Mortgagees and their Indiana counsel rely heavily on title commitments. In Indiana, if a loan commitment fails to identify a prior lien, and if that oversight leads to losses, there are potential consequences to the issuer of the commitment - commonly known as the title agent, abstractor or searcher - not just to the issuer of the insurance policy. The Indiana Supreme Court in U.S. Bank v. Integrity Land Title, 210 Ind. LEXIS 396 (Ind. 2010) (.pdf) broke new ground in this regard.
Missed it. U.S. Bank held what it believed to be a senior mortgage on its borrower’s real estate. Before making its loan, U.S. Bank ordered a title commitment from Integrity, which also closed the transaction. The commitment did not disclose a prior judgment lien held by another lender, LPP, against the seller/owner. LPP later prevailed in its foreclosure action and sold the subject property at a sheriff’s sale that netted no proceeds to U.S. Bank. In other words, LPP’s lien rendered U.S. Bank’s loan unsecured. (Notably, Southern National Title Insurance underwrote a loan policy with U.S. Bank as the insured, but Southern later dissolved. A conventional title insurance claim thus was unavailable.)
Breach of contract. Privity of contract refers to a connection between contracting parties. In U.S. Bank, the Court concluded that there was no privity between Integrity and U.S. Bank and, as such, U.S. Bank had no breach of contract claim against Integrity.
Tort liability. The critical question became whether Integrity owed a duty in tort (a civil wrong, other than a breach of contract, that gives rise to an action for damages). The answer to that question turned upon the Court’s analysis of Indiana’s economic loss rule that, if applicable, would shield Integrity from liability. The Court found that the economic loss rule did not apply. (To learn more about the rule, read U.S. Bank, as well Indianapolis-Marion County Public Library v. Charlier Clark & Linard (.pdf), in which the Court addresses the rule and its exceptions in depth.
Negligent misrepresentation. U.S. Bank sought to hold Integrity, a title commitment issuer with which U.S. Bank had no contractual privity, liable for negligence in failing to uncover a defect in title during the search. The Court posed the legal question as “whether the issuance of a title commitment gives rise in Indiana to a tort cause of action for negligent misrepresentation against a commitment insurer, separate and apart from the contractual obligations of the title policy.” The theory is that, once the commitment issuer assumes the responsibility of performing a title search and disclosing defects, that company should be liable to all foreseeable third parties injured by the issuer’s failure to exercise reasonable care in supplying information. The Court held that Integrity had a duty to communicate the state of title accurately when issuing the commitment. Here’s the rationale:
Integrity should have known that Texcorp (U.S. Bank’s predecessor in interest), in closing the loan to buyer, would act in justifiable reliance on the statement in the preliminary commitment that title was free and clear of any encumbrances. … Armed with direct knowledge of Texcorp’s interests and requirement of accurate title information to guide its lending practices, Integrity prepared the title commitment that indicated that it had performed a title search on the subject property and had found no prior judgment liens.
Not a foreclosure. U.S. Bank did not involve a foreclosure commitment (leading to an owner’s policy) but rather a loan commitment (leading to a lender’s policy). The U.S. Bank negligent misrepresentation claim comes into play in a loan default/foreclosure case only when the lender discovers that its mortgage is primed by a prior lien that should’ve been identified pre-closing. In that instance, foreclosure may not be a viable option (depending upon the amount of the prior lien and the equity in the property). A title claim under the loan policy and/or a negligence claim against the title agent may be the only avenue for recovering losses. (For scenarios when a foreclosure commitment misses a lien, please see my October 14, 2009 post for background and my Strict Foreclosure category of posts regarding the remedy.)
In scenarios involving defective loan commitments, U.S. Bank seemingly permits the lender to sue two parties – the carrier and the agent. Maybe this would be redundant, but maybe not. It depends on the circumstances of the particular case. I welcome e-mails or comments on experiences or thoughts concerning whether, under circumstances like those in U.S. Bank, lenders should assert claims against both its title company (under an insurance policy) and its title agent (based on the commitment).