Barstad v. Stewart Title Guar. Co., Inc.

• Decision Date: 14 February 2002
• Docket Number: No. 70268-3.,70268-3.
• Citation: 39 P.3d 984,145 Wn.2d 528,145 Wash.2d 528
• Court: Washington Supreme Court
• Parties: Herbert BARSTAD and Diane Barstad, husband and wife, together with their marital community; Scott Duda and Carlene Duda, husband and wife, together with their marital community; Clarence Heiser and Harriett Heiser, husband and wife, together with their marital community; Ingeborg Keicher, an individual; James Koetje and Margaret Koetje, husband and wife, together with their marital community; Thomas Lian and Mabel Lian, husband and wife, together with their marital community; Gary Mesick and Pamela Mesick, husband and wife, together with their marital community; Robin J. Olsen, an individual; Donald Phelps and Carol Phelps, husband and wife, together with their marital community; Dale Soden and Margaret Soden, husband and wife, together with their marital community; Robert Stull and Linda Stull, husband and wife, together with their marital community; and Arne Sunde and Violet Sunde, husband and wife, together with their marital community; on their own behalf and on behalf of similarly situated individuals and marital communities, Respondents, v. STEWART TITLE GUARANTY COMPANY, INC., a Texas insurance company; Pacific Northwest Title Company, Inc., a Washington insurance company; Stewart Title Company of Washington, Inc., a Washington insurance company; Thurston County Title Company, Inc., a Washington insurance company; Sentinel Properties, Inc., d/b/a Evergreen Services, a Washington corporation; The Estate of Dennis Johnson; Katherine Johnson, a single woman; Properties Four, Inc., a Washington corporation; and Thomas R. Hazelrigg III, a single man, Petitioners.

39 P.3d 984

145 Wn.2d 528

145 Wash.2d 528

Herbert BARSTAD and Diane Barstad, husband and wife, together with their marital community; Scott Duda and Carlene Duda, husband and wife, together with their marital community; Clarence Heiser and Harriett Heiser, husband and wife, together with their marital community; Ingeborg Keicher, an individual; James Koetje and Margaret Koetje, husband and wife, together with their marital community; Thomas Lian and Mabel Lian, husband and wife, together with their marital community; Gary Mesick and Pamela Mesick, husband and wife, together with their marital community; Robin J. Olsen, an individual; Donald Phelps and Carol Phelps, husband and wife, together with their marital community; Dale Soden and Margaret Soden, husband and wife, together with their marital community; Robert Stull and Linda Stull, husband and wife, together with their marital community; and Arne Sunde and Violet Sunde, husband and wife, together with their marital community; on their own behalf and on behalf of similarly situated individuals and marital communities, Respondents, v. STEWART TITLE GUARANTY COMPANY, INC., a Texas insurance company; Pacific Northwest Title Company, Inc., a Washington insurance company; Stewart Title Company of Washington, Inc., a Washington insurance company; Thurston County Title Company, Inc., a Washington insurance company; Sentinel Properties, Inc., d/b/a Evergreen Services, a Washington corporation; The Estate of Dennis Johnson; Katherine Johnson, a single woman; Properties Four, Inc., a Washington corporation; and Thomas R. Hazelrigg III, a single man, Petitioners.

No. 70268-3.

Supreme Court of Washington, En Banc.

Argued October 23, 2001.

Decided February 14, 2002.

Preston, Thorgrimson, Ellis & Holman, John Ankeny Gose, Richard Gibson Masters, amicus curiae on behalf of Wash. Land Title Ass'n.

Sandler, Ahern & McConaughy, Michael David Sandler, Seattle, for Petitioners.

Paul Edward Brain, Michael Jon Layton, Puyallup, Talmadge & Stockmeyer, Philip Albert Talmadge, Tukwila, Short, Cressman & Burgess, James Albert Oliver, Seattle, for Respondents.

BRIDGE, J.

Presented here is a class of insured individuals who claim that title insurance companies should have made certain disclosures to them in preliminary commitments for title insurance. Specifically, these insureds claim that the companies should have disclosed that the parcels of land securing the loans had not been divided from larger tracts, that a senior lien existed on two of the lots, and that loan proceeds were being used to satisfy the senior lien. The title insurance companies contend that they had no such disclosure obligations. We agree with the title companies and hold that title insurance companies have no general duty to disclose potential or known title defects in preliminary title commitments.

FACTS

Properties Four, Inc., a real estate investment company, owned two undeveloped tracts of land in Washington, one in Maytown and the other in Lacey. The Maytown tract consisted of one contiguous 68-acre plot of land while the Lacey property was comprised of four 40-acre lots. To finance development of the lots, Properties Four arranged for Sentinel Properties, Inc., d/b/a Evergreen Services (Evergreen) to serve as a loan broker and to bundle investment loans. Evergreen or its predecessor, Consumer Loan Services of Lynnwood a/k/a Commercial Loan of Lynnwood (CLS), recruited loan participants through networks of friends and families and "free meal deals" where a potential investor would receive a free buffet dinner if he or she attended a loan presentation. Between August 1994 and January 1996 Evergreen facilitated loans from approximately 400 individuals.¹

Evergreen and its principals would then package a series of loans with 8 to 20 participatory interests each. Investors were assigned a percentage of the loan, with an average loan ranging from $5,000 to $25,000. When Evergreen achieved $200,000 by combining the individual loans, it would make a new loan to Properties Four. Approximately 8 such loans were secured for the Maytown property ($1.6 million) and 23 for the Lacey property ($4.6 million) for a total of 31 loans.

Properties Four and its president, Thomas Hazelrigg, subsequently issued a promissory note to each loan participant. Properties Four also secured the loans by granting a deed of trust on a smaller parcel of land within each larger tract. The larger tracts had not been subdivided into smaller parcels when the loans were secured. When the investors' loans were secured, the Maytown property was unencumbered. However, lots 2 and 3 of the Lacey property already possessed liens on behalf of Pacific Coast Investment Company, a prior lender.

To insure the loans, a Properties Four broker, Larry Landin, requested title insurance commitments for the loans. Stewart Title Guaranty Company, Inc. (STG) ultimately issued 29 of the 31 insurance policies to the investors and Pacific Northwest Title Insurance Company, Inc. (PNTIC) issued the remaining two policies. Mike Gilbertson, STG's regional underwriter, arranged and supervised both the preliminary commitments for the insurance and the final insurance policies.

Because the real estate was situated in Thurston County, Gilbertson contacted STG's licensed agent in Thurston County, petitioner Thurston County Title Company, Inc. (TCT). TCT agreed to examine the title records and prepare a list of exceptions for inclusion in the preliminary commitment for the insurance policies and to prepare the commitment and the final title policy with the underwriter's approval. Because TCT did not agree to perform all of the typical agent functions, Gilbertson employed STG's Seattle agent, petitioner Pacific Northwest Title Insurance Co., f/k/a Stewart Title Company of Washington, Inc.² (PNW), to provide additional support.³ TCT forwarded the completed preliminary commitments to PNW who then entered the information into their computer system, repackaged the commitments in STG jackets and distributed them to Evergreen.⁴ PNW also collected the premiums for the title work and reimbursed TCT for its efforts.

PNW was aware that Pacific Coast's senior liens were supposed to be subordinated or discharged and had not been. Nevertheless, the preliminary commitments and title insurance policies listed these existing liens.⁵ The insureds assert that Evergreen intended to use the loan proceeds to satisfy the senior debts to ensure that the investors would have first priority. To accomplish this objective, the investors' loans were first used to fulfill Property Four's senior debt obligations on the two Lacey lots. STG planned to issue the policies at an unspecified future date when the eight loans on the Lacey lots were closed and the senior debt satisfied. The investors were unaware of this use of the loan proceeds.

In early 1996, Properties Four defaulted on the loans. The investors accepted a deed in lieu of foreclosure on the Maytown property and they successfully foreclosed on lot 1 of the Lacey property, resulting in $1.358 million in proceeds. These proceeds did not cover the entire amount of the loans, however, and Pacific Coast still possessed senior liens on Lacey lots 2 and 3. The liens on the Lacey lots were assigned to a third party who foreclosed ahead of the investors. The investors who were successful in foreclosing and selling collateral sued for the difference between the amount of their loans and the amount recovered from selling the property.

PROCEDURAL HISTORY

In December 1997, the investors filed a class action lawsuit claiming negligent or intentional misrepresentation, violation of Washington securities law, chapter 21.20 RCW, and declaratory relief for coverage under the title insurance policy. The plaintiffs later added claims for violation of Washington's racketeering statute, chapter 9A.82 RCW, violation of federal racketeering law, 18 U.S.C. § 1962, breach of fiduciary duty, violation of the Consumer Protection Act (CPA), chapter 19.86 RCW, and conspiracy. The original complaint named as defendants Properties Four and its owner, Thomas Hazelrigg, Evergreen and its owners, Dennis and Katherine Johnson, STG, and selected real estate appraisers. The plaintiffs later added PNTIC, PNW and TCT. The plaintiffs settled with STG and either settled, dismissed or decided not to proceed against all other parties except PNW and TCT.

Both sides filed motions for summary judgment. The trial court granted the title companies' motion to dismiss the insureds' claims for breach of fiduciary duty, violation of securities law, violation of Washington's racketeering statute and violation of the federal racketeering statute. The court partially dismissed the misrepresentation claims and the parties later stipulated to their complete dismissal. The trial court denied the title companies' motion to dismiss the CPA and civil conspiracy claims, stating:

[I]t is expressly determined that even though there is no Washington case which has imposed a duty upon title insurers to disclose, the Court is of the view that the Washington Supreme Court would impose a duty on title insurers in the context of issuing preliminary commitments to disclose material defects in title of record and known defects not of record, including a duty upon these Defendants to disclose in preliminary commitments (a) the risks relating to lack of platting and subdivision of the collateral given in connection with the Lacey and Maytown loans; (b) the alleged division of loan proceeds in connection with the Lacey lots 2 and 3 loans; and (c) the potential lien priority conflict among the Plaintiff Lenders on the Lacey lots 2 and 3 loans.[⁶]

The trial court stayed the trial date pending appellate review of the summary judgment order. The parties stipulated and the trial court ordered that "[i]f the appellate court finds that the duty to disclose imposed by the trial court does not exist, Plaint...