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LAWYERS TITLE INS. CORP. v. DEARBORN TITLE CORP.

November 6, 1995

LAWYERS TITLE INSURANCE CORPORATION, a Virginia corporation, in its own behalf and as subrogee to certain claimants, Plaintiff,
v.
DEARBORN TITLE CORPORATION, an Illinois corporation, EILEEN RASULIS, an individual, FIRST MIDWEST BANK, N.A., a National Banking Corporation, and NANCY FREMAN, an individual, Defendants.



The opinion of the court was delivered by: BUCKLO

 Background

 Lawyers Title underwrites title insurance. It entered into an Agency Agreement with one of the defendants, Dearborn Title Corporation ("Dearborn"), under which Dearborn would act as Lawyers Title's agent in issuing title insurance policies in Illinois. Dearborn also conducted closings for mortgage lenders and borrowers, acting as an escrow agent. The Agency Agreement, however, excluded Dearborn's escrow and closing activities from the scope of its agency relationship with Lawyers Title. Dearborn maintained its escrow account at First Midwest.

 In addition to underwriting title insurance policies, Lawyers Title also issued Closing Protection Letters to the mortgage lenders who used Dearborn's closing and escrow services. In these letters, Lawyers Title agreed to reimburse the lenders for any losses resulting from Dearborn's failure to comply with the lenders' instructions. Lawyers Title issued these letters upon the request of a lender whose borrower agreed to procure title insurance through Dearborn.

 According to Lawyers Title, Dearborn fraudulently mishandled money entrusted to it as an escrow agent, creating a shortfall in the escrow account exceeding $ 5,000,000. Under the closing protection letters, Lawyers Title has reimbursed the lenders who lost the funds they entrusted to Dearborn. Lawyers Title now sues Dearborn and its principals to recover this money. In addition to suing Dearborn and its principals, Lawyers Title has also brought suit against First Midwest. Lawyers Title alleges that because First Midwest knew that Dearborn held the funds in its escrow account in trust for other people, First Midwest is liable for Dearborn's actions under the Illinois Fiduciary Obligations Act and the Uniform Commercial Code ("UCC"). Lawyers Title also alleges that First Midwest is liable for conversion, because it used money to be deposited into the escrow account to satisfy other obligations Dearborn had to First Midwest.

 First Midwest has counterclaimed against Lawyers Title, asserting a claim for contribution and alleging violations of the Uniform Deceptive Trade Practice Act and the Illinois Title Insurance Act. Lawyers Title has filed a motion to dismiss these two counterclaims and to strike a paragraph from First Midwest's affirmative defenses alleging contributory negligence.

 Count II

 In Count II, *fn1" First Midwest seeks contribution from Lawyers Title, alleging negligence and malfeasance by Lawyers Title. First Midwest contends that if it is held liable to Lawyers Title for damages, then Lawyers Title should itself be responsible for a portion of that liability. Because Lawyers Title has alleged only intentional torts by First Midwest, however, First Midwest may not seek contribution for its potential liability.

 As the Seventh Circuit has explained, a suit "under" the Uniform Fiduciaries Act ("UFA"), codified in Illinois as the Fiduciary Obligations Act, 760 ILCS 65/1 et seq., is based on a common law cause of action against a third-party who "assist[s] a fiduciary in misappropriating the principal's funds." Appley v. West, 832 F.2d 1021, 1030 (7th Cir. 1987) (Appley I). The UFA provides the bank with a complete defense when it is merely negligent, permitting liability only when the bank "has actual knowledge of the fiduciary's misappropriation of the principal's funds" or "acts in bad faith." Id. at 1031. Because the UFA requires actual knowledge by the bank before allowing liability to attach, the common law suit against the bank necessarily alleges an intentional tort. See RESTATEMENT (SECOND) OF TORTS ยง 8A cmt. b (1965) ("If the actor knows that consequences are certain, or substantially certain, to result from his act, and still goes ahead, he is treated by the law as if he had in fact desired to produce the result."). See also Maryland Casualty Co. v. Bank of Charlotte, 340 F.2d 550, 556 (4th Cir. 1965) (disallowing defense of contributory negligence by bank because "liability [under the UFA] is based on defendant's conscious conduct or 'bad faith'").

 In Illinois, a defendant sued for an intentional tort may not assert a claim for contribution. Appley v. West, 929 F.2d 1176, 1180 (7th Cir. 1991) (Appley II) ("Under Illinois law, intentional tortfeasors are not entitled to contribution.") (citing Gerill Corp. v. Jack L. Hargrove Builders, Inc., 128 Ill. 2d 179, 538 N.E.2d 530, 542, 131 Ill. Dec. 155, cert. denied sub nom. Jack L. Hargrove Builders, Inc. v. Rosch, 493 U.S. 894, 107 L. Ed. 2d 193, 110 S. Ct. 243 (1989)). First Midwest may therefore not seek contribution for its liability to Lawyers Title on this claim.

 First Midwest argues that Lawyers Title is responsible for Dearborn's fraud and is therefore not an innocent victim. First Midwest asks me to create an exception to the usual rule barring contribution for intentional torts in cases of this type. In support it cites In re Broadview Lumber Co., 168 Bankr. 941 (Bankr. W.D. Mo. 1994). In Broadview, the court allowed the defendant bank sued for violating the UFA to assert a cross-claim against the people who wrongfully took the money from the trust account at the bank. In this case, First Midwest alleges only that Lawyers Title should be held responsible for Dearborn's actions as Dearborn's overseer. First Midwest does not claim that Lawyers Title actually received the funds wrongfully taken from the escrow account. Broadview is therefore factually distinguishable. Moreover, Broadview was decided under Missouri law. Illinois law makes clear that an intentional tortfeasor may not assert a claim for contribution.

 First Midwest may similarly not pursue contribution for its liability based on Lawyers Title's conversion claim. See Kerrigan v. American Orthodontics Corp., 960 F.2d 43, 45 (7th Cir. 1992) ("Conversion is an intentional tort."). Lawyers Title asserts a statutory conversion claim, based on section 420 of the UCC, codified in Illinois as 810 ILCS 5/3-420. First Midwest argues that because the UCC does not mention mens rea, conversion under the UCC is not an intentional tort. I disagree. The common law tort of conversion is an intentional tort. The UCC codified the common law of conversion. 810 ILCS 5/3-420(a); McAdam v. Dean Witter Reynolds, Inc., 896 F.2d 750, 771 (3d Cir. 1990). First Midwest may not seek contribution for its violation of the UCC.

 Because contribution would not be allowed against Lawyers Title on either of the claims alleged against First Midwest, First Midwest's claim for contribution is dismissed. *fn2" For the same reason, paragraph 42 of First Midwest's affirmative defenses alleging contributory negligence will be stricken. *fn3" See Kerrigan, supra, 960 F.2d at 45 ("The ...


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