Posting for

     Wednesday, July 11, 2001

 

     by:  Alan Rubin

     arubin@FirstAmNY.com

 

     THE VALUE OF TITLE INSURANCE/OWNER'S POLICY/JUDGMENT LIENS/DUTY TO DEFEND

 

     Alan Rubin (Manhattan) writes:

 

     Every now and then we come across a claim that reinforces the value of the owner's policy of title insurance. The following is one of them:

 

     On March 26, 2001, David and Lucy purchased a one-family dwelling in upscale Scarsdale, Westchester County, New York for the purchase price of $1,685,000, and made a mortgage in favor of Hudson Valley Bank in the principal amount of $1,000,000. The seller of the property was Janine Golding-Ochsner ("seller"), who had acquired title to the premises by several deeds between the years 1996-1998. In connection with this transaction, First American issued fee (owner's) and loan policies of title insurance.

 

     Our branch office's title report raised a judgment against the seller (and her husband) in favor of Anthony L. Fiorito, Inc. ("Fiorito") in the sum of $9,200, docketed in Westchester County in June, 1997; that judgment was omitted as an exception based on escrow in the sum of $12,000 taken at closing by the seller's attorney....

 

     In addition, a New York State Tax Commission Warrant against seller (and her husband) in the amount of $50,l97 and docketed in Westchester County in December, 2000 (also prior to the closing) was picked up on a "continuation search" and was omitted based on a $100,000 escrow taken as security for the satisfaction of the Tax Warrant.

 

     As a result of the two judgments referred to above, the seller's attorney signed an undertaking at closing to induce First American to omit the two judgments as exceptions in the title policies. In addition to holding the $12,000 and $100,000 in escrow, the agreement provided that the seller "would indemnify and hold harmless" First American from any "loss, claim, liability or damage" arising from First American's failure to except the judgments in the title policy.

 

     On or about May 22, 2001, an Order to Show Cause under New York Civil Practice Law and Rules (CPLR) section 5206(e) in a "homestead proceeding" (Note: under New York Law, there is a $10,000 homestead exemption; a creditor seeking to enforce a judgment by selling homestead property must demonstrate to the court that the debtor's equity in the homestead property exceeds $10,000) was brought against the seller/judgment debtor, who no longer owned the property--having already conveyed it to the insured owners as indicated above. The proceeding, brought on behalf of two judgment creditors other than the two creditors referred to above seeks permission to sell the real property now owned by David and Lucy and have the proceeds applied first to the Fiorito and State Tax Commission Warrant and then to the two petitioning creditors, who hold judgments of $45,000 and $44,000 respectively.

 

     Significantly, however, is the fact that the petitioning creditors' judgments were docketed subsequent to the policy dates (the date of closing); therefore, they did not attach as liens to the property now owned by David and Lucy.

 

     (As an aside, at the time that the Order to Show Cause was brought, the seller's attorney advised us that the Fiorito judgment is still open although disputed by the seller/judgment debtor, and the State Tax Warrant has been paid in full although not yet satisfied of record. The $12,000 and $100,000 escrow amounts are still being held by seller's attorney.)

 

     Stated otherwise, the petitioning judgment creditors, having no lien against the insured premises, are without any basis in law or fact to support their enforcement proceeding.

 

     Based on our obligation under the owner's title insurance policy (i.e., the duty to defend), we retained counsel to bring on motion to dismiss the creditors' "homestead proceeding" and to seek a declaration that the petitioning creditors do not have a lien against the premises.

 

     Having purchased the property only two months prior to the commencement of the enforcement proceeding, the insured purchasers were (according to their attorney's claim letter) "rather upset to receive this paperwork". In my acknowledgment letter to the insureds' attorney, I stated: "Please tell your clients not to be concerned about the pending action. As I discussed with you, this is a classic case that demonstrates the value of title insurance".

 

     Comment by Bert Rush:  A sometimes overlooked benefit of title insurance is its protection against ridiculous claims and frivolous litigation. 

 

     What could have happened here is that the two 'late' creditors may have been represented by attorneys whose delay in having judgments docketed now threatens their clients' ability to recover. Embarrassed or, worse yet, personally liable, the creditors' attorneys may be resorting to desperate measures.

 

     Still, frivolous lawsuits can be just as expensive to defend as the "colorable" or the tough ones.  And, without an owner's policy, these insureds would probably have to fend for themselves-since the total amount sought by the two 'late' creditors appears too small to threaten the purchase money lender's security interest, and thus not trigger the title insurer's duty to defend the insured lender.

 

     As Alan says, a "classic case...."

 

**********

   Following Wednesday's posting, Jim Dondero (Grand Rapids, MI) writes:

 

     Don't Plaintiffs' claims (i.e. based on judgments docketed post-closing and post-policy) fall within policy Exclusion 3(d) to matters "attaching or created subsequent to Date of Policy;" ?

 

     Likewise, Jon Reynolds (Phoenix) asks:

 

     Whither Exclusion 3(d) ?

 

     Reply by Bert Rush:  Good point!  If these two petitioning creditors base their pending motion solely on their status as lienholders whose interests were created post-policy, then this claim could be denied as a post-policy matter.

 

     However, my understanding is these two are asking the court to execute upon the Fiorito lien and the State Tax Commission Warrant and then, by the way, just pay any surplus to the petitioning creditors (who 'woulda' had a lien--if they'd recorded while their debtor was still in title).  Can't imagine a court not seeing through this nonsense, but still our insured owners should be represented by legal counsel to file an opposition on their behalf. 

 

     Since the duty to defend is broader than the duty to indemnify, and the duty to defend arises whenever there's "potentiality" of coverage, I would treat this as "covered."  The next question is whether the claims handler should make a reservation of rights "to the extent the claim may ultimately involve post-policy issues."  I probably wouldn't bother.  This looks like a sure winner for our insureds, and under the circumstances you might not want to unnecessarily concern them about your commitment to fully protect their interests.

**********

   Following Wednesday's posting, and replies, Alan Rubin (Manhattan) writes:    

 

     With respect to the issue of "post-policy" as a way out, it appears from my discussion with judgment creditor's attorney that he is not convinced that the plaintiff's judgments are post-policy.

 

     If we believe that the enforcing judgment creditor believes that the judgment lien has attached, do you feel that we must still defend?? (For purposes of this question, assume that the Fiorito and State Tax Commission judgments did not exist).

 

     Reply by Bert Rush:  Yes.  My rule of thumb is that if the adverse claimant makes an allegation that would be covered by the title policy (even if you can't understand how the allegation can be proven), then the title company should provide a defense.  (Whether the title company, having acknowledged coverage for one allegation, must then also provide a defense for related but clearly not covered allegations is another question--with a different answer from state to state.)

 

     If, on the other hand, you pick through the adverse claimant's allegations and can't conceive how any could be covered (whether provable or not), then the claim should be denied.  (And, in my claims handling days when I encountered this latter situation, I would invite the insured to explain how the adverse claims might unfold or evolve to somehow come to involve a covered matter--and would reconsider our position accordingly.)