The recent decision in Lawyers Title Ins. Corp. v. MHD Corp., 2010 WL 4157301 (Ohio Ct. App. Oct. 22, 2010), addressed whether a title insurer was subrogated to the rights of its insured against a seller where the insurer's negligent title search failed to report a properly recorded encumbrance on the property. The court ruled the title insurer was not entitled to subrogation.
In November 1991, MHD Corporation ("MHD") purchased 12.74 acres of real property from S&S Realty, Inc. ("S&S") pursuant to a warranty deed that contained a right of first refusal on the premises retained by S&S. Lawyers Title Insurance Corporation ("Lawyers Title") acted as the escrow agent and title agent for the sale and, in such capacity, it recorded the warranty deed and issued a title guaranty. The title guaranty did not list the right of first refusal retained by S&S.
In September 2000, MHD conveyed a parcel of the 12.74 acres to Helen Schoen ("Schoen"). Lawyers Title was hired to conduct a title examination, and it subsequently issued a policy of title insurance to Schoen ("Policy"). The Policy did not list the right of first refusal in favor of S&S as a restriction, lien, encumbrance or defect in title to the parcel transferred to Schoen.
On December 8, 2000, S&S filed a lawsuit against MHD and Schoen alleging a violation of S&S's first refusal right pursuant to the 1991 deed. Pursuant to the Policy, Lawyers Title settled the S&S litigation by paying $230,000 to S&S in exchange for a release of all claims against Schoen. Lawyers Title also paid Schoen $78,000 in consideration for Schoen dismissing her cross-claim against MHD without prejudice.
Following the settlement payments, Lawyers Title filed an action against MHD for subrogation pursuant to a provision in the Policy which stated: "Whenever [Lawyers Title] shall have settled and paid a claim under this policy, all right of subrogation shall vest in [Lawyers Title] unaffected by any act of the insured claimant." MHD moved for summary judgment, arguing that Lawyers Title was not entitled to subrogation due to its negligence. The trial court granted MHD's motion for summary judgment.
The Ohio Court of Appeals affirmed summary judgment in favor of MHD. The court ruled that Lawyers Title was not entitled to conventional subrogation under the Policy because "Lawyers Title's loss was precipitated by its own negligent actions in failing to apprise its insured [Schoen] of potential restrictions, encumbrances or defects which were publicly and properly recorded in the . . . records." The court adopted the factual finding of the trial court that Lawyers Title possessed constructive knowledge of the existence of the S&S right of first refusal due to the recordation of the 1991 deed in the public records, and actual knowledge of the S&S right of first refusal, as it was in possession of a copy of the 1991 deed when the property was transferred to Schoen in 2000. The appeals court found that "[t]he trial court properly distinguished between Lawyers Title's general entitlement to the doctrine of subrogation and its more specific right to recovery under the doctrine in light of its own negligent action in this matter." As such, the court held that "[w]here an imperfect title search has been performed and relied upon by a lender, equity will not reward such negligence by applying the doctrine of subrogation in favor of the negligent party."
The court found unpersuasive Lawyers Title's argument that if equities were to be considered, Lawyers Title is entitled to subrogation because its failure to discover the right of first refusal was a "simple mistake." The court noted that "equitable subrogation" has been applied to provide relief against mistakes but only to benefit a party injured by the mistake of a negligent party, not in favor of the negligent party itself.
This decision by the Sixth District of Ohio's Court of Appeals is inconsistent with an earlier ruling issued by the Eighth District, Midland Title Security, Inc. v. Carlson, 872 N.E.2d 968 (Ohio Ct. App. 2007), in which that court held the negligence of a title insurer did not bar the insurer from asserting a contractual right to subrogation. In that case, Midland Title, the escrow agent and title insurer, issued the proceeds of the sale directly to the sellers rather than the mortgagee. The seller cashed the check but ultimately defaulted on the mortgage, and the mortgagee initiated foreclosure proceedings against the property. Midland Title bought the note from the mortgagee to prevent foreclosure.
After buying the note, Midland Title filed suit against the seller, alleging it was the subrogee of the buyer under the terms of the title insurance policy. The trial court agreed with the seller that Midland Title's negligence in issuing the closing check to the sellers precluded it from asserting subrogation and entered judgment in favor of the seller. The appellate court reversed, holding that Midland Title had a contractual right to subrogation and "[e]quitable defenses are not available to challenge conventional subrogation." The opinion in Lawyers Title does not cite or refer to Midland Title.
This conflict within the intermediate appellate courts in Ohio is mirrored nationwide. In USLife Title Ins. Co. of Dallas v. Romero, 652 P.2d 249, 253 (N.M. Ct. App. 1982), the court held the title insurer's negligence barred conventional subrogation. In that case, the court ruled the insurer was not subrogated to an insured's claims for breach of warranty of title after paying a federal tax lien because the insurer failed to exempt the properly recorded tax lien from the coverage provided under the policy. However, the Supreme Court of Arkansas has ruled, consistent with Midland Title, that a title insurer's negligence does not bar conventional subrogation. Welch Foods, Inc. v. Chicago Title Ins. Co., 17 S.W.3d 467, 471 (Ark. 2000) ("[W]here the insurer is exercising express contractual rights of subrogation in a claim against one other than its insured and against one to which it owed no legal duty, or who demonstrated no reliance, equitable defenses are unavailing."). The Court of Appeals of Georgia has gone so far as to rule that a title insurer's negligence does not preclude it from asserting a right to equitable or legal subrogation where the policy does not expressly provide a right of subrogation. Wilkinson Homes, Inc. v. Stewart Title Guar. Co., 610 S.E.2d 187, 192 (Ga. App. 2005) (holding that "despite the alleged negligence of [the insurer's] agent" and "[e]ven assuming that the short form of the policy does not provide Stewart Title any contractual right to recover for breach of warranty, the doctrine of equitable subrogation applies here." )
In Lawyers Title, the court did not agree that the equities entitled Lawyers Title to subrogation because it made a "simple mistake," but other jurisdictions have found that argument persuasive. In Castleman Constr. Co. v. Pennington, 432 S.W.2d 669, 676 (Tenn. 1968), the Supreme Court of Tennessee held that "regardless of the source of the right of subrogation [i.e., conventional or equitable], the right will only be enforced in favor of a meritorious claim and after a balancing of the equities." The court ruled that the equities balanced in favor of the title insurer, although it failed to identify two defects in title, because "ordinary negligence alone will not be held as a complete bar to subrogation where in spite of such negligence the equities are still in favor of the subrogee."
Castleman can be reconciled with Lawyers Title and USLife. In Castleman and USLife, the title insurers committed "ordinary negligence" by failing to discover and exempt title defects in the public records. The court in Lawyers Title found that the title insurer had actual knowledge of the right of first refusal, which presumably is a more egregious error than "ordinary negligence."
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