First Am. Title v. Action Acquisitions

• Decision Date: 25 July 2008
• Docket Number: No. CV-07-0412-PR.,CV-07-0412-PR.
• Parties: FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation, Plaintiff/Counter-Defendant/Appellee, v. ACTION ACQUISITIONS, LLC, an Arizona limited liability company; Free For Now, LLC, an Arizona limited liability company, Defendants/Counter-Claimants/Appellants. Action Acquisitions, LLC, an Arizona limited liability company; Free For Now, LLC, an Arizona limited liability company, Third-Party Plaintiffs/Appellants, v. Capital Title Agency, Inc., an Arizona corporation, Third-Party Defendant/Appellee.
• Court: Arizona Supreme Court

187 P.3d 1107

218 Ariz. 394

FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation, Plaintiff/Counter-Defendant/Appellee, v. ACTION ACQUISITIONS, LLC, an Arizona limited liability company; Free For Now, LLC, an Arizona limited liability company, Defendants/Counter-Claimants/Appellants.

Action Acquisitions, LLC, an Arizona limited liability company; Free For Now, LLC, an Arizona limited liability company, Third-Party Plaintiffs/Appellants, v. Capital Title Agency, Inc., an Arizona corporation, Third-Party Defendant/Appellee.

No. CV-07-0412-PR.

Supreme Court of Arizona, En Banc.

July 25, 2008.

Ramras Law Offices, P.C. by David N. Ramras, Ari Ramras, Phoenix, Attorneys for First American Title Insurance Company.

Berens, Kozub & Kloberdanz, P.L.C. by Daniel L. Kloberdanz, William A. Kozub, Scottsdale, Attorneys for Action Acquisitions, LLC and Free For Now, LLC.

Jackson White, P.C. by Eric M. Jackson, Christine Farnsworth, Mesa, Attorneys for Capital Title Agency, Inc.

OPINION

BALES, Justice.

¶ 1 This case involves title insurance for a home purchased at a sheriff's sale. After the purchasers obtained the insurance policy, the superior court set aside the sale because the purchasers had paid a grossly inadequate price. The purchasers then made a claim for insurance coverage. We hold that the title insurer properly denied coverage based on the policy's exclusion for loss resulting from risks created by the purchasers.

FACTS AND PROCEDURAL BACKGROUND

¶ 2 At a sheriff's sale in early 2005, the purchasers-Action Acquisitions, LLC and Free for Now, LLC-successfully bid $3,500 for a home in Gilbert. The sale occurred because a homeowner's association had foreclosed on the home to collect about $3,000 in unpaid assessments. The property was worth between $300,000 and $400,000 and subject to a $162,000 deed of trust. The purchasers, who were in the business of buying and selling homes for profit, thus stood to gain more than $130,000 if they resold the home at market value.

¶ 3 After the six-month redemption period, the purchasers bought from Capital Title Agency a $400,000 owner's title insurance policy issued by First American Title Insurance Company. The purchasers allege that, before the policy issued, Capital Title investigated the underlying foreclosure to confirm there had been no procedural errors, and that it knew the purchasers had paid only $3,500. They also allege that they accepted Capital Title's recommendation to buy a premium policy instead of a basic policy. The policy they purchased—as did the basic policy-excluded coverage for certain losses, including those resulting from the insured's "failure to pay value for [the] Title" (Exclusion 5) or from risks "created" by the insured (Exclusion 4.a).

¶ 4 The prior homeowner successfully moved to set aside the sheriff's sale on the ground that the $3,500 price was grossly inadequate. See Nussbaumer v. Superior Court, 107 Ariz. 504, 507, 489 P.2d 843, 846 (1971) (recognizing court's equitable power to set aside foreclosure sale for grossly inadequate price). The purchasers did not appeal the superior court's judgment setting aside the sale. Instead, they made a claim against the title insurance policy. First American sought a declaratory judgment that it was not liable; the purchasers brought a counterclaim and a claim against Capital Title. First American and Capital Title moved for summary judgment, which the superior court granted. It found that coverage was properly denied under the "created" risk exclusion. It did not address the "failure to pay value" exclusion.

¶ 5 The court of appeals affirmed; it relied on the "failure to pay value" exclusion and did not address the "created" risk exclusion. First Am. Title Ins. Co. v. Action Acquisitions, LLC, 216 Ariz. 537, 539-40 ¶ 8, 169 P.3d 127, 129-30 (App.2007). The court stated that Arizona courts no longer construe insurance contract ambiguities against the drafter, but instead look to the purpose of the exclusion, public policy, and the transaction as a whole. Id. at 540 ¶ 9, 169 P.3d at 130. Considering these factors, the court concluded that the "failure to pay value" exclusion applies if the insured is not a bona fide purchaser for value under the recording statutes and that a purchaser whose sale is set aside for a grossly inadequate price is not a bona fide purchaser. Id. at 540-41 ¶¶ 12-13, 169 P.3d at 130-31. The court further held that the purchasers had no reasonable expectation of insurance coverage. Id. at 542 ¶ 9, 169 P.3d at 132.

¶ 6 This case presents important, recurring issues. We granted review and have jurisdiction under Article 6, Section 5(3) of the Arizona Constitution and A.R.S. § 12-120.24 (2003).

ANALYSIS

¶ 7 To resolve this case, we must consider the scope of the policy exclusions for "failure to pay value" and for risks "created" by the insured and whether the purchasers here had a reasonable expectation of coverage.

I.

¶ 8 We review de novo the interpretation of insurance contracts. Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529, 534, 647 P.2d 1127, 1132 (1982). If a clause appears ambiguous, we interpret it by looking to legislative goals, social policy, and the transaction as a whole. Employers Mut. Cas. Co. v. DGG & CAR, Inc., 218 Ariz. 262, 264 ¶ 9, 183 P.3d 513, 515 (2008). If an ambiguity remains after considering these factors, we construe it against the insurer. Id. The court of appeals erred in saying that we have "abandoned" the rule that ambiguities are construed against the insurer. That rule remains; we simply do not resort to it unless other interpretive guides fail to elucidate a clause's meaning. See Transamerica Ins. Group v. Meere, 143 Ariz. 351, 355, 694 P.2d 181, 185 (1984).

II.

A.

¶ 9 The policy excludes coverage for loss resulting from the insured's "failure to pay value for [the] Title." The purchasers argue that if "value" is given its "plain meaning," the exclusion does not apply, because they paid $3,500 for property that was subject to both a $162,000 first mortgage and a statutory right to redeem the foreclosure. Alternatively, the purchasers argue that the word "value" has various meanings and the court of appeals erred in equating the term as used in the exclusion with the "valuable consideration" required for a purchaser to be protected by the recording statutes.

¶ 10 We agree with the purchasers that the word "value," when considered alone, is somewhat unclear. But this conclusion merely indicates that we need to consider whether other factors will clarify the meaning of the exclusion. We have not identified any pertinent legislative goals or social policies regarding this interpretive issue. We find guidance, however, in the transaction as a whole, including both the general nature of title insurance and the provisions of this policy.

¶ 11 Title insurance generally is an insurer's agreement to insure against losses caused by claims against the insured's title to real property, unless a title search identifies the risk of those claims or an exclusion applies. Quintin Johnstone, Title Insurance, 66 Yale L.J. 492, 492-95 (1957). Before issuing a policy, an insurer will review the public records to identify defects or encumbrances. D. Barlow Burke, Law of Title Insurance § 1.01 (2000 & Supp.2007). The insurer typically will exclude from its coverage a list of "exceptions" reflecting these risks. Joyce Palomar, Palomar and Patton on Land Titles § 41 (3d ed. 2003 & Supp.2007). Apart from such scheduled exceptions, title insurers will include standard exclusions, like those at issue in this case.

¶ 12 Title insurance exists against the backdrop of the recording statutes. Under those laws, unrecorded interests are invalid against creditors and against subsequent purchasers for "valuable consideration" who lack notice of the interest. A.R.S. § 33-412(A) (2007). Conversely, unrecorded instruments are valid "as to all subsequent purchasers with notice thereof, or without valuable consideration." A.R.S. § 33-412(B). The term "bona fide purchaser" is often used to refer to one who purchases property for value and without notice. See, e.g., Davis v. Kleindienst, 64 Ariz. 251, 258, 169 P.2d 78, 82 (1946).

¶ 13 This background informs our interpretation of the "failure to pay value" exclusion. How can a purchaser's failure to pay value for the title result in a loss? This loss can obviously occur if an insured lacking recording act protection faces a title challenge from a prior unrecorded interest. The recording statutes generally protect bona fide purchasers from unrecorded interests in land, but such interests are valid and binding as to a purchaser who does not pay valuable consideration or who has notice.

¶ 14 The circumstances in which a purchaser will not be protected by the recording statutes have evident counterparts in the policy exclusions. Exclusion 5 excludes coverage for losses that result from the purchaser's "failure to pay value" for the title; Exclusion 4.b applies to unrecorded risks that are known to the purchaser but not the insurer.

¶ 15 Given the policy language and the nature of title insurance, the exclusion for "failure to pay value" is most reasonably understood as applying when an insured is not a bona fide purchaser protected by the recording statutes. Although we have not found decisions in other jurisdictions addressing this issue, our conclusion comports with the views of commentators. See Joyce Palomar, Title Insurance Law § 6.25 (2007); Roger Bernhardt, Teaching Property Law as Real Estate Lawyering, 23 Pepp. L.Rev. 1099, 1209 (1996).

¶ 16 Thus, we agree with the court of appeals that the policy's exclusion for loss resulting from the insured's "failure to pay value" for the title means a loss resulting because the insured has not paid "valuable consideration" and therefore is not protected under the recording statutes.

B.

¶ 17 The purchasers contend that even if the exclusion applies...