The United States District Court for Nevada recently reversed a bankruptcy court’s decision and held that a title insurance company’s bankruptcy claim was not barred by the doctrine of claim preclusion because, among other reasons, it was not a party to the underlying state court action. See Commonwealth Land Title Ins. Co. v. Creditor Grp., 2017 WL 4683968 (D. Nev. Oct. 17, 2017). In the case, two individuals (the “Owners”) formed two companies (the “Companies”) to purchase and develop property. In 2005, one of the Companies obtained a $29 million loan that was secured by a deed of trust on the property. Later that same year, the Owners signed a promissory note in favor of one of the Companies that was secured by a second-position deed of trust. Two years later, the Owners sought a new loan for the Companies and, in order to convince the bank to lend the money, allegedly made several representations that they would subordinate or reconvey their second-position deed of trust to the lender’s new deed of trust. The lender then approved the loan and the title insurance company issued a title insurance policy to the lender insuring its alleged first-position lien on the property. Nonetheless, the Companies did not reconvey their 2005 deed of trust and it remained in the first position. In 2009, the lender sued the Companies regarding this priority issue, however, the FDIC placed it in receivership soon thereafter and its successor-in-interest continued the lawsuit. The successor lost on most of the claims because the court found that it could not prove it was assigned the note and deed of trust at issue, and the successor then voluntarily dismissed its misrepresentation claims without prejudice.
During this same period, the Companies declared bankruptcy. The title insurance company filed a claim based on the alleged misrepresentations regarding priority. The bankruptcy court, however, held that the title insurance company is in privity with the successor and that the doctrine of claim preclusion barred the title insurance company’s claim because of the adverse state court decision. On appeal, the District Court reversed. First, it held that the title insurance company and successor are not in privity. Although the title insurance policy provides the title insurance company the right establish title or prevent damage to the insured, “it does not give Commonwealth the right to join its own misrepresentation claims against [the Companies or the Owners].” The fact that the title insurance company paid for the successor’s counsel in the state court action does not change this determination. Second, the Court held that the state court did not make any final determination as to the misrepresentation or negligence claims, which were voluntarily dismissed. Although the state court dismissed some of the successor’s claims, that decision was based on standing and there was no final judgment on the misrepresentation or negligence claims. Finally, the Court held that the title insurance company’s misrepresentation claim could proceed under an indirect reliance theory even though the alleged misrepresentation was made to the lender and not the title insurance company.