Defrauded couple may be allowed to sue agents disbursing construction costs

The Elsebaeis contracted to build a home and financed it with a loan through Charter One.  The builder, Landmark Construction, defrauded them during construction.  The Elsebaeis sued the Seaver Title Agency, under several different operating names, alleging that it negligently enabled the builder's fraud by failing to perform its duties in disbursing Charter One loan proceeds.

The Title Agency argued that it was working under contract with Charter One and owed no duty to the mortgagor-homeowners.   On that basis, the Title Company claimed that it should have been granted summary disposition.  The Court of Appeals pointed to the controversy that developed after the Michigan Supreme Court Republican majority held in the Fultz case that a contracting party owed no duty to other people outside the contract.  The judges noted that the Republicans on the Court reconsidered this heavily criticized opinion and in the Loweke case issued a more nuanced opinion:  entering into a contract does not eliminate a party's common law duty to act reasonably with respect to third-parties.

The appellate court concluded that when the Title Company undertook to disburse contract funds, it assumed the duty to the borrowers of disbursing funds in a professionally reasonable manner.  Further, although several cases have held that a title company's liability is limited to the terms of the insurance contract, in this case, the Title Company was acting outside the contract when it disbursed funds.  Therefore, its liability was not limited by the terms of the title insurance policy.

Lastly, the Court rejected the claim that the title company should not be responsible for the "unforeseeable" criminal activity of the builder.  While "criminal actions are normally unforeseeable" the Court held that if the borrowers can prove that a "special relationship" existed between them and the title company, a duty to protect the borrowers from the builder's fraud would be imposed.