Court Holds That a Notice of Abatement Action is Not a Defect In, Lien or Encumbrance on Title and That a Preliminary Title Report Is Not a Contract

In Stockton Mortgage, Inc. v. Tope, a California appellate court affirmed summary judgment in favor of First American Title Insurance Company (“First American”) in a title dispute.

The action arose out of a 2005 purchase of a residential home in Stockton, California, which was foreclosed upon following the close of escrow. The plaintiffs were investors in the real estate loan who sued several defendants, including Stockton Mortgage, Inc., for damages arising from an alleged failure to follow up on the release of a notice of abatement action. The crosscomplainants filed a cross-action against First American and Alliance Title Company (“Alliance”), amongst others, due to First American’s refusal to provide coverage under a title insurance policy and Alliance’s alleged representation that it would obtain a release of the notice of abatement action prior to close of escrow for the property transaction. The preliminary title report issued by Alliance identified the notice of abatement action among the exceptions to coverage and represented that Alliance required a release of the notice prior to the close of escrow. Although Alliance paid outstanding enforcement costs, the notice of abatement action was not released as the violations had not been corrected. First American’s title insurance policy did not mention the notice of abatement action and First American denied that there was any coverage for the action under the policy.

The trial court granted First American’s summary judgment motion holding that the title insurance policy did not cover the notice of abatement action. The court also held that the preliminary title report relied on by the cross-complainants was not a contract and, therefore, could not support a breach of contract claim. The appellate court affirmed the judgment.

The appellate court affirmed that the notice of abatement action did not constitute a lien, defect or encumbrance on the title of the property. The Court explained that the notice warns that the property is substandard, relates to the physical condition of the property, and raises the issue of future enforcement. The accrual of enforcement costs did not transform the notice of abatement action into a defect in, lien, or encumbrance on the title. The Court also held that the crosscomplainants were not insured under the policy. Accordingly, there was no coverage for the notice of abatement action under the First American title insurance policy.

The appellate court also held that the preliminary title report is not a contract as a matter of law. The preliminary title report is instead an offer to issue a title insurance policy. This case is significant because it confirms that: (1) a notice of abatement action was not covered by a title insurance policy, even where representations were made on the preliminary title report relating to its release; and (2) a preliminary title report is not a contract for purposes of pursuing a breach of contract claim.

Kendra J. Pappas, Attorney, kjp@sbj-law.com