Daily Development for
Wednesday, August 30, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

TITLE INSURANCE; ABSTRACTOR'S LIABILITY: An abstractor is not liable to a third party when there is no reasonable expectation that the third party will be induced to rely on the abstract as evidence of title.

Muhlenkort v. Union County Land Trust, 530 N.W.2d 658 (S.D. 1995).

As part of the divorce decree the plaintiff received a property settlement in the form of payments to be secured by a lien upon land owned by the ex-husband. The husband sold the property, and plaintiff's lien did not appear in the abstractor's report or title policy. It was not paid from sale proceeds. Plaintiff's lien later expired, so her claim against the property in the hands of the new purchaser was no longer valid.

Plaintiff, undaunted, sued the abstractor and title insurance company that issued the report and title policy at the time the husband sold the property. She claimed professional negligence in the insurer's failure to properly list her lien as an encumbrance on the property. The plaintiff argued, apparently, that she was injured because her lien would have been paid out of the earlier sale proceeds had the purchasers known of it.

The court's report is somewhat sketchy here, as the husband sold the property sold at a loss - taking into account liens of which purchasers were aware. Perhaps plaintiff's lien had a higher priority than some of those that were paid. (But there is still a question of whether the sale would have occurred at all had plaintiff's lien been known.) But all of this is moot in light of the court's holding:

Held: Even though the privity limitation on abstractor's liability may no longer apply, there will be no professional abstractor's liability to third parties who cannot show that they relied upon the content of the report in making a decision with respect to the party.

The issue of abstractor liability to a third party lien creditor such as the plaintiff was a question of first impression. In examining the policies of a number of jurisdictions, the court settled on adopting the rule that an abstractor owes no duty to a third party lien creditor if the creditor does not rely on the title policies, is not a beneficiary of the policy or abstract, and fails to act diligently in relation to the lien once aware of its omission from the title documents.

Comment: Although there has been a gradual expansion of liability for title insurers, compelling them to perform to the expectations that they have encouraged the community to develop, this case states an appropriate limitation on that expansion. In the end, title companies provide private title examination and insurance services. They are not public record keepers, and do not hold themselves out as such. It is not reasonable for parties to rely upon title insurance companies to provide the function of a public record keeper.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.