Metropolitan Title Guarantee Co., Appellant, v. William Gildenhorn, Appellee, 249 F.2d 933 (D.C. Cir. 1957)

This is an appeal from a judgment of the District Court awarding money damages to the insured, Gildenhorn, under an interim title insurance binder issued by appellant Metropolitan Title Guarantee Company.

The facts, briefly, are these: In 1951, Gildenhorn arranged with Public Service Title Company to invest $4,000 in a certain encumbered property in the District of Columbia for which refinancing was being sought. The property at that time was subject to first, second, and third trusts, all of which were to be liquidated by Public Service in the refinancing and to be replaced by a new first trust and note in Gildenhorn's favor. Public Service also agreed to perform a title search on the property, to secure title insurance, and to furnish to Gildenhorn a certificate of title showing that the new trust had been recorded as the senior security. Public Service was the representative in the District of Columbia of the appellant Metropolitan Title Guarantee Company, which has offices in New York City. Subsequently, Metropolitan issued to the appellee Gildenhorn, "through the offices of Public Service Title Company," an interim binder for a title guaranty policy, stating that the title was good in the fee owners (one Yates and his wife), subject only to the three old trusts. Public Service obtained from the fee owners a deed of trust and a note for $4,500 payable to Gildenhorn's agent; it also recorded the Gildenhorn trust. Gildenhorn paid $4,000 cash to Public Service for the note. But, contrary to its agreement with Gildenhorn, Public Service paid off only two of the existing trusts, leaving the new Gildenhorn trust junior to one of the old, and still extant, trusts. These events took place in the summer and fall of 1951.

In January, 1952, Gildenhorn learned that one of the old trusts had not been retired by Public Service. Public Service at that time informed Gildenhorn's counsel that there was a defect in the title back in 1889 or 1890, and that Metropolitan would not permit it to issue the final policy until it clarified the defect; Public Service requested 60 to 90 days to do this, which was granted. Gildenhorn's counsel demanded by letter in the summer of 1952 that the old trust be paid off, and after ascertaining in October, 1952, that Public Service's bank trustee account, in which Gildenhorn's check had been deposited, no longer existed, renewed his demand that Public Service pay the amount due on the old trust. In a letter dated November 12, 1952, to Gildenhorn's counsel, the attorney for Public Service described the title defect previously referred to¹  and stated that Metropolitan would not permit Public Service to issue a certificate of title (including, apparently, any title insurance policy) "with this state of affairs." The letter further said that if Gildenhorn would accept a title subject to the "exception" set out, Public Service would pay off the remainder of the unpaid old trust and issue to him a certificate as the first trust lienor with the exception noted. Gildenhorn apparently refused this offer. It was later revealed that Public Service had appropriated to its own use the money provided by Gildenhorn for such payment. Public Service subsequently went bankrupt and it, with one of its officers, was prosecuted criminally for this theft.²  No guaranty policy was ever issued, other than the original binder.

In April of 1953 the holder of the old trust foreclosed. Apparently the makers of the note believed that they had refinanced the whole debt, and that they had discharged their debt under the old trust. Consequently, after making the note to Gildenhorn, they made no further payments to the old trustees. Despite the fact that he had learned in January, 1952, that the old note was still outstanding, Gildenhorn continued to accept payments on his note from the makers until foreclosure. The proceeds of the foreclosure sale were insufficient to satisfy any part of the balance remaining due on Gildenhorn's note.

Gildenhorn then sued Metropolitan on the binder policy alleging that "as a result of a defect in the title to the * * property, which was not set forth in the Binder Policy," the plaintiff suffered a loss of his investment. At the trial Gildenhorn's counsel stated that he was relying on a defect in title dating back some 70 or 80 years, which was different from that set out in the Public Service letter of November 12, 1952.³  The District Court, sitting without a jury, awarded judgment to Gildenhorn.⁴ 

This suit is to recover a loss allegedly sustained "as a result" of a title defect not disclosed in the binder.⁵  Our primary inquiry then must be whether the District Court was warranted in concluding that an undisclosed defect was the proximate cause of the loss in this case — that is, whether such a defect was "that cause which is most nearly and essentially connected with the loss as its efficient cause." Standard Oil Co. of New Jersey v. United States, 1950, 340 U.S. 54, 58, 71 S. Ct. 135, 137, 95 L. Ed. 68, per Mr. Justice Black. See also Ætna Insurance Co. v. Boon, 1877, 95 U.S. 117, 130, 24 L. Ed. 395; Lanasa Fruit Steamship & Importing Co. v. Universal Insurance Co., 1938, 302 U.S. 556, 562, 58 S. Ct. 371, 82 L. Ed. 422.

A study of the undisputed facts here compels the conclusion that, under the test approved in the Standard Oil case, the loss was not proximately caused by any title defect not disclosed in the binder policy. The senior old trust which was foreclosed was of course disclosed in, and excluded from, the coverage of the binder policy. It was the foreclosure of this trust — the result of a chain of events set in motion by the failure of Public Service to fulfill its agreement to retire all three of the old trusts — which was essentially connected with the loss as its operative and efficient cause. Even if there had been no undisclosed defect in title, the loss would have occurred exactly as it did: that is, the old trust would have been foreclosed in the circumstances here, notwithstanding that the record title was otherwise perfect in the fee owners. On the other hand, if Public Service had complied with its agreement to pay off the old trust so that there would have been no foreclosure, the facts contain nothing to suggest that Gildenhorn would have suffered any loss. On the contrary, the fee owners made payments on their note to him until they lost the property by foreclosure, and no claimants have come forward under any other encumbrance — or any defect — to assert priority or otherwise threaten Gildenhorn's security. There was thus no undisclosed title infirmity which caused any loss. The loss Gildenhorn suffered occurred because the old trust which Public Service had failed to retire pursuant to its contract was foreclosed. Cf. Narberth Building & Loan Ass'n v. Bryn Mawr Trust Co., 1937, 126 Pa.Super. 74, 190 A. 149; Sala v. Security Title Insurance & Guarantee Co., 1938, 27 Cal. App. 2d 693, 81 P.2d 578. The most that can be said is that if Gildenhorn had known of a defect prior to investing his money, he perhaps would not have invested at all.⁶  But after the original investment was made, the presence or absence of an undisclosed cloud on the title did not alter or affect the events which precipitated the loss to any degree. And, as suggested by Gildenhorn's own witness, the defect sued on probably had been cured by adverse possession.

The appellee urges that there was an essential connection, pointing out that the Public Service letter of November 12, 1952, stated that if he, Gildenhorn, would accept a title subject to the defect set out therein, Public Service would pay off the outstanding old trust and issue a certificate to him as the first trust lienor with the exception noted. But Public Service was already at that time bound by contract to pay off the old trust and had been in default in doing so for approximately a year. The mere fact that, in an unsuccessful attempt to amend the contract on which it was already bound to pay off the old trust, Public Service referred to a title defect does not supply the essential causative link between that defect and the loss. Nor does this obscure the fact that the only operative and efficient cause of the loss was its failure to carry out its original contract. Furthermore, it is worthy of note that the title defect referred to in the letter was not the defect on which this suit is based; hence, in any event, the letter would be ineffective to serve as a bridge to connect the defect sued on with the loss.

The District Court recognized that the failure of Public Service to pay off the existing first lien was the "primary" cause of the loss, but purported to find that a defective title was a contributing cause — on the theory (see fn. 4, supra) that Gildenhorn could have prevented the loss of his security only by paying off the original old trust⁷  and that he would have been unwilling to invest more money in a defective title. But we are concerned here with the "efficient cause" of the loss that actually occurred — not with the reason why a further investment was not made to prevent that loss — and the District Court's opinion fails entirely to suggest any other basis to support its conclusion of a proximate causal connection between that loss and a title defect.

The provisions of the binder did not undertake to make Metropolitan an insurer of Gildenhorn's investment or a guarantor of its payment in full, although Gildenhorn may have desired that type of insurance. Under the binder (see fn. 5, supra) Gildenhorn was "indemnified only against such defects, liens, encumbrances as may be evidenced by the records of the District of Columbia at the date of the policy, and not against any other matters." The original unpaid trust, the foreclosure of which eliminated Gildenhorn's interest, was set out in and was excepted from the insurance coverage in the interim binder. The defect on which appellee based his suit was not disclosed in the binder and might have given a basis for recovery under the binder if in fact it had caused a loss — as by another claimant coming forward with a superior claim. But, as already shown, it had no proximate connection with the loss which did occur, and as suggested by plaintiff's witness, probably had been cured by adverse possession. Neither the later criminal acts of Public Service functioning as middleman between the fee holders and Gildenhorn, the later default by the fee holders on the old trust note, nor the later foreclosure by the senior trustee can be treated as defects or encumbrances "evidenced by the records of the District of Columbia, at the date of the policy." We find no valid theory under which there can be liability under the interim binder.

The District Court stated that it found that Gildenhorn dealt with Metropolitan and Public Service jointly. But since the suit is based solely on loss resulting from a title defect undisclosed in the binder policy, and since the loss was not shown to have been caused by such a defect, it is unnecessary to consider whether Public Service was the agent of Metropolitan. However, we may assume for present purposes that, insofar as the title insurance dealings were concerned. Public Service was Metropolitan's agent, and that its failings in that capacity would have been chargeable to Metropolitan. But there is nothing in the evidence to show that in regard to its refinancing function Public Service was acting for or was authorized to act for Metropolitan.⁸ 

For these reasons, the judgment of the District Court must be

Reversed and remanded, with directions to enter judgment for appellant.

FAHY, Circuit Judge (dissenting).

I would affirm.

Proximate cause in the insurance field has been variously defined. It has been said that proximate cause referred to "the cause nearest to the loss." Again, courts have properly stated that proximate cause "does not necessarily refer to the cause nearest in point of time to the loss. But the true meaning of that maxim is, that it refers to that cause which is most nearly and essentially connected with the loss as its efficient cause."

Standard Oil Co. v. United States, 340 U.S. 54, 58, 71 S. Ct. 135, 137, 95 L. Ed. 68.

In this case the District Court found that appellee advanced the $4,000, which he lost, in reliance upon the interim binder policy. The court also concluded that the proximate cause of the loss was the failure of appellant to set forth the title defect in the interim binder policy and the failure of the Public Service Title Company, Inc., to discharge existing outstanding liens on the properties. These and other relevant findings and conclusions I think are not clearly erroneous; that is to say, we should not hold that these factual conclusions of the trial judge are erroneous as matter of law. I think he was well within his competence in finding on the evidence that the payment made by appellee in reliance upon the mistaken representation in the interim binder policy was, in the language of the Supreme Court, the cause "most nearly and essentially connected with the loss as its efficient cause." This is so even though the foreclosure held by the majority as the proximate cause was, in point of time, "nearest to the loss." Cf. American Insurance Co. of City of Newark v. Keane, 98 U.S.App. D.C. 152, 233 F.2d 354, 360.