First American Title Insurance v. Action Acquisitions, LLC

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.
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¶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.
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 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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