                                IN THE
            ARIZONA COURT OF APPEALS
                             DIVISION ONE


    FIRST AMERICAN TITLE INSURANCE COMPANY, a California
                 corporation, Plaintiff/Appellee,

                                      v.

       JOHNSON BANK, a Wisconsin bank registered in Arizona,
                     Defendant/Appellant.

                         No. 1 CA-CV 14-0190
                           FILED 6-30-2015


          Appeal from the Superior Court in Maricopa County
                         No. CV2013-003634
             The Honorable Robert H. Oberbillig, Judge

                    REVERSED AND REMANDED


                               COUNSEL

Lake & Cobb, P.L.C., Tempe
By Richard L. Cobb, Joseph J. Glenn
Counsel for Plaintiff/Appellee

Ridenour Hienton, P.L.L.C., Phoenix
By William G. Ridenour, Damien R. Meyer
Counsel for Defendant/Appellant
                     FIRST AM v. JOHNSON BANK
                          Opinion of the Court




                                OPINION

Judge Lawrence F. Winthrop delivered the opinion of the Court, in which
Presiding Judge Kent E. Cattani and Judge Peter B. Swann joined.


W I N T H R O P, Judge:

¶1            Johnson Bank appeals the superior court’s order granting
summary judgment in favor of First American Title Insurance Company
(“First American”). Johnson Bank alleges the superior court erred when it
determined the date for calculating loss under a lender title insurance
policy as the date of foreclosure. For the following reasons, we reverse the
superior court’s grant of summary judgment and remand for proceedings
consistent with this opinion.

                FACTS AND PROCEDURAL HISTORY

¶2            First American issued two title insurance policies to Johnson
Bank on December 2, 2005, and June 19, 2006. These policies insured
Johnson Bank’s interest in two properties held by The Equitable Troon K,
LLC (“Troon K property”) and Three Sticks Management Group LLC
(“Troon H property”) (collectively, “the owners”).1 The policies insured the
Troon K property for $1,000,000 and the Troon H property for $1,050,000,
which reflected the exact amounts Johnson Bank loaned to the owners. First
American issued separate title insurance policies to the owners of the
properties.

¶3            In 2008, the owners sued First American to recover damages
under their owners’ title insurance policies, alleging certain undisclosed
covenants, conditions, and restrictions (“CC&R’s”) existed that prohibited
commercial development on both properties. The owners then defaulted
on their obligations to Johnson Bank, and on September 22, 2010, Johnson
Bank obtained title to the two parcels through foreclosure credit bids of


1      These policies stated in relevant part: “[First American] insures, as
of Date of Policy shown in Schedule A, against loss or damage, not
exceeding the Amount of Insurance stated in Schedule A, sustained or
incurred by the insured by reason of: . . . 2. Any defect in or lien or
encumbrance on the title.”


                                     2
                      FIRST AM v. JOHNSON BANK
                           Opinion of the Court

$55,000 for Troon K and $47,000 for Troon H. In October 2011, Johnson
Bank provided First American with notice of title claims under its lenders’
title insurance policies, asserting the CC&R’s prevented both properties
from being developed for commercial purposes, and that these CC&R’s
were not listed exceptions to the title insurance policies.

¶4             The parties agreed to arbitrate the damages claims, but could
not agree on the comparative starting date for calculating the alleged
diminution in value of the subject parcels. Johnson Bank argued that the
date the loans were issued should be the date used to calculate any
diminution in value, whereas First American argued that the date of
foreclosure should be utilized for this calculation. In April 2013, First
American sought declaratory relief in superior court to determine the
proper date to measure diminution in value to foreclosed properties under
lender’s title insurance policies in Arizona. Johnson Bank answered and
filed a counterclaim seeking the same declaratory relief.

¶5            The parties filed cross motions for summary judgment and,
following oral argument, the superior court determined the date of
comparative valuation for diminution of value of the two parcels was the
date of foreclosure. After entry of a stipulated final judgment, Johnson
Bank timely appealed. We have jurisdiction pursuant to Arizona Revised
Statutes (“A.R.S.”) sections 12-2101(A)(1) and (B).2

                                ANALYSIS

¶6            Johnson Bank raises two issues on appeal, alleging the
superior court erred when it (1) granted summary judgment in favor of First
American, holding that the proper starting date to measure the diminution
of a property is the date of foreclosure; and (2) determined that a lender is
precluded from asserting reliance on information contained in the title
insurance policy to establish contract damages under the title insurance
policies.3



2     We cite the current version of rules and statutes if no revisions
material to our decision have occurred since the relevant dates.

3      Johnson Bank argues the superior court erred when it concluded the
bank could not assert reliance on information in the title insurance policies
to establish contract damages. Based on the record before this court, it
appears that, while the superior court and counsel at oral argument
discussed the issue of reliance, no final ruling prohibiting Johnson Bank


                                     3
                       FIRST AM v. JOHNSON BANK
                            Opinion of the Court

       I.      Date of Valuing the Diminution of Property Value

¶7              We review a motion for summary judgment de novo,
construing the facts and inferences in the light most favorable to the party
against whom judgment was entered. Brookover v. Roberts Enter., Inc., 215
Ariz. 52, 55, ¶ 8, 156 P.3d 1157, 1160 (App. 2007) (internal citations omitted).
“We review de novo the interpretation of insurance contracts.” First Am.
Title Ins. Co. v. Action Acquisitions, LLC, 218 Ariz. 394, 397, ¶ 8, 187 P.3d 1107,
1110 (2008) (internal citation omitted).

¶8              We note at the outset that “[t]itle insurance does not
guarantee perfect title; instead, it pays damages, if any, caused by any
defects to title that the title company should have discovered but did not.”
Swanson v. Safeco Title Ins. Co., 186 Ariz. 637, 641, 925 P.2d 1354, 1358 (App.
1995). Moreover, title insurance does not “guarantee either that the
mortgaged premises are worth the amount of the mortgage or that the
mortgage debt will be paid.” First Am. Bank v. First Am. Transp. Title Ins.
Co., 759 F.3d 427, 433 (5th Cir. 2014) (internal citation omitted).

¶9             This court has previously held the date for valuing a property
under an owner’s title insurance policy is the date the title defect is
discovered. See Swanson, 186 Ariz. at 641, 925 P.2d at 1358. That opinion is
consistent with a majority of other jurisdictions regarding the date of
property valuation under owners’ title insurance policies. See id. at 642, 925
P.2d at 1359. This does not, however, answer the question raised in this
appeal, as an owner is in a different position than a lender. See CMEI, Inc.
v. Am. Title Ins. Co., 447 So. 2d 427, 428 (Fla. Dist. Ct. App. 1984) (identifying
substantial differences between the insured interest of an owner and a
lender).

¶10          The relevant insurance policies contain no specific applicable
language, and there is no statute or other binding legal precedent in
Arizona that determines the starting date of comparative valuation of
property for calculating covered losses under a lender’s title insurance
policy.

¶11          Johnson Bank argues that First American’s policies are
ambiguous because the policies do not specify the date on which the
property should be valued in the event of a covered loss. The superior court
resolved the purported ambiguity in favor of First American, holding the


from asserting reliance on this information to establish contract damages
was issued. Accordingly, we decline to address this argument.


                                        4
                       FIRST AM v. JOHNSON BANK
                            Opinion of the Court

date of foreclosure was the date to measure the diminution in value of a
property. A number of jurisdictions that have considered this issue hold
the date of foreclosure is the appropriate date to measure the value of
property.4 A lesser number of courts have adopted the view that the date
of the loan is the proper comparative date to use in calculating diminution
in value of subsequently foreclosed property.5

¶12            The standard title insurance policy provision in question is
Section 7(a)(iii), which states: “(a) The liability of the Company under this
policy shall not exceed the least of . . . (iii) the difference between the value
of the insured estate or interest as insured and the value of the insured
estate or interest subject to the defect, lien or encumbrance insured by this
policy.”6 The failure of the provision to specify the date the loss is to be
calculated creates an ambiguity.7 We interpret an ambiguous clause by
looking to social policy and the transaction as a whole. First Am. Title Ins.
Co., 218 Ariz. at 397, ¶ 8, 187 P.3d at 1110. Following that analytical process,
this court will construe any remaining ambiguity against the insurer. Id.

¶13           Johnson Bank urges this court to adopt the reasoning in Equity
Income Partners LP v. Chicago Title Ins. Co., 2012 WL 3871505 (D. Ariz. Sept.
6, 2012), an unpublished opinion from the federal district court. In Equity
Income Partners, Equity loaned over two million dollars to the owners of two
properties. Id. at *1. Equity obtained lender’s title insurance from Chicago
Title. Id. The owners of the properties discovered they were precluded

4      See e.g. Karl v. Commonwealth Land Title Ins. Co., 20 Cal.App.4th 972,
985, 24 Cal.Rptr.2d 912, 920 (Cal.Ct.App. 1993); First Am. Bank, 759 F.3d at
432-34; Associated Bank, N.A. v. Stewart Title Guar. Co., 881 F. Supp. 2d 1058,
1066-67 (D. Minn. 2012); First Tennessee Bank Nat’l Ass’n v. Lawyers Title Ins.,
Corp., 282 F.R.D. 423, 427 (N.D. Ill. 2012); First Internet Bank of Indiana v.
Lawyers Title Ins. Co., 2009 WL 2092782 at *6-7 (S.D. Ind. July 13, 2009).

5      See e.g. Citicorp Sav. of Illinois v. Stewart Title Guar. Co., 840 F.2d 526
(7th Cir. 1988).

6      The parties do not dispute that this section delineates the method to
calculate Johnson Bank’s loss under the title insurance policy.

7      The superior court also referenced First American’s failure to include
a date of valuation during oral argument, stating, “[i]nsurance companies
know how to write sentences that say ‘on the date of foreclosure’ in them.
I don’t know why they don’t.”



                                        5
                       FIRST AM v. JOHNSON BANK
                            Opinion of the Court

from legally accessing the properties and stopped making loan payments
to Equity. Id. Equity filed suit against Chicago Title, alleging the starting
point for valuation of the properties should be the date that Equity learned
of the undisclosed defects. Id. at *2. Chicago Title argued that the date of
foreclosure should determine the diminution in value to the properties. Id.
The federal district court held the date of the loan was the proper valuation
date, relying on the court’s analysis in Citicorp Sav. of Illinois v. Stewart Title
Guar. Co., which reasoned that “because the policy was breached at the time
of the loan, the title insurer should bear any risk of market value decline in
the property at that time.” Id. at *4 (internal citation and punctuation
omitted).

¶14              We agree with the reasoning in Equity Income Partners and
hold that, where the undisclosed defect in title has caused the borrower’s
default, the date of the loan is the proper date to measure a property’s
diminution in value as a result of the undisclosed title defect. The facts in
Equity Income Partners and Citicorp present substantially similar situations
to those presented here, and differ from those facts under which other
jurisdictions have used the date of foreclosure as the date to measure
diminution in value. See First Am. Bank, 759 F.3d at 433. In Equity Income
Partners and Citicorp, and as seen here, the undisclosed title defect
frustrated the intended use of the property, and was the direct cause of the
borrower’s default and subsequent foreclosure by the lender. Because such
default is a result of the undisclosed title defect, the title insurer should bear
the consequences of that default, not the lender. See Equity Income Partners
at *4; see also Christopher B. Frantze, Equity Income Partners LP v. Chicago Title
Ins. Co. and Recovery Under a Lender’s Title in a Falling Real Estate Market, 48
Real Prop. Tr. & Est. L.J. 391, 405 (2013).

¶15            Additionally, the policies provide the recovery amount will
be “the difference between the value of the insured estate or interest as
insured and the value of the insured estate or interest subject to the defect.”
(Emphasis added.) The words “as insured” contained within this clause do
not weigh in favor of holding the comparative valuation date as the date of
foreclosure; rather, these words suggest the date of the loan and the
contemporaneously-issued title insurance policy as the comparative date at
which the property should be valued. Further, “[a]llowing the insurer to
wait to value the [property] in a falling real estate market works to the
insurer’s benefit, a result that does not construe an ambiguity in the policy
in favor of the insured.” In re Evans, 460 B.R. 848, 899 (Bkrtcy. S.D. Miss.
2011), disagreed with by First Am. Bank, 759 F.3d at 432-34; see Barlow Burke,
Law of Title Insurance § 7.04 (3rd ed. Aspen Publishers 2004) (“The choice
of a date for measuring damages should not provide the insurer with an


                                        6
                      FIRST AM v. JOHNSON BANK
                           Opinion of the Court

opportunity to shield its eyes from the insured’s actual, economic, and
consequential losses.”).

¶16            Unlike an owner, a lender stands to gain nothing when
market forces cause property to appreciate. A lender purchases insurance
to insure the value of its loan, not the value of a property. A rule that allows
the insurer to benefit from market depreciation while facing no risk in the
event of a rising market would not reflect the reasonable expectations of the
contracting parties. But the rule we adopt here allows certain evaluation of
the risks associated with the policy and therefore strikes a fair balance: each
party to the insurance policy knows what the policy is worth, and how
damages will be calculated. Our holding does not transform lenders’
insurance policies into guarantors of future market property values that are
the product of subsequent market fluctuation – liability under such policies
is simply the difference between the value of the property without the
insured defects at the time of the loan and the value of the property with
the insured defects at the time of the loan.

¶17           Because First American failed to discover and timely disclose
the CC&R’s, the policy was breached at the time the loan was made. Using
the date of the loan to measure any diminution in value will allow Johnson
Bank to recover its loss where the default and resulting losses to the lender
were caused by a covered title defect. See Joyce D. Palomar, 1 Title Ins. Law
§ 10:16 (2014-2015 ed.).

¶18             This opinion is consistent with the policies identified in
Swanson. First, using the date of the loan allows recovery for the defects in
title that First American “should have discovered but did not.” Swanson at
641, 925 P.2d at 1358. In addition, “[a]ny other rule would not give the
insured the protection for which he bargained and for which he paid.” Id.
at 642, 925 P.2d at 1359 (internal citation omitted). Under these specific
circumstances and in the absence of a specified date of comparative
valuation identified in the policies, we hold the date to measure any
diminution in property value is the date of the loan. Accordingly, we
reverse the superior court’s grant of summary judgment in favor of First
American and remand for entry of judgment in favor of Johnson Bank on
this issue.

       II.    Attorneys’ Fees

¶19           Both Johnson Bank and First American request an award of
attorneys’ fees and costs incurred on appeal and at the superior court
pursuant to ARCAP 21(c), A.R.S. §§ 12-341 and 12-341.01. In the exercise of



                                       7
                    FIRST AM v. JOHNSON BANK
                         Opinion of the Court

our discretion, we deny both requests. We do award Johnson Bank its costs
on appeal subject to compliance with ARCAP 21.

                            CONCLUSION

¶20           For the foregoing reasons, we reverse the superior court’s
grant of summary judgment and remand for proceedings consistent with
this opinion.




                                :ama




                                   8
