by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
Thanks to DIRTer Carl White for tipping us off on this one.
TITLE INSURANCE; DUTY TO INSURE: Title insurer liable to seller for refusal to insure title that would be acceptable under state title standards.
Morris v. Ford County Title Co., 234 B.R. 173 (Bkrtcy. D. Ka. 1998) (In re Lisa, Inc.)
Trustee in bankruptcy proposed to sell certain property free and clear of liens pursuant to Bankruptcy court order. Bankruptcy law provides that such sale elminates liens attached to the real estate and transfers the lienholder's claim to the sale proceeds. The Trustee contracted to sell property to a buyer, and the sale agreement required the delivery of a title policy insuring title free of liens. Trustee contracted the Title Company to insure the title.
Title Company issued a "binder" acknowledging that the property was to be sold free and clear of liens under Bankruptcy laws, but contained an exception for tax liens absent a showing that taxes and special assessments had been paid. The case does not make clear why the Title Company concluded that it had exposure if it insured over these tax liens.
Trustee objected to the exception in a letter to the Title Company, giving the Title Company of the Kansas Bar Association Title Standard that provided (apparently) that it was acceptable to delete tax liens from a title report when the property is sold free and clear of liens.
The Title Company never responded formally to the Trustee's letter, and the transaction proceeded to closing without the matter being resolved. Thereafter, before it delivered its policy in this transaction, the Title Company raised the exception in connection with the new owner's attempt to obtain lender's insurance for a mortgagee. The new owner brought the problem to the Trustee, who ultimately obtained alternate insurance and sued the Title Company for damages.
Held: The Title Company is liable to seller for failure to deliver a title policy that insures title in accordance with the local title standards.
The court found that by arranging with the Title Company to provide a title abstract and title binder, and by agreeing to pay part of the cost, the Seller had entered into a contract by which the Title Company implicitly agreed to perform services consistent with the ordinary standards used by by lawyers passing upon title in the community. The court also appeared to find that the title company had an implied duty of good faith and fair dealing to provide an insurance policy that met the ordinary standards applied to lawyers - the Title Standards promulgated by the Kansas Bar Association.
The court discusses at length a variety of precedent from Kansas and from other jurisdictions finding that a title insurer has no implied obligation to insure over any title defect or risk that it has identified. In almost all the precedent cases, the title company had prevailed as against efforts to require it to insure title at an identified standard. But the court distinguishes these cases on various grounds.
In response to the Title Company's concern that it might, as a consequence of this case, undertake to insure over risks that it later will be liable to defend against and even pay claims about, the court responds that there always be a right of recourse over against the seller - here a bankruptcy trustee who conceivable could be secure and judgment proof long before any claim might arise.
Comment 1: The title standards impose *minimum* standards of care. They may also be useful for interpretation of what constitutes marketable title. But do they establish maximum standards of review when an attorney has been consulted for an expert opinion? Should an attorney - and by an extension a title company - be free to raise points upon which it disagrees with those who prepared the title standards? Isn't that the very nature of professionalism - that an individual use all the skill and experience at hand to make the best analysis?
Comment 2: Kansas title authorities have informed the editor that title companies frequently have concerns about whether "free and clear" bankruptcy sales in fact elminate absolutely any danger of tax liens, and reservations about tax liens are not uncommon. Is this really an area in which we want to stifle dissent and concern about the security of title?
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