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Stewart Title Guaranty Company v. a Title Escrow Co.

United States District Court, N.D. Illinois, Western Division
Jul 25, 2007
Case No. 05-C-50116 (N.D. Ill. Jul. 25, 2007)

Opinion

Case No. 05-C-50116.

July 25, 2007


MOTION FOR ENTRY OF JUDGMENT ORDER


Plaintiff, Stewart Title Guaranty Company, Inc. ("Stewart"), by its attorneys, WILLIAMSMCCARTHY, LLP, moves this Court for the entry of a judgment order and in support thereof states as follows:

1. On June 14, 2007, the Magistrate Judge entered a Report and Recommendation recommending that Plaintiff's Motion for Sanctions, including default judgment, be granted.

2. By Order dated July 6, 2007, the District Court adopted the Report and Recommendation of the Magistrate Judge and entered a default judgment in favor of Plaintiff and against both Defendants and ordered that the matter be scheduled before the Magistrate for the purpose of calculating damages.

3. Attached hereto as Exhibit A is the Affidavit of Edward Tucker establishing the loss sustained by Stewart as a result of defalcations of K. Sean McKee ("McKee") and A Title Escrow Company, Inc. ("ATEC") in the amount of $963,314.47.

4. Pursuant to ¶ 5(b) (c) of the Underwriting Agreement (Exhibit A of Complaint) Defendants are obligated to Stewart for attorneys' fees, litigation expenses and costs of settlement negotiations sustained or incurred by Stewart as a result of the fraud or intentional act or omission of the Defendants.

5. Attached hereto as Exhibit B is the Affidavit of Scott C. Sullivan which establishes the amount of attorney's fees and costs incurred by Stewart in investigating and prosecuting the claims against McKee and ATEC. The amount of attorney's fees and costs incurred are $226,140.41.

6. Stewart moves for the entry of a judgment order in the amount of $1,189,454.88 in the form attached hereto as Exhibit C.

WHEREFORE, Stewart Title Guaranty Company moves that this Court enter an Judgment Order in the form attached hereto as Exhibit C.

CERTIFICATE OF LAWYER AND NOTICE OF ELECTRONIC FILING

The undersigned certifies that:

1) On July 25, 2007, the foregoing document was electronically filed with the District Court Clerk via CM/ECF filing system;

2) Pursuant to Rule 5 of the Federal Rules of Civil Procedure, the undersigned further certifies that a copy of the foregoing document was electronically served upon the following:

Theodore Liebovich
Liebovich Weber, P.C.
415 South Mulford
Rockford, Illinois 61108

Exhibit A

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS WESTERN DIVISION STEWART TITLE GUARANTY ) COMPANY, a Texas corporation, ) ) Plaintiff, ) ) Case No. 05-C-50116 vs. ) ) Judge Philip G. Reinhard A TITLE ESCROW COMPANY, INC., an ) Magistrate Judge P. Michael Mahoney Illinois corporation, and ) K. SEAN McKEE, an individual, ) ) Defendants. ) ) ) State of Texas ) ) ss County of Harris )

AFFIDAVIT OF EDWARD TUCKER

I, Edward Tucker, being duly sworn on oath, if called to testify would state as follows:

1. I am an adult and have personal knowledge regarding the matters stated in this Affidavit.

2. I am currently employed by Stewart Title Guaranty Company ("Stewart") as an Audit Manager, and for approximately six years prior to March, 2006, my title was Senior Auditor. My primary job functions are to conduct due diligence reviews, compliance reviews, and reviews of the financial records of Stewart Title's independent agencies when questions arise regarding their business practices and whether any defalcations may have occurred.

3. I hold a bachelor's degree in accounting from Brigham Young University and am a Certified Public Accountant.

4. Sometime during the week, of March 14, 2005, I was informed by one of Stewart's managers that questions had arisen with respect to substantial overdrafts in the escrow accounts maintained by A Title Escrow Company, in Freeport, Illinois ("ATEC"). I was asked to perform an audit of ATEC's escrow accounts. I was told that questions had arisen regarding potential defalcations of trust funds being maintained in those escrow accounts.

5. As a result of this request, I went to ATEC's headquarters in Freeport, Illinois, the week of March 21st to perform an on-site audit of its bank accounts. This audit lasted approximately three weeks. The primary individuals involved in the audit were Lynn W. Wilburn, a private investigator hired by Stewart for this purpose, and Leah Howe, another Stewart Title employee. Two other Stewart employees, Nicole Thomas and Stephanie Wheeler, assisted during the audit, as did private investigator Susan Smith Kirby.

6. During my investigation, I learned that ATEC maintained certain accounts at Gateway Community Bank ("Gateway"), located at 5306 Williams Drive, Roscoe, Illinois as follows:

Account No: Account Type 1034 Escrow-old 1035 Escrow-recording 1134 Escrow-west 1208 Escrow-new 1410 Operating-operating 3285 Operating-sweep 1201 Operating-property

In addition, ATEC maintained certain accounts at Kent State Bank, located at West Fairview Road, Freeport, Illinois. Those accounts included escrow accounts 4681 and 3255 and operating accounts 4788 and 4737.

7. When I began my audit activities, I was initially alerted to a series of several suspicious transactions as a result of several NSF checks drawn on the 1034 Gateway escrow account. To cover those NSF checks, ATEC, through a series of transfers between January 10, 2005 and February 1, 2005, transferred $968,415.77 from Gateway escrow account 1208 to the 1034 account. Those transfers are set forth below:

Date Type of Amount Transaction 1/10/05 WT $229,391.94 1/12/05 WT $122,080.09 1/12/05 WT $56,030.18 1/13/05 WT $233,283.19 1/14/05 WT $50,620.81 1/18/05 WT $28,860.46 1/19/05 WT $34,227.47 1/20/05 WT $599.00 1/21/05 WT $86,627.32 1/25/05 WT $9,831.49 1/26/05 WT $2,622.11 1/27/05 WT $10,411.71 1/31/05 WT $3,830.00 2/1/05 WT $100,000.00 TOTAL $968,415.77 8. As a result of my investigation of the above transfers, I concluded that there was no support or adequate explanation as to why client escrow funds were transferred from the 1208 Gateway escrow account to the 1034 Gateway escrow account, other than to cover overdrafts in that account.

9. As a result of my preliminary audit activities in March and April of 2005, Stewart was able to trace and document the net transfer of $713,689.44 of client escrow funds directly from several of ATEC's escrow accounts to its operating accounts, almost all of which was transferred during the periods of November 2004, January, February and March 2005.

10. Examples of transfers from ATEC's escrow accounts to its operating accounts include, but are not limited to, the following transactions:

Date From Check # To Amount 06 28 04 Gateway Escrow 1034 7179 Gateway Operating 1033 $205,000.00 10 13 04 Kent Escrow 4681 10649 Gateway Operating 1033 $50,000.00 10 25 04 Kent Escrow 4681 10651 Gateway Operating 1033 $50,000.00 11 18 04 Kent Escrow 4681 10652 Gateway Operating 1033 $50,000.00 01 18 05 Kent Escrow 4681 10653 Gateway Operating 1410 $100,000.00 02 03 05 Kent Escrow 4681 10990 Gateway Operating 1410 $40,000.00 02 16 05 Kent Escrow 4681 10991 Gateway Operating 1410 $19,000.00 03 15 05 Gateway Escrow 1208 Wire Gateway Operating 1410 $200,000.00 12. The total amount of the transfers of client escrow funds from ATEC's escrow accounts to its operating accounts through April 1, 2005 was determined to be $713,689.44.

13. As a Senior Auditor, I am aware that escrow accounts are fiduciary accounts and that the money contained in those accounts does not belong to ATEC, but rather to ATEC's customers that are ear-marked for the payment of certain obligations arising out of real estate closings and insured closing letters.

14. In furtherance of Stewart's audit activities, the accounts and records of ATEC were reviewed for the purpose of determining whether payments from ATEC's escrow accounts, that were not part of normal payroll, were made to the K. Sean McKee (ATEC's President) or his relatives. As a result of that audit, it was determined that approximately $1,095,000 in payments outside the ordinary course of business were made to K. Sean McKee and certain of his family members.

15. As a result of ATEC's defalcations, Stewart terminated its underwriting agreement with ATEC on Monday, June 6, 2005. Later that day, the Illinois Department of Financial and Professional Regulation canceled ATEC's certificate of registration as an agent for Stewart Title. A true and correct copy of a letter from the Illinois Department of Financial and Professional regulation to ATEC was previously filed of record in this cause.

16. By early July of 2005, ATEC ceased operations.

17. On or about July 13, 2005, ATEC Gateway escrow account 1208 went into an overdraft position because the checks presented on that account exceeded the funds then available in that account.

18. In order to mitigate Stewart's losses that it owed to customers of ATEC pursuant to insured title policies and insured closing letters, and to protect the financial interests of its insureds, Stewart initially made arrangements with Gateway to review the overdrawn checks ("NSF checks") on a check by check basis to determine which checks would be funded by Stewart. For a period of approximately two weeks, Stewart transferred funds to Gateway to cover certain NSF checks.

19. Beginning in late July of 2005, Stewart ceased transferring funds to the Gateway escrow account and instead, allowed the ATEC checks to bounce and issued new checks from the accounts of Stewart to customers of ATEC to cover liabilities under title policies and insured closing letters.

20. In order to calculate the loss that Stewart sustained as a result of ATEC's defalcations, I examined the records of Gateway, ATEC and Stewart. Attached hereto as Exhbit A is the calculation of the loss ("Loss Calculation") sustained by Stewart that I prepared. This report reveals that on or about July 13, 2005, ATEC's escrow account 1208 went into an overdraft position of approximately $49,983.92. From July 13 through July 29, 2005, an arrangement was worked out between Gateway and Stewart, wherein Gateway would hold checks presented to the end of each day and would allow Stewart to review and approve the escrow checks when presented. Upon approval, each day Stewart would transfer funds to Gateway to cover the payment of approved checks. The amount of those transfers advanced by Stewart to cover the client escrow funds misappropriated by K. Sean McKee and ATEC were $450,594.25. This is shown on pages one through three of the Loss Calculation.

21. Beginning on July 23, 2005, Gateway and Stewart determined that it would be easier to reimburse escrow checks on a per customer basis by reissuing checks out of Stewart's own operating account. Thereafter, Stewart reviewed all claims and checks presented for funding on a per file basis. Upon approval, Stewart would then reissue a check to cover the loss sustained by customers of ATEC as Stewart was obligated to stand behind those losses pursuant to it obligations under insured closing letters or insured title policies. The amount of the losses sustained by Stewart as a result of the re-issuance of checks to cover previous NSF checks issued by ATEC to cover the client escrow funds misappropriated by K. Sean McKee and ATEC totaled $512,720.22. This is shown on pages three through six of the Loss Calculation.

22. Pursuant to the Loss Calculation that I summarized in Exhibit A, I determined that the total amount of loss sustained by Stewart as a result of it having to cover insured obligations because of the misappropriation of client escrow funds by K. Sean McKeen and ATEC was $963,314.47. This is shown on page six of the Loss Calculation. This amount does not include attorney's fees, auditing fees or other expenses incurred by Stewart, that are additional sums due and owing to Stewart by ATEC.

23. Pursuant to ¶ 5(b) (c) of the Underwriting Agreement (Exhibit A of Complaint) Defendants are obligated to Stewart for attorneys' fees, litigation expenses and costs of settlement negotiations sustained or incurred by Stewart as a result of the fraud or intentional act or omission of the Defendants.

24. I have personal knowledge that the foregoing statements are true.

Further affiant sayeth not.

Date: July 10, 2007 Edward V. Tucker Subscribed and sworn to before me on the 10th day of July, 2007. Notary Public

Tucker Affidavit Exhibit A

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Exhibit B

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS WESTERN DIVISION STEWART TITLE GUARANTY ) COMPANY, a Texas corporation, ) ) Plaintiff, ) ) Case No. 05-C-50116 vs. ) ) Judge Philip G. Reinhard A TITLE ESCROW COMPANY, INC., an ) Magistrate Judge P. Michael Mahoney Illinois corporation, and ) K. SEAN McKEE, an individual, ) ) Defendants. ) ) ) State of Illinois ) ) ss County of Winnebago )

AFFIDAVIT OF SCOTT C. SULLIVAN

Scott C. Sullivan, havin g been duly sworn under oath deposes and states as follows:

1. I am an adult, of legal age and competent to testify to the facts contained herein.

2. I am an attorney licensed in the State of Illinois and have been principal counsel for Stewart Title Guaranty Company in connection with the above captioned matter.

3. Pursuant to ¶ 5(b) (c) of the Underwriting Agreement (Exhibit A of Complaint) Defendants are obligated to Stewart for attorneys' fees, litigation expenses and costs of settlement negotiations sustained or incurred by Stewart as a result of the fraud or intentional act or omission of the Defendants.

4. Attorney's fees accrued by the firm of WILLIAMSMCCARTHY, LLP for its services in connection with the above entitled matter total $220,073.60. Costs advanced in connection with the above entitled case by the firm of WILLIAMSMCCARTHY, LLP total $6,066.81.

5. The total fees and costs incurred by Stewart Title Guaranty Company to WILLIAMSMCCARTHY, LLP for its services in connection with the above entitled case total $226,140.41. Total hours billed were 1,052.20 at rates ranging from $40.00 per hour to $260.00 per hour.

6. The undersigned affiant is in control of the billing records which can be presented in camera for inspection by the Court which substantiate the fees and costs set forth herein.

Further affiant sayeth not.25th July

Date: July 25, 2007 Scott C. Sullivan Subscribed and sworn to before me on the day of , 2007. Notary Public

Exhibit C

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS WESTERN DIVISION STEWART TITLE GUARANTY ) COMPANY, a Texas corporation, ) ) Plaintiff, ) ) vs. ) Case No. 05-C-50116 ) A TITLE ESCROW COMPANY, INC., an ) Judge Philip G. Reinhard Illinois corporation, and K. SEAN ) Magistrate Judge P. Michael Mahoney McKEE, an individual, ) ) Defendants. )

JUDGMENT ORDER

The Court having previously entered a default judgment against the Defendants, and after reviewing the evidence submitted, this Court enters Judgment in favor Stewart Title Guaranty Company, a Texas Corporation ("Stewart Title"), against Defendants, A Title Escrow Company, Inc., an Illinois Corporation ("ATEC"), and K. Sean McKee ("McKee") as stated herein.

THE COURT FINDS AS FOLLOWS:

1. This court has personal jurisdiction over the parties.

2. This court has subject matter jurisdiction over the claims asserted in this lawsuit.

3. This court entered a Temporary Restraining Order on June 14, 2005, which restrained ATEC and McKee from certain actions and further froze funds located in certain accounts maintained at Kent State Bank, Plaza Bank and Gateway Community Bank.

4. This court converted the Temporary Restraining Order to an Agreed Preliminary Injunction Order on August 3, 2005.

5. That ATEC and McKee misappropriated client escrow funds as alleged in the Verified First Amended Complaint and that such conduct on the part of ATEC and McKee amounted to a defalcation while acting in a fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4).

WHEREFORE, IT IS HEREBY ORDERED ADJUDGED AND DECREED as follows:

1. That Judgment is entered in favor of Stewart Title Guaranty Company, a Texas Corporation ("Stewart Title") and against A Title Escrow Company, Inc., an Illinois Corporation ("ATEC"), pursuant to each of Counts I, II, III, IV, V and VI of the Complaint in the amount of one million one hundred eighty nine thousand four hundred fifty four dollars and eighty eight cents ($1,189,454.88) plus costs of suit.

2. That Judgment is entered in favor of Stewart Title Guaranty Company, a Texas Corporation and against K. Sean McKee pursuant to each of Counts II, III, IV, V and VI of the Complaint in the amount of one million one hundred eighty nine thousand four hundred fifty four dollars and eighty eight cents ($1,189,454.88) plus costs of suit.

3. It is further ordered that a permanent injunction is hereby entered compelling Kent Bank and Plaza Bank to pay over all funds in any accounts maintained in the name of A Title Escrow Company, Inc., to Stewart Title Guaranty Company within five (5) days of receipt of this Consent Judgement Order.

4. It is further ordered that the Clerk of the District Court pay over the sum of fifty nine thousand two hundred twenty three dollars and fifty nine cents ($59,223.59) to Stewart Title Guaranty Company which had previously been deposited with the Clerk pursuant to this Court's order dated February 8, 2007.

5. This Court shall retain jurisdiction of this case for purposes of enforcing each and all terms of the terms of this final Judgment Order.

Date: __________________________ __________________________________ Judge Philip G. Reinhard Prepared by: Scott C. Sullivan Williams McCarthy LLP P.O. Box 219 Rockford, IL 61105-0219 815/987-8900


Summaries of

Stewart Title Guaranty Company v. a Title Escrow Co.

United States District Court, N.D. Illinois, Western Division
Jul 25, 2007
Case No. 05-C-50116 (N.D. Ill. Jul. 25, 2007)
Case details for

Stewart Title Guaranty Company v. a Title Escrow Co.

Case Details

Full title:STEWART TITLE GUARANTY COMPANY, a Texas corporation, Plaintiff, v. A TITLE…

Court:United States District Court, N.D. Illinois, Western Division

Date published: Jul 25, 2007

Citations

Case No. 05-C-50116 (N.D. Ill. Jul. 25, 2007)