Centurion Properties III v. Chicago Title Insurance Co. , 793 F.3d 1087 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CENTURION PROPERTIES III, LLC; No. 13-35692
SMI GROUP XIV, LLC,
Plaintiffs-Appellants, D.C. No.
2:12 cv-05130
v. RMP
CHICAGO TITLE INSURANCE
COMPANY, a Nebraska company,
Defendant-Appellee.
CENTURION PROPERTIES III, LLC; No. 13-35725
SMI GROUP XIV, LLC,
Plaintiffs-Appellees, DC No.
2:12 cv-05130
v. RMP
CHICAGO TITLE INSURANCE
COMPANY, a Nebraska company, ORDER RE
Defendant-Appellant. CERTIFICATION
Appeals from the United States District Court
for the Eastern District of Washington
Rosanna Malouf Peterson, Chief District Judge, Presiding
Argued and Submitted
June 2, 2015—Seattle, Washington
2 CENTURION PROPERTIES V. CHICAGO TITLE
Filed July 16, 2015
Before: Diarmuid F. O’Scannlain, A. Wallace Tashima,
and M. Margaret McKeown, Circuit Judges.
Order
SUMMARY*
Certification of Question to State Supreme Court
The panel certified to the Washington Supreme Court the
following question: Does a title company owe a duty of care
to third parties in the recording of legal instruments?
COUNSEL
Steven J. Wells (argued), Timothy J. Droske, Dorsey &
Whitney LLP, Minneapolis, Minnesota; Peter S. Ehrlichman,
Todd S. Fairchild, Dorsey & Whitney LLP, Seattle,
Washington, for Plaintiffs-Appellants/Cross-Appellees.
Stephen J. Sirianni (argued), Sirianni Youtz Spoonemore
Hamburger, Seattle, Washington, for Defendant-Appellee.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
CENTURION PROPERTIES V. CHICAGO TITLE 3
ORDER
This case arises from a dispute between plaintiffs-
appellants Centurion Properties III, LLC (“CPIII”) and SMI
Group XIV, LLC (“SMI”) (together, “Plaintiffs”), and
defendant-appellee Chicago Title Insurance Company
(“Chicago Title”) over whether Chicago Title breached a duty
of care to Plaintiffs, causing damages, when it recorded
unauthorized liens on CPIII’s property. We have jurisdiction
under 28 U.S.C. § 1291. The appeal turns on whether a title
company owes a duty of care to third parties in these
circumstances, which is a potentially dispositive, but
unresolved and important question in Washington law. Thus,
we respectfully certify to the Washington Supreme Court the
following question:
Does a title company owe a duty of care to
third parties in the recording of legal
instruments?
I.
CPIII was formed in 2006 to purchase a tract of real
property in Richland, Washington (the “subject property”).
SMI, which was owned by Michael Henry (“Henry”),
controlled ten percent of CPIII. The remaining ninety percent
was owned by entities controlled by Tom Hazelrigg III and
his son, Aaron Hazelrigg. CPIII’s managing member upon its
formation was an Aaron Hazelrigg-owned company known
as Centurion Management III, LLC (“CMIII”), which owned
seventy-eight percent of CPIII.
Shortly after its formation, CPIII purchased the subject
property, which was financed by a loan from General Electric
4 CENTURION PROPERTIES V. CHICAGO TITLE
Capital Corporation (“GECC”); in turn, the loan was secured
by a senior lien on the subject property. As a condition of the
loan, CPIII agreed not to further encumber the subject
property without GECC’s prior written approval. The GECC
Loan Agreement specified that CPIII’s failure to comply with
this condition constituted an event of default.
Chicago Title served as the escrow, closing agent, and
title insurer for the original purchase, and it also was named
trustee of GECC’s senior lien. Pursuant to this role, Chicago
Title received copies of the documents prohibiting the
recording of junior liens on the property.
In July 2007, Aaron Hazelrigg signed a junior deed of
trust to another lender, Centrum Financial Services, Inc.
(“Centrum”), encumbering the property. Chicago Title
served as the title insurer on this transaction, and it was also
tasked with recording the junior lien. Centrum provided
Chicago Title with the following instructions for recording:
You may record the Leasehold [Deed of
Trust], provided you are irrevocably
committed to insure the enclosed Mortgage,
on a mortgagee’s extended basis with
coverage of $10,000,000.00, as a valid
SECOND lien against the leasehold property
which is the subject of the commitment for
title insurance issued under the referenced file
number, subject only to matters set forth
therein.
Centrum also provided Chicago Title with another copy of
the documents prohibiting CPIII from recording a second lien
against the subject property without GECC’s approval.
CENTURION PROPERTIES V. CHICAGO TITLE 5
Chicago Title subsequently issued the title insurance policy
and recorded the junior lien. Chicago Title later recorded
three more instruments against the subject property as a
courtesy service to Centrum.1 Chicago Title has “conced[ed]
. . . that it could be charged with actual knowledge of [the
documents prohibiting recording of junior liens] when it . . .
recorded the liens.” Centurion Props., III, LLC v. Chi. Title
Ins. Co., No. CV-12-5130-RMP, 2013 WL 3350836, at *6
(E.D. Wash. July 3, 2013).
In September 2009, GECC learned about the junior liens
on the subject property after obtaining a title report reflecting
the recordings. GECC notified CPIII that events of default
had occurred. In January 2010, GECC declared that CPIII
was in default and commenced foreclosure proceedings.
In response to the default, CPIII – now led by Henry and
SMI, rather than CMIII and the Hazelriggs – sought
replacement financing for the property. CPIII negotiated with
a potential replacement lender, CTL Capital, which at one
point indicated there was a “reasonable likelihood” that it
would be able to provide the loan. However, for reasons the
record does not directly reflect, CTL Capital backed out of
the financing. Henry indicated in affidavit testimony that he
believed, based on “lengthy experience in commercial real
estate transactions and financing,” that CTL Capital backed
out because junior liens had been recorded against the subject
property.
In February 2010, CPIII and SMI filed suit in Washington
state court against a large number of parties, including Tom
1
An additional legal instrument was recorded against the subject
property by First American Title Insurance Co.
6 CENTURION PROPERTIES V. CHICAGO TITLE
and Aaron Hazelrigg and Centrum, alleging improper actions
taken while the Hazelriggs controlled CPIII. The case was
removed to the U.S. District Court for the Eastern District of
Washington.
CPIII subsequently declared bankruptcy after failing to
obtain replacement financing for the GECC loan. The district
court in October 2010 thus referred the case to the U.S.
Bankruptcy Court for the Eastern District of Washington,
where it became an adversary proceeding in the bankruptcy
case. In April 2011, while the adversary proceeding was
pending in bankruptcy court, Appellants amended their
complaint to assert a claim against Chicago Title for
negligence, stemming from Chicago Title’s recording of the
disputed liens. The district court accepted CPIII’s
reorganization plan before ruling on the parties’ summary
judgment motions in the adversary proceeding; thus, the case
returned to federal district court. The district court
subsequently granted summary judgment to Chicago Title on
the negligence claim, holding that Chicago Title did not owe
a duty of care to Plaintiffs. This appeal followed.
II.
A.
Certification is a means “to obtain authoritative answers
to unclear questions of state law.” Toner for Toner v. Lederle
Labs., Div. of Am. Cyanamid Co., 779 F.2d 1429, 1432 (9th
Cir. 1986). In general, its use “in a given case rests in the
sound discretion of the federal court.” Lehman Bros. v.
Schein, 416 U.S. 386, 391 (1974). Certification is
particularly appropriate “where the issues of law are complex
and have ‘significant policy implications.’” McKown v.
CENTURION PROPERTIES V. CHICAGO TITLE 7
Simon Prop. Group Inc., 689 F.3d 1086, 1091 (9th Cir. 2012)
(quoting Perez-Farias v. Global Horizons, Inc., 668 F.3d 588,
593 (9th Cir. 2011)).
Washington state law recognizes the propriety of
certification “[w]hen in the opinion of [the] federal court
before whom a proceeding is pending, it is necessary to
ascertain the local law of [Washington] in order to dispose of
such proceeding and the local law has not been clearly
determined.” Wash Rev. Code § 2.60.020; see McKown,
689 F.3d at 1091. Thus, we have certified a question to the
Washington Supreme Court where a question of law “‘has not
been clearly determined’ by the Washington courts,” Bylsma
v. Burger King Corp., 676 F.3d 779, 783 (9th Cir. 2012)
(quoting § 2.60.020), and “the answer to [the] question is
outcome determinative,” id.
B.
Under the standards articulated above, certifying to the
Washington Supreme Court the question whether a title
company owes a duty of care to third parties when recording
legal instruments is an appropriate and reasonable exercise of
our discretion. Whether Chicago Title owed such a duty is
determinative to how this appeal will be resolved. If, as the
district court reasoned, Chicago Title owed no duty, then we
would affirm the district court’s grant of summary judgment
to Chicago Title. If Chicago Title did owe a duty of care,
then summary judgment would be inappropriate at this stage.
In that event, we likely would remand to the district court for
a determination in the first instance as to causation, which the
parties also dispute. See Quinn v. Robinson, 783 F.2d 776,
814 (9th Cir. 1986) (“As a general rule, ‘a federal appellate
8 CENTURION PROPERTIES V. CHICAGO TITLE
court does not consider an issue not passed upon below.’”
(quoting Singleton v. Wulff, 428 U.S. 106, 120 (1976))).
Whether a duty of care exists in these circumstances is a
matter of Washington common law. In determining the
existence and scope of a duty, Washington courts weigh
“considerations of ‘logic, common sense, justice, policy, and
precedent.’” Snyder v. Med. Serv. Corp. of E. Wash., 35 P.3d
1158, 1164 (Wash. 2001) (quoting Lords v. N. Auto. Corp.,
881 P.2d 256, 260 (Wash. Ct. App. 1994)).
To date, no Washington case has addressed whether a title
company owes a duty of care to third parties to refrain from
negligently recording legal instruments. Plausible arguments
can be made on both sides.
Washington courts have concluded that professionals owe
duties of care to third parties in other contexts. For example,
in Affiliated FM Insurance Co. v. LTK Consulting Services,
Inc., the Washington Supreme Court concluded that an
engineering firm owed a duty of care – to refrain from
producing negligent designs – to third parties who
foreseeably might be injured by the products of those designs.
243 P.3d 521, 528 (Wash. 2010). Washington courts have
indicated that similar duties of care exist in some instances
for accountants and real estate appraisers. See Schaaf v.
Highfield, 896 P.2d 665, 670 (Wash. 1995); Dewar v. Smith,
342 P.3d 328, 334–35 (Wash. Ct. App. 2015).
According to Plaintiffs, title companies occupy a position
of public trust similar to engineers and accountants, see White
v. W. Title Ins. Co., 710 P.2d 309, 315–16 (Cal. 1986) (“A
title company is engaged in a business affected with the
public interest . . . .”), and ought to be held liable insofar as
CENTURION PROPERTIES V. CHICAGO TITLE 9
their negligence in recording legal instruments affects
foreseeable victims. For this proposition, Plaintiffs lean
heavily on the Washington Supreme Court’s decision in
Affiliated FM. However, Affiliated FM arguably gave special
treatment to engineers because of the propensity of their work
to result in physical injury. Affiliated FM, 243 P.3d at 528
(“An interest we must consider is the safety of persons and
property from physical injury, an interest that the law of torts
protects vigorously.”). Further, title companies engaged in
the recording of legal instruments may be different from other
professionals because recording typically does not involve the
exercise of professional discretion, as does the provision of
accounting or appraisal services.2 See McLean v. City of N.Y.,
905 N.E.2d 1167, 1173 (N.Y. 2009) (“[M]inisterial acts may
support liability only where a special duty is found.”). We
cannot extrapolate from Affiliated FM that the Washington
Supreme Court would extend a duty of care to companies
recording legal instruments.
Chicago Title’s arguments are equally unsatisfactory.
Chicago Title emphasizes that the Washington Supreme
Court has held that title companies do not owe tort duties to
contracting parties when issuing “preliminary commitments”
for title insurance, which, according to Chicago Title, means
that Washington courts would not approve of title companies’
owing duties to third parties. See Barstad v. Stewart Title
Guar. Co., 39 P.3d 984, 988 (Wash. 2002); Klickman v. Title
Guar. Co. of Lewis Cnty., 716 P.2d 840, 842 (Wash. 1986).
Although these precedents arguably suggest a reticence to
impose duties on title companies beyond those they assume
2
We note, however, that Plaintiffs presented plausible evidence that
Centrum instructed Chicago Title to record the disputed liens only if they
were valid, thereby calling on Chicago Title’s professional discretion.
10 CENTURION PROPERTIES V. CHICAGO TITLE
through contract, that is not the only reasonable
interpretation. That tort duties do not attach when a title
company issues “a statement submitted to the potential
insured establishing the terms and conditions upon which the
title insurer is willing to issue a title policy” does not prove
that title companies have blanket immunity from tort liability.
Barstad, 39 P.3d at 988 (citing Wash Rev. Code
§ 48.29.010(3)(c)). Considerations of “logic, common sense,
justice, policy, and precedent” may counsel for more
expansive liability when a title company actually acts on
behalf of a client. Snyder, 35 P.3d at 1164 (quoting Lords,
881 P.2d at 260).
Precedent outside of Washington is also inconclusive.
We are aware of only two cases to address whether title
companies owe a duty of care to third parties. In the first
case, Seeley v. Seymour, the California Court of Appeal
concluded emphatically that the title company defendant did
owe a duty of care to a third party to refrain from negligent
recording of title documents. 237 Cal. Rptr. 282, 291–92 (Ct.
App. 1987) (“As institutions charged with the public trust, it
is important that [title companies] be held accountable when
their negligent acts result in economic harm to individual
property interests.”). In the other case, Luce v. State Title
Agency, Inc., the Court of Appeals of Arizona reached
precisely the opposite conclusion. 950 P.2d 159, 162 (Ariz.
Ct. App. 1997).
In sum, there is no way accurately to predict how the
Washington Supreme Court would decide this matter. “Our
task, when sitting in diversity, is to ask ourselves what the
Washington Supreme Court would do with this case . . . .
Simply put, we just do not know what it would do.”
McKown, 689 F.3d at 1093–94. Any decision by the panel
CENTURION PROPERTIES V. CHICAGO TITLE 11
essentially would be making a policy judgment that lies
properly within the purview of the Washington Supreme
Court.3
Holding that title companies owe duties to third parties
when recording legal instruments might have a significant
impact on how the title industry and recording generally
operates in Washington. Cf. Keystone Land & Dev. Co. v.
Xerox Corp., 353 F.3d 1093, 1097 (9th Cir. 2003) (certifying
question to the Washington Supreme Court, in part, because
of potential “far-reaching effects on those who contract in, or
are subject to, Washington law”). These concerns are
particularly acute given Washington courts’ insistence on a
stable, orderly recording system. See Ellingsen v. Franklin
Cnty., 810 P.2d 910, 913 (Wash. 1991). We take no position
on the issue; we merely wish to indicate that the common
law issue at bench is a weighty one, and that Washington’s
own courts are best suited to decide it.
III.
In light of the foregoing discussion, we hereby certify the
following question to the Washington Supreme Court:
Does a title company owe a duty of care to
third parties in the recording of legal
instruments?
3
Ordinarily, we are hesitant to certify a question when certification is
requested for the first time on appeal. Thompson, 547 F.3d at 1065. The
question presented here, however, “raise[s] important policy
considerations that only Washington state can answer.” McKown,
689 F.3d at 1094.
12 CENTURION PROPERTIES V. CHICAGO TITLE
In framing the question this way, “[w]e do not intend to
restrict the Washington Supreme Court’s consideration of this
issue, and we recognize that it may reformulate the question.”
Queen Anne Park Homeowners Ass’n v. State Farm Fire &
Cas. Co., 763 F.3d 1232, 1235 (9th Cir. 2014).
The Clerk of Court is hereby ordered to transmit to the
Washington Supreme Court, under official seal of the United
States Court of Appeals for the Ninth Circuit, a copy of this
order and all briefs and excerpts of record pursuant to Wash.
Rev. Code §§ 2.60.010(4), 2.60.030(2), and Wash. R. App. P.
16.16.
If the Washington Supreme Court accepts the certified
question, we designate appellant CPIII as the party to file the
first brief pursuant to Wash. R. App. P. 16.16(e)(1).
We hereby vacate submission and stay further
proceedings in this court pending the Washington Supreme
Court’s decision whether it will accept the certified question
and, if so, receipt of the Washington Supreme Court’s answer
to the certified question. The panel will resume control and
jurisdiction upon receipt of an answer to the certified question
or upon the Washington Supreme Court’s decision to not
accept the certified question.
When the Washington Supreme Court decides whether or
not to accept the certified question, the parties shall file
promptly a joint status report informing this court of the
decision. If the Washington Supreme Court accepts the
certified question, the parties shall file a further joint status
CENTURION PROPERTIES V. CHICAGO TITLE 13
report informing this court when the Washington Supreme
Court issues an answer to the certified question promptly
upon the issuance of that determination.
IT IS SO ORDERED.
___________________________________
Chief Judge Sidney R. Thomas
U.S. Court of Appeals for the Ninth Circuit