Posting for

Friday, March 24, 2000

by: Bert Rush

PUBLIC RECORDS/GOVERNMENTAL REGULATION EXCLUSION/COVERAGE ISSUES

With an expansive interpretation of "public records," the Vermont Supreme Court has held that risk of loss from non-compliance with state subdivision regulations may be covered by the insuring provisions of a title insurance policy, even where no notice of violation has been filed with the county (or in this case, town) recorder.

In 1976, Alfred and Dorothy Lafrance owned a parcel of land in Essex, together with a modular home and a mobile home. They sold a portion of their land, including the homes, to one Gordon Reinhart, retaining a portion of land with less than ten acres in area.

Applicable subdivision regulations require a minimum of ten acres for the construction of a home. In light of this, Alfred Lafrance obtained a deferral permit from the Vermont Department of Environmental Conservation. Apparently, this brought the Lafrances into compliance with the law, but the deferral permit included a prohibition against construction on the land of a building for occupancy requiring "installation of plumbing and sewage facilities" without further compliance with Vermont's subdivision regulations. This deferral permit was not recorded in the town land records.

In 1986 the Lafrances conveyed the land to Eugenia Evans, who apparently lived there in a mobile home. In 1988, Ms. Evans conveyed the land to Edward Fleming.

Mr. Fleming obtained a building permit from the town, permitting him to replace the mobile home on the property with a two-story house. This permit was inconsistent with the deferral permit, and with construction of the house there was created a violation of the deferral permit.

In 1991, Mr. Fleming refinanced the property, giving a mortgage for $67,000 to New England Federal Credit Union ("NEFCU"). The mortgage was insured by Stewart Title, through an agent.

In 1992, Mr. Fleming died, and his estate contracted to sell the property for $94,000. But the deal fell out when the prospective buyer learned of the deferral permit violation.

In time, NEFCU foreclosed and sold the property at a "distress price" of $10,734. NEFCU made a claim under its title policy, which Stewart Title denied.

NEFCU filed a lawsuit for declaratory relief. On cross-motions for summary judgment, the trial court ruled in favor of Stewart Title, holding that the deferral permit affected physical use of the land, but not legal title, and so it was not an "encumbrance" within the meaning of the insuring provisions of the title policy. The trial court also ruled that the matter would be excluded from coverage as a "governmental regulation" (under paragraph 1 of the "Exclusions from Coverage") since no notice of violation appeared in the town land records.

NEFCU appealed, and the Supreme Court reversed.

The Supreme Court first observed that the trial court decision made no reference to the higher court's 1995 decision in Hunter Broadcasting, Inc. v. City of Burlington, 164 Vt. 391, 670 A.2d 836. The Hunter Broadcasting case was noteworthy because it held that Vermont's public health regulations "do affect title to the land." This holding was announced in a case where the City of Burlington had conveyed a non-conforming (9.7 acre) parcel to Hunter Broadcasting, by a warranty deed. The issue was whether the City's failure to have a subdivision permit breached its covenant against encumbrances contained in the warranty deed. The Supreme Court held it did.

But in the NEFCU case, the Court acknowledged the issue was interpretation of a title policy, not a warranty deed. So, the Court examined the title policy language, in its entirety, to determine the "intent of the parties."

Here, the Court was swayed by the language of paragraph 1 of the "Exclusions from Coverage," where it's provided that loss, etc., arising from "governmental regulation" is excluded, except to the extent that notice of an enforcement action or a violation has been recorded in the public records at Date of Policy. This, said the Court, "evinces a clear intent to include violations of land-use regulations within the meaning of 'encumbrance,' and within the scope of coverage, to the extent that they had been recorded in the public records on the date of the policy."

So Stewart wins? Not so fast....

Again relying on Hunter Broadcasting (and another case), the Court said that in Vermont "records imparting constructive notice of matters relating to real property are not confined...solely to documents recorded in the municipal land records," explaining further that parties should be charged with constructive notice of matters of common knowledge, such as the provisions of Vermont's subdivision regulations.

In other words, the Court seems to say that matters which one should discover through ordinary due diligence will be considered to fall within the definition of "public records," contained in the title policy.

If Stewart Title wanted to achieve a "more narrow definition of public records," the Court said, it could have added "limiting language" to the policy, specifying government records which would not be considered "public records," as was done in the Massachusetts case of Somerset Savings Bank v. Chicago Title Insurance Co., 649 N.E.2d 1123 (1995).

Finally, the Court said "it is unclear whether the policy requires an actual notice of violation" to have been issued, in order to support coverage. Citing the familiar rule that ambiguity must be resolved in favor of the insured, the Court ruled that in the exercise of ordinary due diligence Stewart Title should have discovered the deferral permit on file with the Vermont Department of Environmental Conservation, and that should be notice enough.

In a footnote to its decision, the Court notes that following oral argument in this case the Vermont legislature enacted changes in the law that, under certain conditions, allow property to be marketable even where permit requirements have not been complied with. Said the Court, "as a practical matter the significance of our ruling in this case may be substantially limited."

Comment: This decision adds to a few others like it (which it cites with approval) that blur the definition of "public records" till it makes no sense.

From Vermont, State Manager Hal Miller reports that "since the Hunter Broadcasting case and the Bianchi case (in 1997), the attorneys (who search and clear title issues) have been dealing with these issues for the past 5 years or so. We have been underwriting as if the permit violations would be covered under both the standard and EAGLE policy since Bianchi. Not much will change in the future issuance of policies and searching. The real problem is the number of policies we issued between 1987 and 1995 (pre Hunter Broadcasting). I have spent a lot of time at the legislature over the past 5 years testifying on various bills intended to soften the effect of Hunter Broadcasting and Bianchi, resulting in the legislation mentioned in footnote 5 (described above). This will help some, but it's not a silver bullet."

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Following Friday's posting, Peter Norden (Regional Veep for region including Vermont/Boston) writes:

Please remember the following when reading this case. 1. it is the people's republic of vermont, 2. Stewart has repeatedly mishandled claims in this state, 3. attorneys routinely search permits due to act 250. while this is bad law, please keep in mind where it comes from.

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Following up on our posting for Friday, 3/24/00, Alan Rubin (Uniondale, NY) writes:

I can't believe the Vermont Supreme Court's decision in "NEFCU" v. Stewart Title! While Stewart may--as Peter Norden indicates--have mishandled (the) claim, and while attorneys "routinely search permits", the Court has (improperly, in my opinion) included in the definition of "public records" a meaning vastly different from what the contracting parties (i.e., insurer and insured) intended.

The Court's reasoning that "records imparting constructive notice" (i.e., public records) include matters of common knowledge is without basis and indicative of the court "making up the rules as the game is being played". It is because of decisions such as NEFCU that we often find ourselves in a position where we believe that a matter is not covered as a result of the very exclusion raised in NEFCU, but we are reluctant to litigate for fear that new law will be made.