Kernell and Stanley Thaw were
married in 2001. In 2002 Stan Thaw and Leslie Schachar began operating a
business together. When the business failed, Schachar paid business debts that
were guaranteed by both Stanley and Schachar.
Schachar sued Stanley in 2008 to
recover Stanley’s share of the debt.
While the lawsuit was pending, the
Thaws contracted to purchase a home in Frisco Texas. In 2009 Schachar obtained
a final judgment against Stanley, and Stanley appealed.
While the appeal was in process, Schachar
recorded an Abstract of Judgment in Collin County before any Deeds to the new
home were recorded. Kernell and Stanley Thaw moved into their new home in 2010.
In 2011 the Thaws paid off the
mortgage debt and only then recorded a Deed in a transaction insured by
Fidelity National Title. One month later the Texas Court of Appeals affirmed
Schachar’s judgment, so Stanley countered by filing a bankruptcy petition near
the end of 2011.
Schachar filed a proof of claim in
the bankruptcy for a $400,000 secured interest in the Frisco property. The
bankruptcy court held that both the claim and lien were valid, finding that
Schachar had recorded his Abstract of Judgment lien before the Thaws had made
their new Frisco property their Texas homestead.
As a consequence, when the Frisco
property was sold in 2013 the Schachar lien attached to the net proceeds of the
sale, approximately $500,000.
In 2014 the bankruptcy Trustee as
well as Stanley and Kernell Thaw made demand upon Fidelity for insurance
benefits, as the title insurance policy insured title without exclusion for
Schachar’s judgment. In 2016 the bankruptcy court approved a settlement in
which Schachar received $444,000 from the net proceeds of the sale, in full
satisfaction of his claim.
At that juncture the Trustee and Kernell
Thaw determined they could recover the amount paid to Schachar from their title
insurance carrier. As you likely guessed, Fidelity Title resisted and refused
to pay.
So Kernell and the Trustee sued
Fidelity Title, arguing that Fidelity had breached its Policy by denying the
claim. The bankruptcy court reviewed the policy and these unique facts, and
issued an Order that coverage under Fidelity’s insurance policy was barred. The
reasoning was partly due to application of the “Fortuity Doctrine.”
The Trustee and Kernell Thaw appealed
the bankruptcy court’s Order.
The Fortuity Doctrine relieves
insurers from covering some behaviors that the insured undertook prior to
purchasing the insurance policy. Under this doctrine, the insured cannot obtain
coverage for losses of which the insured had knowledge when the policy was
bought, but failed to disclose to the insurance carrier.
Kernell claimed that she had no
actual knowledge that Schachar had recorded an Abstract of Judgment lien and
further – she would not have understood the effect of such a filing if she had
known of it.
Evidently the Fortuity Doctrine
covers this event, as it precludes insurance coverage when the insured is or should be aware of a known loss at the
time the policy is purchased. Not understanding the legalities or process is
not a great defense.
The Court rationalized that even if
Kernell had no knowledge of the recordation of the Abstract of Judgment, she
knew or should have been aware that her husband’s failure to pay his debts
resulted in a Judgment against him in 2009. And that due to appeals, the
Judgment was uncollected at the time the Thaws purchased the Frisco property.
And that the Judgment remained unpaid when the Thaws paid off the mortgage debt
and purchased the title insurance policy in 2011.
The Court reasoned that was a “loss
in progress” and for that reason, Fidelity Title is not responsible for the
claims asserted by Kernell Thaw and the Trustee.
Fidelity Title wins; Kernell Thaw and
the Trustee lose. See Christopher Moser
and Kernell Thaw v. Fidelity National Title Insurance Company; US District
Court; Eastern District of Texas; Case 4:17-CV-104; March 21, 2018; https://www.leagle.com/decision/infdco20180322h25
Lessons
Learned / Questions Asked:
1. Now
I know what the Fortuity Doctrine is!
2. Insurance
companies have abilities to defend that many of us (meaning: me) could never
contemplate. This is one among many.
3. This
is my 99th blog posting over a period of almost 10 years. Shouldn’t
I get a watch, pen, or tuna sandwich? I mean, for the love of Pete it’s been
fun but 99 blogs, really?
* Board Certified,
Commercial (1989) and Residential (1988) Real Estate Law,
Texas
Board of Legal Specialization
Reprinted
with the permission of the North Texas Commercial Association of REALTORS®, Inc.
*
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