From the October, 2003 issue of The Title Insurance Law Newsletter
In an important victory for the land title industry, the Nevada Supreme Court says that an insured does not have notice of a recorded document just because it is shown on a search printout in its title company's file.
The Donald J. Adams Trust deeded a Nevada residence to Tanner Song. Song conveyed it to David Huntington on the same day. Song and Huntington signed an unrecorded Real Estate Holding Agreement that said Song held the property as nominee for Huntington. (This suggests that either the property was reconveyed from Huntington to Song, or the deed to Huntington was not recorded). The key ingredient of the Agreement was that Song could not put a deed of trust on the property without Huntington's approval. Song and Huntington also signed a memorandum disclosing the Agreement, which was eventually recorded and re-recorded.
After the memorandum was recorded, Song got a home equity loan from MILA, Inc. The title insurer, Stewart Title, ran a search that uncovered the memorandum, but did not disclose it on the preliminary title report. Thus, MILA did not inquire about any limitation on Song's power to encumber the property. MILA lent the money and recorded its deed of trust.
Huntington filed a quiet title action against MILA, who sued Song, who sued Huntington. The district court granted MILA's motion for summary judgment, determining that MILA was a bona fide encumbrancer without notice of the Agreement.
Huntington's argument on appeal was that MILA was bound by the knowledge of Stewart Title. A footnote says that Huntington did not assert that MILA had constructive notice from the public records, and thus the court did not decide that issue.
The court rode one horse the whole distance, in the California case of Rice v. Taylor, 220 Cal. 629, 32 P.2d 381 (1934). In Rice, a borrower failed to tell his lender about a prior deed of trust, but did disclose it to the title insurer.
Without actual knowledge of the first encumbrance, the lender executed the loan.
The court concluded that, unlike an abstract of title, a title insurance policy is an indemnity agreement of an independent contractor and contains no elements of agency.
The Nevada court noted that California and Nevada have nearly identical statutes defining abstracts of title and excluding preliminary title reports from that definition. Because Stewart Title was not an abstractor of title, it had no duty to inform MILA of every title issue, and was not MILA's agent:
We conclude that a title insurance company is not required to disclose every encumbrance in a title policy because a title policy, unlike an abstract of title, does not impart constructive notice of encumbrances. Instead, a title company must disclose the encumbrances it is not willing to insure or indemnify against in a title policy.
We are persuaded that the Rice opinion's analysis is correct. Because a clear statutory distinction exists between an abstract of title and title insurance, we conclude that a title insurance company, conducting a title search on behalf of a lender, is not the lender's agent. Therefore, a title company's constructive notice may not be imputed to the lender. Because Stewart Title was not Mila's agent as a matter of law, we refuse to impute Stewart Title's constructive notice to MILA.
By aligning Nevada with California based on their very similar title insurance laws, the Court was able to make only a glancing reference to the Arizona case of Hall v. World Savings & Loan Ass'n, 189 Ariz. 495, 943 P.2d 855 (App.1997), which came to the opposite conclusion. In that case, the deed by which the owner/borrower took title recited that nominal consideration had been paid for the property. A judgment creditor asked to have the insured mortgage found junior to the judgment under a fraudulent conveyance statute, based on this notice. The Hall court agreed "that the title company was [lender] World's agent for purposes of the title report, and thus World is bound by whatever notice the title company had while acting within the scope of its authority."
In siding with Rice and not Hall, the Nevada Supreme Court has provided a modern decision that might be applied in other states.
Huntington v. MILA, Inc., 75 P.3d 354 (Nev. 2003). Thanks to subscriber Charles T. Cook, Esq., Las Vegas, for submitting this excellent decision.
