Liberty National Enterprises, L.P. v. Chicago Title Insurance Company

(Lawsuit Alleging Tortious Conduct in Connection With the Acquisition of Title By the Insured Is Not Covered By An ALTA Policy)

In Liberty National Enterprises, L.P. v. Chicago Title Ins. Co., 217 Cal.App.4th 62 (June 13, 2013), the California Second District Court of Appeal reversed the trial court’s entry of judgment in favor of Liberty National Enterprises, Inc. (“Liberty National”) in the amount of $1,083,292.38 against Chicago Title Insurance Company (“Chicago Title”). The parties’ dispute arose out of an underlying lawsuit filed by partners of an entity which owned a 9.5% interest in a commercial real estate property located in downtown Los Angeles known as the Broadway Trade Center (“BTC property”). The partners alleged that Liberty National engaged in tortious conduct in attempting to acquire 100% of the title of the BTC property. In reversing the trial court’s entry of judgment holding that Chicago Title was obligated to defend Liberty National against the underlying lawsuit, the Court of Appeal set forth a summary of the intent behind title insurance as follows:

“Title insurance is a contract to indemnify against loss through defects in the title or against liens or encumbrances that may affect the title at the time when the policy is issued.” (Elysian Investment Group v. Stewart Title Guaranty Co. (2002) 105 Cal.App.4th 315, 320.) Changes in the condition of title after the insurer issues the policy are outside the scope of coverage. (Rosen v. Nations Title Ins. Co. (1997) 56 Cal.App.4th 1489, 1500 (Rosen). “Title insurance, as opposed to other types of insurance, does not insure against future events. It is not forward looking. It insures against losses resulting from differences between the actual title and the record title as of the date title is insured. The policy does not guarantee the state of the title.” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 41.) Instead, title insurance protects against the possibility that liens or other encumbrances exist, even though they were missed in the title search or the preliminary title report. (Siegel v. Fidelity Nat. Title Ins. Co. (1996) 46 Cal.App.4th 1181, 1191.) A title insurer issues its policies on the basis of, and in reliance on, its own investigation into recorded instruments, which should impart constructive notice. (Quelimane Co. v. Stewart Title Guaranty Co., supra, at p. 41) The records on which a title insurer relies are generally public records concerning the status of title. (Ibid.) To a large extent, therefore, the title insurer is able to control the degree of risk it undertakes in issuing a policy by performing its own investigation beforehand. (Ibid.) But “[t]he records pertaining to real property are complex and encumbrances may be missed by even the most thorough search. Title insurance is an acknowledgement that errors may have been made.” (Siegel v. Fidelity Nat. Title Ins. Co., supra, at p. 1191.)

There are essentially two types of title insurance policies available in California for owners of real property interests — CLTA policies and ALTA policies. (Lick Mill Creek Apartments v. Chicago Title Ins. Co. (1991) 231 Cal.App.3d 1654, 659.) CLTA policies insure primarily against defects in title that are discoverable through an examination of the public record. (Ibid.) CLTA policies protect against some risks not apparent from inspection of recorded instruments, such as “a forged, altered or improperly delivered deed, incompetency, incapacity; marital rights, or irregularities in any probate proceeding.” (Moskopoulos, supra, 116 Cal.App.3d at p. 666.) ALTA policies, such as the type Liberty purchased here, provide greater coverage in that they also insure against “off-record defects, including rights of parties in possession and not shown on the public records, water rights, and discrepancies or conflicts in boundary lines and shortages in areas that are not reflected in the public record.” (Elysian Investment Group Stewart Title Guaranty Co., supra, 105 Cal. App.4th at p. 318, In. 1.) But “[w]hile an ALTA policy provides greater coverage than a CLTA policy, it does not follow that an ALTA policy extends coverage to matters not affecting title.” (Lick Mill Creek Apartments v. Chicago Title Ins. Co., supra, at 1662.

The Court of Appeal then held that its decision in Safeco Title Ins. Co. v. Moskopoulolos (1981) 116 Cal.App.3d 658 applied to the parties’ disputes such that the trial court should have entered judgment in favor of Chicago Title and found that a duty to defend was not owed under the ALTA policy issued to Liberty National for the BTC property. The Court of Appeal stated as follows:

Chicago Title argues this case is just like Moskopoulos in that the Partielly Action did not allege defects in title, but tortious conduct in the manner in which Liberty acquired title. Indeed, Chicago Title argues, the Partielly FAC stated that the defendants “were able to acquire full and complete title to the subject property on or about. January 21, 1998 through the entity defendant Liberty” - it was simply that the Partiellys were seeking to obtain an interest in title through equitable remedies based on tortious conduct by the defendants. (Italics added, capitalization omitted.)

Liberty counters that the FAC is internally inconsistent about whether Liberty had 100 percent title to the property. It points to allegations suggesting that the Partiellys actually owned a 9.5 percent interest in title to the property, not just that they were seeking to obtain such an interest. For instance, the FAC alleged that the Partiellys acquired a 9.5 percent interest in the property in 1990 by virtue of the loan participation agreement, and Union Federal Bank's foreclosure on the property in 1994 “did not have the effect of wiping out all of the ownership interests,” which suggests the Partiellys believed their 9.5 percent interest in the property endured and was never eliminated. Liberty further cites to the prayer for relief, which asks for “a declaration that 9.5% ownership.”

Liberty asserts that, their face, these allegations stated title was not 100 percent vested in Liberty. Moreover, Liberty says, the Partiellys' assertion of a quiet title claim was evidence that they did not concede Liberty owned 100 percent title. This is purportedly because a quiet title claim “inherently presupposes that the plaintiff . . . possesses legal (as opposed to equitable) ownership in the property,” and the claim is merely to eliminate an adverse claim and to perfect title in the legal owner. Liberty acknowledges that the Partielly Action alleged tortious conduct by the insured in personal dealings, but it maintains that this quiet title claim makes all the difference in distinguishing this case from Moskopoulos. It says the plaintiffs suing Moskopoulos conceded they no longer held title to the property, and sought to get title back by invoking equitable claims. Those plaintiffs alleged no quiet title claim. Here, by contrast, the Partiellys had a quiet title claim presupposing that they currently held legal title to a 9.5 percent interest The Partiellys were therefore alleging a defect in Liberty's title, Liberty asserts.

We are not persuaded by Liberty's arguments and its attempt to distinguish Moskopoulos. The Partielly Action was not covered by the insuring clause of Liberty's policy. To review, the insuring clause of the policy insured against loss sustained because of “defect in or lien or encumbrance on the title.' According to our Supreme Court, “the words “defective title” mean that the party claiming to own has not the whole title, but some other person has title to a part of portion of the land.”' (Hocking v. Title Ins. & Trust Co. (1951) 37 Cal.2d 644, 649.) As in Moskopoulos, the Partielly Action did not allege a defect in Liberty's title, but tortious conduct in the manner in which Liberty acquired title. (Moskopoulos, supra, 116 Cal.App.3d at p. 665; see also Barczesoski, supra, 210 Cal.App.3d at p. 410 [lender's action acknowledged that insured trust deed was recorded first and entitled to legal priority as matter of public record, but alleged should not be given legal priority because of insured's tortious conduct].) The allegations of tortious conduct should be apparent from our detailed discussion of the Partielly Action in the factual background section. The Partiellys alleged that they had a 9.5 percent interest in title to the BTC property by virtue of the loan participation agreement, but they were deprived of that interest when the defendants excluded them from “downstream transactions” in violation of a purported partnership agreement, and fraudulently represented that the BTC property was “no good” and that the defendants “intended to walk away and take no additional or active part” in it. The Partielly Action acknowledged that Liberty had full and complete title to the BTC property, and it sought to restore a 9.5 percent interest of which the Partiellys were wrongfully deprived. This situation is no different than Moskopoulos, in which the insured held legal title to the subject property, but the sellers sought to regain title (through a constructive trust or rescission) because the insured's alleged tortious conduct deprived them of it.