Herbert Barstad et al. v. Pacific Northwest Title Insurance Co Inc et al.

Presented here is a class of insured individuals who claim
that title insurance companies should have made certain disclosures to them
in preliminary commitments for title insurance. Specifically, these
insureds claim that the companies should have disclosed that the parcels of
land securing the loans had not been divided from larger tracts, that a
senior lien existed on two of the lots, and that loan proceeds were being
used to satisfy the senior lien. The title insurance companies contend
that they had no such disclosure obligations. We agree with the title
companies and hold that title insurance companies have no general duty to
disclose potential or known title defects in preliminary title commitments.

FACTS

Properties Four, Inc., a real estate investment company, owned two
undeveloped tracts of land in Washington, one in Maytown and the other in
Lacey. The Maytown tract consisted of one contiguous 68-acre plot of land
while the Lacey property was comprised of four 40-acre lots. To finance
development of the lots, Properties Four arranged for Sentinel Properties,
Inc., d/b/a Evergreen Services (Evergreen) to serve as a loan broker and to
bundle investment loans. Evergreen or its predecessor, Consumer Loan
Services of Lynnwood a/k/a Commercial Loan of Lynnwood (CLS), recruited
loan participants through networks of friends and families and 'free meal
deals' where a potential investor would receive a free buffet dinner if he
or she attended a loan presentation. Between August 1994 and January 1996
Evergreen facilitated loans from approximately 400 individuals.1
Evergreen and its principles would then package a series of loans with 8 to
20 participatory interests each. Investors were assigned a percentage of
the loan, with an average loan ranging from $5,000 to $25,000. When
Evergreen achieved $200,000 by combining the individual loans, it would
make a new loan to Properties Four. Approximately 8 such loans were
secured for the Maytown property ($1.6 million) and 23 for the Lacey
property ($4.6 million) for a total of 31 loans.

Properties Four and its president, Thomas Hazelrigg, subsequently issued a
promissory note to each loan participant. Properties Four also secured the
loans by granting a deed of trust on a smaller parcel of land within each
larger tract. The larger tracts had not been subdivided into smaller
parcels when the loans were secured. When the investors' loans were
secured, the Maytown property was unencumbered. However, lots 2 and 3 of
the Lacey property already possessed liens on behalf of Pacific Coast
Investment Company, a prior lender.

To insure the loans, a Properties Four broker, Larry Landin, requested
title insurance commitments for the loans. Stewart Title Guaranty Company,
Inc. (STG) ultimately issued 29 of the 31 insurance policies to the
investors and Pacific Northwest Title Insurance Company, Inc. (PNTIC)
issued the remaining two policies. Mike Gilbertson, STG's regional
underwriter, arranged and supervised both the preliminary commitments for
the insurance and the final insurance policies.

Because the real estate was situated in Thurston County, Gilbertson
contacted STG's licensed agent in Thurston County, petitioner Thurston
County Title Company, Inc. (TCT). TCT agreed to examine the title records
and prepare a list of exceptions for inclusion in the preliminary
commitment for the insurance policies and to prepare the commitment and the
final title policy with the underwriter's approval. Because TCT did not
agree to perform all of the typical agent functions, Gilbertson employed
STG's Seattle agent, petitioner Pacific Northwest Title Insurance Co. f/k/a
Stewart Title Company of Washington, Inc.2 (PNW), to provide additional
support.3 TCT forwarded the completed preliminary commitments to PNW who
then entered the information into their computer system, repackaged the
commitments in STG jackets and distributed them to Evergreen.4 PNW also
collected the premiums for the title work and reimbursed TCT for its
efforts.

PNW was aware that Pacific Coast's senior liens were supposed to be
subordinated or discharged and had not been. Nevertheless, the preliminary
commitments and title insurance policies listed these existing liens.5 The
insureds assert that Evergreen intended to use the loan proceeds to satisfy
the senior debts to ensure that the investors would have first priority.
To accomplish this objective, the investors' loans were first used to
fulfill Property Four's senior debt obligations on the two Lacey lots. STG
planned to issue the policies at an unspecified future date when the eight
loans on the Lacey lots were closed and the senior debt satisfied. The
investors were unaware of this use of the loan proceeds.

In early 1996, Properties Four defaulted on the loans. The investors
accepted a deed in lieu of foreclosure on the Maytown property and they
successfully foreclosed on lot 1 of the Lacey property, resulting in $1.358
million in proceeds. These proceeds did not cover the entire amount of the
loans, however, and Pacific Coast still possessed senior liens on Lacey
lots 2 and 3. The liens on the Lacey lots were assigned to a third party
who foreclosed ahead of the investors. The investors who were successful
in foreclosing and selling collateral sued for the difference between the
amount of their loans and the amount recovered from selling the property.

PROCEDURAL HISTORY

In December 1997, the investors filed a class action lawsuit claiming
negligent or intentional misrepresentation, violation of Washington
securities law, chapter 21.20 RCW, and declaratory relief for coverage
under the title insurance policy. The plaintiffs later added claims for
violation of Washington's racketeering statute, chapter 9A.82 RCW,
violation of federal racketeering law, 18 U.S.C. sec. 1962, breach of
fiduciary duty, violation of the Consumer Protection Act (CPA), chapter
19.86 RCW, and conspiracy. The original complaint named as defendants
Properties Four and its owner, Thomas Hazelrigg, Evergreen and its owners,
Dennis and Katherine Johnson, STG, and selected real estate appraisers.
The plaintiffs later added PNTIC, PNW and TCT. The plaintiffs settled with
STG and either settled, dismissed or decided not to proceed against all
other parties except PNW and TCT.

Both sides filed motions for summary judgment. The trial court granted the
title companies' motion to dismiss the insureds' claims for breach of
fiduciary duty, violation of securities law, violation of Washington's
racketeering statute and violation of the federal racketeering statute.
The court partially dismissed the misrepresentation claims and the parties
later stipulated to their complete dismissal. The trial court denied the
title companies' motion to dismiss the CPA and civil conspiracy claims,
stating:

{I}t is expressly determined that even though there is no Washington case
which has imposed a duty upon title insurers to disclose, the Court is of
the view that the Washington Supreme Court would impose a duty on title
insurers in the context of issuing preliminary commitments to disclose
material defects in title of record and known defects not of record,
including a duty upon these Defendants to disclose in preliminary
commitments (a) the risks relating to lack of platting and subdivision of
the collateral given in connection with the Lacey and Maytown loans; (b)
the alleged division of loan proceeds in connection with the Lacey lots 2
and 3 loans; and (c) the potential lien priority conflict among the
Plaintiff-Lenders on the Lacey lots 2 and 3 loans.{6}

The trial court stayed the trial date pending appellate review of the
summary judgment order. The parties stipulated and the trial court ordered
that '{i}f the appellate court finds that the duty to disclose imposed by
the trial court does not exist, Plaintiffs will be unable to prove all
necessary elements of their negligent misrepresentation, CPA violation and
conspiracy claims.'7 The petitioners then filed a motion for discretionary
review to determine whether this court would impose such a duty.

ANALYSIS

On four separate occasions this court has been asked to decide whether
title insurance companies possess a general duty to search and disclose
potential title defects when issuing preliminary commitments for title
insurance and four times we have declined to directly decide this issue,
basing our opinions on other grounds. See Shotwell v. Transamerica Title
Ins. Co., 91 Wn.2d 161, 588 P.2d 208 (1978) (holding exclusionary language
in insurance policy should be interpreted in manner most favorable for
insured and as would be understood by average person purchasing insurance);
Transamerica Title Ins. Co. v. Johnson, 103 Wn.2d 409, 693 P.2d 697 (1985)
(holding only insured may bring action for CPA violation); Klickman v.
Title Guar. Co. of Lewis County, 105 Wn.2d 526, 716 P.2d 840 (1986)
(holding lien on proceeds from sale of property does not affect title and
is not encumbrance); Lombardo v. Pierson, 121 Wn.2d 577, 852 P.2d 308
(1993) (holding document disclosing continuing obligation to pay irrigation
assessments was not expressly excepted from title insurance policy and
title insurance company did not have duty to disclose such information).

We now address the question directly and respond in the negative.
RCW 48.29.010
Subsequent to the decisions in the four previous cases, the Legislature
amended the definition section of chapter 48.29 RCW, which sets forth the
general duties of title insurers, clarifying the distinctions between a
title policy, an abstract of title, and a preliminary report, binder or
commitment.8 In distinguishing between a preliminary commitment and an
abstract of title, the Legislature also clarified some of the
responsibilities associated with each form. The insureds ask this court to
decide that a preliminary commitment serves essentially the same purpose as
an abstract of title. Such a conclusion would be contrary to the clear
language of RCW 48.29.010.

As defined, a preliminary commitment is a statement submitted to the
potential insured establishing the terms and conditions upon which the
title insurer is willing to issue a title policy. See RCW 48.29.010(3)(c).
The statement is merely an offer to issue the title insurance subject to
the stated conditions. Id. Significantly, the Legislature clearly
established that a preliminary commitment is not a representation of the
condition of title, but a 'statement of terms and conditions upon which the
issuer is willing to issue its title policy, if such offer is accepted.'
RCW 48.29.010(3)(c). Furthermore the statute explicitly states that
'reports are not abstracts of title, nor are any of the rights, duties, or
responsibilities applicable to the preparation and issuance of an abstract
of title applicable to the issuance of any report.' Id.
An abstract of title, on the other hand, is a 'written representation,
provided pursuant to contract . . . intended to be relied upon by the
person who has contracted for the receipt of such representation.' RCW
48.29.010(3)(b). Unlike a preliminary commitment, an abstract of title
lists all recorded conveyances, instruments, or documents that impact the
chain of title. Id. The definition further establishes that the abstract
of title imparts 'constructive notice with respect to the chain of title to
the real property described.' Id. The preliminary commitment does not
serve this same purpose.

The amended statute thus resolves the obligations associated with a
preliminary commitment and an abstract of title. However, the statute was
amended at least one year after the insurance agents here issued their
preliminary commitments, though several months before the class filed this
action.

Retroactive Application

A statutory amendment will be applied retroactively, if constitutionally
permissible under the circumstances, when it is (1) intended by the
Legislature to apply retroactively, (2) curative in that it clarifies or
technically corrects ambiguous statutory language, or (3) remedial in
nature. McGee Guest Home, Inc. v. Dep't of Soc. & Health Servs., 142 Wn.2d
316, 324-35, 12 P.3d 144 (2000) (citing State v. Cruz, 139 Wn.2d 186, 191,
985 P.2d 384 (1999)). The court may turn to the statute's purpose and
language,9 legislative history,10 and legislative bill reports to analyze
retroactivity.11 An amendment is curative and remedial if it clarifies or
technically corrects an ambiguous statute without changing prior case law
constructions of the statute. In re Pers. Restraint of Matteson, 142
Wn.2d 298, 308, 12 P.3d 585 (2000). Thus ''{s}ubsequent enactments that
only clarify an earlier statute can be applied retrospectively.'' Id. at
307 (quoting State v. Dunaway, 109 Wn.2d 207, 216 n.6, 743 P.2d 1237, 749
P.2d 160 (1987) (citing Johnson v. Morris, 87 Wn.2d 922, 925, 557 P.2d 1299
(1976); Marine Power & Equip. Co. v. Human Rights Comm'n Hearing Tribunal,
39 Wn. App. 609, 614, 694 P.2d 697 (1985))). This court generally
disfavors retroactive application of a statute.12
The Legislature's amendment to RCW 48.29.010 represents a statutory
clarification analogous to those retroactively applied in McGee and
Matteson. As the legislative history for RCW 48.29.010 indicates, the
amendment was intended to clarify the differences between an abstract of
title, a title policy, and a preliminary title report, commitment, or
binder. See Final B. Rep. (HB 1452), 55th Leg., Reg. Sess. 1 (Wash. July
27, 1997) ('The differences between an abstract of title, a title policy,
and a preliminary title report, commitment, or binder are clarified.').
Uncontroverted testimony in the Senate and the House lends additional
support to this stated intent. See S.B. Rep. (HB 1452), 55th Leg., Reg.
Sess. 2 (Wash. July 27, 1997) ('Abstracts are harder to create and to read,
and abstracts do not provide insurance. In designing and purchasing title
insurance products, consumers must know they are purchasing title insurance
and not an abstract of title.'); H.B. Rep. (HB 1452), 55th Leg., Reg. Sess.
2 (Wash. July 27, 1997) ('This bill clarifies differences between an
abstract of title and title insurance.').

The McGee court recognized that '{w}e often apply amendments retroactively
'where an amendment is enacted during a controversy regarding the meaning
of the law.'' McGee, 142 Wn.2d at 325 (quoting Tomlinson v. Clarke, 118
Wn.2d 498, 511, 825 P.2d 706 (1992)). Additionally, '{t}he Legislature's
intent to clarify a statute is manifested by its adoption of the amendment
QSsoon after controversies arose as to the interpretation of the original
act{.}''' McGee, 142 Wn.2d at 325 (quoting Johnson v. Cont'l W., Inc., 99
Wn.2d 555, 559, 663 P.2d 482 (1983) (quoting 1A C. Dallas Sands, Statutory
Construction sec. 22.31 (4th ed. 1972))). Testimony in the Senate supports
such an intention as to RCW 48.29.010. S.B. Rep. (HB 1452) at 2 ('{t}he
lack of clear definitions in this statute has caused some litigation, and
we want to avoid this litigation'). The Senate's recognition of past
litigation and the likelihood of future litigation, resulting from
confusion about the distinctions between an abstract of title and a
preliminary commitment, support a conclusion that retroactive application
is appropriate.

The insureds cite State v. T.K., 139 Wn.2d 320, 987 P.2d 63 (1999), to
support prospective application of RCW 48.29.010. Combining T.K. with
McGee, they contend that a court should not apply an amendment
retroactively when it impacts substantive rights. While T.K. and McGee
generally support this proposition, the amendments to RCW 48.29.010 do not
appear to be substantive changes in the law. An examination of T.K. helps
illustrate this point.

T.K. involved an amalgamation of three representative cases where the
defendants had sought to seal their respective juvenile records. T.K., 139
Wn.2d at 323-25. Prior to its amendment, the relevant statute permitted
juvenile offenders to petition the court to vacate disposition orders and
to permanently seal juvenile court files two years after discharge from
state agency supervision. Id. All three of the defendants in T.K. had met
this two-year period preceding the statute's amendment. Id. In 1997, the
Legislature amended RCW 13.50.050 requiring sealing only after the
petitioner had spent 10 consecutive years in the community without
committing additional offenses for a Class B felony and after 5 years for a
Class C felony. Id. The amendment thus substantively changed the law from
a 2-year waiting period, to either 5 or 10 years, depending on the level of
the crime.13

In contrast, the amendment to the title insurance statute does not
substantively change the law.14 Rather, it appears to simply confirm
industry practice as well as to clarify legislative intent. For example,
the Washington Real Property Deskbook from 1996 states with regard to title
insurance that the commitment is not a report on the status of title to the
property. 3 Wash. State Bar Ass'n, Washington Real Property Deskbook sec.
39.10, at 39-14 (3d ed. 1996). 'Rather it provides assurance that upon
closing, a policy or policies will be issued subject only to those
exceptions agreed upon or as permitted by the proposed insured.' Id. The
Washington Practice has also noted that:

Title insurers roundly deny they have the abstracter's duty. They
argue that the preliminary commitment merely discloses what the policy will
and will not cover, that their only legal obligation is to pay for losses
under the policy, and that an insured has no reasonable expectation of
anything more.

18 William B. Stoebuck, Washington Practice: Real Estate-Transactions sec.
13.18, at 147 (1995). Furthermore, the Washington Land Title Association
(WLTA)15 asserts that a ruling finding a disclosure duty 'would disrupt the
manner in which the title industry has done business for decades with
respect to subdivision and other comparable issues.'16

The elements of a preliminary commitment also illustrate that it was not
common industry practice to disclose the same title information generally
included in an abstract of title. According to the Deskbook, a preliminary
commitment will likely include (1) the type of policy or policies to be
issued, (2) the amount of the proposed policy or policies to be issued, (3)
the nature of the title (fee, leasehold, etc.), (4) the current owner of
the title, (5) the legal description of the land, (6) the title defects
that the title company would not be willing to eliminate if the policy were
then being written, and (7) requirements, if any, of the title company.
Deskbook, supra, sec. 39.10, at 39-15. The only element that appears
applicable is item six; however, exclusionary clauses merely represent
aspects of the property that the insurance company will not cover if it
issues a title insurance policy. Id. at 39-20. The exceptions or
exclusions are not intended to indicate known encumbrances or defects of
title.17 Considering the common elements of the commitment and the purpose
of the exclusions, it logically follows that the preliminary commitment is
not intended to disclose recorded or unrecorded defects of title.
As industry practice suggests, title insurance companies conduct the
necessary research to determine the scope of the policy that they will
offer to the potential insured. Deskbook, supra, sec. 39.8, at 39-12
('This search is for the benefit of the title insurer, not the insured.').
Furthermore, this court has recognized that to require the title insurance
companies to disclose this information may constitute a significant change
in the law. Johnson, 103 Wn.2d at 413. Therefore, industry practice
further supports the proposition that because a duty did not exist, such a
clarification would not substantively change the law and retroactive
application of RCW 48.29.010 is appropriate in this case.

Other Ninth Circuit States

In applying RCW 48.29.010 retroactively, we side with the narrow majority
of state courts in the Ninth Circuit that have held that title insurance
companies have no general disclosure duty in preliminary commitments.
Among Ninth Circuit states, California,18 Oregon,19 Idaho20 and Nevada,21 have
all held that there is no general duty to disclose title defects in
preliminary commitments. See generally 3 Baxter Dunaway, The Law of
Distressed Real Estate: Foreclosure, Workouts, Procedures App. 27B-D
(2001); and Jay M. Zitter, Title Insurer's Negligent Failure to Discover
and Disclose Defect as Basis for Liability in Tort, 19 A.L.R.5th 786 (1994
& Supp. 2000). Of these states California is notable because it enacted a
statute similar to RCW 48.29.010 clarifying the duties associated with
preliminary commitments. See Cal. Ins. Code sec. 12340.10-11 (West 1988).
The California statute clarified the duties associated with an abstractor
as contrasted with a title insurer who issues a preliminary report. See
Herbert A. Crocker & Co. v. Transamerica Title Ins. Co, 27 Cal. App. 4th
1722, 33 Cal. Rptr. 2d 313, review denied (Oct. 26, 1994). Many states
outside the Ninth Circuit have also held that an insurance company does not
have a general duty to disclose. See generally Dunaway, supra, App. 27B-D;
Zitter, supra, 19 A.L.R.5th 786.

Fiduciary Duty

Independent from the applicability of RCW 48.29.010 and other state courts'
decisions, the insureds argue that the imposition of a general disclosure
duty for preliminary commitments is supported by two cases from the
liability insurance context, Tank v. State Farm Fire & Cas. Co., 105 Wn.2d
381, 715 P.2d 1133
(1986); Van Noy v. State Farm Mut. Auto. Ins. Co., 142 Wn.2d 784, 16 P.3d
574 (2001). Both Tank and Van Noy are distinguishable and we decline to
extend their general principles to the case presented.

Tank involved the duty to defend an insured when the insurance company
accepts defense under a reservation of rights. Favorably citing other
'defense' cases, the Tank court noted that 'an insurer owes the same duty
of good faith to its insured, regardless of the type of defense it has
undertaken.' Tank, 105 Wn.2d at 387. In Tank we reasoned that the
potential conflict of interest in this type of defense mandates a higher
standard of care. Id. Additionally, we stated 'an insurance company's
duty of good faith rises to an even higher level than that of honesty and
lawfulness of purpose toward its policyholders: an insurer must deal fairly
with an insured, giving equal consideration in all matters to the insured's
interests.' Id. at 386. In Tank we addressed a specialized area in the
insurance industry, defense under a reservation of rights. We determined
that because of the potential conflict of interest in this particular area,
it warranted a heightened good faith obligation. Id. at 387. Because this
case does not present such an inherent conflict of interest, Tank is
distinguishable and we refrain from extending its general principles.

Van Noy involved an insurance company's retroactive denial of personal
injury protection coverage more than a month after receiving notice of the
insureds' claims and after the insureds had already begun treatment for
their injuries. Van Noy, 142 Wn.2d at 785. We held that the insurers had
a quasi-fiduciary duty to deal fairly with the insureds and to give equal
consideration to their interests in all matters. Id. at 793. We
determined that even though the appellate court's decision referred to the
duty as an 'enhanced fiduciary obligation,' the use of that terminology was
not intended to impose a novel fiduciary duty on the insurer. Id. at 794.
Thus, we did not impose a new duty in Van Noy and the relationship between
an insured and insurer in the context of a preliminary commitment for title
insurance does not warrant applying an enhanced fiduciary duty now.
The insureds also rely on RCW 48.01.03022 as a conduit to impose an enhanced
fiduciary duty in these circumstances. RCW 48.01.030 holds persons in the
insurance industry to a good faith standard and has been frequently applied
when an insurer denies claim coverage or acts unreasonably when processing
a claim. See generally Gingrich v. Unigard Sec. Ins. Co., 57 Wn. App. 424,
788 P.2d 1096 (1990); Safeco Ins. Co. of Am. v. JMG Rest., Inc., 37 Wn.
App. 1, 680 P.2d 409 (1984). We have interpreted 'bad faith,' potentially
in violation of RCW 48.01.030, as an act that is unreasonable, frivolous or
unfounded. Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 560, 951 P.2d 1124
(1998). In this case, the title insurance companies had reason to believe
that Evergreen, acting as the investors registered agent, would disclose
the information they provided to Evergreen to the investors. Additionally,
industry practice supported the title insurance companies' belief that the
information would be disclosed elsewhere, such as in an abstract of title.
Because the title insurance companies had a well-founded, reasonable basis
for not including this information in their preliminary commitments,
therefore, we cannot find that RCW 48.01.030 has been violated.

Viewing RCW 48.29.010 as curative and intended by the Legislature to apply
retroactively, we now apply it retroactively and refuse to impose a general
disclosure duty in preliminary commitments on title insurance companies.
Accordingly we reverse the trial court's partial denial of summary
judgment. The insureds' request for attorney fees pursuant to RCW
19.86.090 and RAP 18.1 is denied.

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