William England and Medardo Garza owned real estate in Houston, subject to a mortgage held by EMC Mortgage. In September 2009 England conveyed his interest to Garza. Three months later, a bankruptcy proceeding was started against England, in which England’s conveyance to Garza was declared void as a fraudulent transfer.
In December 2010 EMC Mortgage foreclosed its lien. Cochran Investments, Inc. was the foreclosure purchaser.
Six months later Cochran entered into a contract whereby Cochran agreed to sell Michael Ayers the Houston property. In June 2011 Cochran and Ayers closed their transaction. Cochran delivered a Special Warranty Deed whereby Cochran “GRANTED, SOLD AND CONVEYED and by these presents does hereby GRANT, SELL AND CONVEY” to Ayers the property “without limiting the grant or the warranty of title provided herein.”
The Deed also bound Cochran and its successors and assigns “to WARRANT AND FOREVER DEFEND, all and singular the Property, subject to the matters stated herein, unto [Ayers, his successors, and his assigns], against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through or under [Cochran], but not otherwise.”
I added the underscored words, because those seven added words have the effect of converting a General Warranty Deed into a Special Warranty Deed.
Seven. Powerful. Words.
Ayers received an Owner Policy of Title Insurance at or shortly after closing, issued by Chicago Title Insurance Company. The policy covered Ayers in the event he did not have “good and indefeasible title.”
Four days after closing the trustee overseeing England’s bankruptcy sued EMC Mortgage and Cochran, asserting that the foreclosure sale violated the automatic stay imposed by bankruptcy law. Ayers was later added to the lawsuit, and Chicago Title assumed his defense pursuant to his Owner Policy of Title Insurance.
To obtain case dismissal, Chicago Title paid $45,000 to the bankruptcy trustee and $20,000 to Garza. Then, subrogated to Ayers’ position under the title policy, Chicago Title sued Cochran claiming breach of the “implied covenant of seisin.”
Seisin. Breach of seisin. I am so happy I can finally find a place to write that word, as I have neither seen it nor heard it since law school. Basically, seisin is the legal ownership and possession of a feudal fiefdom or estate in land, typically referred to simply as a “fee” or “fee estate.”
In medieval times it referred to both possession and ownership. Now we separate those interests, but that’s a digression.
The case proceeded to trial. A Judgment was rendered for Chicago Title, finding that the foreclosure sale and the sale to Ayers were void and that Cochran had breached the covenant of seisin (one cannot sell real estate which one does not own, unless a quitclaim deed is used). The court awarded Chicago Title $125,000 damages and $11,000 attorney’s fees.
The Texas court of appeals reversed, finding that a special warranty deed does not imply a covenant of seisin and further, this particular Special Warranty Deed did not make a representation or claim of ownership. The reason, says the court of appeals, is that the Deed stated that Cochran’s title warranty is only regarding claims “by, through or under [Cochran], but not otherwise.”
The claim of Ayers, says the Texas court of appeals, was not by Cochran, was not through Cochran, and was not under Cochran.
Chicago Title appealed.
The Supreme Court of Texas was presented with a narrow issue: Do Special Warranty Deeds contain an implied covenant of seisin (ownership) or not? The Texas high Court determined that various Texas appellate courts have made inconsistent decisions regarding this issue and as a consequence, “Texas law on this issue is thus far from settled.”
The Texas Supreme Court first defined a General Warranty Deed as an agreement by the grantor to pay damages if title fails, no matter the date of failure as long as it is on or before the date of the Deed. A Special Warranty Deed, however, limits the scope of that indemnity obligation to losses and injuries arising only “by, through, or under the grantor.”
The Supremes voted in favor of Cochran by deciding that Cochran did not breach the title covenant in the Deed that was signed, as Cochran did not create the circumstances that caused the Deed to fail. Those events occurred in the preceding deed – the foreclosure deed – where the foreclosing lender and its trustee evidently lacked the lawful ability to proceed with the public auction.
This implicitly means that if Cochran had signed a General Warranty Deed then the outcome would have been different. But no. Cochran signed a Special Warranty Deed to Ayers in 2011. Cochran is only liable for title defects occurring during Cochran’s period of ownership. This title failure occurred when Cochran received a defective foreclosure deed from EMC Mortgage in 2010.
Cochran wins; Chicago Title loses. See Chicago Title Insurance Company v. Cochran Investments, Inc.; Case No. 18-1676; Supreme Court of Texas; June 19, 2020: https://law.justia.com/cases/texas/supreme-court/2020/18-0676.html.
Lessons Learned / Questions Asked / Issues Presented:
- Issue: Did you think that a Grantor in a Special Warranty Deed implicitly warranted to the Grantee that the Grantor owned title and had the legal ability to transfer it? I’ll admit it – I did.
- Issue: Will this cause you to rethink your purchase and sale strategies regarding executing and accepting Deeds?
- Issue: Will you now start reviewing title ownership prior to the date of your closing? Will you now start evaluating the net worth and liquidity of the title insurance companies you have been using?
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204