Title Insurance Company, DLJ, contends that instead of relying upon title policies as evidence of title insurance, it relied on certain pre-closing, unmarked certificates of title which were created and issued by Ted Doumazios, Chicago Title's limited agent, in forming its "belief' that the mortgages were legitimate and that they had been insured. However, Certificates of Title are not title insurance policies but merely pre-closing "commitments" to possibly issue at a future date title policies if: (a) certain conditions and requirements of closing are met to the satisfaction of the title underwriter before the closing; and (b) a title premium is paid to the title underwriter before the closing. Here, DLJ did not check to see if either the closing conditions were satisfied or if premiums were paid. And, DLJ never questioned why not a single title policy was found in the Loan Files and never bothered to inquire to see if policies were ever issued'. Had they done so, they would have discovered that none of the closing requirements were ever met, premiums were never paid and thus policies were never issued. In fact, they would have learned that the reason there were no title policies in the file was because none existed, and Chicago Title was totally unaware of these mortgages. In light of the fact that (i) DLJ did not allege any conduct whatsoever on the part of Chicago Title related to the issuance of the commitments; and (ii) DLJ purchased the loans despite title policies being glaringly absent from the Loan Files, the Appellate Division unanimously held that the criminal acts of Doumazios cannot be imputed to innocent title insurance underwriters on a theory of apparent authority (the only theory of liability argued by DLJ) as a matter of law. In so doing, the Appellate Division dismissed DLJ's claim against Chicago Title on two independent grounds. First, the Court found that DLJ's failure to allege any "misleading conduct" on the - i:__ fl 1 part ol iacago i itie preeiuue a iiauu eiaim itgaoisi ii uaaeu on wii-csiaoiiucu principais of apparent authority articulated by this Court and applied countless times by the Appellate Division: Plaintiff's claims against the title insurance defendants for the acts of their agents, who were co-conspirators in a mortgage fraud scheme, should have been dismissed. The complaint does not allege that the title insurers were aware that their agents had issued fraudulent certificates of title and commitments for title on the title insurers' behalf for mortgages that plaintiff eventually purchased. Nor can liability attach under the doctrine of apparent authority, since there is no allegation of any misleading conduct on the part of the title insurers. (see flallock v. State of N. Y, 64 N.Y.2d 224, Normally, prior to a closing, the conditions set forth in the title commitment are either marked "omitted" or "excepted" from coverage. Here, the commitments were unmarked. This was an obvious red flag that the conditions had not been satisfied and thus title policies had not been issued. HERR IC K August 20, 2013 Page 3 231 [19841). Plaintiff purchased the fraudulent mortgages from a third party, and never dealt with the title insurer defendants directly. Order at 489, 959 N.Y.S.2d at 19. Second, and equally dispositive, the Appellate Division correctly found that the absence of title insurance policies from the Loan Files forecloses DLJ's assertion of reasonable reliance as a matter of law: In any event, plaintiff cannot show justifiable reliance upon the alleged misrepresentations of the agent (see Id.). The loan file documents relied upon, prepared by the agents, did not show that title insurance policies had in fact been issued in connection with the fraudulent mortgages purchased by plaintiff. Order at 490, 959 N.Y.S.2d at 19. Now, DLJ contends, as it must, that this Court should find the Appellate Division's unanimous ruling was incorrect on both grounds. DLJ argues that the mere fact Chicago Title's agent had limited actual authority pursuant to an agency contract, coupled with the fact that Chicago Title's agent created pre-closing title commitments which were contained in the Loan Files, somehow cloaked the agent with apparent authority to commit massive mortgage fraud which could be imputed to Chicago Title. Moreover, DLJ claims that, in conducting its due diligence review of the Loan Files, DLJ relied on the representations of Doumazios contained in the certificates of title in forming its misguided "belief' that the loans had closed and were in fact "legitimate." DIJ's contentions, however, fail for several reasons. First, the contractual agency relationship between Chicago Title and Doumazios, i.e., "actual authority," is entirely irrelevant to a claim based on ap parent authority, which requires a showing of misleading conduct on the part of the principal that cloaks the agent with authority to commit the alleged fraudulent acts. Tellingly, DLJ's lead contention to the lAS Court was based on a theory of "actual authority," but DLJ later abandoned that claim in its Appellate Brief, conceding it is "irrelevant and should be disregarded." DLJ subsequently attempted to revive that theory by using it as DLJ's basis to assert a claim of apparent authority. Essentially, DLJ contends that since Doumazios' title agency, Clear View Abstract, was given actual authority to issue Chicago Title title commitments and title policies and was given Chicago Title "forms," such authority is evidence of misleading conduct by Chicago Title because it somehow cloaked Clear View Abstract, and its principal, Doumazios, with apparent authority to issue fraudulent Certificates of Title and commit fraud on behalf of Chicago Title. DLJ, however, does not explain how giving its agent forms to conduct "honest business" is evidence of misleading conduct by Chicago Title and DLJ does not cite to a single case in H E R R I C K August 20, 2013 Page 4 support of this proposition, i.e., that the existence of actual authority is evidence of the "misleading conduct" required to establish apparent authority. Second, the Complaint does not allege any affirmative or misleading conduct on the part of Chicago Title, In fact, the Complaint does not allege that Chicago Title engaged in any conduct whatsoever related to the title commitments or that it either knew or could have known about the commitments. Accordingly, this Court's requirement that the principal must have engaged in "misleading conduct" to create apparent authority renders DLJ's claim insufficient as a matter of law. Third, DLJ admits that the loans it purchased were not insured and that there were no title insurance policies in the Loan Files. In fact, DLJ alleges that it purchased a total of 31 loans whose files contained some form of "commitment" by either Respondent Chicago Title or Respondent United General Title Insurance Company to issue a title policy, in the future, but not even one of the 31 loan files contained evidence that a title policy had ever been issued. This lone fact, which is undisputed, precludes DLJ from asserting reasonable reliance as a matter of law. Indeed, if DLJ, as it contends, thought it was purchasing "insured mortgages" on the secondary market that had already closed, the absence of copies of title insurance policies in the Loan Files should have, at a minimum, been alarming to DLJ. Fourth, the certificates of title—the only documents DLJ alleges it relied upon in support of its claim against Chicago Title—are hardly evidence that title policies were issued, let alone that closings on the loans took place. To the contrary, these documents state, on their face, that closings did not take place and that several preconditions must be satisfied before title policies could be issued. To make matters worse, the certificates of title were unmarked, which should have immediately alerted DLJ to the fact that the loans never closed. Indeed, this Court has already recognized that a certificate of title is not evidence of title insurance coverage. Mandor v Lawyers Title Ins, Corp., 28 N.Y.2d 739, 321 N.YS.2d 120 (1971). Finally, the Loan Files contained other glaring "red flags" which should have, at the very least, placed DLJ on notice to inquire further. For example, I)LJ did not even bother to conduct a simple internet search to check if the mortgages were in fact recorded. Had it conducted a search (an ACRIS search), it would have would have immediately realized that these mortgages were not recorded, a clear red flag indicating fraud. Confronted with this and other red flags, a sophisticated purchaser of mortgages, like DLJ, should have placed a simple phone call to any of the title companies to inquire about the missing title policies -- a virtually effortless act which likely would have uncovered the entire fraud. DLJ did not even undertake this modicum of due diligence. Thus, DLJ is precluded from asserting reasonable reliance. Each of these points standing alone is dispositive to DLJ's fraud claim. Accordingly, this Court should affirm the unanimous holding of the Appellate Division that the Complaint fails to state a cause of action against Chicago Title. H F R R I C K August 20, 2013 Page 5 STATEMENT OF FACTS A full recitation of the facts relevant to this appeal is set forth in detail in Chicago Title's Brief to the Appellate Division, which is incorporated by reference herein. Chicago Title incorporates the factual allegations relevant to this appeal throughout this submission and respectfully refers the Court to its Appellate Brief and the Joint Record on Appeal which make evident why the Appellate Division was correct in dismissing DLJ's claim against Chicago Title. IIIIMI1IMiR1IFIftJ! In 2010, DLJ commenced this action in the Supreme Court, New York County against more than 20 defendants for their role in an alleged massive "mortgage fraud scheme." Although no title insurance policies were issued in connection with these fraudulent loans, DLJ also sued three title insurance underwriters, including Chicago Title, for the alleged fraud perpetrated by their limited title agents. In April of 2011, Chicago Title moved to dismiss the fraud claim. Although the lAS Court (Ramos, J.) recognized that Chicago Title is "probably going to [win on] summary judgment" (R. 44), it denied Chicago Title's motion, at oral argument from the bench, and erroneously reasoned that Chicago Title "may have" known about the fraudulent transactions (R. 43) even though DLJ never alleged anywhere in the Complaint that Chicago Title had knowledge of the fraud. The lAS Court was similarly mistaken when it found that these issues could not be decided at the pre-answer motion level (R. 53-54). Moreover, the lAS Court plainly, and admittedly, failed to understand the significance and legal import of the pre-closing certificates of title, allegedly relied upon by DLJ in purchasing these loan. (R. 28-29, 36). Chicago Title appealed. The Appellate Division unanimously reversed the lAS Court's ruling and dismissed DLJ's claim against Chicago Title. The Appellate Division correctly found that the fraud claim based on apparent authority fails for two independent reasons: (i) the Complaint fails to allege that Chicago Title was aware of the fraud or that it engaged in any misleading conduct; and (ii) the absence of title insurance policies in the Loan Files precludes an assertion of reasonable reliance as a matter of law. DLJ moved to reargue the Appellate Division Order, or, alternatively, for leave to appeal to this Court. DLJ's motion to reargue was denied and the Appellate Division granted DLJ leave to appeal. H E R R I C K August 20, 2013 Page 6 ARGUMENT I, THE FACTS ALLEGED IN THE COMPLAINT DO NOT GIVE RISE TO A CLAIM OF APPARENT AUTHORITY A. A Limited Agency Contract "Actual Authority" -- Does Not Automatically Create Apparent Authority As DLJ articulates in its Letter Brief, to state a claim under the doctrine of apparent authority, the plaintiff must show that the facts leading to that conclusion emanate from the principal and not from the agent. Indeed, this Court has expressly held that "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 Hosp., 32 N.Y.2d 464, 473, 346 N.Y.S.2d 238, 244 (1973) (emphasis added). Thus, to state a claim, DLJ must, at a minimum, allege that Chicago Title engaged in some affirmative, misleading words or conduct that DLJ reasonably relied upon. See McGarry v. Miller, 158 A.D.2d 327, 328, 550 N.Y.S.2d 896, 897 (1st Dep't 1990). Plainly stated, DLJ has not alleged any such conduct on the part of Chicago Title. Rather than allege that Chicago Title engaged in any misleading conduct, DLJ mixes two doctrines together, concocting an apparent authority argument based on actual authority, pointing to Chicago Title's "actual, authorized agency relationship" with Doumazios, i.e., the limited Agency Contract (R. 8 15-24). DLJ Letter Brief at 5. In other words, even though the Complaint does not allege that Chicago Title (i) engaged in any overt, "misleading conduct," (ii) communicated with DLJ, or (iii) knew about or benefitted from the alleged fraud, DLJ argues that the mere fact that Clear View Abstract was Chicago Title's actual limited agent and gave him forms to "honestly" use in connection with title closings, cloaked Clear View Abstract, and its principal, Doumazios, with apparent authority to commit fraud. Tellingly, DLJ neither explains how such conduct on the part of Chicago Title was "misleading" nor cites a single relevant case to support this theory -- that the mere existence of actual authority can cloak an agent with apparent authority to commit fraud, 2 Indeed, this Court has held that "[t]he mere creation of an agency for some purpose does not automatically invest the agent with 'apparent authority' to bind the principal without limitation. An agent's power to bind his principal is coextensive with the principal's grant of authority. One who deals with an agent does so at his peril, and must make the necessary 2 The only case DLJ relies on for this theory is lure Liquidation of Nat'lSur. Co., 162 Misc. 344, 294 N.Y.S.2d 433 (Sup. Ct. N.Y. Cnty. 1937), a case that neither supports, nor alludes to, the proposition asserted. In fact, that decision actually undermines DLJ's contention, in that it was the "negligence of the [principal]" and the misleading conduct of the principal which cloaked the agent with authority (as opposed to a mere agency agreement). Indeed, "[p]eople calling up the [principal] company to apply for bonds or amendment of bonds were customarily referred to [agent] whose office was in the offices of the [principal] company and whose telephone extension was connected with the surety company's switchboard." M. at 345, 294 N.Y.S.2d at 434. HERRICK August20, 2013 Page 7 effort to discover the actual scope of authority." Ford, 32 N.Y.2d at 473, 346 N.Y.S.2d at 244. Thus, DLJ is asking this Court to do precisely what this Court has already found to be contrary to the law. Moreover, despite making the argument to the lAS Court, DLJ conceded, on appeal, that in perpetrating the alleged fraud, Doumazios was not acting in the scope of its actual authority and liability cannot be imputed to Chicago Title on that basis. In DLJ's words: 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 (emphasis added). DLJ's prior concession that the theory of actual authority is "irrelevant" makes it ironic, and somewhat disingenuous, that it is now premising its apparent authority argument almost exclusively on the doctrine of actual authority. Since this contention is contrary to the case law, which requires allegations of "misleading conduct" by the principal (here, Chicago Title), DLJ's fraud claim against Chicago Title fails as a matter of law. B. The Complaint Does Not Contain A Single Allegation Of Misleading Conduct On The Part Of Chicago Title DLJ's Complaint, containing an astonishing 198 pages and over 630 paragraphs of excruciating detail, does not allege a single overt or misleading act on the part of Chicago Title. In fact, the entirety of "conduct" DLJ claims that Chicago Title engaged in—which is not really conduct at all—is confined to one lone paragraph in the Complaint which states, in its entirety: Chicago Title was responsible for the appearance of authority in Clear View Abstract and T. Dournazios, 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, H ERRICK August 20, 2013 Page 8 R. 494, 994. Boiled down to its essence, it is the certificates of title alone that DLJ alleges it relied upon in forming its claim against Chicago Title. Even assuming, however, DLJ was permitted, as a matter law, to rely on certificates of title found in the Loan Files allegedly reviewed by DLJ before purchasing the subject loans (which it clearly was not, see infra Point II), DLJ still does not allege that Chicago Title prepared these documents or was even aware of their existence. To the contrary, DLJ admits that the certificates of title were prepared by the agent, and 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 (emphasis added). See also Order at 490, 959 N.Y.S.2d at 19 (the certificates of title were "prepared by the agents"). "The very basis of the doctrine of apparent authority indicates that the principal can be held liable under the doctrine only where he was responsible for the appearance of authority in the agent to conduct the transaction in question. The apparent authority for which the principal may be held liable must be traceable to him; it cannot be established by the unauthorized acts, representations or conduct of the agent." Ford, 32 N.Y.2d at 473, 346 N.Y.S,2d at 244. As such, New York Courts consistently dismiss claims against principals whose agent commits fraud where, like here, the principal is not alleged to have engaged in misleading conduct. See McGarry, 158 A.D.2d at 328, 550 N.Y,S.2d at 897 ("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"). Thus, taking the allegations in DLJ's Complaint as true, the Appellate Division correctly found that the theory of apparent authority is not in play since "there is no allegation of any misleading conduct on the part of the title insurers." (Order at 490, 959 N.Y.S.2d at 19). Accordingly, the Order should be affirmed. 4 $ The absurdity of DLJ's claim is demonstrated by the fact that Chicago Title "certificates" to potentially, in the Jiiture, issue title policies were found in only 18 of the 95 loans purchased, yet DLJ somehow under its "conspiracy" theory seeks damages against Chicago Title for all 95 Fraudulent Transactions. DLJ does this even though nothing in the remaining 77 Loan Files references Chicago Title and there is absolutely no allegation that Chicago Title even knew about the 18 Chicago Title "certificates of title." DLJ's reliance on Mey aw erson v. Lyers Title Ins. Corp., is misplaced. 39 A.D.2d 190, 333 N.Y.S.2d 33 (1st Dep't 1972), qff'a', 33 N.Y.2d 704, 349 N.Y.S.2d 675 (1973) In Ivleyerson, 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 H E R R I C K August 20, 2013 Page 9 C. The Question Of Apparent Authority Must Be Decided As A Matter Of Law Where The Complaint Contains No Allegations Of Misleading Conduct By The Princinal DLJ maintains that the question of apparent authority should not be decided at the pre-answer motion to dismiss stage. In support of this, DLJ specifically cites cases where the issue of apparent authority was found to be factual in nature and involved instances where, unlike here, there were allegations of overt conduct on the part of the principal. See Aarons Fifth Ave. v. Ins. Co. of N. Am., 52 A.D.2d 855, 383 N.Y.S.2d 45 (2d Dep't 1976) (affidavits regarding failure to notify of termination of authority raised factual question). As explained above, however, where a complaint does not contain any of the requisite allegations to state a cause of action based on the doctrine of apparent authority, there are no questions of fact and courts do not hesitate to dismiss such cases on the pleadings. See e.g., HSA Residential Mortg. Servs. v. Stewart Title Guar. Co., 7 A.D.3d 426, 427, 776 N.Y.S.2d 791, 791 (1st Dep't 2004) (complaint failed to adequately plead apparent authority since plaintiff did not "allege any words or conduct by the title insurers"); 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"). Indeed, any discovery here would be futile as there are no allegations of conduct by Chicago Title in the first instance. Accordingly, the Appellate Division's unanimous dismissal of DLJ's claim against Chicago Title was entirely proper. D. This Court's Decision In Kirschner Is Entirely Distinguishable From, And Inapplicable To, The Instant Case DLJ relies heavily on this Court's decision in Kirschner v. KPMG LLP, 15 N.Y.3d 446, 912 N.Y.S.2d 512 (2010). Plainly stated, Kirschner dealt with issues of "corporate agency," that have no relevance here. Indeed, the holding in Kirschner involved imputation of gpporate officers' and employees' acts to a coproration. Here, Doumazios (Cleai View Abstract) was neither a corporate officer nor empoyee of Chicago Title, but rather a limited authority based on the fact that the title company [principal] engaged in overt ac/s and misleading conduct regarding the fraudulent transaction at issue. In finding the title company liable, the Court focused on the principal title company's actual conduct that led plaintiffs to believe that the agent was authorized to act on the title company's behalf for the transaction at issue. Thus, unlike in the instant case, it was this misleading conduct that cloaked the agent with apparent authority, including (I) 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. Unlike in ivfeyerson, DLJ does not allege that it had any contact whatsoever with Chicago Title or its agent. In fact, there is no allegation that Chicago Title had any knowledge of these transactions. Thus, Meverson is inapposite. H E R R I C K August 20, 2013 Page 10 contractual agent whose sole function was to solicit and issue title insurance policies on behalf of Chicago Title. 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, which specifically dealt with liability imputed to corporations for the acts of their corporate officers, has no relevance here. As this Court explained, "[c]orporations 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... [l]ike a natural person, a corporation must bear the consequences when it commits fraud." Id. at 465, 912 N.Y.S.2d at 517-18 (quotations and citations omitted). Unlike in Kirschner, where the Court was specifically addressing liability for "corporate acts" (Id. at 467, 912 N.Y.S.2d at 519), here, Doumazios was not a corporate officer or employee of Chicago Title, nor was its conduct considered to be "corporate acts" of Chicago Title. Rather, his limited authority was confined to and defined by the terms of his Agency Contract with Chicago Title (i.e., he was authorized only to solicit and issue title insurance policies on behalf of Chicago Title) (R. 8 15-24). These facts, which are uncontested, certainly do not fall within the "corporate agency" reach of Kirschner. Accordingly, Kirschner is inapplicable. II. THE APPELLATE DIVISION CORRECTLY HELD THAT DLJ CANNOT ESTABLISH REASONABLE RELIANCE AS A MATTER OF LAW A. DLJ Admits That It Purchased The Fraudulent Mortgages Despite The Absence Of Title Insurance Policies From The Loan Files Even if DLJ could establish apparent authority, its fraud claim still fails as a result of its incredible lack of due diligence. Indeed, "[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 particularly disinclined to entertain claims of justifiable reliance." SchlaUèr iVance & Co. V. Estate of Warhol, 119 F,3d 91, 98 (2d Cir. 1997). DLJ—a sophisticated purchaser of mortgages on the secondary market—knows or should know that a mortgage loan file which does not contain a title insurance policy is the ultimate red flag that the mortgage is likely fraudulent. And, the existence in the file of a pre-closing commitment to HER R I C K August 20, 2013 Page II "possibly" issue a title policy if (i) the conditions set forth in the commitments are satisfied, and (ii) the policy premium is paid, is not evidence that a title policy was ever issued. In light of this uncontested fact, the Appellate Division unanimously held: plaintiff cannot show justifiable reliance upon the alleged misrepresentations of the agent (see id). The loan file documents relied upon, prepared by the agents, did not show that title insurance policies had in fact been issued in connection with the fraudulent mortgages purchased by plaintiff. Order at 490, 959 N,Y.S.2d at 19. Despite the Appellate Division's holding that the absence of title insurance policies was di spositive of DLJ's claim against Chicago Title, DLJ unabashedly contends that this fact "has absolutely no relevance." (DLJ Letter Brief at 8). DLJ reasons that because it has not asserted a breach of contract claim (i.e., DLJ is not suing Chicago Title for breach of its obligations under the non-existent title policies), the absence of title policies has no bearing on the claims arising from the "mortgage fraud scheme." But what DLJ fails to recognize is that the very fact that the Loan Files did not contain title policies should have, at the very least, alerted DLJ that the loans were suspect, prompting a mere phone call to inquire. DLJ did not even undertake this modicum of due diligence, preferring instead to purchase over $50,000,000 of fraudulent, uninsured loans. New York Courts consistently dismiss fraud claims, on the pleadings, based on these precise types of due diligence failures. See UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87, 88-89, 773 N.Y.S.2d 385, 386 (1 st 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 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...") B. DLJ's Purported Reliance On Unmarked, Pre-Closing Certificates Of Title Was Unreasonable As A Matter Of Law In support of its fraud claim against Chicago Title, DLJ alleges in its Complaint that, in conducting its due diligence prior to purchasing the fraudulent loans, DLJ relied solely on certain certificates of title, prepared by the agent (Doumazios), which were contained in the Loan Files. Specifically, DLJ alleges: DLJ would not have purchased the 18 fraudulent mortgages (see Exhibit 15 annexed hereto), without Chicago Title certUlcates qf title (incorporated herein by reference) fraudulently prepared by Clear View Abstract and T. Doumazios, Esq., as agents of Chicago Title. H E R R I C K August 20, 2013 Page 12 R.494, 995 (emphasis added). DLJ's purported reliance on these certificates of title, in forming its "belief" that the transactions had previously closed and the loans were legitimate, is per se unreasonable, for several reasons. First, in conducting its "due diligence," if DLJ went so far as to read the certificates of title, DLJ would have immediately been alerted to the fact that as of the date the certificates of title were issued, closings had not taken place and that the transactions were questionable, at best. The certificates of title state, on their face, that closing had not yet taken place and no title insurance policy could be issued unless and until certain preconditions are satisfied: ,.1,;,-,,.. ,f ti,,, t, t;,.,,, 7t1, t Ht1 (tJ)IFl,5 LJ £ 1W II FLM4tJ1i, 111 VV 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 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 "[c]ommitment 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). Thus, it routinely occurs that a commitment is issued but a closing never takes place and therefore a title insurance policy is not issued. Indeed, this Court in Mandor, 28 N.Y.2d at 739, 321 N.Y.S.2d at 120 expressly rejected a claim that a report of title is evidence of title insurance coverage. Accordingly, a title commitment to insure a mortgage provided that certain pre-closing conditions are satisfied and a premium is paid is not evidence that the loan ever closed. Second, the certificates of title which DLJ found in the Loan Files were unmarked. In other words, at a closing, the title closer routinely "marks-up" the pre-closing conditions and either "excepts" or "omits" the condition. Because the commitments in the DLJ loan files 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 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 H ERR IC K ugust 20, 2013 Page 13 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." Finally, in an effort to bolster its claim for reliance, DLJ points to certain "Recertification Commitments" contained in the Loan Files. These documents, however, are nothing more than updated certificates of title (R.740-4 1), and thus, they add nothing. A "Recertification Commitment" is merely an update commitment which updates new conditions which need to be satisfied at a future closing. Regardless, the record does not contain any Recertification Commitments issued by an agent of Chicago Title, only other title companies; therefore these documents cannot be utilized by DLJ in support of its claim against Chicago Title. C. The Loan Files Contain Other Glaring "Red Flags" That Should Have Prompted DLJ To Inquire Further - DLJ's Flagrant Due Diligence Failures Preclude An Assertion Of Reasonable Reliance As A Matter Of Law Even putting aside the fact that: (i) there were no title insurance policies in the loan files -- a clear indicator that no closings ever took place, and (ii) DLJ cannot reasonably rely on pre-closing, unmarked certificates of title, the Loan Files contained other clear indicators of fraud which should have, at the very least, prompted DLJ to inquire further. For example, the pre-closing certificates of title are dated after the closing date indicated on the HUD-1 forms. See e.g., R. 650, 680, 703, compare R. 677, 701, 723. As stated DLJ contends that it can assert reasonable reliance and thereby impute liability to Chicago Title for all 95 loans "[i]n light of the conspiracy-based nature of the fraud...[since] each member of the conspiracy is liable for the acts of the whole.." DLJ Letter Brief at 10. Of course, in order to assert a conspiracy-based claim against Chicago Title, DLJ must have alleged, at the very least, that Chicago Title was aware of the fraud. See Faulkner v. City of Yonkers, 105 A.D.3d 899, 900, 963 N.Y.S.2d 340, 341 (2d Dep't 2013), The Complaint contains no such allegations against Chicago Title. Accordingly, the Appellate Division correctly found that the Complaint should have been dismissed since "[t]he complaint does not allege that the title insurers were aware that their agents had issued fraudulent certificates of title and commitments for title on the title insurers' behalf for mortgages that plaintiff eventually purchased." Order at 489, 959 N.Y.S.2d at 19. Moreover, to the extent DLJ is arguing that the actions of all the criminal co-conspirators are imputed to Doumazios and then somehow imputed to Chicago Title, such a far-reaching contention must likewise be rejected. Putting aside DLJ's failure to adequately plead apparent authority in its Complaint (see Point I supra), a prerequisite for any claim against Chicago Title, conspiracy-based liability simply does not lie unless Chicago Title was aware of the fraud and actively participated in the fraud. The two cases DLJ cites on this topic stand for entirely different propositions and do not hold parties liable unless they actively participated as co-conspirators and a conspiracy is properly alleged. Here, however, there is not a single allegation that Chicago Title participated in the conspiracy or was even aware of the conspiracy so these cases are inapposite. See Am 7)ansit Ins. Co. v. Faison. 242 A.D.2d 201, 661 N.Y.S.2d 624 (1st Dep't 1997) (liability for civil conspiracy is joint and several when a conspiracy is properly alleged); Anesthesia Assocs. of Mount Kisco LLP v. N. Westchester Hosp. Cir., 59 A.D.3d 473, 873 N.Y.S.2d 679 (2d Dep't 2009) (explaining that individuals may be connected to an underlying tort, where none might otherwise exist, through proper allegations of civil conspiracy). H E R R I C K August 20, 2013 Page 14 above, the purpose of a certificate of title is to indicate what liens or encumbrances exist which must be satisfied prior to a closing so that a title insurance policy can be issued. Here, the mortgages are dated before the certificates of title. It makes absolutely no sense that after a loan is made and mortgage given a title commitment is issued to insure a future mortgage on a loan which has already closed. Thus, issuing a certificate of title to insure a "future" closing after the closing has already occurred should have been a major "red flag" to DLJ that the mortgages may be fraudulent. At the very least, seeing that the dates of closing documents were different than the dates on the title documents should have caused DLJ to perform further inquiry as to the existence of actual title insurance policies. DLJ did not further inquire. Additionally, the underlying deeds and mortgages were not recorded. As DLJ, a sophisticated entity versed in the acquisition of mortgages knows, a title insurance policy is issued after the underlying deeds and mortgages are recorded with the county clerk's office since a mortgage policy insures that the mortgage is in the first recorded lien position. However, the mortgages and many of the related deeds were not recorded, a fact which was readily ascertainable to DLJ and its agents since the purported closings had allegedly occurred weeks to months before DLJ's acquisition. The subject mortgages all related to properties located within New York City. Accordingly, the records for each of these properties can be searched and viewed online via the New York City Department of Finance's Automated City Register Information System (ACRIS). DLJ did not even need to physically go to the county clerk's office to determine whether the mortgages it was considering purchasing were valid and recorded; DLJ could determine that pertinent and necessary information simply by logging on to the ACRIS website. If DLJ, a sophisticated institutional lender, had simply reviewed the public records, it would have realized that the mortgage and the corresponding deed that it was considering purchasing had not been recorded. This simple fact would have raised yet another "red flag" that would have put DLJ on notice that the mortgages it was purchasing were not insured. In 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. See UST Private Equity Investors, 288 A.D.2d at 88, 773 N,Y.S,2d at 386; 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"). Accordingly, the Appellate Division Order, holding that DLJ cannot assert reasonable reliance, should be affirmed. H E R R I C K August 20, 2013 Page 15 III. IF THIS COURT REVERSES THE APPELLATE 1)IVISION ORDER, THE IMPACT WILL BE DEVASTATING TO TITLE INSURANCE COMPANIES The oft-visited agency law issues in this case have been decided by New York Courts countless times. DLJ does not cite any case, nor are we aware of one, in which a title insurance underwriter has been found liable for the fraudulent acts of its agent, when the underwriter does not know about or benefit from the fraud, or engage in any misleading conduct in connection therewith. Here, DLJ does not properly allege that Chicago Title was a co- conspirator and does not even allege that Chicago Title "knew, had reason to know or could have known" that there were fraudulent mortgages or that certificates of title were issued. Nowhere does DLJ explain how Chicago Title could possibly have done anything about its agent's unauthorized and secretive conduct. DLJ likewise does not point to a single case where a title underwriter has been held liable for a "massive mortgage conspiracy" in which it was not a co- conspirator. DLJ is asking this Court to change that settled precedent. This Court should uphold the unanimous holding of the Appellate Division. Indeed, the impact of reversal would render the scope of apparent authority virtually limitless and would be devastating for title companies as well as other innocent and unsuspecting principals. Title insurance underwriters would, for the first time, be held responsible when their limited agent goes out, behind their back, and commits fraud, without even so much as issuing a title insurance policy and without any knowledge, benefit or conduct whatsoever on the part of the title underwriter. It would mean that any agent with a limited agency agreement could bind its underwriter for the agent's own criminal activity, for no reason other than the existence of the agency contract. Worse yet, reversal would mean that sophisticated entities, like DLJ, would be permitted to assert fraud claims against title companies when no title insurance policies were ever issued. If a sophisticated purchaser of packaged mortgages could buy tens of millions of dollars in uninsured loans, and subsequently sue a title underwriter for fraud, this would effectively eliminate any due diligence obligation and undermine the entire concept of reasonable reliance. Accordingly, given the importance of this issue, oral argument is imperative and thus Chicago Title respectfully requests that, rather than an alternative procedure review pursuant to Rule 500.11, the Court proceed with a normal course appeal, including full briefing and oral argument. ER RIG K ugust 20, 2013 Page 16 CONCLUSION For all the foregoing reasons, as well as the reasons set forth in Chicago Title's briefs to the Appellate Division, Chicago Title respectfully requests that this Court affirm the unanimous Order of the Appellate Division which dismissed DLJ's claim against Chicago Title or, in the alternative, proceed with a normal course appeal including full briefing and oral argument. Respectfully submitted, ii ArthurG.Jakoby I, H E R R I C K August 20, 2013 Page 17 DISCLOSURE STATEMENT Pursuant to Section 500.1(f) of this Court's rules of practice, Chicago Title, a Nebraska Corporation states that it is the 100% owner of Commonwealth Land Title Insurance Company, a Nebraska Corporation. Chicago Title is 100% owned by Fidelity National Title Group, Inc. ("FNTG"), a Delaware Corporation, and FNTG is 100% owned by FNTG Holdings, Inc., a Delaware Corporation. FNTG Holdings is a direct subsidiary of Fidelity National Financial, Inc. ("FNF"). FNF is a publicly-traded holding company and the ultimate parent of Chicago Title. HERRICK, FEINSTEIN LLP By 2 Park Avenue New York, NY 10016 (212) 592-1400 Counsel Jbr Defendant-Respondent ('jifff(rf Titfo ('nnrini AFFIDAVIT OF SERVICE STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) Adam Stein, being duly sworn, deposes and says: 1. 1 am not a party to this action, am over 18 years of age, and reside in Flushing, New York. 2. On the 20th day of August, 2013, I served the within letter brief upon: Michael J. Schwarz, Esq. DelBello Donnellan Weingarten Wise & Wiederkehr, LLP One North Lexington Avenue, 11th Floor White Plains, New York 10601 JoIm P. Amato, Esq. Hahn & Hessen LLP 488 Madison Avenue New York, New York 10022 the address designated by said attorneys for that purpose in a properly addressed envelope via Federal Express for overnight delivery. A Adam Stein Sworn to before me this 20th day of August, 2012 ( / / I ( ( / Notary Public JONATHAN W ADMORE Notary PubHc, St/ Y New York H, Lw ) in County Comrniswoi L - -- inher 5, HF7435713v.1 I02069/0071