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.
Cochran appealed.
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
P:
972.716.1888
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