Editor’s note: This is Part 18 of a series of posts in which Denver-area real estate attorney Frederick Skillern provides summaries of case law pertinent to real estate practitioners (click here for previous posts). These updates originally appeared as materials for the 32nd Annual Real Estate Symposium in July 2014.
First Citizens Bank & Trust Co. v. Stewart Title Guaranty Co.
Colorado Court of Appeals, January 2, 2014
2014 COA 1
Title Insurance; Exclusion 3(a) matters “created, suffered, assumed or agreed to by the insured claimant”; closing handled by insured lender; ambiguous; no need to “foreclose first” if deed of trust defective; subrogation to rights of insured lender to sue on note; attorney fees and the American Rule.
Bank commits to make a loan, and gets a commitment for a loan policy of title insurance. The commitment reflects that title is not in borrower, and contains a requirement that a deed be recorded vesting title in borrower before issuance of a new policy. Bank closes the loan in house and does not get a vesting deed. According to the trial court’s findings, the bank assumed the title company issuing the commitment (but not handling the closing) would get and record the deed. The title company assumed the bank would do that. It is not apparent from the decision whether title was searched prior to closing or issuance of a policy.
The borrower defaults on the loan, and files a title claim in the amount of the debt. A separate action is filed by the bank against the borrower, which had not gone to judgment by the time of trial in this action. The trial court enters judgment against the title insurer for the full amount of the balance due on the loan, together with attorney fees incurred by the lender in bringing the action. On appeal, the court affirms the judgment for the full amount of the debt but reverses the award of attorney fees.
The court follows the holding in Sims v. Sperry, 835 P.2d 565 (Colo. App. 1992), that Exclusion 3(a), which excludes coverage for matters “created, suffered, assumed or agreed to” is ambiguous, and that the title insurer must prove that the lender “made a conscious and deliberate act intended to bring about the conflicting claim” in order to successfully resort to this exclusion from coverage. Id. at 570. Like many legal rules stated by courts, this rule itself may overstate the meaning of the court’s ruling in Sims, since if a title company relies on the “agreed to” portion of 3(a), which would seem to mean that the encumbrance, if you will, was “intended.” In any event, the court here held that each party thought the other would satisfy the “requirement,” and the court held that the lender was only negligent in not complying with the requirement. The trial court’s refusal to apply this defense was supported by the record, and the judgment is upheld on liability.
As to damages, the court held that the insurance company could be held liable for the full amount of the indebtedness owed to the insured, as the deed of trust is invalid. The court held that the trial court correctly did not require the lender to attempt foreclosure of the deed of trust under Policy Condition and Limitation 8(b), holding that the limitation does not apply where “it is conceded that the insured’s title is defective. It did not require that this action be stayed pending the outcome of the banks suit on the note – any recovery would reduce the damage claim of the insured lender – because upon payment of judgment in this action, the insurer would be subrogated to the bank’s right to proceed against its borrower.
Perhaps the most significant ruling in this case is the court’s reversal of the insured bank’s claim for its attorney fees incurred in suing the title insurer. It explicitly disapproves of the holding in an earlier case, Hedgecock v. Stewart Title Guaranty Company, 676 P.2d 1208, 1210-11 (Colo. App. 1983), relying to a large extent on the holding of our supreme court in Allstate v. Huizar, 52 P.3d 816, 820-21 (Colo. 2002) (the creation of a new exception to the American Rule is best left to the legislature). In the absence of a contractual or other statutory provision for recovery of attorney fees, no recovery.