Herbil Holding Co. v. Commonwealth Land Title Ins. Co.

• Decision Date: 18 November 1992
• Citation: 590 N.Y.S.2d 512,183 A.D.2d 219
• Parties: HERBIL HOLDING CO., et al., Appellants, v. COMMONWEALTH LAND TITLE INSURANCE COMPANY, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 512

590 N.Y.S.2d 512

183 A.D.2d 219

HERBIL HOLDING CO., et al., Appellants, v. COMMONWEALTH LAND TITLE INSURANCE COMPANY, Respondent.

Supreme Court, Appellate Division Second Department.

Nov. 18, 1992.

Cohn, Rosenthal & Avrutine, Baldwin (William S. Cohn and Howard D. Avrutine, of counsel), for appellants.

Kirschenbaum & Kirschenbaum, P.C., Garden City (Samuel Kirschenbaum and Ira Levine, of counsel), for respondent.

Before BRACKEN, J.P., and HARWOOD, MILLER and COPERTINO, JJ.

COPERTINO, Justice.

In order to determine whether the Supreme Court properly dismissed the complaint we must, inter alia, interpret the clause in a title insurance policy which excludes from coverage a loss arising from rights asserted by a "person in possession" of the subject real property. Specifically, we must decide if the exclusion bars recovery after a successful claim by a record owner that the judgment of foreclosure under which the insureds purchased the property was improperly entered against him. The question appears to be one of first impression in New York, and we answer it in the negative.

A judgment of foreclosure and sale, dated April 11, 1983, was entered in an action in the Supreme Court, Nassau County, entitled Fidelity Bond & Mortgage Co. v. Robert A. Barbieri, Index No. 25985/82. A foreclosure sale was held on June 1, 1983. The successful bid of approximately $19,000 was made by the plaintiffs. The property was improved with a single-family house.

On June 3, 1983, the plaintiffs ordered a title search from T.P.S. Abstract Corp., an agent of the respondent Commonwealth Land Title Insurance Company (hereinafter Commonwealth) before issuing a title insurance policy. The abstract company thereafter furnished a certificate and report of title which was "marked up" by its title closer at the closing held on July 1, 1983. Under Schedule B of the certificate, a notation "Except" was made next to item 4, "[r]ights of tenants or persons in possession". The purchase price was paid, and a deed to the property dated July 1, 1983, was executed and delivered to the plaintiffs by the referee in foreclosure. It was duly recorded in the office of the Nassau County Clerk on July 7, 1983. In exchange for a $459 premium, Commonwealth issued its policy to the plaintiffs, effective July 1, 1983, in the amount of $65,000. In keeping with the notation made at the closing, Schedule B of the policy identified "Rights of tenants or persons in possession" as one of the exceptions.

The plaintiff Herbil Holding Co. then commenced a summary proceeding to recover possession of the premises in the District Court, Nassau County, First District. Shortly thereafter, Robert Barbieri moved in the Supreme Court, Nassau County, to vacate the judgment of foreclosure. Barbieri asserted that he and his former wife (Janet Barbieri) jointly owned the property which had been the subject of the foreclosure action, but that he had never been served with process. He stated that he and his wife were divorced in January 1972 that he had not lived in the house since that time, and had learned of the action "by pure luck * * * near the very end of June, 1983". He further stated that he intended to satisfy the mortgage upon vacatur of the foreclosure judgment.

Robert Barbieri's motion in the foreclosure action resulted in a demand by the plaintiffs that Commonwealth defend them. Commonwealth engaged counsel and agreed to pay for the defense in accordance with the terms of the policy. The plaintiffs then cross-moved to dismiss the motion to vacate, for leave to intervene in the foreclosure action, and for a hearing on service. In the event Barbieri prevailed, they demanded a refund of the money they paid for the property. By order entered October 11, 1983 (Brucia, J.), the motion to vacate the judgment of foreclosure was granted. So, too, was that branch of the cross motion which sought the refund, and the plaintiffs' money was refunded.

By letter dated September 4, 1984, the plaintiffs demanded $46,000 from Commonwealth, which represented the difference between the approximately $19,000 returned to them by the foreclosing mortgagee and the $65,000 for which title was insured, which amount was allegedly the market value at the time of purchase. Commonwealth refused, stating, in a letter dated September 13, 1984, that the policy was one of indemnity, not guarantee, and asserting that the plaintiffs had already received the money they had paid.

The plaintiffs then commenced the instant action to recover the $46,000, plus interest on the sum of the approximately $19,000 for the period it was held by the referee and the foreclosing mortgagee, counsel fees, and other expenses incurred in connection with their purchase. The respondent answered, alleging two affirmative defenses: (1) the plaintiffs had "received full indemnity for the monies expended" when they recovered their purchase money, and (2) there was an exception from coverage set forth in the policy for the rights of tenants or persons in possession.

In order to resolve the issues presented, the parties submitted a "Stipulation of Agreed Statement of Facts" to the Supreme Court, from which we have drawn much of the foregoing. Worthy of particular note is that the parties agreed that Robert Barbieri was "in possession" of the subject premises at the time title closed. In resolving the instant action upon this stipulation, the court relied on general principles of contract law and held that the exception for the "[r]ights of tenants or persons in possession" absolved the title company from liability. This appeal ensued.

The plaintiffs' first contention on appeal is that Commonwealth waived its right to assert the exception because the only reason given for its refusal to pay damages up to the policy limits was that the plaintiffs had already received a refund of the purchase price. We agree with Commonwealth that this argument lacks merit. The plaintiffs do not claim that they suffered any prejudice from the failure to assert as a ground for disclaimer the exception for the "[r]ights of tenants or persons in possession". Under the circumstances, Commonwealth is not estopped from asserting that exception from coverage (see, Guberman v. William Penn Life Ins. Co., 146 A.D.2d 8, 12, 538 N.Y.S.2d 571).

We turn now to the exception for "[r]ights of tenants or persons in possession." The plaintiffs urge that the purpose of this exception is to insulate the insurer from the expense of evicting tenants or others "in possession" whose rights arose through the prior owner. The plaintiffs point out that here, however, Robert Barbieri was that owner and Commonwealth had "guaranteed" that their title was superior to his. Since his right of possession arose solely from his ownership, which was evident in the chain of title, the plaintiffs assert that his claim was covered by the policy.

Commonwealth contends that the insureds lost their right to pursue any claim for damages under the policy of insurance when they accepted a refund of the full purchase price from the mortgagee. It bases this contention on the fact that, after the plaintiffs intervened in the foreclosure action, they sought only a refund from the mortgagee, and nothing at all from Barbieri, the party whose motion threatened their title. Commonwealth claims that the plaintiffs could have asked the court to fashion a remedy pursuant to CPLR 5015(d) and 5523, enabling them to recoup the fair market value of the property, and, because they made no such application, the court was unable to grant that relief. This omission, argues Commonwealth, triggers the application of another exclusion, which reads as follows: "Judgments against the insured or estates, interests, defects, objections, liens or incumbrances created, suffered, assumed or agreed to, by or with the privity of the insured". Commonwealth contends that the plaintiffs' "acquiescence to the judgment" divesting them of title bars a claim against it.

We disagree. In their cross motion the plaintiffs sought, inter alia, dismissal of Robert Barbieri's motion or a hearing to challenge the assertion that he never had been served with process. That is not "acquiescence," as Commonwealth puts it. The request for a refund was for alternative relief only in the event Barbieri's application was granted. We therefore conclude that the insured never acquiesced or agreed to the vacatur of the foreclosure judgment, and the plaintiffs could turn to Commonwealth for loss of their bargain (see, Smirlock Realty Corp. v. Title Guar. Co., 97 A.D.2d 208, 469 N.Y.S.2d 415).

As to the exclusion for the "rights of tenants or persons in possession" itself, Commonwealth simply relies on the stipulated fact that Robert Barbieri was "in possession" at the time of issuance of the policy, and contends that coverage therefore can be denied under the exception. There is no New York authority interpreting such an exception, and we thus turn to the decisions of courts in other jurisdictions which have been confronted with a similar problem.

In an oft-cited Florida case the court described the purpose of an exception for "the rights or claims of parties other than the insured in actual possession of any or all of the property" as follows:

"The rationale for including an actual possession exclusion in a title insurance policy stems from the fact that possession of the land is notice of an interest in it * * * When a person, who does not appear in the chain of title, is found in possession of property it may indicate, for example, that he is making claim to the property by adverse possession, or that he is claiming under an unrecorded deed. A title examiner, however, seldom visits the land the title to which he is concerned with * * * Thus, both to protect themselves and to put their client on notice of this state of affairs, title examiners and title insurance companies generally exclude from their title...