Real Estate Litigation

By: Ben Reeves

Last year (as we blogged about here and wrote a more in depth Law360 article about here), the Ninth Circuit certified to the Washington Supreme Court the question of whether title companies owe a duty of care to third parties when they record legal instruments. We finally have an answer…

“We answer the certified question no and hold that title companies do not owe a duty of care to third parties in the recording of legal instruments. Such a duty is contrary to Washington’s policy and precedent, and other duty of care considerations.”

Centurion Properties III, LLC v. Chicago Title Ins. Co., 375 P.3d 651, 653 (Wash. 2016).

Facts of the Case

As described more fully in our prior articles, the fact pattern involved a title company that knew that a borrower was contractually prohibited from recording junior liens against a commercial property, but nevertheless recorded multiple junior liens at the request of the junior lender to the detriment of the borrower. The legal issue was whether the title company owed a duty of care to the borrower when it recorded the junior liens.

The Supreme Court of Washington’s Analysis

The Washington Court began its analysis by looking at the nature of a legal duty. “The duty of care question implicates three main issues—the existence of a duty, the measure of that duty, and the scope of that duty.” Centurion, 375 P.3d at 654 (citing Dan B. Dobbs, the Law of Torts § 226, at 578 (2000)).  To decide the legal questions of the existence and scope of a duty, the Washington Court examined the considerations of “logic, common sense, justice, policy, and precedent” which “lead [the Court] to conclude that a title insurance company does not owe a duty of care to third parties in the recording of legal instruments.” Id. The Washington Supreme Court analyzed these considerations in reverse order, and we do the same.

Precedent

In analyzing precedent, the Washington Court first noted that Washington precedent does not impose a duty on the title company to disclose title defects—even to its client—unless the title company prepares an abstract of title. Id. (citing Barstad v. Stewart Title Guaranty Co., 145 Wash.2d 528, 541 (2002)).  Since no party requested an abstract of title in the Centurion case, the Court concluded as follows:  “Because our title insurer liability precedent does not support finding a duty to identify and disclose title defects to its own clients, it cannot support extending this duty of care to nonclient third parties when recording a legal instrument, particularly when that legal instrument is facially valid, as it is here.”  Centurion, 375 P.3d at 657.

Next, the Washington Court looked at its precedent imposing a duty to third parties on professionals. Based on a review of that precedent, the Court concluded that absent a substantial risk to public safety or property damage, professionals do not owe a duty to third parties when the transaction at issue is not intended to benefit the third party. Id. (citing Affiliated FM Ins. Co. v. LTK Consulting Servs., Inc., 170 Wash. 2d 442, 243 P.3d 521 (2010)).  Because the transaction at issue in Centurion was not intended to benefit the borrower (and in fact, was intended to burden the borrower’s property), the Washington Court had little difficulty concluding that its precedent does not impose a duty of care on title companies to its nonclients.

Finally, the Washington Court examined the two cases cited by the Ninth Circuit: Luce v. State Title Agency, Inc., 950 P.2d 159, 162 (Ariz. Ct. App. 1997) and Seeley v. Seymour, 237 Cal. Rptr. 282, 291-92 (Ct. App. 1987). Luce held, on extraordinarily similar facts, that the title company did not owe a duty of care to third parties when it gratuitously recorded a deed of trust. Seeley held, under the unusual circumstances of that case, that the title company was liable to a third party, because the title company was morally culpable for recording a facially invalid memorandum of agreement in breach of its contract with the county recorder’s office.  Echoing our prior analysis of these cases, the Washington Court found Luce more persuasive, and determined that the special factual circumstances of Seeley rendered it inapposite. Centurion, 375 P.3d at 661.

Thus, precedent did not support the imposition of a duty on title companies to third-parties.

Policy

The Washington Supreme Court next examined policy considerations, and concluded that although the title recording system plays an important role in protecting property rights, the imposition of a “negligence” standard of care on title companies would not further that policy. Indeed, the Washington Court noted that the torts of slander of title and tortious interference of contract provide sufficient protection to property owners yet those torts require intentional and/or malicious conduct.  Thus, the Washington Supreme Court “agreed with [the title company] that recognizing liability for the ‘negligent recording’ of a facially valid instrument would have a chilling effect on recording documents and undermine the goals of [Washington’s title insurance statutory scheme].” Id. at 663.  Thus, public policy considerations did not support the imposition of a duty.

Logic, Common Sense, and Justice

Utilizing logic and common sense, the Washington Court further concluded that the borrower had no right to rely on the title company’s commitment to provide title insurance to the junior lender, since the borrower had no relationship with the title company. “As a matter of logic and common sense, [the borrower] is not entitled to something for nothing; not having entered into a contract with [the title company] relating to future recordings, [the borrower] is not entitled to the benefit of [the junior lender’s] bargain with [the title company].  Nor [is the borrower] entitled to have [the title company] review operating agreements and presumably lengthy loan agreements without a contract for—and paying for—that benefit.” Id. at 663.  Thus, as a matter of logic and common sense, the title company owed no duty to the borrower in the Centurion case.

In regard to the final consideration of justice, that “factor supports placing liability on the party best able to mitigate or control the anticipated harm.” Id. Here, the manager of the borrower was in the best position to mitigate the harm.  As the Court noted, shifting that burden to title companies “increases their costs, slows the recording process, and frustrates public policy, with no appreciable benefit.” Id. Thus, justice would not be served by imposing liability on the title company.

Conclusion

Title companies certainly can breathe easier with the issuance of this recent ruling. As we noted in our prior articles, this decision could have been a game-changer for title companies.  However, in a very well-reasoned opinion, the Washington Supreme Court established that absent unusual circumstances like those in Seeley, title companies do not owe a duty to their nonclients.