Stagen v. Stewart-West Coast Title Co.

Opinion

This is a consolidated appeal by cross-complainant Sta-gen from (1) a judgment on the pleadings in favor of Stewart-West Coast Title Company (hereinafter West Coast Title), and (2) a judgment on the pleadings in favor of Stewart Title Guaranty Company (hereinafter Title Guaranty), an affiliate of West Coast Title.

Facts

On August 20, 1976, Stagen, a licensed real estate broker, and Simon Bard entered into a written contract of sale, wherein Bard was to convey certain real property to Stagen. The property was the community property of Simon Bard and his wife Stella but was held by them as “husband and wife, joint tenants.” Stagen was aware, through his agent, of Stella Bard’s community interest in the property. Only the husband, Simon Bard, signed

On October 7, 1976, after repeated demands for Bard’s performance, Stagen filed an action against Simon Bard for specific performance. Stella Bard was not named as a defendant in Stagen’s complaint. On the same date, Stagen recorded a notice of pending action (lis pendens) on the property.

On October 8, 1976, Simon Bard and Stella Bard conveyed the property to H. & G. Brown (Vz interest), and J. & P. Mora (Vz interest). In connection with this conveyance, either Bard, as the seller, or the Browns and Moras, as buyers, obtained the services of West Coast Title and Title Guaranty to search the record as an abstractor of title and to issue a policy of title insurance. The title report failed to disclose the existence of Stagen’s lis pendens.

Stagen amended his complaint to include the Browns and Moras as co-defendants with Simon Bard. The Browns and Moras filed a cross-complaint against the Bards and Stagen. Stagen filed a cross-complaint against West Coast Title and Does 1 through 10 and later amended it to name Title Guaranty as a cross-defendant in place of Doe 1. Only the Stagen cross-complaint is involved in these appeals.

West Coast Title and Title Guaranty filed separate answers. On June 29, 1981, West Coast Title moved for a judgment on the pleadings on the ground that since Stagen was not in contractual privity with West Coast Title, and was not within the class of persons intended to be benefitted by the title report, no duty of care was owed to him. Hence, Stagen’s cross-complaint failed to state a cause of action against West Coast Title. The superior court, Judge Chernow, granted the motion, and judgment for cross-defendant West Coast Title was entered. Stagen appealed from that judgment.

During the trial, Title Guaranty moved for a judgment on the pleadings, on the ground that the judgment in favor of West Coast Title left no cause of action against Title Guaranty because the cross-complaint did not allege any negligent acts or omissions by Title Guaranty.

The matter was tried initially before a jury (as to the legal causes of action) which determined that Bard had breached the land sale contract in bad faith. Stagen was awarded both actual and punitive damages. Thereafter, the equitable causes of action were tried by the court, which denied specific performance on the grounds that the property was the community

After trial the superior court, Judge Ackerman, made and entered a judgment which included granting Title Guaranty a judgment on the pleadings. Stagen then appealed from that part of the judgment granting Title Guaranty a judgment on the pleadings.

The two appeals are here consolidated.

Contentions

Stagen contends that where it is foreseeable to a negligent party that its acts would harm a particular third party, privity of contract is not required as a basis for liability. He maintains that respondent title companies were negligent in failing to disclose the lis pendens recorded in connection with his action for specific performance against Bard, the seller of the property. Stagen asserts that respondents knew, or should have known, that their omission of the lis pendens from the title report would jeopardize the rights of that class of individuals (e.g., persons, such as himself, who are claimants of an interest in the title to, or the right of possession of, real property) who reasonably rely on title companies to disclose the recordation of a lis pendens.

He argues that defendants are liable because the lis pendens was recorded with the reasonable expectation that if the seller attempted to sell the property to another buyer, the prospective buyer would not purchase property with such a cloud on its title. Stagen concludes that had the title companies acted in accordance with their duty to their insured no sale would have been completed, and the remedy of specific performance would have been practicable at trial.

Discussion

When abstractors are negligent in preparing a title report, recovery may be sought either in contract or tort. (Northwestern Title Security Co. v. Flack (1970) 6 Cal.App.3d 134 , 146 [ 85 Cal.Rptr. 693 ], Accord, Lattin v. Gillette (1892) 95 Cal. 317 [ 30 P. 545 ]; Hawkins v. Oakland Title Ins. & Guar. Co. (1958) 165 Cal.App.2d 116 , 123-125 [ 331 P.2d 742 ].)

Recovery on the Contract

Civil Code section 1559 provides: “A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the

In Kenny v. Safeco, supra, 113 Cal.App.3d 557 , a title company insured a buyer’s title to be free of encumbrances. When the buyer discovered the existence of a federal tax lien on the property, the title company paid the lien and sued the sellers for breach of contract against encumbrances. The sellers filed a cross-complaint in tort alleging that the title company’s negligence precluded them from effecting a settlement with the IRS for a sum considerably less than the full amount of the lien. The court held that the sellers’ prior knowledge of the tax lien negated any reliance by the sellers on the insurance policy or any possible duty on the part of the title company to advise the sellers of the lien’s existence. “They had this knowledge.” Citing section 552 the court concluded that it could not “rationalize any theory as to how a pleader . . . could properly plead a cross-complaint for negligence in the absence ... of a duty of care.” (Id., at pp. 559-561.)

In Banville v. Schmidt (1974) 37 Cal.App.3d 92 [ 112 Cal.Rptr. 126 ], plaintiffs had accepted an offer for their property, through the broker with whom they had listed it, of $2,000 cash and the assignment of a promissory note secured by a first deed of trust on other property. The broker had represented to plaintiffs that the security for the note was adequate and that the maker of the note was financially responsible. The deed from plaintiffs to the buyer and the assignment to the plaintiffs of the trust deed securing the promissory note (and the note) were recorded contemporaneously. At the same time a title company issued to plaintiffs a policy of title insurance insuring plaintiffs that title to the property which was subject to the trust deed securing the note was vested in the maker of the note.

In fact, the maker of the note had recorded a deed conveying the property back to the buyer of plaintiffs’ property six days prior to issuance of the policy to plaintiffs. The encumbered property was actually inadequate as security for the note, and the maker of the note was in shaky financial condition {id., at pp. 96-97).

Plaintiffs brought an action in tort for negligence, fraud, and misrepresentation against the broker, the buyer, and the title company. The trial court granted judgment against the broker and the buyer for compensatory and punitive damages, but granted judgment for the title company and against plaintiffs, who appealed from the judgment for the title company.

On appeal, the title company urged that it was only an insurer of title; that it owed no duty to the plaintiffs to search the title; that its liability, if any, could be founded only in contract, which was not pleaded; and that it

The broker cross-complained against the title company for indemnity, alleging that its negligence in incorrectly reporting the status of the title to the property securing the trust deed was a superseding cause of any damage incurred by plaintiffs; and that if the broker should be held liable to plaintiffs, the title company should indemnify the broker. The trial court sustained without leave to amend the title company’s demurrer to the broker’s cross-complaint. The court of appeal affirmed, pointing out that there was no privity of contract between the broker and the title company, that the “end and aim” of the title insurance policy was not to protect the broker from the consequences of his own negligence, and that the conduct upon which the broker’s liability to plaintiffs was predicated was not done in reliance upon any information furnished by the title company. Thus, there was no basis for holding the title company liable to the broker.

De Zemplen v. Home Federal S. & L. Assn. (1963) 221 Cal.App.2d 197 [ 34 Cal.Rptr. 334 ], is a pleading case in which the court of appeal reversed a judgment of dismissal following the sustaining, without leave to amend, of demurrers to a complaint for damages for negligent representation in connection with an exchange of property.

Plaintiffs alleged that a title company falsely represented to them that, in acquiring certain property in an exchange, they would be protected by an existing indemnity agreement in respect to the property. Those representations were false, plaintiffs relied upon them to their damage, and the title company intended that plaintiffs rely upon those representations. The court of appeal reversed the judgment, citing section 552, holding that it was not necessary to plead privity of contract to maintain an action for negligent misrepresentation and pointing out that the only limitations in section 552 are that the defendant must intend that the plaintiff rely on the information and that the plaintiff must rely on it to his detriment. (Id., at pp. 205-206.)

In each case cited above title companies were found liable only to persons (1) for whose guidance information was supplied; (2) who justifiably relied on the information; and, most importantly, (3) who were intended to be influenced by the communication. Intent to influence is a threshold issue. In its absence there is no liability even though a plaintiff

Stagen’s argument that had the title companies not failed to disclose the lis pendens no sale would have been completed and the remedy of specific performance would have been practicable at trial, is also without merit. The trial court denied specific performance because the property was the community property of the seller and his wife, the wife did not execute the sales contract, and Stagen was aware of these circumstances. The court concluded that ordering specific performance would have required it to enforce a contract that neither party ever agreed to, and Stagen’s legal remedy of damages was adequate. It is obvious that Stagen’s failure to recover judgment for specific performance was not caused by the subsequent sale of the property.

Stagen also relies on a line of cases commencing with Biakanja v. Irving (1958) 49 Cal.2d 647 [ 320 P.2d 16 , 65 A.L.R.2d 1358 ], to establish liability of professionals to third persons who are not in privity of contract. Biakanja involved a negligence action by the intended beneficiary of an improperly attested will prepared by a notary public. Framing the issue as “whether defendant was under a duty to exercise due care to protect plaintiif from injury and was liable for damage caused plaintiif by his negligence even though they were not in privity of contract.” (id., at p. 648), the Biakanja court set forth the criteria for liability under such circumstances. “The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to aifect the plaintiif, the foreseeability of harm to him, the degree of certainty that the plaintiif suifered injury, the closeness of the connection between the defendant’s conduct and the injury suifered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.” (Id., at p. 650.)

In finding for the intended beneficiary, the court concluded that “the ‘end and aim’ of the transaction was to provide for the passing of [decedent’s]