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Washington Supreme Court: No Cause of Action for Negligent Recording for Third Parties
Slade Smith
   

The Washington Supreme Court has held that a title company cannot be liable for negligent recording of a document to a plaintiff who was not a party to the document, in a case where a title company recorded an unauthorized second mortgage that facially violated a term in the first mortgage that it had also recorded.

In the case, a business bought a tract of real estate, financed by a loan secured by a first mortgage on the property. As a condition for the loan, the business agreed that it would not further encumber the property without written approval of the lender, and also agreed that violation of this term would constitute a default on the terms of the loan. Chicago Title did the title work for the transaction, handled the escrow, and closed the transaction, and in the course of its duties received copies of all the documents prohibiting junior liens on the property without written approval. In other words, Chicago Title had in its possession information that would lead it to know that if additional liens were recorded on the property without the approval of the existing lender, it would be a problem.

Nonetheless, Chicago Title later handled a second transaction on the property, in which one of the owners of the business, allegedly without authorization he needed from the other owners, signed a second mortgage on the property. At the instruction of the lender in that transaction, Chicago Title recorded the junior lien even though as part of the transaction, it once again received copies of the documents from the closing of the first mortgage, which prohibited second liens on the property without prior written approval of the first mortgage lender.

When the first mortgage lender learned that a second mortgage had been recorded on the property, it contacted the business and informed it that it was in default, and then foreclosed, as it was permitted to do under the terms of its mortgage in the event of a default. The business tried to refinance the first mortgage to avoid foreclosure, but other potential lenders backed out when they learned of the unauthorized second mortgage. Eventually, the business filed for bankruptcy.

The owners who hadn’t been involved in the second mortgage transaction sued Chicago Title through the business, claiming that Chicago Title was negligent in recording the second mortgage in violation of the terms of the first mortgage loan. The complaint alleges that Chicago title knew that filing the second mortgage was an act that constituted a default on the first mortgage, and Chicago Title had a duty of care to the business not to harm the business by recording it.

Chicago Title admitted that it knew about the terms of the first mortgage and recorded the second mortgage which violated those terms. But Chicago Title argued that it owed no duty of care to the business in the second mortgage transaction since, according to the business itself, the second mortgage transaction was unauthorized and the business was thus not actually a party to the transaction for which the second mortgage was recorded. Since it owed no duty of care to the business, it could not be held liable for negligence by the business, Chicago Title argued.

The 9th Circuit Federal Court of Appeals was required to decide the issue based on Washington State Law, but couldn’t find any precedent in the state’s law. In fact, in all 50 states, the court could only find two cases on the issue. In a California case, the court ruled that a title company could owe a duty to a third party for negligently recording a a document; in an Arizona case, the court found that the title company owed no duty of care to third parties in recording a document.

The court also looked at the legal duties of other types of professionals, such as architects and accountants, to see what legal duties they owed third parties. The court found that some could be liable for negligence to third parties, such as when an architect provided faulty plans to a construction company and some third party was hurt when the structure failed. But again, the court found nothing definitive.

With nothing to tip the scales one way or the other, the 9th Circuit exercised its option to ask the Washington Supreme Court to answer the question. The Washington Supreme Court provided the answer last week, ruling that a title company does NOT have a duty of care to a third party when recording an instrument. Chicago Title therefore is not liable to the business for negligence, even though it recorded the second mortgage with information that would have been sufficient to put Chicago Title on notice that filing the second mortgage would be a disaster for the business.

The Washington Supreme Court cited several reasons for its decision. First, it noted that in its prior decisions, it had only found that a professional duty of care to third parties existed in three types of circumstances: (1) when the third party was 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 was best able to mitigate the risk of a physical injury. None of these circumstances existed here: the recording of the second mortgage burdened, rather than benefitted, the company by encumbering its property; the recording was not a negligent misrepresentation (or at least the company didn’t even try to argue that it was); and no physical injury had occurred, and the company’s damages were only monetary.

Second, the Court analogized the duty of care to the professional duty of care that attorneys owe to third parties when they represent their clients. The Court noted that attorneys sometimes do owe a duty of care to third parties, but only when the attorney’s actions are intended to benefit the third party.

Third, it examined the duty of care that architects owe to third parties. But it noted that that professional duty of care was based on a public safety concern: we all have a strong interest in having architects take care to build safe buildings for their clients because other people will use the buildings and rely on the safety of those buildings for their own safety. The public interest in making title companies liable to third parties for their recordings is not nearly as strong.

Finally, the court found that only the Arizona case that had been pointed out by the Federal Appeals Court was based on similar facts to the case here. It found the California case, in which the title company was found to be liable to a third party, was distinguishable—for example, the instrument that the title company recorded in that case was facially invalid.



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