By Thomas G. Wolfe, J.D.
In connection with several real estate transactions that the Federal Deposit Insurance Corporation characterized as fraudulent “flip transactions,” the FDIC, as receiver for a bank, contended that it was entitled to damages beyond the total amount of the combined deficiency judgments that the bank had obtained at foreclosure sales of the pertinent properties. Judge Andrea Wood of the U.S. District Court for the Northern District of Illinois disagreed, ruling that the FDIC’s potential recovery of damages against certain title insurance companies would be limited, under Illinois law, to the sum total of the deficiency judgments—should the FDIC ultimately demonstrate the companies’ liability.
By way of background, in the recent case of Federal Deposit Insurance Corporation v. Chicago Title Insurance Company (N.D. Ill., Sept. 9, 2015), Founders Bank had served as the lender/mortgagee for the applicable real estate transactions. In its capacity as receiver for Founders Bank, the FDIC alleged that the title insurance companies “acted negligently and breached contractual and fiduciary duties in their role as closing agent” for the transactions, and that the companies’ agents engaged in negligent or fraudulent activities. Further, the FDIC claimed that a separate real estate company, acting as the property appraiser in each of the transactions, was liable for negligence and breach of contract.
In its lawsuit against the various companies, the FDIC not only sought recovery of the deficiency judgments entered in favor of Founders Bank, the FDIC also sought recovery of certain losses it sustained on the sale of the properties and certain constructions costs it incurred after the sale of the properties. In response, the title insurance companies asked the court to limit the amount of potential damages that could be recovered by the FDIC on its theories of liability to the sum of the deficiency judgments that Founders Bank had obtained at the foreclosure sales.
Translating the different stances of the parties into monetary terms, the FDIC maintained that the “total aggregate loss” by Founders Bank on the pertinent properties was approximately $6.15 million. In contrast, the title companies asserted that the FDIC’s damages should be limited to approximately $3.88 million—the sum of the applicable deficiency judgments—because the bank placed credit bids on the properties at issue. The court agreed.
In reaching its decision in favor of the title companies, the court reviewed the Illinois practice of “credit bidding” that allows a foreclosing lender to bid on the pertinent property at auction. In the court’s estimation, absent some showing of fraud or malfeasance concerning the foreclosure proceeding or the credit bid process itself, a credit bid “generally stands as a conclusive measure of the property’s value, even with respect to third parties.” Accordingly, the court emphasized that this rule “does not cause any undue prejudice to a lender, who can avoid all of these consequences by bidding what it believes the property is actually worth.”
At the same time, during the present stage of the litigation, the court was not yet called upon to address whether the FDIC would be limited in the same way as to any potential recovery against the real estate appraisal company.
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