Posting for

Thursday, November 12, 1998

by: Bert Rush

brush@firstam.com

ACCOMODATION RECORDINGS/NEGLIGENCE/ABSTRACTOR'S LIABILITY

In a split decision, an Arizona appeals court has held that a title company should not be liable to aggrieved limited partners for issuing title insurance and performing an accomodation recording in connection with an unauthorized encumbrance of limited partnership property.

The case is Luce v. State Title Agency, Inc., 190 Ariz. 500, 950 P.2d 159 (1997).

David and Joyce Luce were limited partners (with a 70% interest) in a limited partnership formed by Daniel O'Connor and a company he (O'Connor) wholly owned. O'Connor and his company were the general partners of the limited partnership. The Luces contributed real property to the limited partnership--which became its sole asset.

Like many limited partnership agreements, this one gave exclusive management and control over the business of the partnership to the general partners--except that the limited partners had the right to approve or disapprove of "any sale, exchange, refinance or pledge of substantially all of the assets of the Partnership."

In April 1991, without obtaining the limited partners' approval, O'Connor gave a deed of trust against the limited partnership real property to Pacific Court Holdings for $204,545. State Title Agency, an agent for Fidelity National, recorded this deed of trust as an accomodation (there being no formal escrow) and caused the deed of trust to be insured by a Fidelity National title policy. In connection with issuance of the title policy, State Title reviewed the subject limited partnership agreement--presumably to satisfy itself of O'Connor's authority to execute the deed of trust.

After learning of the deed of trust, the Luces filed suit to quiet title which included causes of action against State Title for negligence, breach of contract, and breach of fiduciary duty.

The trial court entered summary judgment in favor of State Title, on all counts, finding that State Title had no obligation to the Luces--since it acted "solely on behalf of the lender."

The Luces appealed, arguing that State Title had a duty to protect them from foreseeable harm (a) as a real estate professional, and (b) under the Restatement (Second) of Torts.

The Court of Appeal affirmed (albeit narrowly), first holding that State Title's status as a real estate "professional" did not create a "special relationship" between it and the Luces--creating a duty where one does not otherwise exist. Instead, the Court said that State Title had "no contractual relationship with anyone regarding recordation of the deed of trust."

The Court noted that the Luces' strongest support for their "special status or relationship" claim was to be found in the California decision in Seeley v. Seymour, 190 Cal.App.3d 844, 237 Cal.Rptr. 282 (1987). In Seeley, a title company was held liable for the accomodation recording of a bogus "Memorandum of Lease"--signed only by the purported lessee, which created a cloud on the property owner's title. But this Court distinguished the cases, saying that in Seeley the offending "Memorandum" was void on its face (whereas in Luce the deed of trust would be merely voidable, as an unauthorized action), and in Seeley the title company had a standing contract with the local recorder's office whereby it (the title company) was required to review documents to ensure their validity prior to recording. There was no such contract in the Luce case.

The Luces' second argument was that the title company owed them a duty of care under Restatement (Second) of Torts, sections 323 and 324A (1965). Section 323 provides that one who gratuitously or for consideration undertakes to render services to another is held to a duty of care in the rendering of such services. The Court brushed this argument aside, saying that State Title did not undertake any action for or on behalf of the Luces.

Likewise, the Court held section 324 did not apply. Section 324 provides that one who undertakes gratuitously or for consideration to render services to another for the apparent benefit of a third person, is held to a duty of care to the third person in the rendering of such services. Again the Court brushed the argument aside, saying "the facts do not show that State Title undertook to 'render services to (the lender--Pacific Court) which (State Title) should recognize as necessary for the protection of (the Luces).'"

In a dissent, Judge Gerber expressed the opinion that, under the facts of this case, State Title owed a duty to the Luces. The judge felt the case was analogous to another case, Burkons v. Ticor Title Ins. Co. of Cal., 168 Ariz. 345, 813 P.2d 710 (1991), in which the Arizona Supreme Court recognized a heightened standard of care for "real estate professionals" (in the Burkons case, an escrow agent) because of circumstances which should have aroused suspicion of fraud being perpetuated against a party to an escrow.

Judge Gerber also believed the Seeley case should apply, and said:

Comment: Ulitmately the result of this appeal should not deprive the Luces of a remedy--they still appear to have a "live" cause of action for quiet title.

But this case is a reminder of how far some judges may be willing to go to find a duty whenever a title company and/or escrow/closing agent are involved in a misbegotten real estate recording. The Burkons decision, cited above, took a big step in this direction by labeling title and escrow companies "real estate professionals," with something akin to a fiduciary duty to their customers. Judge Gerber's dissent takes this a step further with the "public trust" language--but it's not such a big step (seems to me).

Fortunately, in this case the majority focused on the law--of contracts and tort--and was able to resist the temptation to announce new public policy.

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