In the recently-decided matter of First National Bank of Izard County v. Old Republic National Title Insurance Company, No. CV-20-310, (Ark. Ct. App. Nov. 2, 2022), the Arkansas Court of Appeals (“the Court”) held that the negligent recording of a mortgage by the Insured, as to the timing of its recordation with other recorded instruments, precluded coverage under the Title Policy’s Section 3(a) “created, suffered, assumed and agreed to” exclusion.

The dispute stems from the dissolution of a two-owner, non-party LLC, wherein one of the business partners (the “selling partner”) sold their business interests and real property interests to the other (the “purchasing partner”). The terms of the sale contained two important documents: (1) an LLC Membership Interest Purchase Agreement that set forth the terms and conditions of the transaction (the “Purchase Agreement”); and (2) a Memorandum summarizing the terms of the Purchase Agreement (the “Memo”), as the Purchase Agreement had been designated confidential. Importantly, the Purchase Agreement contained a provision granting a reversionary interest in the real property to the selling partner, which was indicated and summarized in the Memo.

At the closing, Plaintiff First National Bank of Izard County (“Plaintiff”) agreed to issue loans to the purchasing partner which were to be secured by mortgages on the real property involved in the transaction. In connection with these loans Plaintiff purchased title insurance policies from Defendant Old Republic National Title Insurance Company (“Defendant”). The policies each contained standard Paragraph 3(a) restrictive exclusions which stated as follows:

The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damages, cost, attorneys’ fees or expenses which arise by reason of:

3. Defects, liens, encumbrances, adverse claims or other matters: (a) created, suffered, assumed, or agreed to by the Insured Claimant[.]

Post-closing, Plaintiff assumed responsibility for the duty of publicly recording the transaction documents, having its employee mail the closing documents–including the Memo–to the County Clerk for recording. However, upon receiving the mailed documents, the County Clerk proceeded to record the Memo–and its reversionary interest to the selling partner–four minutes ahead of Plaintiff’s mortgages, thus giving that interest priority over the mortgages.

The purchasing partner later defaulted on his mortgage loans and Plaintiff commenced a foreclosure action against him. In accordance with his reversionary interest, the selling partner filed an answer in the action asserting that he possessed a superior property interest to Plaintiff by virtue of his right of reversion. This caused Plaintiff to submit a claim for coverage and defense with Defendant, who denied coverage. Plaintiff brought suit against Defendant in connection with the denial.

In deciding the competing summary judgment motions, the trial court noted that in the process of doing so, Plaintiff: (1) was in possession of all relevant documentation; (2) failed to fully review the documented materials; (3) at all times had an employee present at the closing, who also served as a witness and notarized each of the transaction documents; and (4) had that same employee mail the materials to the County Clerk with an attached note instructing the Clerk as to the specific order in which the materials were to be recorded. It was never conclusively established if the employee had misnumbered the order in which the documents were to be filed, or if the County Clerk had mistakenly failed to comply with the filing order indicated. The trial court granted summary judgment to Defendant finding Exclusion 3(a) was applicable, as Plaintiff had assumed responsibility for ensuring the mortgage was properly recorded before the right of reversion.

Plaintiff appealed, with the Court ultimately affirming the propriety of the denial on the basis of the 3(a) exclusion. The Court reasoned that the “suffered” terminology used in the 3(a) exclusion was synonymous with “permit,” holding that by undertaking to record the property interests and failing to exert sufficient power over both its employee and the recording process itself, Plaintiff had “permitted” the creation of the reversionary interest, noting that Plaintiff had, at all times, possessed adequate “power to prohibit the [Memo] from having priority” which it had failed to exert. Thus, the denial of Plaintiff’s claim was upheld as warranted.

Take-aways

This is an interesting and potentially far-reaching holding which should be viewed in light of other decisions interpreting 3(a) exclusions. While many courts interpret these exclusions as only being triggered by intentional actions, see Home Fed. Sav. Bank v Ticor Tit. Ins. Co., 695 F.3d 725, 733 (7th Cir. 2012) (“the clear majority view . . . is that the exclusion applies only to intentional misconduct); Feldman v Urban Commercial, Inc., 87 N.J. Super. 391, 401 (App. Div. 1965), this decision is one of a growing body of caselaw extending exclusion 3(a) to negligent actions, in this instance negligent recording.