Title Insurance Agents; Escrow Accounts; Fraud; Subrogation

TRW Title Insurance Co v Security Union Title Insurance, 153 F3d 822 (7th Cir 1998).

Facts: TRW Title Insurance (TRW) brought suit against Security Union Title Insurance (Security) asserting, inter alia, fraud, unjust enrichment, co-trustee liability, and equitable subrogation after it had reimbursed a shortfall in a title agent's escrow account. These claims derived from the actions of one of Security's former title insurance agents who, while dissolving his relationship with Security, signed a title agency agreement with TRW. While working under an exclusive agency agreement with Security, the agent began using the float created by escrow accounts under his control to pay his operating expenses. Although Security did not catch the embezzlement, it did become aware of other misconduct by the agent. After discovering misconduct, Security sued the agent for breach of contract, fraud, and Racketeer Influenced and Corrupt Organizations Act (RICO) violations. The parties eventually settled the suit with one of the conditions being that the agent obtain a new underwriter for all of his title insurance agency services. Subsequently, the agent informed TRW that Security was dissolving its relationships with Illinois agents and had given him leave to find another insurer. The agent failed to mention that Security was suing him in order to dissolve the relationship. TRW then entered into an agency relationship with the agent and allowed the agent to use the same escrow account that he had used while with Security. At the time of the agreement, TRW was not aware that the escrow account had a $2.9 million deficiency. However, the deficiency was discovered by TRW during an audit of the account, which revealed the deficiency had reached $4.1 million. TRW took over the administration of the escrow account, but continued to run it on float for the next 18 months. Upon realizing that $2.9 million of the deficiency existed at the outset of its agreement with the agent, TRW filed this suit against Security. The district court dismissed the unjust enrichment and fraud claims, entered a directed verdict against the co-trustee claim, and later entered a judgment as a matter of law against the subrogation claim. Plaintiff appealed.

Holding: Affirmed. To succeed on the fraud claim, TRW would need sufficient evidence that Security knew of the shortage at the time it sent the agent out to look for a new principal. TRW could not demonstrate that Security had actual knowledge of the shortage; thus, the fraud count fails. The unjust enrichment claim was also appropriately dismissed. TRW should have been aware of a substantial risk of shortage when it signed up the title agent. TRW's failure to discover the shortage was the result of reckless failure to investigate. An unjust enrichment claim is denied to a plaintiff whose recklessness caused his claimed injury. With regard to the co-trustee indemnity claim, here, the only interaction between the depositors and the title insurers was the title insurance policy and the escrow protection letters, which are simple contractual relationships. These relationships do not amount to the placement of trust and confidence, and even if they did, the fact that depositors dealt either with TRW or Security, but never both, during the alleged co-trusteeship defeats any claim of a co-trusteeship. Finally, after discovering the deficiency in the escrow account, TRW continued running the account on float, which exposed TRW to liability. This liability disqualifies TRW as a subrogee.

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