Court of Appeals of California Reverses Dismissal of Title Insurance Company From Case For Allegedly Improper Recording of Release

The Court of Appeals of California recently reversed a trial court’s determination dismissing a title insurance company from a case in which the plaintiff alleged that the title insurance company improperly recorded a release.  See SMS Fin. XXIII, LLC v. Cornerstone Title Co., 19 Cal. App. 5th 1092 (Ct. App. 2018).  In the case, a lender made a business loan in 2004 that was secured in part by a deed of trust.  In 2011, the lender assigned the note and the deed of trust to plaintiff.  In 2014, plaintiff prepared to initiate foreclosure on the deed of trust when it learned that, in 2007, the defendant title insurance company had executed and recorded a release of the obligation secured by the deed of trust without the original lender’s authorization.  Plaintiff sued defendant, as well as the other obligors on the loan, seeking payment of the loan, a declaration that the release was void and, in the event the release was valid, damages for defendant’s negligence in executing and recording the release.  Defendant demurred to the negligence cause of action, arguing that plaintiff failed to allege that the tort claims in the cause of action were assigned to it with the loan and deed of trust.  The trial court agreed and dismissed defendant from the case.  

On appeal, the Court of Appeals reversed.  The Court held that, in view of the broad language of California Civil Code §2941 regarding the requirements for recording a release of an obligation, plaintiff alleged sufficient facts to state a claim against defendant.  Specifically, if the release was not properly authorized by the original lender, defendant could be liable under subsection (b)(6) of the statute, which states that “[i]n addition to any other remedy provided by law, a title insurance company preparing or recording the release of the obligation shall be liable to any party for damages, including attorney's fees, which any person may sustain by reason of the issuance and recording of the release, pursuant to” prior sections of the statute.  In doing so, the Court rejected defendant’s claim that plaintiff could not bring this action because the assignment to plaintiff did not expressly include the assignment of this tort claim.  Contrary to this argument, the Court held plaintiff has its own potential claim against defendant under the statute by virtue of holding the deed of trust by assignment, regardless of any claims that the lender may have been or may still be able to assert against defendant.   

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com or Dylan Goetsch at dgoetsch@riker.com.