Posting for

     Monday, July 8, 2002

 

     by:  Bert Rush

     brush@firstam.com

 

     INTEGRATION CLAUSE/COVERAGE ISSUES/CLAIMS

 

     Upholding the integration clause of a title insurance policy, the Michigan Supreme Court has held that a title insurer may not defeat an insured's policy claim in reliance on the insured's pre-policy breach of commitment terms.

 

     If this sounds like bad news, read on.

 

     The case is Archambo v. Lawyers Title Insurance Corporation, 646N.W.2d 170 (2002).  Here's what happened.

 

     Clarence G. Archambo III was one of three shareholders of a corporation formed around 1980, and disappearing in 1985.  This corporation failed to pay withholding taxes for 1985 and, as a result, in 1987 the IRS recorded a federal tax lien against each of the former shareholders.

 

     Later, Archambo formed a new company that built a home for one Victoria Bonus.  In 1992, when a dispute arose over Ms. Bonus' ability to pay, Archambo purchased the home from her.

 

     The purchase was handled by Cheboygan Title Company, an agent for Lawyers Title.  Title insurance was ordered both for the purchase money lender and for buyer Archambo.  Archambo would later testify that, at the time, he was not mindful of the 1987 tax lien because he recalled that an IRS agent had told him the lien would only be valid for five years.  So he failed to mention it to anyone.

 

     Of course, the tax lien was still valid.  However, Cheboygan Title failed to find it.  So, Cheboygan Title issued a commitment, closed the transaction, and issued new owner's and loan policies without mention or exception for the lien--which attached to the property as soon as Archambo came into title.

 

     In 1993, Archambo sold the property to Mr. and Mrs. Roberts.  This time, a title search turned up the tax lien.  In order to close the sale, Archambo borrowed money to pay off the IRS.  Then, Archambo filed suit against Lawyers and Cheboygan Title to recover this payment, together with interest on the loan.

 

     At trial, Archambo argued the tax lien was covered by his policy, and not subject to any exception or exclusion from coverage.

 

     In response, the title companies argued that coverage should be denied because Archambo breached the terms of the commitment by failing to disclose the tax lien and, alternatively, that the lien was a matter excluded from coverage under section 3 of the standard "Exclusions From Coverage" contained in the policy.

 

     With respect to the title companies' first argument, this case is unusual because the commitment in question included language not found in ALTA-approved commitment forms (more about this later).  Specifically, the commitment included the following:

 

             "This commitment is delivered and

          accepted upon the understanding that the

          party to be insured has no personal knowledge

          or intimation of any defect, objection, lien or

          encumbrance affecting subject land other than

          these set forth herein and in the title insurance

          application.  Failure to disclose such information

          shall render this commitment and any policy

          issued pursuant hereto, null and void as to such

          defect, objection, lien or encumbrance."

 

     The trial court ruled in favor of Archambo, finding that although he breached the commitment by failing to disclose the lien, the subsequent title policy superseded the commitment, and there was no requirement in the policy that the insured disclose recorded liens.  The title companies appealed.

 

     In a split decision, the Court of Appeals reversed, holding that the above-quoted language created a "condition precedent" to issuance of the title policy, and since the condition was breached, "the resulting policy was void with regard to the federal tax lien."

 

     On further appeal, the Supreme Court reversed the Court of Appeals, holding that the commitment was entirely superseded by the subsequently issued title policy.  In so holding, the Supreme Court cited the following "integration clause" from paragraph 15 of the standard "Conditions and Stipulations" contained in the policy:

 

             "(a)  This policy, together with all

          endorsements, if any, attached hereto by the

          Company is the entire policy and contract

          between the insured and the Company.  In

          interpreting any provision of this policy, this

          policy shall be construed as a whole.

 

             (b)  Any claim of loss or damage, whether

          or not based on negligence, and which arises

          out of the status of the title to the estate or

          interest covered hereby or by any action

          asserting such claim, shall be restricted to this

          policy."

 

     Thus, the Supreme Court rejected the "condition precedent" analysis, instead holding that once the title policy was issued its terms and conditions alone governed the contractual relationship of the parties.

 

     Turning to the policy, the Supreme Court held that Archambo's failure to disclose the tax lien would not justify denial of his claim under section 3(b) of the "Exclusions From Coverage," which excludes claims based on matters "not recorded in the public records" but known to the insured, because the tax lien in question was recorded at the time the policy was issued.

 

     However, the case was remanded for lower courts to decide whether coverage should be denied under section 3(a) of the "Exclusions From Coverage," which excludes claims "created, suffered, assumed or agreed to by the insured."

 

     Comment:  What's going on here?  Why hasn't this case been previously disposed of under section 3(a)?  It certainly seems to give Lawyers a more "winnable" argument.

 

     A clue to this mystery may be found in the much earlier—and unrelated--case of Lawyers Title Insurance Corporation v. First Federal Savings Bank & Trust, 744 F.Supp. 778 (U.S.D.C., E.D. Mich. 1990).

 

     This 1990 case arose from a scam perpetrated by one Henry Ewald, by which forged deeds into a corporation controlled by Ewald were used to get a $6.5 million loan secured by a mortgage against a 426 unit apartment building known as "Westland Towers."  The mortgage was, of course, insured by Lawyers Title.

 

     Lawyers denied the resulting claim from lender First Federal, relying in part on provisions of a commitment issued prior to its $6.5 million title policy--which provisions were identical to the commitment language quoted above from the Archambo case.  Thus, in the 1990 case Lawyers argued that First Federal's coverage against the forgery risk was voided by virtue of the lender's "knowledge or intimation" of fraud, prior to the title policy being issued.

 

     But the federal trial court ruled in favor of First Federal, holding (in part) that "the mortgage title insurance policy supersedes the commitment."

 

     Undaunted, it appears Lawyers has continued to include this unusual language in its commitments, apparently hoping to better control forgery risks assumed under its title policies.  And, in Archambo they may have seen an opportunity to relitigate this issue and get a more favorable opinion. Had they been successful, the Michigan Supreme Court decision would probably carry more weight than the 1990 decision of a single federal judge.

 

     Nice try.

 

     Even if it fails to serve Lawyers' purpose, the Archambo decision is strong authority for enforceability of the "integration" provisions contained in all title insurance policies.   As such, it's welcome news.

 

***********

 

Following Monday's posting, Jim Dondero (Grand Rapids, MI) writes:

 

Have to comment on these 2 decisions from my home state! From its inception, my eyebrows were raised on LTIC's 3(b) defense in the Westland Towers case.  And certainly it cannot fly on the facts in Archambo, although it seems that 3(a) should. For that reason, I was glad to hear of the remand and believe LTIC should prevail on its 3(a) defense on these facts. I also agree that the holding is good precedent for the "integration" provisions of the  policy, which were often previously ignored by many an insured's counsel.

 

     Keith Pearson writes:

 

This appears to be a correct decision to me. I wonder why the defense of no loss or damage was not also raised by the title insurer. The tax lien is for taxes of the insured, Archambo, and therefore he is no worse off because it is HIS debt and his lien. I also believe that the created, suffered defense should be successful since the tax lien was created by the insured's failure to pay his own taxes, which makes me wonder why this issue would need to be remanded to the trial court.

 

************

 

Following up on our posting for 7/8/02, a Michigan Court of Appeals has decided that the insured owner's claim under his title insurance policy, based on a federal tax lien recorded against this selfsame insured, is not a matter excluded from coverage as "created, suffered, assumed or agreed to" by the insured.

 

     Whaaa?  The unpublished opinion, in this latest chapter in the case of Archambo v. Lawyers Title Insurance Corporation, may be found at 2002 WL 31013194 (Mich.App.).

 

     As dedicated Savants may recall, this case involved a federal tax lien recorded against three former shareholders of a corporation that failed to pay withholding taxes on its employees for 1985.

 

     One of these former shareholders was Clarence Archambo, who would later say he wasn't the person in the former corporation who was responsible for paying its taxes, and he didn't know there was a tax lien recorded against him at relevant times. 

 

     Anyhow, the tax lien was recorded and it attached to property purchased by Archambo in 1992.  But when Archambo notified his title insurer the insurer, Lawyers Title, denied his claim on grounds Archambo had breached terms of his title commitment by failing to disclose existence of the tax lien before his policy was issued and, further, on grounds the claim was excluded from coverage under sections 3(a) and 3(b) of the "Exclusions from Coverage" contained in the policy.

 

     In the previous decision, which was the subject of our posting for 7/8/02, the Michigan Supreme Court held that terms of the commitment could not defeat Archambo's claim because the commitment was superseded by the policy by virtue of the "integration clause" in paragraph 15 of the "Conditions and Stipulations" contained in the policy, and that section 3(b) did not apply because the tax lien was recorded before the policy was issued.  With that, the Court remanded the case for further proceedings to decide whether the claim was excluded from coverage under section 3(a).

 

     Now, the Court of Appeals has issued its decision holding that the claim is not excluded from coverage under section 3(a), as a matter "created, suffered, assumed or agreed to by the insured claimant," because

 

          "(a)ll evidence and testimony regarding the

          matter establishes that plaintiff (Archambo)

          had no responsibility for the payment of taxes

          in the corporation and in no way agreed to the

          placement of a lien."

 

     In so holding, the Court relied on substantial case authority, and the annotation appearing at 87 ALR 3d 515, to the effect that an adverse matter may be deemed to have been "created, suffered, assumed or agreed to" when it results from the insured's intentional misconduct, action or permission, but not when it is brought about by mere negligence on the part of the insured.

 

     Comment:  The only good thing about this decision, in my opinion, is that it has not been ordered to be published in the Official Reports.  As a result, it may not be relied upon as authority in future cases.

 

     So what's to criticize?

 

     Under federal law, it appears Archambo had (and still has) personal liability in the event withholding taxes were not reported and paid by the defunct corporation, by virtue of his status as a principal officer and shareholder.  It follows that he had "responsibility for the payment of taxes," despite the Court's statement to the contrary.  His failure to meet this legal obligation should be viewed as an intentional or volitional omission--which he allowed to happen--rather than as some accident occurring through mere negligence.  Likewise, it should follow that the lien is a matter "created, suffered (i.e., allowed to happen), assumed or agreed to" by Archambo. 

 

     Our old friend (and mentor) Oscar Beasley famously labeled section 3(a) the "your own darned fault" exclusion.  Perhaps that says it best.

 

     Otherwise, the Court's statement that Archambo "in no way agreed to the placement of a lien" seems irrelevant.  What delinquent taxpayer ever agrees to the "placement of a lien?"  Rhetorical question.  Point is, the lien results from Archambo's legally-created personal obligation, and it is not the purpose of title insurance to protect an insured against his "own" obligations.

 

************

 

     Following up on our posting for 7/8/02, and the Update posted 11/25/02, Jim Dondero (Grand Rapids, MI) writes:

 

Well said, Bert. I want to go on record that, partly based on this and another poor decision (in Graves, granting priority of a divorce lien over a purchase-money mortgage), I did not vote for any incumbents of the high Court in the November 5 election. Best holiday wishes to all savants!

 

************

 

     Following up on our posting for 7/8/02, and recent developments, Jack Murray (Chicago, IL) writes:

 

The decision in Archambo (also cited as 2002 Mich. App. LEXIS 1270, Sept. 3, 2002) is misguided, to say the least. Below is the original post on this case on DIRT, by Bush Nielsen, and then my posted response, which was also picked up and posted by the ABA Real Property Section's Listserv.

 

Bert's comments on this case are very much on point. According to the Sixth Edition of Black's Law Dictionary (1990), to "suffer"  means "to allow, to admit, or permit." Black's further states that, "To suffer an act to be done or a condition to exist is to permit or consent to it; to approve of it, and not to hinder it.  It implies knowledge, a willingness of the mind and responsible control or ability to prevent (citations omitted)."

 

Seems to me that Archambo's actions clearly qualify under these definitions. Archambo may not have "created" the tax lien, but he sure as shootin' did "suffer" it, and he sure could have prevented it!  It was his duty, not the title insurer's, to see that the corporation's taxes were paid so that he would avoid personal liability for nonpayment. He has now "suffered" the consequences because he has to pay the taxes, which he allowed or permitted to become delinquent and a lien against him personally because of his own actions (or inaction).

 

The Michigan appellate court (noting that this case was on remand from the Michigan Supreme Court for the second time) stated that, "No Michigan case has defined the words 'created' or 'suffered' in relation to this clause [referring to the applicable title policy exclusion], which is standard in many title insurance policies." The appellate court also acknowledged that "the word 'suffered' within the exclusion has been deemed to be synonymous with the word 'permit' and to imply power to prohibit or prevent."

 

However, the court insisted (incorrectly, in my humble opinion) that -- as Bert points out --  Mr. Archambo was "merely negligent" and did not "intentionally" (which the court deems to be the proper test) fail to pay the taxes because he was "not in charge of these corporate responsibilities," and "in no way agreed to the placement of the lien."  Huh?  Does this mean that, under the law, ignorance is bliss?? If I fail to pay my mortgage payments, can I claim that my wife was in charge of making these payments and that it's not my fault that she failed or neglected to inform me of her "oversight" and that I shouldn't be responsible for the mortgage debt because I didn't "intentionally" fail to make the payments and I did not "agree" to the subsequent foreclosure by our lender? The logic of the Michigan appellate court escapes me, and can lead to absurd results in future cases.

 

As Bush Nielsen points out, the only sure solution may be for the ALTA to amend the policy exclusion for matters "created, suffered, assumed or agreed to" by the insured to make it clear that any matter that the insured could have prevented (including his own "negligence") is not covered under the policy.

 

     Here is Bush Nielson's original posting on DIRT:

 

Daily Development for Monday, November 4, 2002

by: Patrick A. Randolph, Jr.

Elmer F. Pierson Professor of Law

UMKC School of Law

Of Counsel: Blackwell Sanders Peper Martin

Kansas City, Missouri

dirt@umkc.edu

Readers are encouraged to respond to or criticize this posting.

Today's "guest appearance" is by Bushnell Nielson

TITLE INSURANCE; "CREATED OR SUFFERED" EXCLUSION:  An insurer must prove that the insured intended to create a lien, or had the power to prevent it, in order for Title Insurance  Exclusion 3(a), the "created or suffered " exclusion,  to apply.  

Archambo v. Lawyers Title Ins. Corp., 2002 WL 31013194 (Mich.App.) (unpublished).

The new decision comes after the Michigan supreme court ruled this summer that the tax liens at issue were not excluded as having been known to the insured.

Archambo was a shareholder in a solar heating company.  The IRS filed a tax lien against the corporation and all of its  shareholders, including Archambo.  He changed careers, becoming a home builder.  Archambo was forced to buy back a house he had built, and took title in his own name.  His title insurer failed to locate the IRS lien filed against Archambo.  The lien was discovered when Archambo sold the house a second time.  Archambo borrowed money to pay off the lien, then sued Lawyers Title for get the money back.

Lawyers Title defended by arguing that the tax lien was excluded under 3(a) as a matter "created" or "suffered" by the insured.  The court began by noting that the policy does not provide definitions of these words.  Therefore, the court drew on a summary of cases in an ALR article on the exclusion.  It summarized the annotation's commentary this way:

     "That annotation states that generally the provision has not barred coverage for
     liens that were brought about by the insured's negligence. . . .  Conversely, where
     the lien has resulted from the intentional misconduct of the insured, the clause
     will bar coverage. . . .   While none of these foreign cases deal with a federal tax
     lien, other states have consistently held that an insured must intentionally act in
     order to be deemed to have come within the terms of the exclusion. . . .  The word
     "suffered" within the exclusion has been deemed to be synonymous with the word
     "permit" and to imply power to prohibit or prevent. . . .  An insured is not barred
     from coverage if he was merely negligent."

Archambo had not been in charge of the corporate books at the solar heating company, and testified that he did not know the company had failed to pay the federal taxes.  The trial judge believed him.  Based on these facts, the appellate court found that Archambo had neither "created" nor "suffered" the tax lien.

     "Not having been in charge of these corporate responsibilities, plaintiff would
     have lacked control of the nonpayment of the taxes that gave rise to the lien.  He
     consequently could not be charged with intentionally failing to make the
     payments.  Therefore, under the uniform interpretation of the clause, the trial court
     did not err in finding that plaintiff neither created nor suffered the lien.  All
     evidence and testimony regarding the matter established that plaintiff had no
     responsibility for the payment of taxes in the corporation and in no way agreed to
     the placement of a lien."

Reporter's Comment:   The case highlights two issues. First, the lack of definitions for the words used in Exclusion 3(a) has provided the excuse for a series of decisions narrowly limiting the exclusion.  Courts have relied on commentators to supply the definitions lacking in the policy itself.  The earlier Archambo decision, similarly, ruled that Exclusion 3(b) did not apply, based on the court's interpretation of the undefined term "known."

The second and more distressing aspect of Archambo is that the opinion says Exclusion 3(a) does not remove coverage as to all liens filed against the insured.  It has long been assumed by title insurers that there is no coverage for liens against the insured, because those are the insured's obligation.  The tax lien was Archambo's debt, even though it stemmed from a corporate tax obligation.  This decision orders insurance reimbursement for a valid tax debt.  It should be contrary to public policy to allow an insured to obtain insurance against his own tax obligations.  It would behoove ALTA to refashion the exclusion to make this coverage limitation more plain.

The Reporter for this item is Bushnell Nielson, writing in his excellent Title Insurance Law Newsletter.  Visit WWW.woodridgelegal.com for information.

     And, Jack's reply to Bush's posting:

The "created, suffered, assumed and agreed to" exclusion is invoked by title insurers more than any other exclusion from coverage in the standard ALTA policy to exclude title defects, liens, and encumbrances. See Theodore C. Taub and Marcia G. Ryderberg, "Defects Created, Suffered, Assumed, or Agreed to by the Insured," 306 PLI/Real 489 (1988), James M. Pedowitz, "Understanding Title Insurance Coverage," 397 PLI/Real 9 (1993); Leopold Z. Sher and Kerry J. Miller, "Interpreting the Term 'Created' in Policy Exclusion 3(a)," 434 PLI/Real 349 (1998).

As noted by the court in the Archambo case, the recent trend has been for courts (and some commentators) to construe the exclusion narrowly and to interpret the "created" and "suffered" language to require intentional -- as opposed to negligent, unintentional, or mistaken -- conduct on the part of the insured.

However, in the article referenced above by Mr. Sher and Mr. Miller, the authors urge reconsideration of these case-law decisions and persuasively argue that -- after reviewing applicable insurance law and the specific terms and conditions of the title policy -- the courts' interpretation of the terms "created" and "suffered" is problematic. According to the authors:

If one (a) considers the plain meaning of the term "created," (b) reads Exclusion 3(a) in pari materia with other  exclusions in the standard ALTA title insurance policy, (c) applies the principle that title insurance involves the  elimination and control of risks as opposed to the assumption of risk, and (d) defers to commentators and other courts' interpretations of "created," it is strongly suggested that "created" should be interpreted to encompass all acts of the insured that cause defects, including intentional and unintentional acts. Such an interpretation of "created" would completely comport with one commentator's observation that Exclusion 3(a) should exclude defects that are the insured's "own darn fault." [Citing Oscar Beasley, "Highlights of Commercial Coverage," printed in A.B.A. Real Prop. Prob. & Tr.L. publication, Attorney's Role in Title Insurance, Tab B, at 10 (1990).] Sher and Miller, supra, at 350. 

I agree wholeheartedly with Bush Neilson's comment that, "[i]t should be contrary to public policy to allow an insured to obtain insurance against his own tax obligations."