The Appellate Court of Connecticut recently held that a lender’s loss under a title insurance policy is limited to the amount paid at a tax sale foreclosure minus the amount of taxes, regardless of what the court in the lender’s own foreclosure action found to be the fair market value.  See RCN Capital, LLC v. Chicago Title Insurance Company, 196 Conn. App. 528 (2020).  In 2012, plaintiff issued a loan in the amount of $600,000 to a borrower.  As security, plaintiff received a mortgage on a property, and defendant issued a title insurance policy to plaintiff.  The policy amount was later increased to $800,000.  The borrower later defaulted and plaintiff commenced a foreclosure action in 2015, in which the trial court determined that the fair market value of the property was $304,000.   During the action, however, plaintiff learned that there was a prior mortgage on the property in the amount of $1.4 million.  Later that year, the city commenced a tax sale foreclosure for $34,662.92 in unpaid property taxes on the property.  Plaintiff purchased the property at the tax sale for $150,000.  After the unpaid taxes and sale fees were paid, the remaining monies, about $108,000, were paid to the first mortgagee.  Plaintiff then brought this action against defendant seeking its damages caused by the prior mortgage.  Plaintiff argued that its damages were $269,337.08—the fair market value of the property as determined in plaintiff’s foreclosure action ($304,000) minus the amount of the tax lien ($34,662.92).  The trial court disagreed and found that plaintiff’s damages were only the $108,000 paid to the first mortgagee, and plaintiff appealed.

On appeal, the Court affirmed.  It found that the first mortgagee received $108,000 after the sale and “[b]ut for the . . . superior mortgage, the plaintiff, therefore, would have received $108,000. Thus, under the circumstances before us, the plaintiff sustained an actual loss of $108,000. An award in excess of that amount would provide the plaintiff with an impermissible windfall.”  In making this finding, the Court rejected plaintiff’s claim that the price at the tax sale was unreliable because there were only a small number of bidders, noting in a footnote that “[a]lthough not directly relevant to our resolution of this claim, it is not lost on this court that the plaintiff availed itself of the ‘unreliable’ valuation process in order to secure the property at a price well below the fair market valuation of its own expert witness.”  The Court also found that there was no evidence supporting plaintiff’s claim that, if it held the first mortgage, it simply would have paid the taxes on the property and avoided the tax sale entirely.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Anthony Lombardo at alombardo@riker.com.