Posting for

Monday, November 30, 1998

by: Bert Rush

brush@firstam.com

PENNSYLVANIA CLAIMS/THE VALUE OF TITLE INSURANCE/BONA FIDE PURCHASER

Here are homeowners with title insurance to be thankful for this Thanksgiving.

They are residents of Northampton, in suburban Philadelphia, a tidy neighborhood of townhouses and single family homes built in the mid-1980's.

On November 10, Philadelphia lawyer Jacquelyn Frazier-Lyde sent letters to 719 homes, which read as follows:

To most folks the aggrieved Joseph Frazier is less known as a land developer than as former heavyweight boxing champ "Smokin' Joe" Frazier--whose professional career began in Philadelphia in 1965, and ended at Manila ten years later in the fourteenth round of his third match with Muhammad Ali.

But a developer he was and, coincidentally, his efforts to gain approval for a townhouse project on the land now in question were interrupted by his last major bout--the "Thrilla in Manila." When their plans for development stalled, Frazier and his then partner, Brian Wright, agreed to sell the land on terms which now seem to be a source of controversy.

Through his attorney (who is also his daughter) Frazier says that in November 1978 he and Wright (who is now deceased) agreed to sell the 140 acres to Fricker Corp., in return for a promissory note requiring payment of a purchase price of $1,865,000 in installments ending in 1999. But, Frazier alleges, in 1992 he had not been paid as promised and he realized, for the first time, that the promissory note was unsecured--contrary to his understanding of the original agreement. Frazier claims he's now due $1.3 million.

Contacted by reporters for the Philadelphia Inquirer, Werner Fricker, Sr. (President of Fricker Corp.) said Frazier sold his interest in the land to a trust, the Greit Realty Trust of Philadelphia, between November 1978 and October 1981. Fricker claims his company paid its debt for the land, in full, to the trust.

Buck County records show three separate deeds signed by Frazier conveying the land to Fricker Corp. and two other companies in 1983 and 1984. New homes were built and sold through 1986.

Anyhow, the "Notice of Demand for Possession" surprised the homeowners like a left hook. But HOA representatives and county officials soon figured out that many homes on Frazier-Lyde's mailing list are on land never owned by Frazier. Frazier-Lyde acknowledged the mistake, and so named owners of 475 homes in a lawsuit filed November 19. The suit also names the Greit Realty Trust, Fricker Corp., and others involved in developing the 140 acres. The suit seeks to recover the land, plus damages of $84 million.

Meet Joe Grinch.

Title companies are stepping in to defend their insureds--and homeowners feel relief. Said Larry Graham, President of the 100 Acre Woods Townhouse Association, "There was a guy cleaning my chimney. Maybe I should send the bill to Joe."

Prediction: As bona fide purchasers--for value and without knowledge of Frazier's claims--the homeowners should easily win dismissals of the lawsuit against them. The bigger question is how the action might interfere with property sales and/or refinancings pending summary judgment(s)--and whether Frazier-Lyde might compound the inconvenience by filing an appeal.

Another story illustrating the value of title insurance...and many thanks to in-house counsel Rich Angelo (Valley Forge) for sending all the newspaper clippings. My favoritie headline--from the Philadelphia Daily News: "Title Bout."

Questions, comment, argument? Just punch the "reply" button....

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

Land developer or land speculator ??? Maybe "Smokin' Joe" took one too many left hooks to the head to realize, only 6 years after his note went into default, that the obligation was unsecured - prompting me to inquire how that fact translates into a claim against title to the land (sounds as though his daughter might not have been one of the top graduates of her law school class) ? I think that you may have answered my question by characterizing these as "inconvenience" claims, but thank you for an entertaining story which points out (glaringly) the "legal defense" value of title insurance, however lacking in merit the basis of such lawsuits might be !

And Rick Garlick (Golden/Denver) writes:

Bob Bailey has volunteered to fly to the east coast with his ill gotten black market "Furby" profits and put a whippin on Smokin Joe..... Contact Bob to arrange the details.

Rick (Don King is a lightweight) Garlick Boppin Bob Bailey's Manager

Reply: Guys! Where's your holiday spirit??? Let me suggest another spin on this.

I don't know what the Company spends on advertising, but we can't do better than this: A high profile, well-liked former heavyweight champ threatens to take away the property of hundreds of innocent homeowners --and the title industry comes to the rescue. The media's eating it up! Wish we'd insured ALL the homes in Northampton!

Let's get some publicity shots of "Boppin' Bob"--in his white Everlast trunks, bare-knuckled, eyes burning with vindication. I can see the headlines now: "First American squares off against Smokin' Joe!"

And why stop in PA?--we oughta take this act national. In every major city, encourage some high profile cat to file frivilous claims against innocent property owners--then First American comes to the rescue! This could be bigger than the WWF!!! Way I see it.

Anyhow, Keith Pearson (Glendale/L.A.) writes:

It appears that the beating Ali gave to Frazier in his last bout must have been so bad that it still affects his thought patterns, as well as those of his offspring. Actually this is a symptom of a larger problem, namely attorneys that will file suits well past the statute of limitations for millions of dollars in the hopes of recovering even 5 cents on the dollar which will still be a large sum of money.

First American and some other title companies had a claim similar to this one where a man who had been paid on a deed of trust way back in the 1980's claimed that he had not been paid, of course after a condominium complex had been constructed on the property. After being confronted with proof that he had been paid, the suit was settled with the man paying the title companies $5,000.00 for their troubles (not to mention all their attorney fees).

I have been taking a increasingly hard line with bogus claimants as I find them to be the sort of people who will take a mile when given a inch. I am curious how other offices are dealing with these obviously bogus claims that are nothing more than a shakedown by litigation.

Hope you and all the savants had a great Thanksgiving.

Reply: I think all our claims handlers are resistant to paying truly bogus claims. The hard part is seeing the claim from every possible perspective. What looks bogus to you might seem very legitimate to someone else--such as a judge with no background in real estate law or the lay-person juror.

For me the plumb line has always been: Did we (or our agent) do anything wrong? That's the elementary issue for a trier of fact. If we--the real estate professional--made a mistake then it's easy for a trier of fact to make us liable for any damages seemingly related to our mistake. I know this is lazy thinking--but remember you have to go to law school to learn about proximate cause and mitigation of damages.

So, I think, the challenging part of claims-handling is knowing when to fold 'em. Any other Savants have thoughts?

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Following up on last Monday's posting, Jim Dondero (Grand Rapids) writes:

You've got to know when to HOLD 'em, too! I guess you're saying that we've got to come in with "clean hands" so to speak before we can do that with confidence, and I agree.

Recently, we litigated a claim in Michigan where we missed a "Claim of Lien" recorded three days before the closing. Turns out the Seller had borrowed money to buy the house 2 years earlier, the indebtedness being evidenced only by an unrecorded "backward" land contract showing the (individual) lender as the vendor. The lender also made 2 smaller subsequent advances to the "vendee".

At the hearing on our (insureds') motion for summary judgment, one of the first things the judge asked was that, with the new purchase money mortgage of record, was there not title insurance behind the transaction and, if so, why wasn't the Claim of Lien disclosed and dealt with? He denied the motion and, many months later after a bench trial, issued his opinion and judgment imposing a $103,000 "equitable mortgage" against the title (purchase price and amount of insurance were $65,000).

We appealed with little hope of success, mostly to "buy time" until we finally convinced the "equitable lienholder" to accept our $65,000 (being the limit of our policy liability) to discharge his "equitable mortgage" and Claim of Lien. What a nightmare! ... But I believe it turned largely on the fact that the judge knew there was a title insurer who had missed the Claim of Lien of record.

Reply: You had some interesting dynamics there: (1) The agent missed a so-called "Claim of Lien" which (in many states) may not be a document entitled to be recorded (under state statutes). (Instead, the seller should have filed a lawsuit and recorded a notice of pending action.) (2) Had the agent spotted the Claim of Lien they probably wouldn't have closed without clearing things with the seller. (3) The court seems to have ruled in a manner consistent with strong public policy favoring payment of vendor's liens and/or purchase money obligations--to prevent innocent sellers from being cheated out of their equity. I hate to think judges base their decisions on the presence of insurance (as you suggest), but then I hate to think there's no Santa, too.

Peter Norden (Boston) writes:

Given the recent decision in Maine, I truly wonder whether knowledge of the law has anything to do with a claim at all! By the way, Marvelous Marvin Hagler is an insured, maybe he can help.

Comment: Not being familiar with the claim in Maine, I called in-house counsel Joe Attura for the details.

Seems we insured an owner for $90,000 in connection with purchase of a rear lot (set back from the road) to be used as a transfer station for the insured corporation's trash hauling business. When the insured corp. parked trash trucks on what it thought was the boundary between it and an adjacent single family residence, the neighbor complained and disputed location of the boundary line. Ultimately the neighbor sued the insured corp.

The insured requested a defense from First American. We denied the claim since the subject matter of the lawsuit fell squarely within the exception in the policy for "(d)iscrepancies, conflicts in boundary lines, shortages in area, encroachments, or any other facts which a correct survey would disclose, and which are not shown in the public records."

The insured sued First American for breach of contract, bad faith and (get this) intentional infliction of emotional distress upon the principal shareholder of the insured corporation.

On cross motions for summary judgment, the trial court ruled in favor of First American on the coverage issue. On appeal the court of appeal reversed. Relying on legal reasoning unique to Maine, the court of appeal held that in deciding the coverage issue the trial court must consider only the allegations in the insured's complaint against the insurer compared with the provisions of the title insurance policy. (Don't worry about trying to make sense of the preceding sentence--the reported decision is Penney v. Capitol City Transfer, Inc. [1998] 707 A.2d 387.)

First American picked up the defense of the insured on the boundary dispute, while the remainder of the insured's case against First American went to trial before a jury. After trial in which the insured's attorney testified our claims-handling was OK, but the principal shareholder of the insured corporation testified that denial of the claim caused him to worry and drink more than usual, the jury found (1) First American is liable for breach of contract, in the amount of $5,000; (2) First American is not liable for bad faith, and did not commit unfair claims practices; (3) First American is liable to the principal shareholder for intentional infliction of emotional distress, in the amount of $85,000, AND because or conduct in this regard was "outrageous, shocking to the conscience and malicious" the Company is also liable for punitive damages in the amount of $1.5 million.

Our motion for judgment notwithstanding the verdict on the emotional distress and punitive damage issues is now pending before the trial judge. We believe this motion will be granted but, if it is not, we're confident we can have the verdict reversed (at least on the emotional distress/punitive damage issues) by the court of appeal or supreme court. Like courts elsewhere, Maine's supreme court has consistently ruled that emotional distress claims are not actionable in the absence of physical injury.

So that's why Peter wonders whether knowledge of the law still has a role in claims-handling.

Robbie Dimon (Atlanta) writes:

As claims handlers, we do have to resist paying bogus claims but I think we also have to make economic decisions (ie., there is litigation and it will cost $5000 to get out v $20,000 in litigation costs). I think we also have to factor in the precedent we are setting by paying nuisance value to get rid of bogus claims.

For example, we have a claim in litigation now in Georgia in which we could have gotten out for much less by paying bribe money. However, we felt that the precedent we would be setting would be very dangerous not just for the Company but for the industry. Briefly the case involves all but one of the underwriters of an agent gone bad. Most of the underwriters got out when they saw warning signs. Two of the smaller underwriters stayed in until the end. The company which paid the loss for the escrow shortage sued the other company which had also not cancelled the agent. The defendant title company brought in all the other underwriters. The defendant title company made it clear that we could either pay bribe money or they would cost us a ton in discovery costs and attorney fees. To our credit, none of the third party defendants paid the holdup money. But we have paid a ton of money in discovery costs and attorney fees. But this is one of those cases in which we felt the precedent we would have been setting justified spending the money in legal fees. Do others agree? Or should we always just make economic decisions?

Reply: I, for one, agree. I have observed that often the decision-makers behind these threats to litigate non-meritorious issues--hoping to extort big settlements--either learn the error of their ways or they self-destruct. Their legal bills will be just as big as yours, and if they wind up with nothing to show for all the bluff and bluster they may have written their resume for a new line of work. What they are doing operates against them like a pyramid scheme. Unfortunately, they often spend $100,000 or $500,000--whatever--litigating a losing issue, only to realize that even if they win at trial they can't get their money back.

Years ago we had an outside counsel here in CA who was pretty good at getting in-house counsel mad at adverse claimants--mad enough to spend enormous sums on vindictive litigation. He had a good reputation for winning--but afterward you still seemed to be the loser. The last time I heard of his firm handling a title insurance case they were unsuccessful--and the in-house counsel who worked with him was terminated. I don't think anyone in the industry sends him cases anymore.

And you definitely do set bad precedent settling a case such as the one you describe by paying "holdup" money. This problem of one or two underwriters getting caught "holding the bag" for a bad agent is a re-occurring issue. If you paid blood money to get out of this case you would, in all probability, face the same law firm(s) making the same threats the next time this happens.