Citibank, N.A. v. Chicago Title Ins. Co.

• Citation: 632 N.Y.S.2d 779,214 A.D.2d 212
• Parties: CITIBANK, N.A., Plaintiff-Respondent, v. CHICAGO TITLE INSURANCE COMPANY, Defendant-Appellant.
• Decision Date: 28 September 1995
• Court: New York Supreme Court Appellate Division

Page 779

632 N.Y.S.2d 779

214 A.D.2d 212

CITIBANK, N.A., Plaintiff-Respondent, v. CHICAGO TITLE INSURANCE COMPANY, Defendant-Appellant.

Supreme Court, Appellate Division First Department.

Sept. 28, 1995.

Jerome M. Lasky, of counsel (David Rabinowitz and Edward R. Finkelstein, on the brief, Moses & Singer, attorneys) for defendant-appellant.

Lawrence J. Slattery and Schwall & Becker, attorneys for plaintiff-respondent.

Before SULLIVAN, J.P., and ELLERIN, WALLACH, WILLIAMS and MAZZARELLI, JJ.

SULLIVAN, Justice.

This appeal presents the issue of whether a mortgagee, here Citibank, the insured under a mortgage title insurance policy, may, absent proof that its alleged loss was occasioned by the subordination of the insured mortgage to other liens and encumbrances, recover damages against the insurer in negligence and/or breach of contract based upon the insurer's faulty title search.

In 1987, Citibank was approached by Thomas Duke with a proposal to refinance an existing mortgage held by Citytrust in the principal amount of $790,000 on premises located at 11 Bevin Road West, Asharoken, New York. On July 17, 1987, as part of that refinancing, Duke executed and delivered to Citibank a mortgage and modification, extension and consolidation agreement (agreement) consolidating the $790,000 Citytrust mortgage, which had been assigned to Citibank, an additional mortgage on the same property securing a further $10,000 loan to Duke from Citibank and a negative amortization mortgage in the sum of $80,000 to secure deferred interest payments on the two other mortgages. The three mortgages were modified, extended and consolidated into a single lien in the sum of $880,000.

Before entering into this transaction, Citibank requested mortgage title insurance from Chicago Title Insurance Company, which, after conducting a title search, issued its Commitment for Title Insurance. The commitment included a "Report of Closing" prepared by an abstractor, Chicago Title's agent, setting forth, inter alia, a list of title defects which Chicago Title would not cover. The commitment, by its terms, represented Chicago Title's agreement to issue a title policy upon satisfaction of certain conditions. Indeed, it expressly provided: "This Commitment is preliminary to the issuance of such policy ... of title insurance and all liability and obligations hereunder shall cease and terminate nine months after the effective date hereof or when the policy ... committed for shall issue, whichever first occurs". The title policy insuring the $880,000 consolidated mortgage was issued on July 17, 1987, contemporaneously with the execution of that instrument.

Schedule B of the policy listed nine defects, liens, encumbrances and other matters against which Chicago Title did not insure. Unfortunately, it did not list the following four liens and filings, all of which were matters of public record:

a) a mortgage for $500,000 from Thomas Duke to First City National Bank and Trust Company, dated November 26, 1986, to secure partially an indebtedness by Duke of $1.5 million;

b) a judgment lien recovered by R.K. Chevrolet in the sum of $923,091.69, which was an encumbrance against the real property that was to be mortgaged by Duke ¹;

c) a lis pendens disclosing that the Citytrust mortgage was itself being foreclosed upon; and

d) a foreclosure action by one Alex Varveris for a mortgage loan in the amount of $150,000, as evidenced by a summons and complaint and lis pendens filed on May 1, 1987 in connection with the foreclosure action.

The total amount involved in these undisclosed liens and lis pendens, exclusive of the foreclosure action on the $790,000 Citytrust mortgage, was $1,573,091.69. ² Duke, who had been in default under the Citytrust mortgage when Citibank acquired it, paid the arrears due to Citibank; without, however, ever making a single payment under the terms and conditions of the agreement, Duke defaulted under the consolidated mortgage. After several years of litigating with other lienholders to resolve priority issues, Citibank eventually foreclosed on its mortgage.

A judgment of foreclosure and sale was entered on May 8, 1992 in Supreme Court, Suffolk County, in favor of Citibank and the mortgaged property was eventually sold at auction. With an offer of $100,000, Citibank was the successful bidder, taking title to the mortgaged premises free and clear of the four alleged defects in title which had not been excepted in Schedule B of the title policy and for which Citibank would be entitled to compensation thereunder provided it suffered a "loss or damage" by reason of the defects. Each of these objections to title which the title policy failed to except were recorded against the mortgaged premises after the recording of the $790,000 Citytrust mortgage on August 18, 1986 and thus were subordinate to it. Since each mortgage in a consolidated mortgage retains its original priority (see, UMB Bank and Trust Co. v. S.H.M. West Parking Corp., 181 A.D.2d 577, 581 N.Y.S.2d 324), the consolidation of the three mortgages into a single consolidated mortgage in the sum of $880,000 did not affect the priority of the original $790,000 mortgage assigned by Citytrust to Citibank. At a hearing on Citibank's application for a deficiency judgment against Duke, the court determined the reasonable market value of the mortgaged property to be $470,000. Citibank subsequently obtained a deficiency judgment in the sum of $919,212.59 and claims a loss of $995,000.

In seeking to recover that amount in this lawsuit, based on theories of negligence and breach of contract, Citibank claims that it would not have extended the loan to Duke had it known "the true nature of [Duke's] financial circumstances", as would have been revealed by a proper title search; Citibank alleges that, as a lender, it relied on the information provided in the "report of title" in deciding whether to go forward with the loan transaction. The alleged breach consisted of Chicago Title's omission of the four defects from the "report of title." After joinder of issue, both parties moved for summary judgment. The IAS court awarded summary judgment to Citibank and directed an assessment of damages, finding that Chicago Title, by neglecting to ascertain the existence of the four alleged defects in title, failed in its implied duty arising out of its issuance of a title policy to conduct a reasonably diligent search and to insure the accuracy of the search. The court found Chicago Title liable in both negligence and breach of contract under the policy. Thus, the court held that the issuance of a title policy entitles the insured not only to indemnification for loss sustained as a result of title defects, but also to a title search, the accuracy of which the policy insures. We reverse.

In finding for Citibank on its negligence claim, the IAS court ignored well settled law that a cause of action for negligence in searching title does not lie in an action on the policy. (Trenton Potteries Co. v. Title Guar. & Trust Co., 176 N.Y. 65, 68 N.E. 132; Maggio v. Abstract Title & Mortgage Corp., 277 App.Div. 940, 941, 98 N.Y.S.2d 1011; Charney v. Commonwealth Land Title Ins. Co., 215 A.D.2d 152, 625 N.Y.S.2d 911.) "The contract of insurance is distinct and separate from the contract of searching. This action is brought upon the contract of insurance. Under the contract for searching titles the defendant may be liable for any damages which its negligence may have imposed upon the plaintiff [citation omitted]. Under the contract of insurance no question of negligence in searching can arise." (Trenton Potteries Co. v. Title Guar. & Trust Co., supra, at 75, 68 N.E. 132.) "In the case of a title insurance policy, the insurer undertakes to indemnify the insured if the title turns out to be defective.... The doctrine of skill or negligence has no application to a contract of title insurance." (Maggio v. Abstract Title & Mortgage Corp., supra, at 941, 98 N.Y.S.2d 1011.) To be sure, "title insurance [is] viewed as being more in the nature of a covenant of warranty against encumbrances...." (Smirlock Realty Corp. v. Title Guar. Co., 52 N.Y.2d 179, 188, 437 N.Y.S.2d 57, 418 N.E.2d 650.)

In holding that a title insurer may be held liable in negligence arising out of its issuance of a title policy, the IAS court (Citibank v. Chicago Tit. Ins. Co., 163 Misc.2d 282, 286-287, 620 N.Y.S.2d 717), cited Smirlock Realty Corp. v. Title Guar. Co., supra (52 N.Y.2d 179, 437 N.Y.S.2d 57, 418 N.E.2d 650), which involved a claim against a title insurer for negligence and breach of contract due to the diminution in value caused by a defect in title not mentioned either in the certificate of title or the subsequently issued title policy. As here, the certificate of title contained a provision that any liability thereunder terminated upon the issuance of the title policy. On that basis, the Appellate Division (70 A.D.2d 455, 421 N.Y.S.2d 232, mod. on other grounds, 52 N.Y.2d 179, 437 N.Y.S.2d 57, 418 N.E.2d 650) affirmed the dismissal of the negligence action, holding, "[w]here, as here, the certificate of title has merged in the subsequently issued title issuance policy, any action for damages arising out of the search--whether sounding in tort or contract--is foreclosed." (Id. at 465-466, 421 N.Y.S.2d 232.) Echoing Trenton Potteries, the Appellate Division also specifically held that a negligence claim could be asserted only under the certificate of title: "The contract for a title search is separate and distinct from the contract of insurance; liability for a negligent search arises from the former." (Id. at 465, 421 N.Y.S.2d 232.)

The Court of Appeals specifically disclaimed any consideration of the negligence claim because no appeal had been taken from that aspect of the Appellate Division's determination. (52 N.Y.2d, at 185 n., 437 N.Y.S.2d 57, 418 N.E.2d 650). Its decision concerned only the disclaimer of...