Ninth Circuit in Centurion Props. III, LLC v. Chi. Title Ins. Co.

• Decision Date: 14 July 2016
• Docket Number: No. 91932–1,91932–1
• Citation: 186 Wash.2d 58,375 P.3d 651
• Court: Washington Supreme Court
• Parties: Certification from the United States Court of Appeals for the Ninth Circuit in Centurion Properties III, LLC; SMI Group XIV, LLC, Plaintiffs–Appellants, v. Chicago Title Insurance Company, a Nebraska company, Defendant–Appellee.

186 Wash.2d 58

375 P.3d 651

Certification from the United States Court of Appeals for the Ninth Circuit in Centurion Properties III, LLC; SMI Group XIV, LLC, Plaintiffs–Appellants

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

No. 91932–1

Supreme Court of Washington, En Banc.

Filed July 14, 2016

Todd Stuart Fairchild, Peter Scott Ehrlichman, Dorsey & Whitney LLP, 701 5th Avenue Suite 6100, Seattle, WA, 98104–7043, Timothy J. Droske, Steven J. Wells, Dorsey & Whitney, 50 South 6th Street Suite 1500, Minneapolis, MN, 55402, Counsel for Plaintiffs.

Stephen John Sirianni, Ann E. Merryfield, Sirianni Youtz Spoonemore Hamburger, 999 3rd Avenue Suite 3650, Seattle, WA, 98104–4038, Counsel for Defendants.

Matthew J. Segal, Jessica Anne Skelton, Pacifica Law Group LLP, 1191 2nd Avenue Suite 2000, Seattle, WA, 98101–3404, Amicus Curiae on behalf of Washington Land Title Association.

WIGGINS

, J.

¶ 1 The United States Court of Appeals for the Ninth Circuit certified the following question to this court: “Does a title company owe a duty of care to third parties in the recording of legal instruments?” We answer the certified question no and hold that title companies do not owe a duty of care to third parties in the recording of legal instruments. Such a duty is contrary to Washington's policy and precedent, and other duty of care considerations.

FACTS

¶ 2 This certified question arises from a civil action for money damages filed in the United States District Court for the Eastern District of Washington. Plaintiffs Centurion Properties III LLC (CP III) and SMI Group XIV LLC (collectively Plaintiffs) assert that defendant Chicago Title Insurance Company negligently breached its duty of care and caused damages when it recorded unauthorized liens on CP III's property.

¶ 3 Michael Henry, the sole member of SMI, joined with Thomas Hazelrigg to form CP III. They formed CP III in order to purchase property and commercial buildings in Richland, Washington. They further agreed that 90 percent of CP III would be owned by individuals and entities controlled by Hazelrigg and 10 percent would be owned by SMI. Aaron Hazelrigg, through nonparty Centurion Management III LLC, was the managing member of CP III.

¶ 4 To purchase the property, CP III obtained a $70.8 million loan from General Electric Capital Corporation (GECC). The loan was secured by a deed of trust on the property naming GECC as the beneficiary. The deed of trust and two other instruments—the CP III operating agreement and the GECC loan agreement—prohibited the placement of any liens or encumbrances on the property without GECC's approval. Any unauthorized lien or encumbrance would constitute an event of default.

¶ 5 Defendant Chicago Title served as escrow agent, closing agent, and title insurer for the purchase of the property at issue. Chicago Title recorded the GECC deed of trust and is named trustee for GECC's senior lien. Chicago Title, as trustee, also received and reviewed copies of the CP III operating agreement and the GECC loan agreement as part of the transaction.

¶ 6 Following the sale, four liens were placed on the property without GECC's approval. The four unauthorized liens were recorded by Chicago Title; two separate deeds of trust granted by CP III in favor of Centrum Financial Services Inc.; a deed of trust granted by CP III to Trident Investments Inc.; and a memorandum of agreement between CP III and Trident. Two additional liens are not at issue in this case.

¶ 7 Each of these liens was a facially valid instrument: the instruments bore the correct legal description, and they were all signed and notarized through Centurion Management by either Aaron Hazelrigg or Thomas Hazelrigg as director of CP Management on behalf of CP III.¹ Chicago Title initially recorded Centrum Financial's deed of trust in conjunction with issuing a commitment for title insurance. The remaining three recordings were done as accommodations.

¶ 8 Later, GECC obtained a title report and learned of the four (prohibited) liens that Chicago Title recorded. GECC notified CP III that the junior liens were events of default and accelerated the entire unpaid balance of the loan, imposing a default rate of interest, Though CP III attempted to refinance the loan, no lender would refinance it while the prohibited liens remained on CP III's title. GECC moved forward with its foreclosure, forcing CP III to file for bankruptcy.²

¶ 9 Plaintiffs filed a civil action against the Hazelriggs, Centrum Financial, and others, alleging that the named defendants misappropriated funds from CP III, improperly transferred ownership of CP III, and secretly placed liens on CP III's property. These claims sought to (1) enjoin foreclosure of the allegedly unauthorized liens and (2) quiet title by voiding the instruments that created them. Plaintiffs later added a sole complaint against Chicago Title; this complaint asserted that Chicago Title was negligent in recording the prohibited liens and that the resulting defaults caused CP III to incur more than $7.5 million in damages, including $3 million in default interest. The claims against all other parties settled, leaving only the negligence claim against Chicago Title. The district court dismissed this claim on summary judgment, finding that Chicago Title did not owe Plaintiffs a duty of care. Centurion Props. Ill, LLC v. Chi. Title Ins. Co. , No. CV–12–5130–RMP, 2013 WL 3350836 (E.D. Wash. July 3, 2013)

(court order). Plaintiffs appealed, and the Ninth Circuit certified its question to this court. Centurion Props. III, LLC v. Chi. Title Ins. Co. , 793 F.3d 1087 (9th Cir.2015). We accepted review pursuant to RCW 2.60.020.

ANALYSIS

¶ 10 We are asked whether a title insurance company owes a duty of care to third parties in the recording of legal instruments. A duty of care is “ ‘an obligation, to which the law will give recognition and effect, to conform to a particular standard of conduct toward another.’ ” Affil. FM Ins. Co. v. LTK Consulting Servs., Inc. , 170 Wn.2d 442, 449, 243 P.3d 521 (2010)

(internal quotation marks omitted) (quoting Transamerica Title Ins. Co. v. Johnson , 103 Wash.2d 409, 413, 693 P.2d 697 (1985) ). The duty of care question implicates three main issues—the existence of a duty, the measure of that duty, and the scope of that duty. Id. (quoting Dan B. Dobbs, the Law of Torts § 226, at 578 (2000)). “In a negligence action, in determining whether a duty is owed to the plaintiff, a court must not only decide who owes the duty, but also to whom the duty is owed, and what is the nature of the duty owed.” Keller v. City of Spokane , 146 Wash.2d 237, 243, 44 P.3d 845 (2002)

. The existence of a duty and the scope of that duty are questions of law, and both are determined by considering the factors listed below.

¶ 11 We consider logic, common sense, justice, policy, and precedent, as applied to the facts of the case, when determining whether a defendant owes a duty in tort. Affil. FM Ins. Co. , 170 Wash.2d at 449, 243 P.3d 521

. We have long applied these factors when defining “duty,” and they can be traced back for more than 100 years.³ We apply these factors here. We first examine precedent and analyze whether our decisions or the decisions of neighboring jurisdictions support finding a duty here. We next consider whether Washington's policy of protecting the rights of property owners through the title recording system is advanced or frustrated by imposing a legal duty of care. Finally, we consider logic, common sense, and justice. These considerations lead us to conclude that a title insurance company does not owe a duty of care to third parties in the recording of legal instruments.

I. Standard of review

¶ 12 Certified questions from a federal court are questions of law that we review de novo. Gray v. Suttell & Assocs. , 181 Wash.2d 329, 337, 334 P.3d 14 (2014)

. We consider the legal issues not in the abstract but rather based on the certified record provided by the federal court. Id. (citing RCW 2.60.030(2) ). Our ruling is not advisory—pursuant to RCW 2.60.020, our ruling in answer to the certified question resolves actual issues pending in the federal proceeding and will be legal precedent in all future controversies involving the same legal question. Id.

II. Precedent

¶ 13 We first consider precedent. Whether a title insurance company owes a duty of care to third parties in the recording of legal instruments is a question of first impression for this court. However, our precedent firmly supports the conclusion that the answer to this certified question is no.

¶ 14 Our analysis begins by considering the duties owed by title insurance companies in prior cases. We next consider other circumstances that have led us to recognize a professional duty of care. Washington law treats professional duties as discrete duties owed to clients—absent a special relationship, we have extended a professional duty of care to third parties only (1) when the third party is an intended beneficiary, (2) when the third party justifiably relied on a professional's representations under a theory of negligent misrepresentation, or (3) when a professional is best able to mitigate the risk of a physical injury. See, e.g., Stewart Title Guar. Co. v. Sterling Sav. Bank , 178 Wash.2d 561, 567, 311 P.3d 1 (2013)

(no duty to nonclient absent intent to benefit nonclient); ESCA Corp. v. KPMG Peat Marwick , 135 Wash.2d 820, 832, 959 P.2d 651 (1998) (negligent misrepresentation); Affil. FM Ins. Co. , 170 Wash.2d at 545, 242 P.3d 876 (engineer owed a duty of care to third parties who may be harmed by engineer's negligence). Because Plaintiffs do not assert a theory of negligent misrepresentation, our analysis considers our rule limiting duties to third parties who are intended beneficiaries and the rationale extending a duty to professionals able to mitigate the risk of physical injury. We conclude by considering the approaches of Arizona and California, the...