One of life’s great lessons, often learned the hard way, is: “You get what you pay for.” The recent case of Soifer v. Chicago Title Co., 187 Cal. App. 4th 365 (2010), reminds us that this lesson holds true with title insurance. In Soifer, a court held that a title insurer could not be held liable for providing free, yet erroneous, email advice about loan seniority to a bidder who relied on the advice when purchasing a property at a foreclosure sale. The court reasoned that if, under long-established California law, a title insurer cannot be held liable for mistakes in a preliminary title report, it certainly could not be held liable for more informal advice sent in an email message. While consistent with existing statutes and legal precedents, this holding may come as a surprise to many in the real estate industry who, over time, have come to rely heavily on informal opinions of title and preliminary title reports from their local title company.
The Costly Foreclosure Purchase
Ben Soifer was an experienced investor in distressed real estate, whose business involved purchasing properties at foreclosure sales. To help him decide whether to bid on a particular property, Soifer needed to know if the loan being foreclosed was the senior loan on the property. His intent was to only bid on properties being foreclosed by the senior lender, to avoid taking the property subject to any other loans. Prior to bidding, Soifer would routinely contact a Chicago Title agent by email to inquire if the foreclosing lender on a particular property held a first-position loan. In anticipation of receiving Soifer’s title and escrow business on a subsequent sale of the property, the Chicago Title agent would respond to Soifer with a brief email advising whether or not the foreclosing lender was in first position, but no title report or policy would be issued by Chicago Title.
As was his practice, Soifer sent an email message to his usual contact at Chicago Title the day prior to the foreclosure sale in question and asked if the $990,000 loan being foreclosed was the senior loan. The agent at Chicago Title quickly checked title and simply responded “yes” by email. In reliance upon Chicago Title’s one-word email response, Soifer bid just over $1,000,000 at the trustee’s foreclosure sale and purchased the property. Unfortunately, however, the Chicago Title agent was mistaken. There was a more senior lien in the amount of $1,600,000, which remained an encumbrance on the property after the foreclosure sale. Soifer negotiated a short-sale for $1.2 million, paid off the senior lienholder, and sought to recover his $1,000,000 loss from Chicago Title.
The Legal Ramifications
The California Insurance Code makes a clear distinction between a preliminary title report and an abstract of title. A title insurer can be held liable for negligently preparing an abstract, for which it is paid a premium, but not a preliminary title report, for which it is paid little or nothing. The essence of Soifer’s complaint against Chicago Title was that Chicago Title had orally contracted to perform “abstractor” services for him and that, by incorrectly advising him of the lien priority status of the foreclosed lien, Chicago Title was liable for breach of contract, negligence and negligent misrepresentation. Chicago Title defended by claiming that no liability could be incurred to Soifer in the absence of the issuance of a title abstract and that the one-word email message to Soifer in this case did not constitute an abstract.
Both the trial court and the appellate court rejected Soifer’s claims. The appellate court found that Soifer had tried to recharacterize an informal, almost casual, arrangement into a formal legal commitment. The court stated that if a party was unable to rely on a preliminary title report to hold a title company liable as an abstractor, then Soifer was certainly unable to hold Chicago Title liable on the basis of a one-word email message. The appellate court opined as follows:
“In short, there are two ways which an interested party can obtain title information upon which reliance may be placed: an abstract of title or a policy of title insurance. Having purchased neither, [Soifer] cannot recover in this case.”
The appellate court’s decision was consistent with a long line of cases beginning with Southland Title Corp. v. Superior Court, 231 Cal.App.3d 530 (1991), holding that failure of a preliminary title report to disclose a title defect could not serve as the basis for abstractor liability on the part of the title company. Under the Insurance Code, a preliminary title report is not a representation of the condition of title. It merely constitutes a statement of the terms and conditions upon which the title company would be willing to issue a title policy.
The Lessons Learned
The Soifer case underscores the risks inherent in relying upon informal title information, including preliminary title reports, obtained from title companies. The common practice of obtaining verbal evaluations of title and copies of purportedly relevant documents can lead to disastrous consequences. Critical due-diligence decisions should be made based only upon purchased title insurance products such as a traditional owner’s or lender’s policy or a more specialized litigation, trustee’s or recorded documents guarantee.