Seventh Circuit sides with closing agent in busted $3 million Caseyville development

By The Madison County Record | Apr 30, 2014


Investors who lost $3 million in the failure of a Caseyville development can’t blame the closing agent, U.S. Seventh Circuit appellate judges ruled on April 25.

They affirmed magistrate judge Donald Wilkerson of East St. Louis, who dismissed a claim that Belco Title and Escrow breached a fiduciary duty.

Investors Steven Edelman, Will Furman and Bradford Jeffries claimed Belco should have told them they held a junior mortgage, rather than a senior one as they believed.

The blame rests with the investors, according to the Seventh Circuit.

“Plaintiffs entered into a loan agreement and handed over the cash directly to the borrowers without first ensuring that they were actually getting what they paid for,” Justice Joel Flaum wrote.

“But Illinois law does not hold Belco responsible for the plaintiffs’ interests under these circumstances."

Edelman invested for himself, and Furman and Jeffries invested for trusts.

They loaned money to brothers Craig and John Nicholson for development of Forest Lakes, a $31 million project that the village of Caseyville sponsored.

The late Harold Belsheim, local lawyer, formed Belco Title and Escrow to carry out title work for transactions involving Forest Lakes.

In 2005, Meridian Bank acquired a $20 mortgage million on a 42 unit residential portion of Forest Lakes, with Belco as closing agent.

In 2007, Edelman, Furman and another investor transferred $1.6 million from the first phase of the project to the second. Jeffries invested an additional $1.4 million.

They executed a loan agreement with the Nicholson brothers for the second phase, after the brothers promised them a first priority mortgage on the residential portion.

"This promise was reflected in the deal’s written loan agreement," Flaum wrote.

"Contrary to the Nicholsons’ representations, however, the plaintiffs received only a junior mortgage."

A title search by Belco’s underwriter, Attorney’s Title Guaranty Fund, revealed Meridian Bank’s senior position.

The loan agreement did not disclose the senior mortgage, and it declared the second phase “free and clear of all encumbrances.”

Flaum wrote that the record is unclear as to whether Belsheim or the Nicholsons drafted the agreement.

At the closing, only representatives of Belsheim and Belco attended. A lawyer and a paralegal who both worked for Belsheim signed the escrow disbursement agreement.

"There is no signature on the line for the seller, and there is no line at all for the lending institution," Flaum wrote.

He wrote that none of the loan funds were ever escrowed with Belco, as they had all gone directly to a Nicholson business.

The paralegal sent closing documents to Craig Nicholson, but not to the investors.

“In fact, Belco never once contacted the plaintiffs – before, during, or after the closing," Flaum wrote.

He wrote that Craig Nicholson forwarded only the mortgage to Edelman.

In 2009, Forest Lakes failed and Meridian Bank foreclosed on the property.

Edelman, Furman and Jeffries sued Belsheim and Belco, alleging breach of fiduciary duty. They sued Attorney’s Title Guaranty Fund, alleging negligent misrepresentation.

The parties consented to assignment of a magistrate instead of a district judge.

In 2012, Wilkerson dismissed Attorney’s Title and Guaranty Fund.

Last year, the investors voluntarily dismissed Belsheim.

Belco moved for summary judgment, denying that it acted as agent of the investors with respect to the loan agreement.

Wilkerson granted summary judgment, finding that the investors and the Nicholsons executed the agreement before Belco got involved.

On appeal, the investors argued that Belco should have contacted them prior to closing, to ask if they wanted to proceed without a senior position.

"But the plaintiffs have identified no Illinois cases holding that a closing agent is under an obligation to seek additional instructions from the transacting parties when the parties do not see fit to provide them," Flaum wrote.

"The plaintiffs never told us, and we don’t see how, on these facts, an agency relationship could have formed.”

He wrote that plaintiffs never manifested to Belco their assent that Belco should represent their interests.

“If we hold that, as a matter of law, Belco became responsible for the plaintiffs’ interests under these circumstances, that ruling would surely destabilize escrow transactions; the escrow agent would have no sure way of knowing what responsibilities it owed to whom," Flaum wrote.

Justice Frank Easterbrook concurred. So did District Judge William Griesbach of Milwaukee, sitting by designation

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