Daily Development for Tuesday, November 20, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

TITLE INSURANCE; MARKETABILITY OF TITLE: Fact of physical encroachment by a city street onto insured's property establishes a triable issue of fact as to whether plaintiff's title is rendered unmarketable.

Mellinger v. TICOR Title Insurance Company, 113 Cal.Rptr.2d 357 (Cal. App. 2001)

This case is shot through with ambiguities and unanswered questions. There is a kernel of analysis that deserves reporting, nevertheless, and we have to ignore all the other problems.

Plaintiffs contracted to buy certain property on the condition that they got preliminary subdivision approval. There was a long escrow while they sought such approval (apparently not surveying the property as part of that process, or as a due diligence exercise) and ultimately they obtained preliminary plat approval and acquired the property.

Thereafter, plaintiffs discovered a discrepancy in their property line. A city street encroached upon one of the boundaries. This rendered the total property undersize for the number of planned lots. Plaintiffs attempted to resolve this problem and simultaneously to sell the property. Ultimately, they did arrange a sale and got a variance from the city for their subdivision, conditioned upon their dedicating to the city the land under the street. Nevertheless, the sale fell through, allegedly because of delays caused by the encroachment issue.

Later, plaintiffs sent a demand to the title insurer for $658,000, representing alleged "lost profits, holding costs, and lost interest income." Not surprisingly, the title insurer told plaintiffs to go jump, and the plaintiffs sued, alleging breach of the insurance contract and bad faith. The plaintiff alleged that coverage was available under the policy insurance of marketability of title.

The trial court, first ruled that, under the contract, the only claim was for diminution in value of the property. Then, ruling that the interpretation of the coverage of the policy was a question of law, concluded that there was no coverage for plaintiff's loss in any event.

On appeal, held, Reversed. The California Court of Appeals concluded that there was a triable issue of fact for the jury as to whether the encroachment was a defect in title that amounted to a loss of marketability.

The Court of Appeals noted that marketability is not a question, necessarily, as to whether there are valid competing claims, but whether any potential competing claims might make it more difficult to sell the property:

"Based on the meaning of marketable title established by the Supreme Court, the question is whether a reasonable purchaser, knowing that a third party might claim an interest in the property, would nevertheless proceed with the transaction. Though many of the facts in this case are undisputed, the question of whether a reasonable purchaser would buy plaintiffs' property knowing the City of Concord or the public might have a vested right to continued use of the Treat Boulevard encroachment remains unanswered."

The court concluded that it could not say with absolute certainty that the City had no claim here. It alluded to doctrines such as implied dedication that might establish such a claim. Further, it was unwilling to concur with an Illinois decision that dealt with such issues as a question of law. Both the fact of a city claim and the damages suffered by the landowner were questions of fact for a jury. Implied dedication questions generally involve interpretation of facts.

The title insurer pointed to language in the policy that indicated that there was no coverage for "easements, liens or encumbrances not shown by the public records." The court acknowledged that this defense indeed might be dispositive of the ultimate claim, but noted that the plaintiffs had brought forth an expert who alleged that the existence of the city encroachment was shown by the official records, despite the insurer's claim to the contrary. Consequently, the question of whether the encroachment was evidenced in the records was a question of fact for the jury.

The policy also included the standard exclusion for interests that might be shown by a competent survey. The court concluded that this exclusion might later become relevant, but that it was first appropriate to decide whether there was coverage before it concluded whether an exclusion was relevant. Therefore, let's go to trial.

Comment 1: That last little bit of trickery, concerning matters that a survey would disclose, was contained in a footnote at the very end of the opinion. It undoubtedly is as mystifying to the reader as it is to the editor. Here is the whole text:

"Plaintiffs' policy excepted from coverage any rights, interests or claims of parties in possession of the land not shown by the public records. It also excepted any facts about the land that a correct survey would disclose and which was not shown by the public records. The trial court noted there was no need to reach the question of exclusions, but it did observe certain exclusions would apply. The exclusions and exception appearing in the policy, if applicable, may eliminate coverage or limit the amount of damages plaintiffs can recover. . . ."

It's one thing to say that the trial court need not have reached the issue of exclusions. The trial court found no coverage to begin with. But why force the parties to a jury trial of facts that might, by some remote interpretation, lead to a conclusion that coverage exists if there is no right to recover based upon exclusions?

Perhaps there's something that the editor doesn't see as to the question of whether the existence of an encroaching roadway would have been shown by a survey (in fact a survey found the problem - that's why we're here.) Any advisors?

Comment 2: The marketable title, analysis, on the other hand, is sound. Clearly if another party does have "assertable" legal rights as a consequence of an encroachment, even if based upon a physical intrusion rather than another type of legal claim, then these rights can affect marketability. Note that the city didn't cave in entirely - it did grant the zoning variance but only in exchange for a dedication of the fee. It didn't completely surrender any potential claim when asked, and there thus could be an impact on the marketability of the property. Normally, however, such an issue wouldn't arise because encroachments would be covered by the survey exception. Still puzzling over that one.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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