5th Circuit: Insurer May Have Duty to Defend Lawyer Who Missed Real Estate Scam

A malpractice insurer should have defended a Dallas attorney in a lawsuit filed by investors who were scammed by a career criminal, despite the carrier’s argument that the lawyer sent notice of her claim to the wrong office, the 5th Circuit Court of Appeals ruled.

The appellate court on Wednesday reversed a district judge’s decision to grant summary judgment in favor of Landmark American Insurance Co. Just because attorney Gaylene Rogers Lonergan didn’t submit the exact documents that the carrier required — and sent the notice to the underwriting department instead of the claims department — that doesn’t mean the carrier was prejudiced by those mistakes, according to the panel’s opinion.

“While an insured’s breach of a material reporting obligation relieves an insurer of its duty to defend and indemnify the insurer, the same is not necessarily true when an insured breaches an immaterial notice condition,” the court said in the unpublished opinion.

Lonergan acted as title agent in a real estate deal between a group of five investors and N&J Enterprise, owned by Jonathan Blount. The investors contend that Lonergan notarized a document that was purportedly signed by a Edward Eddyneton III who asserted he was holding nearly $5 million for Blount and N&J in a Bank of America escrow account.

As it turned out, the account never contained more than $500 and Eddyneton didn’t exist, according to the investor’s lawsuit. They say they later learned that Blount had served many years in federal, Oklahoma and Texas prisons for similar thefts and real estate scams.

The investment group loaned Blount and N&J $4.6 million to buy a property in Dalworthington Gardens, Texas whose title has been clouded because of an ownership dispute after a divorce proceeding. Blount presented an appraisal indicating the property was worth $14.6 million. He asked for a short-term loan so he could buy the other owner’s interest in the land.

Blount never made any payments. The investors foreclosed, but found the deed of trust inaccurately described the property. They were able to recover only $4.9 million, leaving the investors short $1.7 million.

The investment group filed suit against Lonergan and Maverick Title. The suit says Lonergan falsely stated that she had seen Eddyneton sign the escrow documents and notarized fraudulent the documents.

Lonergan gave notice to her Landmark, her liability insurer, but the carrier denied her claim. Landmark said that Lonergan did not file notice in the manner required by the policy, and also that the claim was excluded under other terms stated in the policy.

The district court never reached a decision on whether those exclusions applied, but granted summary judgment in favor of Landmark because Lonergan had not complied with the carrier’s notice provisions. The investors appealed.

The 5th Circuit panel said that the Texas Supreme Court has ruled that insurers can still be held liable to defend a policyholder even if notice was given improperly if they were not prejudiced by the failure to properly report a claim. The district judge never reached a decision on whether Landmark suffered any harm. The appellate court remanded the case and directed the lower court to address that question.

“We express no view or limitation on the actions the district court should take on remand,” the court said.

In a telephone interview, Lonergan denied lying about witnessing the imaginary Eddyneton sign the escrow documents, but she admitted making a mistake.

“It was an error on my part,” she said. “It was a matter of negligence.”

Lonergan said the whole purpose of the investor’s lawsuit against her was to collect from the malpractice insurer. “If they do, more power to them,” she said.

Blount went on to fight a separate legal battle after the investors foreclosed. He sued the City of Dalworthington Gardens accusing its police department of improperly evicting him from a luxury home that he claimed to own. A federal judge dismissed that suit in 2018.