State closes title company

$2 million is missing from escrow account, authorities say

May 30, 2008|By Hanah Cho | Hanah Cho,Sun reporter

A real estate title company in Severna Park and Ocean City was shut down after as much as $2 million from its escrow account for property settlements allegedly turned up missing, according to court documents and state regulators.

Maryland Insurance Commissioner Ralph S. Tyler ordered yesterday that business licenses for Day Title Inc. and owner Deborah A. Williams be suspended and revoked. The Maryland Insurance Administration issues licenses and regulates title companies, which conduct real estate closings.

Tyler's action follows an order issued last week by an Anne Arundel County Circuit Court judge appointing a receiver to oversee the liquidation of Day Title. The court action was initiated by The Security Title Guarantee Corp. of Baltimore, the title insurance company for Day Title.

Security Title has assumed responsibility for Day Title's undetermined number of unpaid mortgages and other settlement costs.

"We are promptly and aggressively identifying our losses and honoring our obligations as the result of the actions of Day Title," Ted Rogers, president of Security Title, said yesterday.

Security Title accused Day Title and Williams of "gross negligence and mishandling of escrow funds," according to court documents.

The alleged misappropriations involved Day Title's escrow account in Severna Park, according to Security Title.

Day Title, which provided residential and commercial settlements as well as title insurance, held money from real estate purchase and refinancing closings to pay off mortgages, make payments to sellers and other closing-related expenses. Its two offices in Ocean City and Severna Park were closed last week.

The company was first licensed by the state in 1998.

Day Title allegedly transferred money for one particular transaction from its escrow account into an operating account, according to court documents.

In another instance, employees allegedly were paid directly out of the escrow account, which Security Title called improper in court filings.

Williams did not return calls to her cell phone yesterday. And her attorney also did not respond to messages.

Such alleged impropriety is rare because title insurance companies regularly audit their agents to ensure that proper accounting procedures are followed, according to the American Land Title Association, a trade group.

In Maryland, more than 8,000 licensed title companies and attorneys handle real estate closings.

"The requirements to represent an underwriter are pretty stringent," said Michelle Sweet, a spokeswoman for the association.

But problems arise, industry experts said, when title company owners who are facing financial difficulties use money in their escrow accounts to operate their business.

Tyler said his office is seeing a spike in complaints involving title companies not making mortgage payments, a trend the commissioner attributes to the slowing real estate market.

He said Day Title's case, however, represented a "very substantial loss."

Rogers, of Security Title, said a case with the kind of allegations brought against Day Title "is more likely to occur in a market such as we're in now where real estate is slow and agents don't have the income they used to have to support the operations."

Still, Rogers noted that Security Title does not fully know why the money went missing from Day Title's escrow account. Its investigation is continuing.

Lynn T. Krause, an Annapolis-based attorney representing Security Title, could not say how much money Security Title might end up covering but said it is paying off "several" mortgages.

"The homeowners whose liens were not paid, they won't be affected at all," Krause said. "Their liens will be taken care of."

Security Title is "handling all the things that have been discovered so far and will continue to do so if there is more," Krause added.

Security Title discovered missing money from Day Title's escrow account in a preliminary audit after being alerted to unpaid mortgage payments for an Anne Arundel County homeowner by Wells Fargo Bank on May 8, court documents show.

After numerous discussions with Williams, Security Title conducted an audit of Day Title's books and records May 19 and found that its escrow account was short between $1.5 million and $2 million, court filings show.

A request for emergency dissolution and receivership was filed the same day.

The court granted Security Title's request May 22.

Williams eventually made those mortgage payments for the Anne Arundel County homeowner, but Security Title said there is still accrued and unpaid interest due to the lender.

Eric M. Smith, who has a law degree and financial experience, was appointed as Day Title's receiver. Smith, of Annapolis, said his job will be to take control of the assets and recover as much money as possible for creditors.

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