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Posting for
September 16, 1998
by: Bert Rush
brush@firstam.com
NEGLIGENT MISREPRESENTATION/ DISCLAIMERS/WAIVERS
As often happens, after finishing the last posting about the Coles of Kentucky ("The Value of Title Insurance"--9/11/98) the very next case I pick up brings on a sense of deja vu.
The case, Menuskin v. Williams, 145 F.3d 755 (6th Cir. 1998), has lawyers and title folk in Tennessee scratching their heads.
This is another case of a builder (Don Williams Construction Co., Inc.) selling homes to buyers who fail to get title insurance. Instead of paying off construction loans, the developer used sale proceeds for a golf course project--which apparently tanked.
About one year after moving in, numerous homeowners were contacted by the construction lender and, in effect, had to "re-purchase" their homes to save themselves from foreclosure.
After settling with Don Williams, who also went to jail, the homeowners sued three former employees of Don Williams Construction (including Williams' daughter)--who allegedly represented the homes would be free of encumbrances--as well as the title company (National Title Insurance Ageency) and attorney (J.P. Sartain) who prepared their warranty deeds.
Plaintiff homeowners based their complaint on a host of theories: negligent misrepresentation, negligence, gross negligence, fraud, violation of federal RICO ("Racketeer-Influenced and Corrupt Organizations Act"), violation of TCPA ("Tennessee Consumer Protection Act"), breach of contract, breach of warranty, civil conspiracy, and infliction of emotional distress.
The trial court granted summary judgment in favor of defendants, and plaintiffs appealed--on all counts except dismissal of their federal RICO claims.
The Court of Appeal affirmed in part and reversed in part, mainly reversing dismissal of the negligence claims against two former Don Williams Construction employees, and reversing dismissal of negligent misrepresentation and TCPA claims against the same two employees, National Title, and Sartain.
The allegations against National Title and Sartain were that they were asked by Don Williams Construction to prepare warranty deeds--and "nothing more." They were not asked to perform a title search or provide title insurance. The warranty deeds recited in part:
"Grantor covenants that it is lawfully seized and possessed of said real estate, has full power and lawful authority to sell and convey the same; that the title thereto is clear, free and unencumbered except as herein above mentioned, and Grantor will forever warrant and defend the same against all lawful claims."
When delivered the warranty deeds were contained in a folder bearing the logo of National Title. Plaintiffs alleged that they relied on these deeds as evidencing true condition of title to their respective properties before closing. Meanwhile, National Title was paid $30 for preparation of each deed.
In holding these allegations sufficient to state a cause of action for negligent misrepresentation, the Court said:
"By including the National Title logo on the documents delivered to the (plaintiffs), National Title and Sartain may have given the (plaintiffs) the false impression that they had performed a title search."
The Court also faulted National Title and Sartain for not including a disclaimer ("This instrument was prepared from information furnished by the parties herein for which the preparer assumes no responsibility."). There was testimony that the defendants had used such a disclaimer in the past, and that other title companies in the area (Chattanooga) had also used such disclaimers.
The Court noted these allegations would support a cause of action for negligent misrepresentation, but not simple negligence, because there was no attorney-client or privity relationship between plaintiffs and National Title and/or Sartain.
The Court went on to hold that negligent misrepresentation may constitute a violation of the TCPA.
Comment: This looks like an extreme case of consumer activism on the federal bench. This case doesn't even belong in federal court at this stage--the sole federal question being the now-abandoned RICO cause of action.
The Court bases its decision on principles of negligent misrepresentation adopted by the Tennessee Supreme Court and embodied in Restatement (Second) of Torts, section 552 (1977), and the case of Collins v. Binkley, 750 S.W.2d 737 (Tenn. 1988)--which seems a real stretch.
What about the four corners of the warranty deed itself? The grantor/ warrantor was Don Williams Construction Co. End of argument.
Still--a case to remember in planning for training--particularly in agent-driven markets.
Final thoughts: If one uses a disclaimer some of the time, it should probably be used all the time (in similar cases). We've heard this argument before that "the title company breached its own practices"--and it can be a tought argument to deal with.
And, as we've said before, where a buyer decides not to get title insurance it's a good idea to have them sign a written waiver--acknowledging that they have been offered owner's title insurance, they understand and acknowledge that the title company makes no representation as to condition of title, and that they have elected not to purchase title insurance coverage.
Questions, comment, argument? Just press the "reply" button....
