Citibank, N.A. v. Chicago Title Ins. Co.
|26 September 1994
|163 Misc.2d 282,620 N.Y.S.2d 717
|CITIBANK, N.A., Plaintiff, v. CHICAGO TITLE INSURANCE COMPANY, Defendant.
|New York Supreme Court
Leonard Schwall, Schwall & Becker and Lawrence J. Slattery, Citibank Legal Affairs Office, New York City, for plaintiff.
Jerome M. Lasky, David B. Eizenman, Edward R. Finkelstein, Moses & Singer, New York City, for defendant.
This negligence and breach of contract action arises out of the performance by defendant Chicago Title Insurance Company ("defendant" or "Chicago Title") of a title search, and its issuance of a title insurance policy to plaintiff Citibank, N.A. ("plaintiff" or "Citibank") in connection with a mortgage loan. Defendant now moves for an order granting summary judgment dismissing the negligence cause of action, and for partial summary judgment as to the breach of contract cause of action. Plaintiff cross moves for summary judgment.
In August 1986, Thomas Duke took out a mortgage from a lender known as Citytrust in the amount of $790,000.00 on premises located at 11 Bevin Road West, Asharoken, New York ("the Premises"). Sometime in 1987, Duke approached Citibank with a proposal to refinance the Citytrust mortgage. In July, 1987, Duke executed and delivered to plaintiff a mortgage and Modification, Extension and Consolidation Agreement ("the Agreement") consolidating (1) the $790,000.00 Citytrust mortgage; (2) an additional mortgage for $10,000.00 from Citibank; and (3) a negative amortization mortgage in the sum of $80,000.00 to secure deferred interest payments on the other two mortgages. All were consolidated into one lien of $880,000.00 ("the Consolidated Mortgage").
In connection with the loan, plaintiff applied to Chicago Title for mortgage title insurance. Pursuant to plaintiff's application, defendant issued a Commitment for Title Insurance ("the Title Insurance Commitment"). On July 17, 1987, the date of closing, defendant issued a Title Policy ("the Title Policy") in Citibank's favor.
When Duke failed to make his payments under the Consolidated Mortgage, Citibank commenced foreclosure proceedings against the Premises in February, 1988. As part of its preparations, Citibank ordered a title search from Ticor Title Guarantee ("Ticor"). The initial title search disclosed two judgments against Duke, one in the amount of $11,978.00 in favor of William R. Lupone, perfected June 25, 1982, and the other in the amount of $923,091.69 in favor of RK Chevrolet, Inc., perfected May 18, 1987. Both judgments appeared to have priority over Citibank's Consolidated Mortgage that was about to be foreclosed. Subsequently, Citibank received a corrected title report from Ticor; that report disclosed that three other mortgage foreclosure actions had been filed against the Premises prior to Citibank's July 17, 1987 closing: two in Suffolk County and one in the U.S. District Court, Eastern District of New York. None of the notices of pendency had been reported in Chicago Title's report to Citibank. The Premises was sold at foreclosure to Citibank for $100,000.00. Citibank subsequently obtained a deficiency judgment in the amount of $919,212.59. The instant action ensued.
As to the first cause of action, defendant contends that it cannot be held liable for its alleged negligent preparation of the Title Insurance Commitment since all liabilities arising thereunder merged upon the issuance of the Title Policy.
Alternatively, defendant contends that it cannot be liable for its alleged negligent preparation of the Title Policy. Defendant contends that the purpose of a policy of title insurance is to provide indemnification to the insured in the event the insured suffers any losses as a result of undiscovered but discoverable defects in title only. In short, it is a contract of indemnity. Defendant contends that were plaintiff's negligence cause of action permitted to stand, the purpose of a title policy would be perverted by making such a policy into a credit report of the borrower and/or a guarantee by the title insurer that the value of the Premises was sufficient to cover the mortgage loan. Put another way, defendant contends that since a title insurance policy is a contract of indemnity, negligence is not relevant; defendant only must indemnify plaintiff for its costs in clearing up title defects. As such, any reliance by plaintiff on defendant's issuance of the Title Policy other than for clearance of title is unreasonable. 1
As to the second cause of action for breach of contract, defendant contends that Citibank is not entitled to indemnification under the policy by reason of the alleged title defects since Citibank did not suffer any loss or damage therefrom. Defendant alleges that when Citibank purchased the property at the foreclosure sale, any alleged title defect was cleared. In any event, defendant contends that there were no defects in title, i.e., that the alleged defects in title involved liens subordinate to that of Citibank. Therefore, Citibank did not sustain any loss or damage, and partial summary judgment is warranted. 2
Citibank contends that the first cause of action is founded on defendant's negligent preparation of the Title Policy and not on the Title Insurance Commitment. Citibank asserts that when defendant conducted its title search in connection with the Consolidated Mortgage, it missed the following significant matters, all of which were publicly recorded:
(a) A mortgage for $500,000.00 from Thomas Duke to First City National Bank and Trust Company, dated November 26, 1986 to partially secure an indebtedness by Duke of $1.5 million;
(b) A judgment lien recovered by RK Chevrolet in the sum of $923,091.69, which was an encumbrance against the real property that was to be mortgaged by Duke;
(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 alone in the amount of $150,000.00, as evidenced by a summons and complaint and lis pendens filed on May 1, 1987 in connection with the foreclosure action.
Citibank contends that had it been aware of the foregoing defects in title, in accordance with established industry practices, it never would have closed on the $880,000.00 loan. Under Citibank's policy, if a preliminary title search report discloses outstanding encumbrances, plaintiff normally requests an explanation from the borrower to see whether or not the outstanding liens, judgments, and other encumbrances have been cleared. If any controversy remains with respect to a lien (other than one in a nominal amount), Citibank does not close on the property. Citibank contends that this view is in accord with the realities of the marketplace; when title insurers sell title insurance to mortgagees, both sides understand that the search is a key part of the bargain and that the banks rely on that search in deciding whether to make a mortgage loan. Indeed, Citibank contends that had Chicago Title known about the serious defects in the title, defendant never would have issued the Title Policy to plaintiff. Thus, Citibank sustained damages arising out of defendant's negligence in the issuance of the Title Policy.
Further, Citibank contends that since the purpose of a title policy is, inter alia, to insure the accuracy of the title search, and defendant failed to do so by virtue of the alleged title defects, a viable cause of action for breach of contract has been stated.
The New York Court of Appeals has held that a policy of title insurance protects the insured against the risk that the property may have some defect in title (Smirlock Realty Corp. v. Title Guarantee Co., 70 A.D.2d 455, 421 N.Y.S.2d 232 [2d Dep't 1979], modified in part, 52 N.Y.2d 179, 437 N.Y.S.2d 57, 418 N.E.2d 650 . The title insurer insures against defects in title and insures that the title search was conducted in a reasonable and diligent manner:
[U]nlike other types of insurance, the insured under a title policy provides little if any information to the title company other than the lot and block of the premises and the name of the prospective guarantor. Armed with this information the title company can then search the various indices and maps to ascertain the state of title to the property. Indeed, it is because the title insurance companies combine their search and disclosure expertise with insurance protection that an implied duty arises out of the title insurance agreement that the insurer has conducted a reasonably diligent search. [citations omitted] ... This duty may not be abrogated through a standard...
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Citibank, N.A. v. Chicago Title Ins. Co.
...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 involv......