• RNT Holdings., LLC v. United General Title Ins. Co. (October 7, 2014; Certified For Publication October 28, 2014) - - Cal.App.4th - -, 2014 W.L. 5449358
  • January 12, 2015
  • Law Firm: McCormick Barstow Sheppard Wayte Carruth LLP - Fresno Office
  • UNDERLYING CLAIM

    Lender RNT Holdings (RNT) claimed a defect in a lien insured under its lender's title insurance policy issued by United General Title Insurance (United) because its trust deed was executed by the borrower prior to transferring title into a trust, but was recorded after title was transferred to the trust. As part of a subsequent refinancing by another entity, RNT executed a reconveyance regarding the insured trust deed, stating that "all sums secured by [that deed] have been fully paid," and releasing "all the estate, title and interest acquired and now held by [RNT] in [that deed]" in order to make clear that the deed of trust was invalid.

    RNT sued United for breach of contract. The trial court granted summary judgment in favor United, holding that RNT's voluntary release of its mortgage terminated United's liability under Condition 10(b) in the policy, which states: "10. REDUCTION OF INSURANCE; REDUCTION OR TERMINATION OF LIABILITY [¶] ... [¶] (b) The voluntary satisfaction or release of the Insured Mortgage shall terminate all liability of [the insurer] except as provided in Section 2 of these Conditions." (Italics added.) Condition 2 provides: "2. CONTINUATION OF INSURANCE[:] The coverage of this policy shall continue in force ... in favor of [the insured lender] ..., but only so long as [lender] retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser...." (Italics added.) The trial court also found that coverage was excluded by Exclusion 3(a), which states: "The following matters are expressly excluded from coverage of this policy [¶] (3) Defects, liens, encumbrances, adverse claims, or other matters [¶] (a) created, suffered, assumed, or agreed to by [the lender]..." RNT appealed.

    THE APPELLATE COURT'S RULING

    The appellate court affirmed, concluding that summary judgment on RNT's claim for breach of the insurance contract was properly granted on three grounds. First, it held there was no title defect because the deed of trust was valid as between the parties, and the only potential title defect (if any) was that a third party who obtained the property as a bona fide purchaser for value might take the property free of the deed of trust.

    Second, the appellate court held that RNT's full release of its mortgage lien terminated coverage under United's title insurance policy pursuant to Condition 10(b). The appellate court noted that no California court has interpreted this condition in similar circumstances, and relied on out-of-state precedents to hold that Condition 10(b) terminates an insurer's liability when the loan is paid off or the mortgage is released, unless (as stated in condition 2) the property is conveyed to a third party in such a manner that the lender retains an interest in it. The appellate court held that, because the subsequent purchaser did not take title to the property free of the lien imposed by the trust deed, it could not be regarded as a bona fide purchaser for value. The appellate court further noted that the principals involved in the transaction were aware of the trust deed, that the seller was the sole shareholder of the buyer, and the transactions were intended to "make clear" that the trust deed did not impose a valid lien on the property. Because the reconveyance fully released RNT's interest in the insured lien, the appellate court held the release terminated United's obligations pursuant to Condition 10(b).

    Third, the appellate court held that, because RNT was aware that the borrower planned to transfer the property to a non-borrower trust after the deed of trust was executed, any claims arising out of the title to the property being held in the trust were excluded by Exclusion 3(a) of the policy, which precludes coverage for defects, liens, encumbrances, adverse claims or other matters "created, suffered, assumed, or agreed to" by the lender. The appellate court held that "created" includes conduct that was "intentional and deliberate and not inadvertent or mistaken," and that it was "immaterial" whether RNT's agent may not have intended to bring about a title defect, or may not have known that any title defect might occur.

    EFFECTS OF THE RULING

    The termination of liability condition is Condition 10(b) in the 2006 American Land Title Association Loan Policy and Condition 9(c) in the 1992 ALTA Loan Policy and the 1990 California Land Title Association Standard Coverage Policy. The continuation of insurance condition is Condition 2 in each of those policies. (See discussion in California Title Insurance Practice (2d ed. Cal. CEB) §§ 6.79, 6.85-6.88.) While RNT Holdings is a case of first impression regarding its interpretation of the termination of liability condition, the same result might have been reached had the court analyzed the extent of RNT's insurable interest. For well over a hundred years, California has applied the rule that a mortgagee's insurable interest under a property insurance policy is limited to the amount of the debt. (See, e.g., Reynolds v. London & Lancashire Fire Ins. Co. (1900) 128 Cal. 16, 19-20.) This rule has also been applied to title insurance. (Karl v. Commonwealth Land Title Ins. Co. (1993) 20 Cal.App.4th 972, 980; Cale v. Transamerica Title Ins. (1990) 225 Cal.App.3d 422, 427.) Thus, the RNT Holdings court could have reached the same result had it concluded that, after its release, the lender no longer had any insurable interest as a matter of law.

    Slightly different versions of Exclusion 3(a) are included in the CLTA policy and the 1992 and 2006 ALTA loan policies. (See discussion in California Title Insurance Practice, supra, §11.71.) The RNT Holdings decision provides a broad interpretation of this exclusion, holding it is triggered if the insured's conduct which gave rise to the title defect was intentional, regardless of: (a) whether the insured actually intended to create a title defect through its conduct, and (b) whether the insured knew that a title defect might occur from its intentional act.