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Texas Supreme Court Holds Bankruptcy Trustee’s Claim Excluded by Special Warranty Deed

sales contractThe Texas Supreme Court recently held that a claim made by a bankruptcy trustee did not fall within a special warranty clause that limited the grantor’s liability to claims asserted by individuals “by, through and under” the grantor.

A copy of the opinion in Chicago Title Insurance Company v. Cochran Investments, Inc. is available at:    Link to Opinion.

In December 2010, a real-estate investment company purchased property at a foreclosure sale and later sold it to a buyer in May 2011. The contract provided the investor “shall execute and deliver a general warranty deed conveying title to the Property” to the buyer. The sales contract also includes a savings clause, which provides in pertinent part: “REPRESENTATIONS: All covenants, representations, and warranties in this contract survive closing. If any representation of Seller in this contract is untrue on the Closing Date, Seller will be in default. . . .”

The investor executed a special warranty deed conveying title to the buyer which bound the investor and its successors and assigns “to WARRANT AND FOREVER DEFEND, all and singular the Property, subject to the matters stated herein, unto [the buyer, his successors, and his assigns], against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through and under [the investor], but not otherwise.”

Four days after the execution of the special warranty deed, a bankruptcy trustee sued the investor, the mortgage company, and eventually the buyer, asserting that the foreclosure sale of the property violated the bankruptcy proceeding’s automatic stay and seeking to set aside the sale.

The buyer filed a claim with his title insurance company.  The bankruptcy trustee’s claim was voluntarily dismissed after the title insurer paid the trustee and prior owner in exchange for their interest in the property.

The title insurer then sued the investor as the buyer’s subrogee under the title policy asserting claims for breach of the implied covenant of seisin and breach of contract. The trial court entered judgment for the title insurer finding that the foreclosure sale and accompanying deed to the investor were void, and that the investor had breached (1) the covenant of seisin implied in the special warranty deed that conveyed the property to the buyer and (2) the residential sales contract with the buyer in connection with the sale of the property.

The investor appealed.  The Appellate Court reversed, rendering a take-nothing judgment in favor of the investor. The Appellate Court held the special warranty deed does not imply the covenant of seisin, and the merger doctrine barred the title insurer’s breach of contract claim because although the sales contract contains provisions addressing any failure to transfer title, the deed itself contains no such provisions and under the merger doctrine, and the title insurer may not “rely on the contract’s conveyance provisions to redress a failure to transfer title.”

The title insurer then filed a petition for review with the Texas Supreme Court.

The Texas Supreme Court first examined whether the title insurer may recover for the investor’s alleged breach of the implied covenant of seisin. “A covenant of seisin is an assurance to the grantee that the grantor owns the very estate in the quantity and quality” that she “purports to convey.” Jackson v. Wildflower Prod. Co., 505 S.W.3d 80, 92 (Tex. App.—Amarillo 2016, pet. denied).  The covenant of seisin is breached by the grantor at the time the instrument is made if she does not own the estate in the land she undertakes to convey. Childress v. Siler, 272 S.W.2d 417, 420 (Tex. App.—Waco 1954). As a matter of longstanding common law, “in the absence of any qualifying expressions,” the covenant of seisin is “read into every conveyance of land or an interest in land, except in quitclaim deeds.” Fender v. Farr, 262 S.W.2d 539, 543 (Tex. App.—Texarkana 1953, no writ).

The title insurer argued that the deed necessarily implies a covenant of seisin, which the investor breached by undertaking to convey property that it did not own, and any limitation by the special warranty does not affect recovery under the covenant of seisin.

The investor responded that the special warranty deed contains no language indicating that the parties intended to imply the covenant of seisin, contending if the covenant of seisin is implied in every instrument purporting to convey property, then every such instrument effectively becomes a general warranty deed, and a grantor would be unable to limit her liability. Adding that the deed’s special warranty clause — in which the investor agreed to warrant the property against persons claiming by, through, and under the investor, but not otherwise — forecloses the investor’s liability for title failures that are not premised on such claims.

Therefore, because the bankruptcy trustee did not claim the property by, through, and under the investor, the investor asserted that it was not liable to the buyer for the failure of title resulting from the foreclosure sale’s violation of the automatic stay.

The Texas Supreme Court noted the deed contains a “qualifying expression[]” that disclaims the investor’s liability for the alleged breach of that covenant here. Further, in assessing the parties’ arguments, the Court noted a warranty of title may take the form of either a general or a special warranty. A general warranty applies to any failure or defect in the grantee’s title, whatever the source. See Gibson, 294 S.W.2d at 787–88 (“The obligation [under a general warranty] is . . . that [the covenantor] will defend and protect the covenantee against the rightful claims of all persons.” (citation omitted)); Moore, 202 S.W.2d at 453.

By contrast, under a special warranty, the grantor “warrants the title only against those claiming ‘by, through or under’ the grantor.” Paul, 211 S.W.2d at 356. To be sure, a special warranty deed still “conveys the land itself,” and “the limited warranty does not, of itself, carry notice of defects of title.” Id.; see also Crow v. Van Ness, 232 S.W. 539, 542 (Tex. App.—Amarillo 1921, no writ) (“The limited warranty does not destroy its effect as a conveyance of the land.”)

The Court found “[u]nder our general precedent governing warranties of title, it is clear that [the investor’s] conveyance of the property to [the buyer] via special warranty deed did not affect the scope of that conveyance or [the buyer’s] ability to qualify as a good-faith purchaser of the property. But we conclude that it did affect [the investor’s] liability for defects in its title.”  The Court noted that a “special warranty limits the scope of that indemnity obligation to losses or injuries sustained by a failure or defect in the grantor’s title arising by, through, or under the grantor. Absent that limitation, a special warranty deed effectively becomes a general warranty deed.”

According to the special warranty clause at issue here, the investor assumed the risk for a failure or defect of title that resulted from an individual claiming the property by, through, and under the investor, but not otherwise.

In responding to the title insurer’s argument that reading the special warranty clause to limit the scope of the investor’s liability for the covenant of seisin transforms every special warranty deed into a quitclaim deed, the Texas Supreme Court noted “the special warranty clause limits the circumstances under which a grantee can recover for a failure of title, allowing it to do so for claims by, through, and under the grantor, but not otherwise,” accordingly, “the special warranty clause speaks to the grantor’s liability, not its conveyance of property.”

The Texas Supreme Court held that “the special warranty deed here limits [the investor’s] liability for title defects to those arising from claims “by, through and under” [the investor]. [The title insurer] alleges no such defect.” Accordingly, the Court held that the title insurer may not recover damages for breach of the covenant of seisin, thus affirming the Appellate Court’s judgment as to that claim under separate reasoning.

The Court next addressed the title insurer’s challenge to the holding that the merger doctrine bars the title insurer’s breach-of-contract claim for failure to convey title. “The merger doctrine provides that ‘[w]hen a deed is delivered and accepted as performance of a contract to convey, the contract is merged in the deed.’” Burlington Res. Oil & Gas Co. v. Tex. Crude Energy, LLC, 573 S.W.3d 198, 209 (Tex. 2019).

The title insurer argued that the pertinent obligations in the sales contract do not contradict the obligations in the deed and the presence of the savings clause in the sales contract — which provides that the contract’s covenants, representations, and warranties survive closing, and that the investor would be in default if any of its contractual representations were untrue on the closing date — prevents the merger doctrine from barring its breach-of-contract claim.

The investor responded that the parties’ agreement, as exhibited in the deed, does not warrant against any title defects that existed prior to its acquisition of the property, and thus the merger doctrine bars the title insurer’s claim.

The Texas Supreme Court agreed, “[t]o the extent the special warranty deed limits [the investor’s] liability for failures of title in a way the contract does not, the terms of the deed and the contract vary, and the merger doctrine forecloses the contract claim.”

Accordingly, the Texas Supreme Court affirmed the Appellate Court’s ruling.

 

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Ryan Grotz practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in all phases of commercial litigation, including motion practice, written discovery, depositions, mediations, and bench and jury trials. Ryan received his Juris Doctor from the Chicago-Kent College of Law, where he was an associate editor on the Access to Justice Student Editorial Board. He was awarded his Bachelor of Business Administration degree from the University of Iowa. Ryan is licensed to practice law in Illinois and the U.S. District Court for the Northern District of Illinois. For more information, see https://mauricewutscher.com/attorneys/ryan-grotz/

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