The U.S. Court of Appeals for the Tenth Circuit recently held that, under Utah law, only the actual levy of a municipal tax assessment on the property constitutes a defect in, or a lien or encumbrance on, title to the insured property.

Because the levy of assessment at issue occurred after the title policy was issued, the Tenth Circuit held that the title insurance policy did not cover a loss incurred when a municipality foreclosed on the insured property.

A copy of the opinion is available at:  Link to Opinion.

In 2008, a lender extended a mortgage loan, and obtained a title insurance policy to cover loss caused by defects in title to the collateral property.  The borrower defaulted on the loan and the lender foreclosed on the property in 2009.  The lender acquired title to the property at a trustee’s sale.

In 2005, the county announced an intention to create an improvement district that would levy assessments against properties within the district, including the subject property. In 2006, the county formally created the improvement district through a resolution.

By 2008, the improvement district had begun installing improvements in the district, including on the property.  In 2009, the improvement district levied assessments against properties within the district. Under Utah state law, a municipal assessment lien is superior to the lien of any trust deed or mortgage.

The borrower never made any payments toward the municipal assessment.  The improvement district began foreclosure proceedings in 2010.  The lender did not learn about the improvement district’s lien on the property until 2010, after the lender had acquired the property.

In a separate court proceeding, the lender unsuccessfully sued the improvement district to stop the foreclosure.  The improvement district acquired title to the property, extinguishing the lender’s interest.

The lender submitted a title insurance claim, and eventually filed suit under the title insurance policy.  On a motion for judgment on the pleadings, the lower court held that the title insurance policy did not cover the improvement district’s foreclosure.  The lender appealed.

On appeal, the Tenth Circuit systematically examined the title policy’s covered risks.

First, the Court held that there was no defect in, or a lien or encumbrance on, title to the insured property at the time of the issuance of the title insurance policy.  The Tenth Circuit relied on a Utah Supreme Court ruling that only an actual assessment can constitute a defect in, or a lien or encumbrance on, title to the property.  Vestin Mortg., Inc. v. First Am. Title Ins. Co., 139 P.3d 1055, 1057 (Utah 2006).  The Court noted that the Utah Supreme Court’s ruling in Vestin applies even if the improvement district made physical improvements to the property before the assessment.

Therefore, the Tenth Circuit held that the title insurance policy did not cover the lender’s loss because the assessments began after the issuance of the policy.

Additionally, the Court held that the title policy language only provides coverage if notice of the intention to enforce the subdivision ordinance has been recorded in the public records at the time of the policy issuance.  The resolution creating the improvement district at issue here, the Tenth Circuit held, did not qualify as record notice because the resolution merely suggested that the improvement district would levy proportional assessments, rather than showing intent to enforce.

Furthermore, the Court held that the improvement district’s foreclosure happened at the time of the assessment, which occurred after the title policy was issued.  Stated differently, the Tenth Circuit held there was no coverage for the governmental takings at issue because the assessment occurred after the issuance of the title insurance policy.

The Tenth Circuit also rejected the lender’s argument that the title insurance policy covers liens at issue because the liens were for services, labor, or material.  The Court held that the assessment lien did not constitute a lien for services, labor, or material, but rather a collection of a municipal assessment.

The Court did not entertain other claims for coverage for procedural reasons.  The Court found that the argument that a disclosable encroachment would affect title was not present in the lender’s complaint.  Rather, the Court noted, the lender’s complaint against the title insurer only brought a claim for loss caused by the improvement district’s foreclosure.

The Tenth Circuit held that the lender also did not preserve its argument that there was unmarketable title due to the assessments.  Last, the Court rejected the lender’s argument that the title insurer had a duty to defend because the argument was inadequately developed.

Accordingly, the Court affirmed the lower court’s ruling granting the title insurer judgment on the pleadings.