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Financial Services FLASHPOINTS November 2019

November 15, 2019Print This Post Print This Post

Michael L. Weissman, Levin Ginsburg, Chicago
312-368-0100 | E-mail Michael L. Weissman

This month, we consider whether a mortgage lender may pursue claims of fraud against an attorney-owner of a title insurance company and whether the Illinois Public Accounting Act protects an accounting firm against certain third-party malpractice claims.

Mortgage Lender Can Recover Against Attorney-Owner of Title Insurance Company for Fraud

In Fifth Third Mortgage Co. v. Kaufman, 934 F.3d 585 (7th Cir. 2019), the lender, Fifth Third, sought a judgment for fraud against an Illinois lawyer named Ira Kaufman who owned a title insurance company named Traditional Title Company, LLC.

The fraud began with Yaseen Ahmed, the president of High Point Developers, Inc., whose limited liability company owned a multiunit condominium building in Chicago. He and one Eliot Higueros solicited individuals to pose as buyers of units in the building. They applied for mortgage loans from Fifth Third and submitted fraudulent loan applications. When the loan proceeds were forthcoming, Ahmed and Higueros appropriated them. No payments were ever made on the Fifth Third loans.

Nine different borrowers purchased a total of 26 units. Kaufman acted as attorney for the seller at each closing. Traditional Title personnel conducted the closings at Kaufman’s law office.

The loan applications submitted to Fifth Third falsified the applicant’s employment status, income, and assets, and each application stated that the particular unit being purchased would be the primary residence of the buyer, even though each buyer was purchasing multiple units.

The closing instructions from Fifth Third required Traditional Title to suspend any closing for a unit that was supposed to be owner-occupied if “the closing agent has knowledge that the borrower does not intend to occupy the property.” 934 F.3d at 587.

Kaufman concealed the purported borrowers’ misstatements and directed the Traditional Title closers to complete the closings even though the purchasers were acquiring multiple units.

When sued, Kaufman stated that he had no duty to review the loan applications or the Fifth Third closing instructions, but Ahmed testified Kaufman knew the purported purchasers were part of the scheme. Additionally, two of Traditional Title’s closers testified that they told Kaufman about the misstatements in the loan applications.

The trial court ruled in favor of Fifth Third, finding that Kaufman was guilty of aiding and abetting a fraud. The Seventh Circuit affirmed, holding that Kaufman was not immune from liability as the owner of Traditional Title. The court said that he acted individually as attorney for the seller and that he personally directed the Traditional Title closers to conceal the fraud from Fifth Third. The court also rejected Kaufman’s argument that, as a matter of law, an attorney cannot aid and abet a client’s fraud.

What’s the point? Mortgage lenders should proceed cautiously when the seller of multiple units is represented by an attorney who also owns and controls an entity through which the closings are conducted.

Illinois Public Accounting Act Protects Accountants from Malpractice Claims of Third Parties

Although the decision in Atlas v. Mayer Hoffman McCann, P.C., 2019 IL App (1st) 180939, did not directly involve a lender, it raises an issue pertinent to lenders.

The case involves §30.1 of the Illinois Public Accounting Act, 225 ILCS 450/0.01, et seq. This provision was added to the Act at a time when accountants were overwhelmed with malpractice litigation because their clients encountered financial distress and could not repay irate creditors.

In the instant case, Marshall and Arlene Atlas were in the business of purchasing delinquent real estate tax certificates from local taxing authorities. They had an employee named Judith Berger.

The Atlases financed the purchase of the delinquent tax certificates with bank loans. They personally guaranteed the loans. The certificates were pledged as collateral. The Atlases used a number of companies as the vehicles through which they acquired the certificates, pledged them as collateral, and procured the bank loans. The most active among them was an entity named Salta Group, Inc.

Mayer Hoffman McCann, P.C., performed accounting services for Salta beginning in 1998. Mayer audited Salta and certified that Salta’s financial statements fairly represented its financial position and had been prepared in accordance with accepted accounting principles. The Atlases relied on those financial statements in guaranteeing and continuing to guarantee the bank loans.

Unbeknown to the Atlases, Berger had concocted a scheme involving the pledge of duplicate certificates for those that had already been redeemed by taxpayers or had been used as collateral for other loans. She converted the funds received from the redemption of the bona fide certificates to her own use. This ultimately resulted in the bank loans and the Atlases guarantees being called and the foreclosure of the mortgage on the Atlases’ residence.

When the accounting firm was sued, it invoked §30.1 of the Act, 225 ILCS 450/30.1. On appeal from a trial court ruling for Mayer, the Illinois appellate court said the effect of the Act was as follows:

[A]ccountants are not liable to individuals or entities not in privity of contract with them, unless the accountant was aware the client intended for the services to benefit a third party; but if an accountant identifies any individuals who are intended to rely on the services and notifies the client and the individuals in writing, then the accountant is liable only to the client and the individuals identified. 2019 IL App (1st) 180939 at ¶12.

The court noted that the accounting firm had notified Salta, its client, that only Salta could rely on its work product. The firm’s engagement letter stated, “This engagement is being undertaken solely for the benefit of the parties to this agreement.” The Atlases were the owners of Salta but were not parties to the engagement agreement.

What’s the point? What should the Atlases have done? They should have served written notice on the accounting firm that they were relying on the work product of the firm. Lenders who may attempt to hold an accounting firm liable in a similar situation should serve notice of their reliance. Only then will there be a basis for a claim for professional negligence.

For more information about financial services, see COMMERCIAL AND INDUSTRIAL LOAN DOCUMENTATION — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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