Equity's borrowers obtained title insurance from Transnation Title Insurance Company.

In September 2006, Equity's borrowers discovered they could not legally access the parcels and, as a result, stopped making payments on their loans. When Equity's borrowers informed Transnation of this defect, Transnation, in an attempt to cure the defect and obtain access to the parcels, sued Maricopa County, the owner of the land surrounding the parcels.

Equity, in turn, noticed trustee's sales to foreclose on the parcels.

When Transnation promised to make interest-only payments on behalf of the borrowers while its litigation against Maricopa County was pending, Equity agreed to halt the foreclosure process.

In March 2010, the court in Transnation's lawsuit ruled in favor of Maricopa County. Shortly thereafter, Transnation stopped making interest payments under the loans which, in turn, caused Equity to re-notice the trustee's sales.

In January 2011, Equity acquired title to the parcels at the trustee's sales via full-credit bids totaling $2,620,725.18.

Equity subsequently submitted a claim to CTIC for the full amount of the Policies ($2.4 million in total total).

When Equity and CTIC could not resolve the claim, Equity sued CTIC.

In that case, the first issue presented to the U.S. District Court for the District of Arizona was the appropriate date for measuring an insured lender's diminution-in-value loss under the title insurance policies. The district court ruled that the loss should be calculated as of the date the title policy was issued, rather than the date of foreclosure.

The second issue presented to the district court was whether Equity's full-credit bids constituted actual payments of the principal of the underlying indebtedness, thereby extinguishing CTIC's liability under the Policies. On this issue, the district court ruled in CTIC's favor, finding that under Policy Section 9(b), Equity's full-credit bids constituted payments on the principal of the indebtedness and, as such, reduced CTIC's liability pro tanto.

Equity appealed the ruling on this issue to the U.S. Court of Appeals for the Ninth Circuit, which certified the following questions to the Arizona Supreme Court:

1. When a lender purchases property by full-credit bid at a trustee's sale, does Section 9 apply, or does Section 2 apply?

2. Is a full-credit bid at a trustee's sale a “payment” or “payment[ ] made” under sections 2 or 9 of the Policies?

3. To what extent does a full-credit bid at a trustee's sale either (a) terminate coverage under section 2(a)(i) of the Policies, or (b) reduce coverage under Section 2 and any possible liability under section 7?

The CTIC Policies

Section 2 of the CTIC Policies, titled:

Continuation of Insurance

provided:

(a) After Acquisition of Title. The coverage of this policy shall continue in force as of Date of Policy in favor of (i) an insured who acquires all or any part of the estate or interest in the land by foreclosure, trustee's sale, conveyance in lieu of foreclosure, or other legal manner which discharges the lien of the insured mortgage ….

…

(c) Amount of Insurance. The amount of insurance after the acquisition or after the conveyance shall in neither event exceed the least of:

(i) the Amount of Insurance stated in Schedule A; [or]

(ii) the amount of the principal of the indebtedness secured by the insured mortgage as of Date of Policy, interest thereon, expenses of foreclosure, amounts advanced pursuant to the insured mortgage to assure compliance with laws or to protect the lien of the insured mortgage prior to the time of acquisition of the estate or interest in the land and secured thereby and reasonable amounts expended to prevent deterioration of improvements but reduced by the amount of all payments made…. 

Section 7 of the CTIC Policies, titled:

Determination and Extent of Liability

provided:

This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the insured claimant who has suffered loss or damage by reason of matters insured against by this policy and only to the extent herein described. (a) The liability of [CTIC] under this policy shall not exceed the least of:

(i) the Amount of Insurance stated in Schedule A, or, if applicable, the amount of insurance as defined in Section 2(c) of these Conditions and Stipulations;

(ii) the amount of the unpaid principal indebtedness secured by the insured mortgage as limited or provided under Section 8 of these Conditions and Stipulations or as reduced under Section 9 of these Conditions and Stipulations, at the time the loss or damage insured against by this policy occurs, together with interest thereon; or

(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 against by this policy.

(b) In the event the Insured has acquired the estate or interest in the manner described in Section 2(a) of these Conditions and Stipulations or has conveyed the title, then the liability of [CTIC] shall continue as set forth in Section 7(a) of these Conditions and Stipulations. 

Section 9 of the CTIC Policies, titled:

Reduction of Insurance; Reduction or Termination of Liability

provided:

(a) All payments under this policy, except payments made for costs, attorneys' fees and expenses, shall reduce the amount of the insurance pro tanto. However, any payments made prior to the acquisition of title to the estate or interest as provided in Section 2(a) of these Conditions and Stipulations shall not reduce pro tanto the amount of the insurance afforded under this policy except to the extent that the payments reduce the amount of the indebtedness secured by the insured mortgage.

(b) Payment in part by any person of the principal of the indebtedness, or any other obligation secured by the insured mortgage, or any voluntary partial satisfaction or release of the insured mortgage, to the extent of the payment, satisfaction or release, shall reduce the amount of insurance pro tanto. The amount of insurance may thereafter be increased by accruing interest and advances made to protect the lien of the insured mortgage and secured thereby, with interest thereon, provided in no event shall the amount of insurance be greater than the Amount of Insurance stated in Schedule A.

(c) Payment in full by any person or the voluntary satisfaction or release of the insured mortgage shall terminate all liability of [CTIC] except as provided in Section 2(a) of these Conditions and Stipulations. 

Section 10 of the CTIC Policies, titled:

Liability Noncumulative

provided:

If the insured acquires title to the estate or interest in satisfaction of the indebtedness secured by the insured mortgage, or any part thereof, it is expressly understood that the amount of insurance under this policy shall be reduced by any amount [CTIC] may pay under any policy insuring a mortgage to which exception is taken in Schedule B [listing 2006 tax liens, water rights, items on a boundary survey, etc.] or to which the Insured has agreed, assumed or taken subject, or which is hereafter executed by an insured and which is a charge or lien on the estate or interest described or referred to in Schedule A [listing borrowers' mortgages], and the amount so paid shall be deemed a payment under this policy. 

The Arizona Supreme Court decided that:

1. Section 2 applied when a lender purchased property by full-credit bid at a trustee's sale.

2. A full-credit bid at a trustee's sale was not a “payment” under Sections 2 or 9 of the policy.

3. The full-credit bid neither terminated nor reduced coverage under Section 2 or Section 7. 

In its decision on the question of whether, under Arizona law, Section 9 or Section 2 of the Policies applied when a lender acquired property by full-credit bid at a trustee's sale, the court found that Section 2 directly addressed the consequences of such an acquisition, including its effect on both the existence and the amount of coverage under the Policies. Indeed, the court said, Section 9(c) expressly deferred to Section 2 when the property was acquired by the lender at a trustee's sale.

In addition, the court said, concluding that Section 9 applied in such circumstances would impermissibly render Section 2 meaningless.

Thus, it held that Section 2 of the Policies applied when a lender acquired property at a trustee sale by either a full- or partial-credit bid.

With respect to the second certified question – whether a full-credit bid at a trustee's sale constituted a “payment” or “payment[ ] made” under either Section 2 or 9 of the Policies – the court noted that the terms “payment” and “payment made” were not defined in the Policies. It then observed that under Arizona's statutory scheme for non-judicial foreclosures, the satisfaction of a borrower's loan obligations by a credit bid might have the same effect as a “payment” from the borrower's perspective. The court added, however, that the impact of a credit bid on the borrower under Arizona's foreclosure laws did not mean that a layperson would understand a credit bid to constitute a “payment” or “payment made” as those terms were used in title insurance policies.

Therefore, the court concluded that the terms “payment” and “payment made” as used in the Policies did not include either a full- or partial-credit bid made by a lender pursuant to Arizona's statutory foreclosure scheme.

The court noted that if CTIC had wanted to limit its liability under the Policies by expanding the ordinary meaning of the terms “payment” and “payment made” to include full-credit bids, “it should have written the Policies to so provide.”

Finally, the court addressed the third question: to what extent a full-credit bid either (a) terminated coverage under Section 2(a)(i) of the Policies or (b) reduced coverage under Section 2 and any possible liability under Section 7. The court concluded that because the terms “payment” or “payment made” as used in the Policies did not include the amount of either a full- or partial-credit bid, such a bid did not terminate coverage under Section 2(a)(i) of the Policies or reduce coverage under Section 2 or any possible liability under Section 7.

The case is Equity Income Partner, LP v. Chicago Title Ins. Co., No. CV-16-0162-CQ (Ariz. Feb. 7, 2017). Attorneys involved include: Dennis I. Wilenchik (argued), Tyler Q. Swensen, Wilenchik & Bartness, P.C., Phoenix, Attorneys for Equity Income Partners, LP and Galileo Capital Partners Limited. Daniel E. Fredenberg (argued), Fredenberg Beams, Phoenix, and Patrick J. Davis, Nathaniel B. Rose, Fidelity National Law Group, Phoenix, Attorneys for Chicago Title Insurance Company. Ari Ramras, Ramras Legal, PLC, Phoenix, Attorneys for Amicus Curiae Land Title Association of Arizona.