Title Insurer Not Responsible For Incorrect Informal Statements Made As To Lien Status Of Property; Leads To $1M Hit For Foreclosure Sale Bidder

A recent ruling by a California appellate court highlights the importance of obtaining title insurance protection when buying (or renting) real estate. The basic facts of the case have been extracted (mostly verbatim, but slightly adapted) from the ruling as follows:

• Individual/Plaintiff alleges that he was an investor in distressed real estate. His business plan involved the purchase of real properties that were being foreclosed upon by mortgage holders.

• In order to decide whether to bid on a particular property, he needed to know if the foreclosing lender was in fact the senior lender on that property. Put another way, if he made a successful bid at a foreclosure sale and the foreclosing lender held a secured position junior to other more senior liens, then plaintiff's title would be subject to such liens.

• In order to avoid such a result, plaintiff alleges that he entered into an oral agreement with Chicago Title Company ["Chicago"] agent, Miguel Escutia, in which it was agreed that Escutia, on behalf of Chicago, would provide title information upon which plaintiff would rely in deciding whether to make a bid at a particular foreclosure sale.

• In exchange, plaintiff alleges that he agreed that he would place business with Chicago upon the subsequent resale of the foreclosed properties. The information that plaintiff wanted from Chicago was limited, specific and time sensitive.

• He needed, usually within twenty-four hours before a particular foreclosure sale, a "yes" or "no" answer to the question of whether a particular designated foreclosing loan was a senior lien.

• Plaintiff emphasizes he neither sought nor obtained a "preliminary title report." What he sought and what Escutia allegedly provided were simple short e-mail answers to his questions as to the senior status of multiple loans. Other than his promise of future title insurance business, plaintiff neither paid nor agreed to pay for these services.

• On March 6, 2008, plaintiff requested seniority information as to a loan that was being foreclosed upon a property located in Encino, California. Through Escutia, Chicago allegedly informed plaintiff that the foreclosing loan (in the amount of $990,000) was in a senior position. In fact, it was junior to a first deed of trust held by Citimortgage, Inc., in the sum of $1,600,000.

• Plaintiff alleges that, in reliance on Chicago's one-word "yes" e-mail response to his inquiry about the mortgage loan, he submitted a bid at the foreclosure sale on March 11, 2008 in the sum of $1,000,000.01. He further alleges that he was only able to sell the property for $1,200,000 and, after negotiating a reduction in and then paying the balance remaining on the senior Citimortgage lien, he sustained a loss in the sum of $1,000,000.

• He then filed a lawsuit against Chicago for negligence and negligent misrepresentation, which he subsequently amended by adding causes of action for breach of oral contract and so-called "abstractor negligence."

Given these facts, the state appeals court found that Chicago Title Company had no responsibility for the investor's loss that may have resulted from the incorrect statements of its agent and, accordingly, affirmed a lower court ruling dismissing the lawsuit.(1)

For the entire ruling, with the analysis of the California law applied in resolving this lawsuit, see Soifer v. Chicago Title Co., No. B217956, ___ Cal App. 4th ___ (2nd Dist. Div.3, August 10, 2010) (certified for publication).

(1) In holding in favor of the title insurer, the court summarized their decision and legal analysis as follows (bold text is my emphasis, not in the original text):

• In Southland Title Corp. v. Superior Court (1991) 231 Cal.App.3d 530 (Southland), we held that a title company could not be held liable for the negligent preparation of a preliminary report of title. Rather, if a representation was sought from the title company as to the condition of the title to a particular property, an abstract of title should have been obtained.

• Here, plaintiff neither sought, obtained nor desired a policy of title insurance or an abstract of title, but nonetheless seeks to hold the respondent, Chicago Title Company (Chicago), liable in both tort and contract for alleged negligence and misrepresentations with respect to the seniority status of encumbrances on certain properties that were in the process of trust deed foreclosure.

• We adhere to our analysis in Southland and extend and apply it here to the several claims asserted by plaintiff. We hold that a plaintiff cannot recover for errors in a title company's statements regarding the condition of title to a property in the absence of a policy of title insurance or the purchase of an abstract of title. We therefore will affirm the judgment.