This new currently unpublished case addresses a subject that the author of this note discussed in the Claims Awareness Hot Sheet of the California Land Title Association in Volume 26, Number 2 of February 2016 in an Article entitled “Title Insurance and the Concept of Marketable or Merchantable Title.” http://www.hhlawgroup.com/_content/PDF/2016_January.pdf.In that article I noted that confusion arises because the term marketable has a completely different meaning in the title insurance context than it does it an everyday financial context.
In that article I observed that when one uses the word marketable in a financial context it connotes a notion of value, e.g. what is the price of a share of stock on a given date or the market value of a parcel of real property on a given date. In a title insurance context marketability is not a value concept, rather it relates to the condition and quality of the real property title in question. In his treatise Title and Escrow Claims Guide, J. Bushnell Nielsen at Section 9.8.3 observes that there are many types of issues that might affect the property’s market value of appeal (salability) which are presented as if they affected the marketability or merchantability of its title but do not.
Two of the most influential California cases on this issue are Nishiyama v. Safeco Title Insurance Company (1978) 85 Cal. App. 3d Sup 1 and Hocking v. Title Insurance and Trust (1951) 37 Cal 2nd 644. In Nishiyama the plaintiffs had purchased property which had been subdivided in violation of the California Subdivision Map Act, CA Government Code § 66499.30 et. seq. The plaintiffs had not been aware of the violation when they made the purchase. They argued that failure to comply with the Act made the property unmarketable. In Hocking the plaintiff had purchased two unimproved subdivision lots for which the developer had failed to post the bonds and agreements necessary to pave and grade the streets. The Hocking plaintiff noted that it would cost more to get the streets paved than the lots were worth. She stated that without the bonds she had not really acquired title to the lots. She lacked marketable title.
The courts disagreed in both cases. In Nishiyama the court of appeal noted that the policy contained an exclusion from coverage for failure to comply with governmental regulations. The parties could still sell the land even though it was unlikely that anyone would buy or lend on the lots until the violation was cured. The California Supreme Court made a similar finding in Hocking. The failure of the developer to provide the bonds did not make the property unmarketable. The plaintiff held fee title to the property and could sell it to whatever it was worth. The defect impaired the value of the land but did not make it unmarketable. Hocking put the matter succinctly and bluntly at page 451. “One can hold title to land that is valueless, one can have marketable title to land while the land itself is unmarketable.”
The Third District Court of Appeal returned to this issue in a recent unpublished case, Northern California Community Development Corporation v. First American Title Insurance Company (March 282019) 2019 WL 1397040. A developer recorded the Feather River Bluffs Subdivision in 1980. The developer sold it to Michael Orr who obtained construction loans on two lots. But the subdivision process was never completed. First American issued loan policies that excluded coverage for failure to comply with governmental ordinances, often referred to as the police power exclusion.
The plaintiff acquired the loans and American West Bank sued it and others to declare the subdivision invalid because it had not been properly created. Plaintiff tendered defense of the action to First American under the title insurance policies. First American refused the tender raising the police power exclusion in the policy as its reason. The plaintiff filed this action against First American based on its alleged failure to indemnify and to defend under the title insurance policy. The trial court held for First American stating among other things that the defect was excluded from coverage under the police power exclusion, and the plaintiff appealed.
The Third District Court of Appeal stated that the plaintiff appeared to confuse marketability of title, covered by the title insurance policy, and marketability of the land, not covered by the title insurance policy and quoted the Hocking maxim. “One can hold perfect title to land that is valueless; one can have marketable title while the land itself is unmarketable.”
The plaintiff had also alleged that the lots were landlocked since Bluffs Drive was not a dedicated city street. But the court said that was not the same as saying there was a lack of access. Those who purchased the lots did so with reference to a recorded map which vested them with a private easement in the streets shown on the map and for any proper use as a private way. This private right exists entirely independent of any public dedication and can only be divested b due process of law. (Danielson v. Sykes (1910) 157 Cal 686)
Although the new case is not at the time of this writing certified for publication, it sets forth and emphasizes the important distinction between marketability of the title and the marketability of the land. It also notes an important right established by a Supreme Court case now over one hundred years old. One who purchases a lot with respect to a recorded map acquires a private right in the streets shown quite separate and apart from any public right to use those streets.