I’ve been writing blog articles for over 10 years, but I have never written about title insurance. The time is nigh.
Hall CA-NV funded the renovation of
the Cal-Neva Lodge & Casino, near Lake Tahoe. Before Hall agreed to finance
the project, the property owner engaged Penta Building Group to conduct some
Hall knew of the contract, so Hall
had Penta subordinate Penta’s construction liens to Hall’s finance documents.
Based at least in part on that subordination, Hall then authorized $29 million
in debt financing, for which Hall received a mortgage.
At the same time Hall obtained a
lender policy of title insurance from Old Republic. In doing so, Hall agreed to
remove the standard Covered Risk 11(a) in the ALTA policy form. That provision protects
the insured against losses sustained because of lack of priority of the insured
The project continued but the loan
became out of balance due to significant change orders. Hall stopped advancing
funds after the owner stopped obtaining additional equity. Penta, however,
continued its work for months later.
Finding itself unpaid, Penta started
foreclosure on its mechanic’s lien claims, claiming super-priority over Hall because
Penta’s liens related back to Penta’s initial work which predated Hall’s
construction loan. Hall received partial payment for its debt position, and
then filed claims against Old Republic since Old Republic was unwilling to
indemnify Hall for a loss of almost $5 million.
The federal district court concluded
that Penta’s liens were for unpaid work incurred before the policy date, and
the policy afforded no coverage to Hall due to the deletion of Covered Risk
11(a). The court entered judgment for Old Republic. Hall appealed.
In the US Court of Appeals, Hall
contended that other provisions of the title policy offer Hall insurance for
this claim. Old Republic responded that Hall agreed to remove the one portion
of the policy that would have protected Hall – Covered Risk 11(a).
And further to that point, Old
Republic offered that not only did Hall agree to remove Covered Risk 11(a) but
Hall also agreed to ALTA endorsement 32-06, which provides that the policy does
not insure against losses due to mechanic’s liens arising from services not
designated for payment in the construction loan finance documents.
Old Republic wins, again. Hall loses, again. See Hall CA-NV, LLC v. Old Republic National Title Insurance Company; Cause 20-10268, US Court of Appeals, 5th Circuit, March 10, 2021: https://scholar.google.com/scholar_case?case=14431452547442516413&hl=en&as_sdt=6&as_vis=1&oi=scholarr.
Lessons / Questions
Title insurance, often overlooked because it is arcane, abstruse, obscure,
abstract, abstruse, and generally no fun to read and comprehend, is
critically important. Title insurance companies write policies to protect
themselves and limit their exposure. Those policies must be negotiated by
property purchasers and their lenders.
Why, you may ask, did Hall not seek recovery from the property owner?
Although not clearly stated in the appellate opinion, it appears Hall may
have done so but the owner’s bankruptcy precluded Hall from collecting all
that was owing, leaving a balance under $5 million. And as a consequence,
Hall then turned its gun turrets to Old Republic.
Do you know how to review title insurance, both from the owner’s and
lender’s perspectives? Are there people on your team who are tasked with
this important job? Are you working with an experienced title agent who
can offer helpful guidance?
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
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.