Arkansas Court Of Appeals Holds Insured's Negligent Recording Of Its Mortgage Can Trigger 3(a) Exclusion To Preclude Coverage

• Jurisdiction: Arkansas,United States
• Law Firm: Riker Danzig LLP
• Subject Matter: Finance and Banking, Insurance, Charges, Mortgages, Indemnities, Financial Services, Insurance Laws and Products
• Author: Mr Michael O'Donnell, Kevin Hakansson, James V. Mazewski and Kori Pruett
• Published date: 16 January 2023

In the recently-decided matter of First National Bank of Izard County v. Old Republic National Title Insurance Company, No. CV-20-310, (Ark. Ct. App. Nov. 2, 2022), the Arkansas Court of Appeals ("the Court") held that the negligent recording of a mortgage by the Insured, as to the timing of its recordation with other recorded instruments, precluded coverage under the Title Policy's Section 3(a) "created, suffered, assumed and agreed to" exclusion.

The dispute stems from the dissolution of a two-owner, non-party LLC, wherein one of the business partners (the "selling partner") sold their business interests and real property interests to the other (the "purchasing partner"). The terms of the sale contained two important documents: (1) an LLC Membership Interest Purchase Agreement that set forth the terms and conditions of the transaction (the "Purchase Agreement"); and (2) a Memorandum summarizing the terms of the Purchase Agreement (the "Memo"), as the Purchase Agreement had been designated confidential. Importantly, the Purchase Agreement contained a provision granting a reversionary interest in the real property to the selling partner, which was indicated and summarized in the Memo.

At the closing, Plaintiff First National Bank of Izard County ("Plaintiff") agreed to issue loans to the purchasing partner which were to be secured by mortgages on the real property involved in the transaction. In connection with these loans Plaintiff purchased title insurance policies from Defendant Old Republic National Title Insurance Company ("Defendant"). The policies each contained standard Paragraph 3(a) restrictive exclusions which stated as follows:

The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damages, cost, attorneys' fees or expenses which arise by reason of:

3. Defects, liens, encumbrances, adverse claims or other matters (a) created, suffered, assumed, or agreed to by the Insured Claimant[.]

Post-closing, Plaintiff assumed responsibility for the duty of publicly recording the transaction documents, having its employee mail the closing documents-including the Memo-to the County Clerk for recording. However, upon receiving the mailed documents, the County Clerk proceeded to record the Memo-and its reversionary interest to the selling partner-four minutes ahead of Plaintiff's mortgages, thus giving that interest priority over the mortgages.

The purchasing partner later defaulted on his mortgage...