Posting for

Wednesday, July 29, 1998

by: Bert Rush

brush@firstam.com

PUBLIC RECORDS/CONSTRUCTIVE NOTICE/DUTY TO DEFEND

One issue fundamental to title underwriting is identification of those "public records" providing constructive notice of ownership and other interests in real property. We typically search the records of a county recorder, register or clerk, but what about other county offices? What about records maintained in municipal, state and federal offices?

Years ago--in the early `80's?--I seem to recall an Alaskan court held that certain records and maps maintained in offices of the federal Bureau of Land Management could impart constructive notice of existence and location of public roads. That one had us scratching our heads.

This issue was recently addressed by the Utah Supreme Court in a case titled First American Title v. J.B. Ranch (1998) 343 Utah Adv. Rep. 6, 966 P.2d 834. Defendant J.B. Ranch purchased land in Grand County (and an adjacent county) in 1984, obtaining title insurance from First American in the amount of $2,000,000.

It was a standard coverage policy, having in Schedule B an exception for "(e)asements, claims of easement or encumbrances which are not shown by the public records." The policy also contained the standard definition of "public records" as "those records which by law impart constructive notice of matters relating to said land."

Soon J.B. Ranch got a letter from the Grand County Commission asserting that certain public roads traversed the land--which couldn't be blocked or closed by J.B. Ranch. This assertion was based entirely on the county having filed some "class `D' road maps" with the county clerk's office in 1978--there was no evidence of these roads in the county recorder's office.

More than seven years after sending the letter, Grand County filed suit against J.B. Ranch seeking declaratory relief that the roads in question were public roads. J.B. Ranch made a claim under its title policy, which was denied based on the Schedule B exception (since, under Utah law, only documents filed with a county recorder impart constructive notice of their contents). J.B. Ranch undertook its own defense--and defeated the Grand County claims. Then it sued First American to recover its legal expenses of $279,878.

The trial court entered summary in favor of First American--ruling that the class "D" road maps were not a part of the public records, so the claim fell within the Schedule B exception and was not covered. It didn't matter to the trial court that there was evidence First American knew of class "D" road maps--and had requested copies of such maps in the past. J.B. Ranch appealed.

Before the Supreme Court, J.B. Ranch argued (1) that an insurance policy should be construed against the insurer, (2) that the trial court construed the term "public records" too narrowly, and (3) that the Utah statute requiring county executives to prepare and file road maps with the "county clerk or recorder" shows legislative intent that these maps impart constructive notice.

As to the first argument, the Court noted that rules of construing insurance contracts allow construction against the insurer only where policy language is found to be ambiguous--which was not the case here. So the Court would "construe the policy according to its plain and ordinary meaning."

As to the second issue, the Court disagreed with J.B. Ranch's contention that "public records" should be construed to include all matters of which First American had constructive notice. The Court noted there are two types of "constructive notice" recognized by Utah law: One results from operation of the recording statutes, and the other is presumed from a person's knowledge of facts which should give rise to notice (otherwise known as "inquiry notice"). And the Court was mindful of the evidence that First American, through one of its agents, had knowledge of the existence of class "D" road maps filed with the county clerk--which might suffice to charge the Company with inquiry notice. But the Court held that a reasonable interpretation of the policy definition of "public records" ("those records which by law impart constructive notice") recognizes only the first type of constructive notice--resulting from operation of the state's recording statutes. So maps filed with the county clerk are not part of the "public records," as defined by the policy.

Likewise, the Court disagreed with the third contention--that the statutory mandate regarding road maps showed legislative intent that they impart constructive notice. The pertinent statute (Utah Code Ann. sec. 27-12-26) provides:

The Court said that the notion of constructive notice from recorded documents "is entirely a creature of statute and not of common law. (Citations omitted.) Such notice must therefore be created by the statute itself or not at all....(W)hen the legislature intends that a record filed pursuant to statute impart constructive notice, it makes is intent known through clear and unmistakable language."

Agreeing with a Washington court of appeal in Ellingsen v. Franklin County (1991) 117 Wash.2d 24, 810 P.2d 910, the Court concluded that to hold that a document imparts constructive notice just because it is designated as a public record would have disastrous consequences for the land records system.

A great decision--reflecting more fine work by outside counsel Bruce Maak and Ron Russell. I'm only guessing, but it looks like J.B. Ranch may have found themselves arguing both sides of these issues--in court with Grand County having to say they were BFP's, acquiring their property without constructive notice of the class "D" road maps, then against First American arguing the maps were part of the "public records." As one country lawyer once put it, "they meet themselves comin' round the barn."

This is a decision for claims handlers to hold on to--excellent analysis and reasoning.

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Following Wednesday's posting, John "Streamline" Hollenbeck (Santa Ana) writes:

Great case to illustrate a point: Our searching and examining procedures are often too broad given policy coverage.

For example, in some markets our procedures include searching court indicies to discover lawsuits which might affect title to real property. Never mind the fact that state law requires a notice of pending action to be recorded in the land title records; somewhere along the line some title manager decided, in an abundance of caution, to check the court records as well. Perhaps we've unwittingly trained the local bar that failing to record a lis pendens is "no big deal" -- "the title company will find the suit."

In some cases, the procedure is such that these lawsuits are posted in our title plants. In other cases, we conduct a court search in every instance.

Either way, it's extra expense to First American.

My suggestion would be that each office review our procedures in this area, weighed against state law, applicable case law and a reasonable underwriting standard.

I would be more than happy to discuss this issue with any office desiring to make positive changes in title productivity.

And, Alan Rubin (Uniondale, NY) writes:

We have had numerous claims over the past few years based on records that could have only been found in offices such as a local "Water Board" office, the "Emergency Repair Office on 125th Street", etc. With respect to such claims, we have taken the position that--pursuant to the policy language--such records are not "public records", and we have denied such claims. We have been fortunate that the issue has not been litigated, since we are always concerned about an adverse decision that will open up a "Pandora's Box".

Reply to Alan: Maybe it's time to go to the mat with someone. I'd be afraid that, sooner or later, one of our competitors will litigate this--and maybe screw up and lose it. Better us than them (???).