Core Settlement Services; Jami Braafhart; updated Court stipulation

Click here for the previous post on the Core/Chelsea/Braafhart title insurance scandal. 

The hearing set for June 14th was postponed and the Court's previous Order (June 1, 2012) has been allowed to continue in effect with certain modifications. On June 13, 2012, the parties entered into a Stipulation placing limitations on the Defendants' ability to write checks on two accounts (Defendants' other accounts remain completely frozen by the Court's June 1 Order).  The title company [Stewart] that brought this action against Core and Jami Braafhart will now have certain veto power over Core's and Ms. Braafhart's daily spending.  The Stipulation provides the following rules for check approval:

The procedures to process and clear checks drawn on those two accounts shall be as follows. When a check drawn on either account is presented for payment before honoring or dishonoring that check Mid Penn Bank shall first email or fax a copy of the check to Plaintiff's [Stewart Guaranty Title Company] representative  . . . . .

After reviewing the copy of the check [Stewart] in [its] sole discretion shall promptly determine whether a check shall be honored or dishonored. [Stewart] shall then promptly notify Mid Penn Bank in writing (if Mid Penn Bank shall require the notice to be in writing) that a particular check shall be dishonored or honored.  If [Stewart] determines that a check shall be honored Mid Penn Bank shall honor and pay the check so long as there are sufficient funds in the account to cover the amount of the check If [Stewart] determines that a check shall be dishonored Mid Penn Bank shall dishonor and refuse to pay the check . . . .

Braafhart shall be permitted to write checks drawn on the Mid Penn Personal Account to fund personal expenses (e.g. mortgage payments cell phone bills utilities automobile payments food purchases house repairs and maintenance etc.) Any check drawn on that account in excess of $ 3,000.00 shall require Plaintiff's prior written approval.

The Court docket number is 12-3471.  The full Stipulation is available at that docket number.  All Orders and pleadings are available online.   The  Stipulation does not say whether there is a procedure in place to alert, in advance, vendors or individuals that do business with these Defendants that certain checks might later be disapproved by Stewart.   Investigation and litigation remain ongoing. 

Title Insurance kickback litigation; Fidelity National Title Insurance

As we have seen in the past week with the Core/Chelsea/Braafhart scandal, title insurance fraud is common enough to justify examining the causes and sources of difficulties in title transactions. One example occurs with "kickbacks."  It has long been illegal for title insurance companies to provide "kickbacks" in exchange for business referrals. Despite this prohibition, this practice occurs regularly.

A new class action lawsuit in California makes "kickback" allegations against Fidelity National Title Insurance and six other major title insurance underwriters. The lawsuit alleges that real estate agents received payments from title insurance companies for selecting those insurance companies to close particular transactions. The real estate agents performed no additional work for those referrals.

Such referral fees are prohibited by the Real Estate Settlement Procedures Act (RESPA) in federally backed transactions. This lawsuit follows a $4.5 million settlement between HUD and Fidelity last year resulting from the same allegations.

Escrow fraud; Title insurance fraud; Demotech, Inc.

In light of the ongoing scandal involving Core Settlement Services, Chelsea Settlement Services and Jami Braafhart, it might be useful to review the fundamentals of title insurance and escrow fraud. Follow this link to an online book from Demotech, Inc. entitled Escrow Theft: Today's Challenge in Title Insurance. This book contains reference to the laws of Pennsylvania and other states. This book might be worth reviewing for those who have trouble following the Core/Chelsea scandal or who have questions about their own transactions. Here is an excerpt:

Parties to a real estate transaction often entrust title agents or other settlement professionals with the transaction. Problems can arise when these professionals violate that trust and breach their duties to hold the purchase money and deed to property in a fi duciary capacity and disburse the funds appropriately. Most alarmingly, this violation of trust comes in the form of escrow theft, which occurs when an agent embezzles or misappropriates funds held in a fiduciary capacity.

Core Settlement Services; Chelsea Settlement Services; Jami Braafhart; Preliminary Injunction issued by Court; Stewart Title Guaranty Company;

A lawsuit is proceeding in Cumberland County that reveals the seamier side of the real estate business and the risks to innocent purchasers from settlements. 

On June 1, 2012, the Cumberland County Court of Common Pleas issued a "Temporary Restraining Order and Special Injunction" against Core Settlement Services, Chelsea Settlement Services and Jami Braafhart.  The lawsuit and Order are docketed at 12-3471.  A hearing is scheduled for June 14, 2012.  In the meantime, the Defendants are prohibited from engaging in real estate transactions or selling assets.

Core/Chelsea are settlement companies that issue title insurance and disburse funds in connection with real estate purchases and refinances. The companies are owned/managed by Jami Braafhart.  The companies serve(d) as title agents for Stewart Title Guaranty Company.  The Defendants were required to collect the proceeds from real estate settlements, pay the sellers and pay the liens, taxes and old mortgages and insure title to the properties in each transaction.  These are the typical duties and functions of any title agency/settlement company.

Stewart has filed suit against all Defendants, alleging essentially that for a period of several years, they have failed to pay liens and mortgages from properties for which they conducted settlement. Stewart's lawsuit accuses the Defendants of keeping the settlement proceeds instead of paying liens and mortgages.  The lawsuit claims that the agencies' escrow accounts have a negative balance in excess of one million dollars and have had a negative balance for some time.  Stewart discovered this conduct in May 2012.

Escrow accounts are not supposed to have negative balances at all, as the accounts do not belong to the title agents, but exist solely to collect the sale proceeds and then pay the sellers, the old mortgages and liens, taxes, etc. 

Paragraph 25 of Stewart's Complaint alleges that the Defendants' account balances have been negative since 2007.  Paragraph 31 alleges that the shortage in the accounts exceeded 1.1 million dollars as of May 29, 2012.  To the extent that these allegations are true, Stewart (as the underwriter) is ultimately responsible to pay off unsatisfied mortgages and other liens on numerous real estate transactions - even though Stewart committed no wrongdoing.

This matter is of concern to more than Stewart Title Guaranty Company and the Defendants. The Defendant companies operated at very high volume for a number of years. There are possibly numerous transactions and properties that now suffer from defective title because liens may not have been paid off. Indeed, paragraph 20 of the Complaint alleges that some customers have complained that prior mortgages have not been paid off. Those customers can seek redress through Stewart Title, but the story does not end there. 

Customers that obtained title policies through Core/Chelsea/Braafhart will someday seek refinance through other agencies.  It has been the policy of many title companies in recent years to search the title only so far back as the last mortgage, instead of searching the previous 60 years (as the practice used to be).  The theory for this shortcut is that if a mortgage was placed on the property five years ago (for example), there must have been a title search at that time and the new title company can rely on the fact that someone did their job 5 years earlier and corrected any liens.  But now that whole practice becomes suspect - especially in light of the large volume that Core/Chelsea handled.  If Core/Chelsea failed to pay old liens (as they were required to do), other title companies should not rely on the fact that a settlement occurred in which Core/Chelsea was involved. Once a new title company insures title (defective or not) with a new purchaser, the old title company is off the hook, as the old title company did not insure that new purchaser.

Other title companies need to be concerned, as Core/Chelsea's high volume has created a potential nightmare scenario in which thousands of purchasers/owners unknowingly spread Core/Chelsea's problems to new title companies.  Title companies should decide whether to stick with the recent policy of searching only back to the last mortgage or resuming the old policy of searching the previous sixty years. 

The insurance commission may want to rethink the rate schedule, in which properties that have been insured within the last two or three years are eligible for deeper discounts.  Due to situations such as Core/Chelsea's as well as the general real estate collapse of the past four years (with the resulting increase in short sales, foreclosures, tax sales, unpaid contractors, etc.) properties that have been sold or financed in the past two or three years involve greater risk than those that have seen no transactions for 10 or more years.

Property owners should be cautious also, especially those that used Core or Chelsea for their transaction.  Even though a buyer is covered by the title insurance policy, there still exists a certain amount of aggravation and stress in dealing with an unpaid lien.  Those who merely refinanced (instead of purchasing) through Core/Chelsea are at greater risk. In that scenario, only the mortgage company was insured and only the mortgage company can make a claim through the policy.  As long as the owner is current on the mortgage, the mortgage company suffers no loss, even if an old mortgage remains unpaid or unsatisfied. 

The bottom line is that buyers should not be comfortable with just any settlement company that a mortgage broker or Realtor sends them to for settlement on their purchase or refinance.  Core and Chelsea were favorites for referrals among many Realtors and mortgage brokers.  Those same Realtors and brokers will now begin sending unsuspecting buyers to other settlement companies, about whom the buyers know or understand little.

If you are a buyer or property owner, use your own attorney for settlement. 

Update - here is a link to the Patriot News article from June 7, 2012.

Real estate title defects in Pennsylvania; Buying property subject to title defects.

I wrote earlier about buyers that purchase real estate with title defects because a settlement company cut corners. Some settlement companies, instead of fixing title defects resulting from tax sales, simply delay settlement for a year:

Keep in mind that the "one year period" has no legal significance. Title defects resulting from a tax sale do not go away after one year. If a buyer purchases a property under these conditions, the buyer will have difficulty selling the property, regardless of the fact that he used a corner-cutting settlement company to do an end run around the title defects.

The same reasoning applies to other title defects, like unpaid judgments, tax liens or unsatisfied mortgages. If you somehow buy a property with such a defect, even if you have purchased title insurance from a corner-cutting settlement company, you will suffer consequences when you try to sell the property.

• Your buyer will refuse to complete the purchase until the defect is cured.
• The settlement company through which you purchased the property may be out of business due to an excess of claims because of similar problems.
• The settlement company through which you purchased the property might have excluded this defect from coverage without you realizing it.

Even if your settlement company covers your defect, you may find yourself in the middle of litigation or negotiation instead of collecting proceeds from a clean and simple settlement.

The point is, when you buy property, make sure any defects are addressed either by obtaining the proper releases from the parties holding the liens or by obtaining an "indemnification" from a nationally based title insurance company. Solve these problems before you complete settlement on your purchase.

I will write more about "indemnification" at a later date.