Daily Development for
Tuesday, April 7, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

Thanks to DIRTer Vicki Morrison of Riker, Danzig et al in Morristown, N.J. for this item.

TITLE INSURANCE; SUBROGATION: Court denies subrogation rights to insured’s deed warranty claims where insurer negligently failed to identify title defect.

First American Title Ins. Co. V. Haggins, 1998 WL 32776 (Ohio App. 1998) (unpublished opinion)

Grantor owned property subject to a mortgage. The mortgage was reassigned a number of times, including passing through the RTC, but Schmidt continued to service the loan. Haggins, a real estate broker, acquired the property for $25,000. There is nothing in the record to show that Haggins acquired title insurance from the defendant. Thirty four days later, Haggins sold the property to Winfrey for $50,000, and gave a general warranty deed not mentioning the mortgage. Haggins paid the outstanding mortgage balance out of the sale escrow.

Notwithstanding this assertion by Haggins that he paid off the mortgage, it appears that Winfrey indeed made payments on the mortgage after Winfrey bought the property. But suffered financial difficulties and Schmidt filed for foreclosure. There were some “starts and stops” in the foreclosure, as Winfrey twice filed for bankruptcy. In 1994, perhaps out of the bankruptcy, perhaps after bankruptcy (the court’s report is unclear), Winfrey sold the property to Pebblebrook. Pebblebrook obtained a title insurance policy from the defendant title insurance company, which issued a policy showing no outstanding prior mortgage as an exception, and also not showing the pending foreclosure action.

Thereafter, Schmidt notified Pebblebrook that it was proceeding with the foreclosure action begun against Winfrey. Pebblebrook notifed the title insurer, which eventually paid the mortgage balance and then brought a subrogation claim against Haggins. The trial court found that the proximate cause of the inury to the insured was the negligence of the title insurer (which was a breach of the title insurer’s contractual obligation to Pebblebrook), and not Haggin’s breach of warranty, and barred recovery.

On appeal, held: Affirmed.

The court cites two cases involving the issue of equitable subrogation of a lender to a prior lien where the lender has inadvertantly taken a later mortgage and cancelled the prior lien without knowledge of intervening liens. Those cases denied subrogation because the lender had been negligent in failing to discover and protect itself against the intervening liens. The court cites these cases for the following proposition: “Where an imperfect title search has been performed and relied upon by a lender, equity will not reward such negligence by applying the doctrine of subrogation in favor of the negligent party. . . To do so would encourage carelessness.” The court saw parallel logic applicable to this case, even though the subrogation issue here is one of conventional (or contractual) subrogation and not legal (equitable) subrogation, as was involved in the precedent cases. The court does not point out the distinction in the type of subrogation involved, but simply concludes that equitable principles bar recovery by the title insurer on the warranty.

The court rejected the insurer’s notion that to find for Haggins would result in unjust enrichment. It accepted, at least for purposes of argument, the notion that Haggins had agreed to pay off the Schmidt mortgage when he sold the property to Winfrey, and did not do so. The court, however, clamed that this resulted in unjust enrichment to the mortgagee, and not to Haggins.

Comment 1: Indeed, many title insurers do not attempt to recover as a subrogated party when they have made an error in identifying an outstanding lien. They do proceed, however, when they feel that there is fraud or inappropriate behavior. In the instant case, the insurer apparently believed that Haggins had not paid off the prior lien, as he had agreed to do. The court, in a statement that demonstrates the incredible naivete of many appellate courts when confronted with real estate matters, concluded that this did not result in unjust enrichment to Haggins. The truth of the matter is that if Haggins sold the property for $50,000, and didn’t have pay off the mortgage, as he agreed to do, then Haggins was unjustly enriched by keeping the purchase monies that should have been used to retire the mortgage.

Comment 2: The court does not discuss the trial court’s analysis of the case, so at least we are not faced with the problem of a court finding intervening negligence and proximate cause as relevant questions for contract recovery, as opposed to tort.

Comment 3: Haggins made a contract to be liable if the title was encumbered. It was. By contract, Pebblebrook assigned the benefit of its contract to the title insurer if the title insurer performed its contract and protected Pebblebrook from a title encumbrance. The title insurer performed, and should have been entitled to its contract rights. This is not an equitable subrogation situation.

In her excellent treatise on Title Insurance Law, DIRTer Professor Joyce Palomar at the University of Oklahoma points out that some courts presently do not recognize a distintion between conventional and legal subrogation in this context, and always weigh the equities in determining whether to enforce a title insurer’s subrogation claim. Nevertheless, she points out that the bulk of the cases do grant subrogation against a title warrantor notwithstanding a title company’s negligent failure to identify the defect in a title search.

Counsel for the title company would have done well to invest in Professor Palomar’s treatise and bring the Ohio court up to date on the law. Surely the cost would be less than the $26,000 plus attorney’s fees that the insurer lost out on here.

Comment 4: Note also the court’s conclusion that the title insurer “breached its contract” with Pebblebrook when it negligently examined the title. This little piece of dicta, of course, tilts Ohio toward the “duty of care” side of the great split in the country right now on the character of a title insurance company’s duties. Some say that there is a duty to be careful in examining title, but others, probably still the majority, say that the title insurer’s duties, at least under normal circumstances, are to honor its insurance contract, and that’s it.

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