Private causes of action against CRESPA surety bond

In First American Title Insurance Company v. Western Surety Company, No. 111394 (March 2, 2012), the Virginia Supreme Court addressed three questions of law certified by the United States Court of Appeals for the Fourth Circuit. The Court held: (1) that the Virginia Consumer Real Estate Settlement Protection Act ("CRESPA") does not provide for a private cause of action against a surety and surety bond executed pursuant to CRESPA; (2) that Virginia law nonetheless permits a common law breach of contract cause of action against a CRESPA surety and surety bond; and (3) that a title insurance company has standing as subrogee of its insured to maintain a cause of action against a CRESPA surety and surety bond.

The case arose out of a real estate transaction involving an owner who sought to refinance his existing mortgage through SunTrust Mortgage, Inc. First American Title Insurance Company ("FATIC") provided title insurance for the refinancing through its title agent, First Alliance Title Company ("First Alliance"). Pursuant to CRESPA requirements, First Alliance obtained a $100,000 surety bond from defendant Western Surety Company ("Western"). At settlement, funds which were designated to pay off the original mortgages on the property were diverted. The original mortgages were not paid, and the original deeds of trust were not released. As a result, SunTrust's deeds securing the refinance indebtedness were behind the original deeds in priority.

The property owner subsequently defaulted, and the original mortgagor foreclosed, resulting in a loss of $734,296.09 to SunTrust. FATIC paid SunTrust the full amount of the loss pursuant to the title insurance policy, and made a formal demand upon Western for the full $100,000 of the CRESPA surety bond. Western refused to pay, asserting that FATIC could not bring a private cause of action against a statutory CRESPA surety bond. FATIC brought this action against Western on its own behalf, and also as a subrogee of SunTrust, asserting that it became subrogated to SunTrust's right after paying in full SunTrust's claim under the title insurance policy.

The parties disputed that FATIC could bring a common law claim against the CRESPA surety bond, and also that FATIC had standing to assert the cause of action. At trial, the District Court found in favor of FATIC, and entered judgment in its favor for the full $100,000 amount of the CRESPA bond. On appeal, the Fourth Circuit certified the three questions of law to the Supreme Court of Virginia.

The Court first held that CRESPA does not provide for a private cause of action. CRESPA expressly authorizes only licensing authorities to fine or otherwise penalize a settlement agent that violates its provisions. Accordingly, the Court found that CRESPA does not recognize a private cause of action against a surety or surety bond executed pursuant to its provisions.
Next, the Court found that under certain circumstances, Virginia common law does allow for a cause of action to be maintained against a CRESPA surety or surety bond. The Court noted that the express language of a statute must expressly state that the statute abrogates a common law cause of action. CRESPA contains no such express language. The general rule in Virginia that any bond required of a surety is at least as good as a common law voluntary contractual obligation. Accordingly, the Court held that while CRESPA does not expressly authorize a private cause of action against surety bonds, Virginia common law does permit the assertion of a common law breach of contract claim.

Finally, the Court found that title insurance companies may have standing as subrogees of their insureds to maintain a common law cause of action against a CRESPA surety bond. CRESPA's surety bond requirement exists to protect parties with an interest in real estate transactions. Title insurers are not parties to real estate transactions and thus are not among the parties CRESPA surety bonds are intended to protect. Because a title insurer is not a protected party under CRESPA, it does not have standing in its own right to maintain a cause of action. However, the Court nonetheless concluded that a title insurer has standing, not in its own right but as a subrogee of its insured, to maintain a cause of action against a CRESPA surety bond.

Therefore, under its ruling in First American Title, the Supreme Court recognized that certain entities may bring a common law cause of action for breach of contract against a CRESPA surety bond. Additionally, the Court recognized that certain parties may have standing to bring such actions, not in their own right, but as subrogees of their insureds.