From the October, 2001 issue of The Title Insurance Law Newsletter
A title insurer's pro forma endorsement protecting against a lien, which was predicated on money to be held in an escrow that was never set up, is nonetheless in force and makes title marketable, according to a Florida court.
Michel Aouate, as trustee, contracted to buy a hotel in Miami Beach from Hotel Europe, Inc. The buyer's lawyer, Robin Willner, prepared a pro forma title commitment that showed $375,000 in liens for building code violations, and a lis pendens for a lawsuit in which the plaintiff claimed an equitable lien on the hotel. Willner learned that the plaintiff was willing to settle the lawsuit for $176,000. The seller promised to get rid of the liens before closing but did not.
The buyer showed up at closing ready to complete the purchase. The purchase agreement gave the buyer the option to remove liens by paying them at closing. Willner prepared a closing statement paying off the city for the code violation liens from the seller's proceeds and putting $176,000 in escrow for the lawsuit. Based on this plan, Willner convinced the underwriter, Fidelity National, to send an endorsement to the pro forma commitment insuring over the lawsuit.
The seller refused to escrow the money and left the closing. The buyer sued for specific performance. At trial, the judge decided the lis pendens was not a lien, and the $176,000 figure a settlement proposal rather than a fixing of the amount of the lien. The court then ruled that Fidelity National's endorsement proved that title was insurable, good and marketable. Therefore, the buyer had not proven that it needed the remedy of specific performance. The court ignored Willner's protest that she had been cut off before she could testify that the title insurance endorsement "was still subject to revisions and conditions," such as the deposit of the money under an indemnity or escrow, which the seller had refused to do.
The appeals court upheld the trial judge. It said that Willner's explanation as to why the endorsement was a pro forma only and not actually in effect would have been mere "parole evidence" that the trial court did not need to hear, because "the terms at issue were clear and unambiguous" on the face of the document. The appellate court affirmed the judgment finding that the seller had proven marketable title.
The land title industry has long wondered about the legal effect of a pro forma policy or endorsement. This decision says that it is effective and binding coverage. Unfortunately, Aouate may be the only decision anywhere as to the legal effect of a pro forma title insurance policy.
The court is terribly wrong, and its refusal to even allow in testimony that would have aided justice is deeply disturbing. The court refused to admit that the real issue was not what the endorsement said, but whether or not it had been unconditionally delivered to the buyer. Delivery cannot be deduced by reading the words. Underwriters and their agents produce many pro forma endorsements and policies every day that do not accurately represent the state of title. They are always delivered with conditions, too often unwritten, such as that the insured instruments be recorded and that the liens not shown be removed.
The awful irony of Aouate is that the buyer's own lawyer made the seller's title good, according to this twisted decision. This was so despite the court's admission that the seller took no action to remove the liens and even refused to perform the condition attached to issuance of the endorsement. Buyer's counsel should reconsider the use of pro forma policies.
Aouate v. Hotel Europe, Inc., ___ So.2d ___, 2001 WL 913754 (Fla.App. 3 Dist.) (not yet released for publication).
