When I was a young attorney, I worked for a firm that represented the largest savings and loan association in the world, and in California. That savings and loan association was the victim of a fraud which involved fake sales of very cheap condominiums in the Oceanside area to “straw men,” phony buyers, at phony prices.

There were phony appraisals and phony loan applications, with the result that our client lent about four times the value of each condominium it took as collateral. In a nutshell, our client made about twenty-five $200,000 loans on $50,000 condominiums. When the fraud was discovered, our firm was engaged to recover what it could.

Miraculously, the F.B.I. caught a number of the perpetrators at the border with millions of dollars in currency – much of it foreign- on them. We succeeded in imposing a lien on the cash seized. (Theoretically, the law does not allow for this, but I digress.)

Our firm prepared a claim on the title insurer, more or less as a protective measure. The title insurer would have been liable for 20-25% of the loss, measured by the value of the collateral lost. We figured we had valid liens, but they were somewhat iffy. Since the owners were fake people, those who signed the deeds of trust were fake, and the notaries were in on the fraud. We did not really expect that any of the perpetrators would challenge the liens, so perhaps the title insurer could have brought an action to quiet title in the liens and been done with matters.

The partner I worked for showed me a legal memorandum written by one of the young attorneys working for the title insurance company. The memo was very well researched, well written, and well reasoned. It concluded that the title company was not liable to our client, taking the position that the title insurer, too, had been defrauded, which constituted a defense to its insurance contract.

The partner I worked for asked me what I thought of the memo. I told him I thought it was pretty good and that we had a battle on our hands. He said no, the client did not wish to respond to it. I asked him why, and learned why he showed me the memo.

Our client was a huge real estate lender in the state of California, and it gave all of its title insurance business to this title company. In a given month, our client paid this title company premiums in an amount more than ten times the amount of this rather small claim. Our client looked at the memo, saw its denial of coverage, and promptly switched title companies. We were told that several of the former title company’s offices across the state of California closed as a result. Our client provided most of the business in those areas.

The memo was well researched, well written, well reasoned and should never have gone out. The title insurance company, and its lawyers, should never have contested the claim. The big picture was that the title company saved perhaps $5,000,000, (or far less) and lost business amounting to $50,000,000 per month. The partner I worked for showed me the memo to make sure something like that never happened at our firm. I have never forgotten the lesson.