SUPREME COURT OF ARIZONA
En Banc
FIRST AMERICAN TITLE INSURANCE ) Arizona Supreme Court
COMPANY, a California ) No. CV-07-0412-PR
corporation, )
) Court of Appeals
Plaintiff/Counter- ) Division One
Defendant/Appellee, ) No. 1 CA-CV 06-0782
)
v. )
) Maricopa County
ACTION ACQUISITIONS, LLC, an ) Superior Court
Arizona limited liability ) No. CV2006-050519
company; FREE FOR NOW, LLC, an )
Arizona limited liability )
company, )
) O P I N I O N
Defendants/Counter- )
Claimants/Appellants. )
_________________________________ )
)
ACTION ACQUISITIONS, LLC, an )
Arizona limited liability )
company; FREE FOR NOW, LLC, an )
Arizona limited liability )
company, )
)
Third-Party )
Plaintiffs/Appellants, )
)
v. )
)
CAPITAL TITLE AGENCY, INC., an )
Arizona corporation, )
)
Third-Party Defendant/Appellee. )
__________________________________)
Appeal from the Superior Court in Maricopa County
The Honorable Paul A. Katz, Judge
AFFIRMED
________________________________________________________________
Opinion of the Court of Appeals, Division One
216 Ariz. 537, 169 P.3d 127 (App. 2007)
VACATED
________________________________________________________________
RAMRAS LAW OFFICES, P.C. Phoenix
By David N. Ramras
Ari Ramras
Attorneys for First American Title Insurance Company
BERENS, KOZUB & KLOBERDANZ, P.L.C. Scottsdale
By Daniel L. Kloberdanz
William A. Kozub
Attorneys for Action Acquisitions, LLC and
Free For Now, LLC
JACKSON WHITE, P.C. Mesa
By Eric M. Jackson
Christine Farnsworth
Attorneys for Capital Title Agency, Inc.
________________________________________________________________
B A L E S, Justice
¶1 This case involves title insurance for a home
purchased at a sheriff’s sale. After the purchasers obtained
the insurance policy, the superior court set aside the sale
because the purchasers had paid a grossly inadequate price. The
purchasers then made a claim for insurance coverage. We hold
that the title insurer properly denied coverage based on the
policy’s exclusion for loss resulting from risks created by the
purchasers.
FACTS AND PROCEDURAL BACKGROUND
¶2 At a sheriff’s sale in early 2005, the purchasers -
Action Acquisitions, LLC and Free for Now, LLC - successfully
bid $3,500 for a home in Gilbert. The sale occurred because a
homeowner’s association had foreclosed on the home to collect
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about $3,000 in unpaid assessments. The property was worth
between $300,000 and $400,000 and subject to a $162,000 deed of
trust. The purchasers, who were in the business of buying and
selling homes for profit, thus stood to gain more than $130,000
if they resold the home at market value.
¶3 After the six-month redemption period, the purchasers
bought from Capital Title Agency a $400,000 owner’s title
insurance policy issued by First American Title Insurance
Company. The purchasers allege that, before the policy issued,
Capital Title investigated the underlying foreclosure to confirm
there had been no procedural errors, and that it knew the
purchasers had paid only $3,500. They also allege that they
accepted Capital Title’s recommendation to buy a premium policy
instead of a basic policy. The policy they purchased – as did
the basic policy - excluded coverage for certain losses,
including those resulting from the insured’s “failure to pay
value for [the] Title” (Exclusion 5) or from risks “created” by
the insured (Exclusion 4.a).
¶4 The prior homeowner successfully moved to set aside
the sheriff’s sale on the ground that the $3,500 price was
grossly inadequate. See Nussbaumer v. Superior Court, 107 Ariz.
504, 507, 489 P.2d 843, 846 (1971) (recognizing court’s
equitable power to set aside foreclosure sale for grossly
inadequate price). The purchasers did not appeal the superior
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court’s judgment setting aside the sale. Instead, they made a
claim against the title insurance policy. First American sought
a declaratory judgment that it was not liable; the purchasers
brought a counterclaim and a claim against Capital Title. First
American and Capital Title moved for summary judgment, which the
superior court granted. It found that coverage was properly
denied under the “created” risk exclusion. It did not address
the “failure to pay value” exclusion.
¶5 The court of appeals affirmed; it relied on the
“failure to pay value” exclusion and did not address the
“created” risk exclusion. First Am. Title Ins. Co. v. Action
Acquisitions, LLC, 216 Ariz. 537, 539-40 ¶ 8, 169 P.3d 127, 129-
30 (App. 2007). The court stated that Arizona courts no longer
construe insurance contract ambiguities against the drafter, but
instead look to the purpose of the exclusion, public policy, and
the transaction as a whole. Id. at 540 ¶ 9, 169 P.3d at 130.
Considering these factors, the court concluded that the “failure
to pay value” exclusion applies if the insured is not a bona
fide purchaser for value under the recording statutes and that a
purchaser whose sale is set aside for a grossly inadequate price
is not a bona fide purchaser. Id. at 540-41 ¶¶ 12-13, 169 P.3d
at 130-31. The court further held that the purchasers had no
reasonable expectation of insurance coverage. Id. at 542 ¶ 19,
169 P.3d at 132.
4
¶6 This case presents important, recurring issues. We
granted review and have jurisdiction under Article 6, Section
5(3) of the Arizona Constitution and A.R.S. § 12-120.24 (2003).
ANALYSIS
¶7 To resolve this case, we must consider the scope of
the policy exclusions for “failure to pay value” and for risks
“created” by the insured and whether the purchasers here had a
reasonable expectation of coverage.
I.
¶8 We review de novo the interpretation of insurance
contracts. Sparks v. Republic Nat’l Life Ins. Co., 132 Ariz.
529, 534, 647 P.2d 1127, 1132 (1982). If a clause appears
ambiguous, we interpret it by looking to legislative goals,
social policy, and the transaction as a whole. Employers Mut.
Cas. Co. v. DGG & CAR, Inc., 218 Ariz. 262, 264 ¶ 9, 183 P.3d
513, 515 (2008). If an ambiguity remains after considering
these factors, we construe it against the insurer. Id. The
court of appeals erred in saying that we have “abandoned” the
rule that ambiguities are construed against the insurer. That
rule remains; we simply do not resort to it unless other
interpretive guides fail to elucidate a clause’s meaning. See
Transamerica Ins. Group v. Meere, 143 Ariz. 351, 355, 694 P.2d
181, 185 (1984).
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II.
A.
¶9 The policy excludes coverage for loss resulting from
the insured’s “failure to pay value for [the] Title.” The
purchasers argue that if “value” is given its “plain meaning,”
the exclusion does not apply, because they paid $3,500 for
property that was subject to both a $162,000 first mortgage and
a statutory right to redeem the foreclosure. Alternatively, the
purchasers argue that the word “value” has various meanings and
the court of appeals erred in equating the term as used in the
exclusion with the “valuable consideration” required for a
purchaser to be protected by the recording statutes.
¶10 We agree with the purchasers that the word “value,”
when considered alone, is somewhat unclear. But this conclusion
merely indicates that we need to consider whether other factors
will clarify the meaning of the exclusion. We have not
identified any pertinent legislative goals or social policies
regarding this interpretive issue. We find guidance, however,
in the transaction as a whole, including both the general nature
of title insurance and the provisions of this policy.
¶11 Title insurance generally is an insurer’s agreement to
insure against losses caused by claims against the insured’s
title to real property, unless a title search identifies the
risk of those claims or an exclusion applies. Quintin
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Johnstone, Title Insurance, 66 Yale L.J. 492, 492-95 (1957).
Before issuing a policy, an insurer will review the public
records to identify defects or encumbrances. D. Barlow Burke,
Law of Title Insurance § 1.01 (2000 & Supp. 2007). The insurer
typically will exclude from its coverage a list of “exceptions”
reflecting these risks. Joyce Palomar, Palomar and Patton on
Land Titles § 41 (3d ed. 2003 & Supp. 2007). Apart from such
scheduled exceptions, title insurers will include standard
exclusions, like those at issue in this case.
¶12 Title insurance exists against the backdrop of the
recording statutes. Under those laws, unrecorded interests are
invalid against creditors and against subsequent purchasers for
“valuable consideration” who lack notice of the interest.
A.R.S. § 33-412(A) (2007). Conversely, unrecorded instruments
are valid “as to all subsequent purchasers with notice thereof,
or without valuable consideration.” A.R.S. § 33-412(B). The
term “bona fide purchaser” is often used to refer to one who
purchases property for value and without notice. See, e.g.,
Davis v. Kleindienst, 64 Ariz. 251, 258, 169 P.2d 78, 82 (1946).
¶13 This background informs our interpretation of the
“failure to pay value” exclusion. How can a purchaser’s failure
to pay value for the title result in a loss? This loss can
obviously occur if an insured lacking recording act protection
faces a title challenge from a prior unrecorded interest. The
7
recording statutes generally protect bona fide purchasers from
unrecorded interests in land, but such interests are valid and
binding as to a purchaser who does not pay valuable
consideration or who has notice.
¶14 The circumstances in which a purchaser will not be
protected by the recording statutes have evident counterparts in
the policy exclusions. Exclusion 5 excludes coverage for losses
that result from the purchaser’s “failure to pay value” for the
title; Exclusion 4.b applies to unrecorded risks that are known
to the purchaser but not the insurer.
¶15 Given the policy language and the nature of title
insurance, the exclusion for “failure to pay value” is most
reasonably understood as applying when an insured is not a bona
fide purchaser protected by the recording statutes. Although we
have not found decisions in other jurisdictions addressing this
issue, our conclusion comports with the views of commentators.
See Joyce Palomar, Title Insurance Law § 6.25 (2007); Roger
Bernhardt, Teaching Property Law as Real Estate Lawyering, 23
Pepp. L. Rev. 1099, 1209 (1996).
¶16 Thus, we agree with the court of appeals that the
policy’s exclusion for loss resulting from the insured’s
“failure to pay value” for the title means a loss resulting
because the insured has not paid “valuable consideration” and
therefore is not protected under the recording statutes.
8
B.
¶17 The purchasers contend that even if the exclusion
applies when an insured does not pay valuable consideration,
their $3,500 payment constitutes such consideration. We agree.
¶18 To pay valuable consideration under the recording
statutes, a purchaser must give a “present equivalent” for the
title. Alexander v. O’Neil, 77 Ariz. 91, 96, 267 P.2d 730, 733
(1954). “Present equivalent” has an expansive meaning. It does
not require the purchaser to pay fair market value or even a
price that might be characterized as fair or adequate. Instead,
the required “valuable consideration” or “present equivalent”
exists if the purchaser surrenders a right or detrimentally
changes a legal position “so that if the claim of title fails
the purchaser is left in a worse position than he was before.”
Id. at 99, 267 P.2d at 735; see 2 John Norton Pomeroy, A
Treatise on Equity Jurisprudence § 747 (4th ed. 1918).
¶19 “Valuable consideration” is required under the
recording statutes to distinguish transactions in which the
purchaser has surrendered a significant right or incurred some
legal detriment from transactions in which a person takes title
as a “volunteer” (for example, by gift or devise). Alexander,
77 Ariz. at 99, 267 P.2d at 735; Pomeroy, supra, at § 747.
Thus, a nominal payment is not valuable consideration because it
demonstrates that no purchase ever occurred. For example, when
9
an elderly father “sold” property to his daughter for $10, the
low price demonstrated that the “sale” was really a gift. Ten
Eyck v. Whitbeck, 31 N.E. 994, 997 (N.Y. 1892).
¶20 Here, the $3,500 was valuable consideration because,
although it was a bargain price, the purchasers surrendered the
right to money of more than a nominal amount. Furthermore,
there is little danger of bad faith because they purchased the
property at arm’s length at a sheriff’s sale, not from a friend
or relative who might charge a minimal amount in an effort to
characterize a gift as a purchase.
¶21 First American and Capital Title nonetheless urge us
to hold, as did the court of appeals, that one whose purchase is
later set aside for a grossly inadequate price has, by
definition, not paid valuable consideration. At least one other
court has adopted this analysis. See Phillips v. Latham, 523
S.W.2d 19, 24 (Tex. Civ. App. 1975). We find this argument
unpersuasive in light of our decision in Krohn v. Sweetheart
Props., Ltd., 203 Ariz. 205, 52 P.3d 774 (2002).
¶22 In Krohn, we held that a trustee’s sale of property
under a “deed of trust may be set aside solely on the basis that
the bid price was grossly inadequate.” Id. at 214 ¶ 38, 52 P.3d
at 783 (emphasis omitted). In so ruling, we observed that a
price of twenty percent or less of fair market value is
generally considered a grossly inadequate price. Id. at 213
10
¶ 34, 52 P.3d at 782. The purchaser in Krohn had bid slightly
more than $10,000 at the trustee’s sale for property worth
$57,000. Id. at 207 ¶ 5, 52 P.3d at 776. We acknowledged that
the purchaser was a bona fide purchaser for value, but concluded
this status did not insulate the sale from being set aside for a
grossly inadequate price. Id. at 211 ¶ 24, 52 P.2d at 780; see
also id. at 214 ¶ 41, 52 P.2d at 783 (McGregor, J., dissenting).
¶23 Krohn establishes that one who has paid an amount
sufficient to qualify as a bona fide purchaser, that is, one who
has paid valuable consideration under the recording statutes,
still risks having the sale set aside. There is good reason not
to conflate the amount needed to secure recording statute
protection with the amount required to prevent a court from
equitably setting aside a foreclosure, as they reflect distinct
policy concerns. “Valuable consideration” is required for
recording act protection because prior transferees holding
unrecorded interests are viewed as having a greater claim to the
law’s protection than subsequent transferees who received their
property interest without giving something up in return. Ten
Eyck, 31 N.E. at 996. In contrast, by using a “grossly
inadequate price” to define the court’s power to set aside a
foreclosure, the law seeks to ensure some substantive fairness
for the debtor-owner, who “has absolutely no control over the
amount bid.” Nussbaumer, 107 Ariz. at 507, 489 P.2d at 846.
11
¶24 Accordingly, although the “failure to pay value”
exclusion applies if the purchaser’s loss is caused by failure
to pay valuable consideration under the recording statutes, we
hold that the $3,500 payment here was sufficient to secure
recording act protection. The “failure to pay value” exclusion,
therefore, does not preclude recovery.
III.
¶25 The policy also excludes coverage for loss resulting
from risks “created, allowed, or agreed to by” the insureds.
The purchasers argue that this exclusion is ambiguous and cannot
support First American’s denial of coverage because Capital
Title knew of the $3,500 bid. First American and Capital Title
contend the exclusion applies because the low bid was an
intentional, affirmative act by the purchasers.
¶26 Arizona’s court of appeals and courts across the
country have held that an insured creates a defect or a risk by
acting affirmatively to bring it about. Ariz. Title Ins. &
Trust Co. v. Smith, 21 Ariz. App. 371, 374, 519 P.2d 860, 863
(1974); see also Burke, supra, § 4.04[A] (citing cases). For
example, a purchaser can create a defect by buying a property
after learning it had been sold to somebody else. Stevens v.
United Gen. Title Ins. Co., 801 A.2d 61, 69 (D.C. 2002).
¶27 The courts disagree, however, about the intent
required to trigger the exclusion. Some hold the insured must
12
merely have intended the act that caused the title defect;
others require the insured to have intended the defect itself.
Compare Transamerica Title Ins. Co. v. Alaska Fed. Sav. & Loan,
833 F.2d 775, 776 (9th Cir. 1987) (applying exclusion when
insured had intentionally obtained an equitable lien rather than
purchasing the property), with Laabs v. Chicago Title Ins. Co.,
241 N.W.2d 434, 439 (Wis. 1976) (finding exclusion inapplicable
when insured had intentionally misplaced a fence, but had not
intended to create a defect). Some cases even suggest that
“intentional misconduct” is required. E.g., Brown v. St. Paul
Title Ins. Corp., 634 F.2d 1103, 1107 n.8 (8th Cir. 1980).
¶28 Considering the nature of title insurance, we conclude
that the exclusion is not ambiguous and that it applies whenever
the insured intended the act causing the defect, not only when
the insured intended the defect or when the insured engaged in
misconduct. Title insurance principally protects against
unknown and unknowable risks caused by third-party conduct, not
intentional acts of the policyholder. Otherwise, the insured
would be able to use title insurance to make windfall profits.
See Am. Sav. & Loan Ass’n v. Lawyers Title Ins. Corp., 793 F.2d
780, 784 (6th Cir. 1986). We also reject the purchasers’
proposed rule that the exclusion applies only when the insured’s
conduct was unknown to the title insurer. That rule would
undesirably deny title insurers the power to define the scope of
13
coverage by excluding recognized risks.1
¶29 In this case, by bidding $3,500, the purchasers
created the risk that resulted in the loss. Their bid was an
intentional, affirmative act that resulted in the sale being set
aside. If the exclusion did not apply, the policy would
effectively guarantee the purchasers a windfall profit of
possibly more than $200,000, even though they paid only $3,500
and later lost title for paying a grossly inadequate price. The
purchasers would benefit as if they had actually sold the
property for market value. Although insurers and purchasers
conceivably could agree to title insurance affording such
coverage, it is not consistent with the “created risk”
exception, the other policy language, or the general nature of
title insurance.
¶30 We accordingly agree with the trial court that the
“created” risk exclusion applies.
IV.
¶31 The purchasers finally argue that even if one of the
exclusions applies, they are entitled to coverage under the
reasonable expectations doctrine, as explicated in Darner Motor
1
We also recognize a line of cases beginning with Hansen v.
Western Title Insurance Co., 33 Cal. Rptr. 668, 671 (Ct. App.
1963), that have found the exclusion does not apply to defects
caused by the insured’s negligent acts. Because the risk in
this case resulted from the insured’s intentional acts, we need
not decide whether to adopt Hansen’s rule.
14
Sales, Inc. v. Universal Underwriters Insurance Co., 140 Ariz.
383, 682 P.2d 388 (1984). Under this doctrine, a contract term
is not enforced if one party has reason to believe that the
other would not have assented to the contract if it had known of
that term. Id. at 391-92, 582 P.2d at 396-97 (adopting
Restatement (Second) of Contracts § 211 (1981)). In Darner, the
Court noted that “[t]he rule which we adopt applies to contracts
(or parts of contracts) made up of standardized forms which,
because of the nature of the enterprise, customers will not be
expected to read and over which they have no real power of
negotiation.” Darner, 140 Ariz. at 394, 582 P.2d at 398.
A.
¶32 First American and Capital Title contend that the
reasonable expectations doctrine should not apply here because
the policy was negotiated and it was issued to sophisticated
business entities that are not within the class of insureds the
doctrine is meant to protect. We need not reach these issues,
but instead assume for analysis that the doctrine does apply.
B.
¶33 Terms can frustrate the insured’s reasonable
expectations in four situations:
1. Where the contract terms, although not
ambiguous to the court, cannot be understood
by the reasonably intelligent consumer who
might check on his or her rights, the court
will interpret them in light of the
15
objective, reasonable expectations of the
average insured;
2. Where the insured did not receive full and
adequate notice of the term in question, and
the provision is either unusual or
unexpected, or one that emasculates apparent
coverage;
3. Where some activity which can be reasonably
attributed to the insurer would create an
objective impression of coverage in the mind
of a reasonable insured;
4. Where some activity reasonably attributable
to the insurer has induced a particular
insured reasonably to believe that he has
coverage, although such coverage is
expressly and unambiguously denied by the
policy.
Gordinier v. Aetna Cas. & Sur. Co., 154 Ariz. 266, 272-73, 742
P.2d 277, 283-84 (1987) (citations omitted).
¶34 We reject the purchasers’ contention that they had a
reasonable expectation of coverage. Their expectations fail
each of the four Gordinier tests. They fail the first test
because a reasonable title insurance holder would not expect
protection against loss caused by its own intentional acts.
Rather, it would understand that title insurance guards against
discoverable risks, as well as a limited number of
undiscoverable risks created by others. For the same reason,
the “created” risk exclusion could not have been “unusual or
unexpected,” nor could it have “emasculate[d] apparent
coverage,” as the second test requires.
16
¶35 The third test presents a closer question. The
purchasers might have subjectively expected coverage based on
Capital Title’s investigation into the foreclosure, its
suggestion that the purchasers buy the premium policy, its
knowledge that the purchasers bought the property at a
foreclosure sale, and its knowledge that doing so was part of
their business. Ultimately, though, this expectation is simply
the “fervent hope usually engendered by loss.” Darner, 140
Ariz. at 390, 682 P.2d at 395.
¶36 The purchasers never asked if the policy would cover
the sale being set aside for a grossly inadequate price and
Capital Title never said anything to suggest that it would. And
even though the purchasers might have hoped for coverage of this
risk, the insurer had good reason to think they wanted this
policy in order to ensure good title before reselling the
property. For the same reasons, the purchasers’ expectations
failed the fourth Gordinier test, which applies if the insurer
acted inconsistently with the exclusion.
¶37 We therefore reject the purchasers’ reasonable
expectations claim. The “created” risk exclusion is
enforceable, so First American properly denied coverage.
V.
¶38 Capital Title and First American have each requested
attorney’s fees. We grant Capital Title’s request pursuant to
17
A.R.S. § 12-341.01(A) (2003). Unlike Capital Title, which
requested fees in its response to the petition for review, First
American did not request fees until the supplemental brief.
Arizona Rule of Civil Appellate Procedure 21(c)(1) requires fee
requests to be made in the petition for review or the response
to the petition. Accordingly, we reject First American’s
request as untimely. See Powell v. Washburn, 211 Ariz. 553, 560
¶ 29, 125 P.3d 373, 380 (2006).
CONCLUSION
¶39 For the foregoing reasons, we vacate the opinion of
the court of appeals and affirm the judgment of the superior
court.
_______________________________________
W. Scott Bales, Justice
CONCURRING:
_______________________________________
Ruth V. McGregor, Chief Justice
_______________________________________
Rebecca White Berch, Vice Chief Justice
_______________________________________
Michael D. Ryan, Justice
_______________________________________
Andrew D. Hurwitz, Justice
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