Tuesday, April 22, 2014

FYI: Cal App Affirms Closing Agents Must Disburse in Accordanace with HUD-1

Wednesday, May 5, 2010

California appellate court recently  reversed a lower court's holding that there was no breach of the closing instructions contract between a wholesale lender and a settlement agent where the lender alleged that the settlement agent had made a kickback payment that was not authorized or disclosed.  

Plaintiff, a wholesale lender, made a loan to the purchaser of a residential property and defendant acted as the escrow holder and settlement agent for the loan.  Defendant prepared and delivered to plaintiff a Good Faith Estimate that set forth the terms, estimated costs and disbursements at closing for the loans.  After the existing liens were paid off, defendant distributed the balance of the proceeds, representing that there were no additional payoffs or fees that were not disclosed in the Good Faith Estimate.  At some point after funding and the close of escrow but before the balance was disbursed, however, and pursuant to a request from the seller of the property, defendant paid the buyer’s attorney-in-fact close to $55,000.00.  Plaintiff was unaware of this disbursement until it saw the final HUD-1 statement.  Plaintiff, unable to sell the loan on the secondary market, was forced to take back the property and sell it after the borrower defaulted.  The plaintiff then sued the settlement agent for breach of contract, negligence and equitable indemnity.  The trial court granted defendant’s motion for judgment, holding that the action by defendant occurred after funding concluded, so it was not inconsistent with the closing instructions.

In reversing and remanding the trial court’s ruling, the appellate court found that under the plain language of an addendum to the closing instructions provided by plaintiff, defendant was “contractually bound to disclose to [plaintiff] any ‘additional payoffs’ that were not disclosed in the estimated HUD-1 or verbally by [defendant].”  The court rejected defendant’s argument that the buyer held equitable title to the money and could distribute it as she saw fit at the time defendant received the instruction to pay the seller’s attorney-in-fact and held that the duty to disclose continued until the loans closed and at least through preparation of the final HUD-1 and not when escrow closed. 

Eric Tsai
McGinnis Wutscher Beiramee LLP
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