The Court of Appeals of Arizona recently affirmed a lower court and held that a lender’s title insurance policy should be reformed due to a mutual mistake after two senior liens on the property were unintentionally omitted from the policy. See BAPCO LLC v. Fid. Nat’l Title Ins. Co., 2019 WL 5576863 (Ariz. Ct. App. Oct. 29, 2019). In 2006, the original lender provided a $250,000 loan to a borrower that was secured by a deed of trust on the borrower’s home. Although there were two senior liens on the property, the title insurance policy did not identify either. The deed of trust, however, stated that it was “SUBORDINATE TO . . . EXISTING FIRST LIEN(S) OF RECORD.” Ten years later, plaintiff purchased a portfolio of assets from the original lender, including the 2006 deed of trust. Plaintiff then filed a claim with the title insurance company based on the prior liens, and the title insurance company denied coverage based on the fact that the original lender knew about the prior liens. Plaintiff brought this action, alleging breach of the policy and bad faith, and the title insurance company counterclaimed for reformation of the policy. The trial court granted the title insurance company’s motion for summary judgment.
On appeal, the Court affirmed. It found that the title insurance company had proffered both a title insurance commitment and an amended title insurance commitment in which both senior liens were disclosed. Likewise, the title insurance company produced closing instructions that named both senior liens and stated that the new deed of trust “will be in the 3rd position.” Finally, the company submitted a 2006 letter from the original lender acknowledging that its lien would be in the third position, which was consistent with the language in the deed of trust that it was subordinate to prior liens. The Court also held that plaintiff’s lack of actual knowledge about the prior liens was irrelevant to the mutual mistake claim because only the original lender’s knowledge mattered. Similarly, the Court found that plaintiff was not a bona fide purchaser of the deed of trust, because the deed of trust expressly noted it was subordinate to other lien(s). Accordingly, the Court found that the prior liens were omitted due to a mutual mistake and that the title insurance company was entitled to summary judgment reforming the policy.