Can Investors Rely on Statements Made by Employees or Agents of Title Companies?

By Eric T. Hartnett, Esq.

Since the “real estate bubble” burst, many investors have sought to capitalize on the values of distressed and foreclosed properties. One such method is bidding on a property at a foreclosure sale.

When bidding at the foreclosure sale, it is imperative to know who is the foreclosing lender. Obviously, bidding at the foreclosure sale of the senior lender as opposed to a junior lender makes a substantial difference. However, how can one determine whether the foreclosing lender was in first, second, or third position? In Soifer v. Chicago Title, a recent California Appellate case, the Court resoundingly eliminated one potential option when it ruled that a title company owes no liability for its employee’s or agent’s verification of title information if the requesting party did not obtain either a policy of title insurance or an abstract of title.

In the Soifer case, plaintiff was an investor in distressed real estate. His business plan involved buying properties that were being foreclosed on by mortgage holders. In order to avoid taking title to a property subject to senior liens, plaintiff needed to know if the foreclosing lender was the senior lender on that property.

In an attempt to ensure that he knew the position of the foreclosing lender, plaintiff entered into an oral agreement with an agent of Chicago Title. Chicago Title’s agent agreed to provide title information to plaintiff upon which plaintiff would rely in determining whether to bid at a foreclosure sale. In return, plaintiff agreed to use Chicago Title for subsequent resales of the foreclosed properties.

One of the properties that plaintiff requested seniority loan information was located in Encino, California. Chicago Title’s agent indicated that the foreclosing loan (in the amount of $990,000.00) was in senior position, when the foreclosing loan was actually junior to a first deed of trust (in the amount of $1,600,000) held by a different lender.

Based on Chicago Title’s representation, plaintiff bid $1,000,000.01 and was the high bidder at the foreclosure sale. However, because the foreclosing lender was not the senior lender, plaintiff lost $1,000,000.00 after selling the property and negotiating a reduction on the senior loan. Plaintiff then filed a lawsuit claiming breach of oral contract, negligence, and misrepresentation against Chicago Title.

Since case law indicates that a preliminary title report is simply the inducement to purchase a title policy and cannot be relied on as a representation as to the current status of title for a property, plaintiff attempted to argue that his oral agreement to determine if the foreclosing lender was the senior lender was an “abstract of title.” The Court rejected this argument because Insurance Code §12340.1 requires that an abstract list “all recorded conveyances, instruments or documents.” Plaintiff only inquired about the specific foreclosing loans and did not request a list of all recorded conveyances, instruments or documents. The Court also added that it would be unfair to find Chicago Title liable when it received no compensation except for the vague promise of future work.

Does this Court ruling mean that a property buyer and title insurer can never contract for the insurer to provide limited title information for which the insurer would be liable if there were an error? No. The Court stated that a property buyer could purchase a policy of title insurance to achieve his/her goal. In this way, the insurer would be receiving the insurance premium in exchange for insuring its representation.

Thus, if you have a property title question where there is the potential for substantial loss for you, it is strongly suggested that you obtain either an abstract of title or a policy of title insurance. Otherwise, if some of the title information you obtained is inaccurate, you may only have yourself to blame if you incur substantial losses.

In the News

Several new laws affecting real estate are set to begin in 2011. For example, the Carbon Monoxide Poisoning Prevention Act requires dwellings intended for human occupancy to have a carbon monoxide device. Transfer Disclosure Statements will also require a disclosure regarding carbon monoxide detection devices. Another new law will
specifically allow clients obtaining a home inspection to request a Home Energy Rating System energy audit as part of their inspection. — SO

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