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Arizona Court: Lender Who Bought Property at Foreclosure By Full Credit Bid Entitled to Title Insurance Coverage

Insurance Coverage Litigation Law Alert Sarah R. Anchors

Can a lender who purchases the secured property via a full credit bid still obtain payment from the insurer who issued a title insurance policy for the deed of trust? Yes, the Arizona Supreme Court ruled this week, in a win for lenders and insureds. See Equity Income Partners, LP v. Chicago Title Ins. No., CV-16-0162-CQ.

When a lender issued two loans to borrowers, it bought two standard form title insurance policies that insured the lender against loss or damage sustained by reason of unmarketable title or lack of right of access to the land the borrowers were purchasing. The borrowers discovered that the land was surrounded by Maricopa County land and that they did not have legal access to the land. The borrowers defaulted and the lender foreclosed, and purchased the properties at a trustee’s sale for a full credit bid (i.e., the full amount of the debt). The lender then submitted a claim to its title insurer. But the insurer, Chicago Title Insurance Company (“Chicago Title”), refused to pay. 

Chicago Title argued the policy was extinguished when the lender purchased the properties by credit bid for the full amount of the debt. The court disagreed, because the policy stated that coverage remained in force after the insured acquired the property. The provision stating that “payment” of the secured debt reduced the amount of insurance did not apply because the credit bid was not a “payment,” the court ruled. The lender received the title to the property and the borrowers' outstanding debt was deemed fully satisfied, but the lender did not actually make or receive any payment. Therefore, the policy was not terminated nor its value reduced by the credit bid. So what is Chicago Title’s liability to the lender? The difference between the loss that the lender incurred and the fair market value of the properties that the lender acquired.

For any questions, please contact Sarah R. Anchors, at sarah.anchors@quarles.com or (602) 229-5788.