WRONGFUL FORECLOSURE


WRONGFUL FORECLOSURE/CLAIMS/SLANDER OF TITLE/ PUNITIVE DAMAGES

A California trial court has awarded more than $11.3 million to developers damaged by a title insurer’s attempt to foreclose “void” deeds of trust. This includes punitive damages of $10 million, to punish the insurer for what the court calls “sharp practices.”

The case is Holly Bass v. Laurel Homes Associates-II; Riverside County Superior Court Case No. 225236. Based on court records, here’s what happened.

Blackmon and Andrews Development Corporation was the general partner for two limited partnerships known as Laurel Homes Associates-II and Sunset Ranch. During 1982-83, Laurel Homes and Sunset Ranch acquired land in Moreno Valley, Riverside County, CA, for development as residential subdivisions.

The record is murky as to how this happened, but between 1985 and 1987 it appears that an individual or individuals who did not have legal authority gave several deeds of trust against the Laurel Homes and Sunset Ranch subdivisions. These deeds of trust were patently defective, in the sense that the names of the individuals and entities involved were, in the court’s words, “legal strangers to the title of the property encumbered.” The deeds of trust purported to secure repayment of about $2 million.

Around 1988, the holders of the deeds of trust arranged to sell them to three investors at a big discount. The wary investors requested title insurance from Fidelity National Title Insurance Company to cover the purchases. At the time, there was a lawsuit pending in Orange County, CA, which challenged the validity and enforceability of the deeds of trust. At least two of the three investors was aware of the lawsuit, as was Fidelity. Nevertheless, Fidelity agreed to insure the purchase and assignments–taking separate indemnity agreements from the sellers.

Predictably, the three insureds soon became involved in disputes over validity of their deeds of trust. They made claims and, after an investigation, Fidelity paid the insureds a total of $720,000 to purchase and take assignments of the insured deeds of trust.

In the meantime, Laurel Homes and Sunset Ranch were busily selling new homes. The primary title insurer for the new home sales was Old Republic Title Insurance Company. Old Republic was well aware of the disputed deeds of trust, which by now covered several hundred residential lots, but issued its commitments and title policies to new homeowners without any exception or other disclosure of their existence. This underwriting decision appears to have been based on an assessment of the validity of the disputed deeds of trust, and a bond purchased by Blackmon and Andrews to indemnify Old Republic.

By July 1992, validity of the deeds of trust had been litigated twice. In the first case, a Bankruptcy Court held the deeds of trust were unauthorized and void ab initio. In the second case, a trial court in Orange County, CA, reached the same result. Fidelity was not a party in the Bankruptcy Court proceeding, but was a party in the Orange County action where, oddly enough, the court issued a judgment in favor of Fidelity–in spite of the same court’s finding that the disputed deeds of trust were void. The reason for this is unclear, but the judge in the Riverside case writes (in his Decision) that the Orange County judgment for Fidelity was “on procedural grounds.”

Within days of the Orange County judgment, Fidelity filed and mailed notices of default commencing non-judicial foreclosures against more than 150 homeowners in the Laurel Homes and Sunset Ranch subdivisions.

Fidelity’s bold recoupment effort panicked the homeowners, even though they were covered by title policies issued by Old Republic. It must be assumed Old Republic promptly agreed to provide legal representation for the homeowners.

Soon, more than 150 homeowners joined in a lawsuit to enjoin the foreclosures by Fidelity, and to recover damages. This was followed by a second lawsuit, in which 58 homeowners (35 properties) filed suit against all the developers and title companies involved in their home purchases, claiming that defendants wrongfully participated in a scheme to sell them homes without disclosing the existence of pending disputes over the unauthorized deeds of trust, and the potential for litigation involving their properties. Plaintiff homeowners also claimed that the threat of foreclosure now rendered their properties unmarketable.

The first lawsuit was settled by April 1994, with Fidelity agreeing not to foreclose and paying $80,000 to the plaintiff homeowners. The second lawsuit, the Bass case (and the subject of this posting), didn’t go so well. In it, the developers and title companies sued Fidelity for indemnity and damages, on grounds of slander of title, libel, and interference with contractual relations.

The second lawsuit was tried in two phases. In the first phase, the trial court held that the deeds of trust were not enforceable by virtue of Fidelity’s (or its insureds’) status as a bona fide encumbrancer, and that the deeds of trust were not entitled to a statutory conclusive presumption of enforceability (California Corporations Code section 15010.5, for the morbidly curious).

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