Does a title company owe a duty of care to third parties in the recording of legal instruments?

By: Ben Reeves

This is precisely the question that the Ninth Circuit recently certified to the Washington Supreme Court in Centurion Properties III, LLC v. Chicago Title Ins. Co.

Facts of the Case

In this case, Centurion Properties III, LLC (the “Borrower”) purchased a tract of real property in Washington with a loan from General Electric Capital Corporation (the “Senior Lender”), and secured the loan with a first position lien against the property. The loan documents and lien instruments specifically prohibited further encumbrance of the property without the Senior Lender’s prior written consent. Chicago Title served as the escrow agent, closing agent, and the title insurer for this transaction.

Despite this prohibition, the manager of the Borrower subsequently signed a junior deed of trust in favor of another lender, Centrum Financial Services, Inc. (the “Junior Lender”), in the amount of $10,000,000. The Junior Lender then asked Chicago Title to record the junior lien, which Chicago title did. Apparently, neither the Senior Lender, nor the minority owner of the Borrower (the “Minority Owner”), were aware of this junior lien.

Two years later, the Senior Lender discovered the junior lien and declared the Borrower in default. The Borrower, now controlled by the Minority Owner, was unable to obtain financing to take out the Senior Lender, and eventually put the Borrower into bankruptcy.

The Legal Dispute

In the bankruptcy, the Borrower and the Minority Owner filed suit against the title company for “negligence, stemming from Chicago Title’s recording of the disputed liens.” Although Chicago Title conceded that “it could be charged with actual knowledge” of the prohibition of junior liens in the Senior Lender’s documents, Chicago Title argued that Washington law does not impose on title companies tort duties to third-parties beyond the duties assumed through its contract with its client. The trial court agreed, and granted summary judgment to Chicago Title “holding that Chicago Title did not owe a duty of care to the Plaintiffs.” The Borrower and Minority Owner (i.e., the “Plaintiffs”) appealed to the Ninth Circuit.

The Appeal to the Ninth Circuit

The question on appeal was whether Chicago Title owed a duty of care to the Plaintiffs when it recorded the junior lien at the request of the Junior Lender. No Washington case has addressed this precise issue, and the Ninth Circuit only found two extra-jurisdictional cases on point.

In the first case, Seeley v. Seymour, the California Court of Appeals held that a title company does owe a duty of care to third parties to refrain from negligent recording of documents. 237 Cal. Rptr. 282, 291-92 (Ct. App. 1987) (“As institutions charged with the public trust, it is important that [title companies] be held accountable when their negligent acts result in economic harm to individual property interests.”). In the other case, Luce v. State Title Agency, Inc., the Arizona Court of Appeals reached the exact opposite conclusion. 950 P.2d 159, 162 (Ariz. Ct. App. 1997).

Based on the dearth of case law on the issue, the important policy considerations for Washington, and the Ninth Circuit’s inability to divine how a Washington court would decide this issue, the Ninth Circuit certified the question to the Supreme Court of Washington for resolution under Washington law. From here, it will be up to Washington to take the case, and decide whether to answer the question: Do title companies owe a duty to third-parties when they record documents?

Implications

The outcome of this case may very well be a game changer for title companies. If title companies owe a duty to third-parties, then title companies will likely be burdened with a significant amount of due diligence before they record any document on behalf of their client. Is it really fair to place such a significant burden on the title company? Shouldn’t the client be responsible for knowing what is, or is not, allowed? If no duty is owed, however, then title companies may be able to avoid liability even if they know, or should know, that recording a document will improperly impact a third-party’s interests. Is that a fair outcome to the third-parties?

This is a difficult question, and it will be interesting to see how Washington resolves this dispute. Stay tuned for future updates.

Update:  Washington answered the question here.

Author: Ben Reeves | Leave a comment Tagged , , ,

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