Centurion Props. III, LLC v. Chi. Title Ins. Co.

• Decision Date: 16 July 2015
• Docket Number: 13–35725.,Nos. 13–35692,s. 13–35692
• Parties: CENTURION PROPERTIES III, LLC ; SMI Group XIV, LLC, Plaintiffs–Appellants, v. CHICAGO TITLE INSURANCE COMPANY, a Nebraska company, Defendant–Appellee. Centurion Properties III, LLC ; SMI Group XIV, LLC, Plaintiffs–Appellees, v. Chicago Title Insurance Company, a Nebraska company, Defendant–Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

793 F.3d 1087

CENTURION PROPERTIES III, LLC ;

SMI Group XIV, LLC, Plaintiffs–Appellants

v.CHICAGO TITLE INSURANCE COMPANY, a Nebraska company, Defendant–Appellee.

Centurion Properties III, LLC ;

SMI Group XIV, LLC, Plaintiffs–Appellees

v.Chicago Title Insurance Company, a Nebraska company, Defendant–Appellant.

Nos. 13–35692

13–35725.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 2, 2015.

Filed July 16, 2015.

Steven J. Wells (argued), Timothy J. Droske, Dorsey & Whitney LLP, Minneapolis, MN; Peter S. Ehrlichman, Todd S. Fairchild, Dorsey & Whitney LLP, Seattle, WA, for Plaintiffs–Appellants/Cross–Appellees.

Stephen J. Sirianni (argued), Sirianni Youtz Spoonemore Hamburger, Seattle, WA, for Defendant–Appellee.

Appeals from the United States District Court for the Eastern District of

Washington, Rosanna Malouf Peterson, Chief District Judge, Presiding. D.C. No. 2:12 cv–05130 RMP.

Before: DIARMUID F. O'SCANNLAIN, A. WALLACE TASHIMA, and M. MARGARET McKEOWN, Circuit Judges.

ORDER

SIDNEY R. THOMAS, Chief Judge.

This case arises from a dispute between plaintiffs-appellants Centurion Properties III, LLC (“CPIII”) and SMI Group XIV, LLC (“SMI”) (together, “Plaintiffs”), and defendant-appellee Chicago Title Insurance Company (“Chicago Title”) over whether Chicago Title breached a duty of care to Plaintiffs, causing damages, when it recorded unauthorized liens on CPIII's property. We have jurisdiction under 28 U.S.C. § 1291. The appeal turns on whether a title company owes a duty of care to third parties in these circumstances, which is a potentially dispositive, but unresolved and important question in Washington law. Thus, we respectfully certify to the Washington Supreme Court the following question:

Does a title company owe a duty of care to third parties in the recording of legal instruments?

I.

CPIII was formed in 2006 to purchase a tract of real property in Richland, Washington (the “subject property”). SMI, which was owned by Michael Henry (“Henry”), controlled ten percent of CPIII. The remaining ninety percent was owned by entities controlled by Tom Hazelrigg III and his son, Aaron Hazelrigg. CPIII's managing member upon its formation was an Aaron Hazelrigg-owned company known as Centurion Management III, LLC (“CMIII”), which owned seventy-eight percent of CPIII.

Shortly after its formation, CPIII purchased the subject property, which was financed by a loan from General Electric Capital Corporation (“GECC”); in turn, the loan was secured by a senior lien on the subject property. As a condition of the loan, CPIII agreed not to further encumber the subject property without GECC's prior written approval. The GECC Loan Agreement specified that CPIII's failure to comply with this condition constituted an event of default.

Chicago Title served as the escrow, closing agent, and title insurer for the original purchase, and it also was named trustee of GECC's senior lien. Pursuant to this role, Chicago Title received copies of the documents prohibiting the recording of junior liens on the property.

In July 2007, Aaron Hazelrigg signed a junior deed of trust to another lender, Centrum Financial Services, Inc. (“Centrum”), encumbering the property. Chicago Title served as the title insurer on this transaction, and it was also tasked with recording the junior lien. Centrum provided Chicago Title with the following instructions for recording:

You may record the Leasehold [Deed of Trust], provided you are irrevocably committed to insure the enclosed Mortgage, on a mortgagee's extended basis with coverage of $10,000,000.00, as a valid SECOND lien against the leasehold property which is the subject of the commitment for title insurance issued under the referenced file number, subject only to matters set forth therein.

Centrum also provided Chicago Title with another copy of the documents prohibiting CPIII from recording a second lien against the subject property without GECC's approval. Chicago Title subsequently issued the title insurance policy and recorded the junior lien. Chicago Title later recorded three more instruments against the subject property as a courtesy service to Centrum.¹ Chicago Title has “conced[ed] ... that it could be charged with actual knowledge of [the documents prohibiting recording of junior liens] when it ... recorded the liens.” Centurion Props., III, LLC v. Chi. Title Ins. Co., No. CV–12–5130–RMP, 2013 WL 3350836, at *6 (E.D.Wash. July 3, 2013).

In September 2009, GECC learned about the junior liens on the subject property after obtaining a title report reflecting the recordings. GECC notified CPIII that events of default had occurred. In January 2010, GECC declared that CPIII was in default and commenced foreclosure proceedings.

In response to the default, CPIII—now led by Henry and SMI, rather than CMIII and the Hazelriggs—sought replacement financing for the property. CPIII negotiated with a potential replacement lender, CTL Capital, which at one point indicated there was a “reasonable likelihood” that it would be able to provide the loan. However, for reasons the record does not directly reflect, CTL Capital backed out of the financing. Henry indicated in affidavit testimony that he believed, based on “lengthy experience in commercial real estate transactions and financing,” that CTL Capital backed out because junior liens had been recorded against the subject property.

In February 2010, CPIII and SMI filed suit in Washington state court against a large number of parties, including Tom and Aaron Hazelrigg and Centrum, alleging improper actions taken while the Hazelriggs controlled CPIII. The case was removed to the U.S. District Court for the Eastern District of Washington.

CPIII subsequently declared bankruptcy after failing to obtain replacement financing for the GECC loan. The district court in October 2010 thus referred the case to the U.S. Bankruptcy Court for the Eastern District of Washington, where it became an adversary proceeding in the bankruptcy case. In April 2011, while the adversary proceeding was pending in bankruptcy court, Appellants amended their complaint to assert a claim against Chicago Title for negligence, stemming from Chicago Title's recording of the disputed liens. The district court accepted CPIII's reorganization plan before ruling on the parties' summary judgment motions in the adversary proceeding; thus, the case returned to federal district court. The district court subsequently granted summary judgment to Chicago Title on the negligence claim, holding that Chicago Title did not owe a duty of care to Plaintiffs. This appeal followed.

II.

A.

Certification is a means “to obtain authoritative answers to unclear questions of state law.” Toner for Toner v. Lederle Labs., Div. of Am. Cyanamid Co., 779 F.2d 1429, 1432 (9th Cir.1986). In general, its use “in a given case rests in the sound discretion of the federal court.” Lehman Bros. v. Schein, 416 U.S. 386, 391, 94 S.Ct. 1741, 40 L.Ed.2d 215 (1974). Certification is particularly appropriate “where the issues of law are complex and have ‘significant policy implications.’ ” McKown v. Simon Prop. Group Inc., 689 F.3d 1086, 1091 (9th Cir.2012) (quoting Perez–Farias v. Global Horizons, Inc., 668 F.3d 588, 593 (9th Cir.2011) ).

Washington state law recognizes the propriety of certification “[w]hen in the opinion of [the] federal court before whom a proceeding is pending, it is necessary to ascertain the local law of [Washington] in order to dispose of such proceeding and the local law has not been clearly determined.” Wash. Rev.Code § 2.60.020 ; see McKown, 689 F.3d at 1091. Thus, we have certified a question to the Washington Supreme Court where a question of law “ ‘has not been clearly determined’ by the Washington courts,” Bylsma v. Burger King Corp., 676 F.3d 779, 783 (9th Cir.2012) (quoting § 2.60.020 ), and “the answer to [the] question is outcome determinative,” id.

B.

Under the standards articulated above, certifying to the Washington Supreme Court the question whether a title company owes a duty of care to third parties when recording legal instruments is an appropriate and reasonable exercise of our discretion. Whether Chicago Title owed such a duty is determinative to how this appeal will be resolved. If, as the district court reasoned, Chicago Title owed no duty, then we would affirm the district court's grant of summary judgment to Chicago Title. If Chicago Title did owe a duty of care, then summary judgment would be inappropriate at this stage. In that event, we likely would remand to the district court for a determination in the first instance as to causation, which the parties also dispute. See Quinn v. Robinson, 783 F.2d 776, 814 (9th Cir.1986) (“As a general rule, ‘a federal appellate court does not consider an issue not passed upon below.’ ” (quoting Singleton v. Wulff, 428 U.S. 106, 120, 96 S.Ct. 2868, 49 L.Ed.2d 826 (1976) )).

Whether a duty of care exists in these circumstances is a matter of Washington common law. In determining the existence and scope of a duty, Washington courts weigh “considerations of ‘logic, common sense, justice, policy, and precedent.’ ” Snyder v. Med. Serv. Corp. of E. Wash., 145 Wash.2d 233, 35 P.3d 1158, 1164 (2001) (quoting Lords v. N. Auto. Corp., 75 Wash.App. 589, 881 P.2d 256, 260 (1994) ).

To date, no Washington case has addressed whether a title company owes a duty of care to third parties to refrain from negligently recording legal instruments. Plausible arguments can be made on both sides.

Washington courts have concluded that professionals owe duties of care to third parties in other contexts. For example, in Affiliated FM Insurance Co. v. LTK Consulting Services, Inc., the Washington Supreme Court concluded that an engineering firm owed a duty of care—to refrain from producing negligent designs—to third parties who foreseeably might be injured by the products of those designs. 170 Wash.2d 442, 243 P.3d 521, 528 (2010). Washington courts have indicated that similar...