Facts: An owner obtains a mortgage from a lender to fund the purchase of a property. The trustee of the owner’s personal trust also acts as the manager for the lender. Before the trust deed for the mortgage is recorded, the trustee records a grant deed transferring title to the property to the owner’s personal trust. The lender obtains a title insurance policy from a title insurer and the lender’s trust deed is recorded. The title insurance policy excludes from coverage any title defect which arises from the actions or with the knowledge of the lender. When the owner seeks to refinance the existing mortgage with the lender, the lender discovers the grant deed was recorded prior to their trust deed and makes a claim for title defect with the title insurer.
Claim: The lender seeks to collect on the title insurance policy, claiming the existence of a title defect and a breach of insurance contract since the grant deed recorded by the owner prior to the lender’s original trust deed causes the new trust deed, which the title insurance coverage was obtained to protect, to be unsecured.
Counterclaim: The title insurer seeks to deny the claim made for the title defect, arguing the lender’s title insurance policy excludes from coverage any defects arising from the actions or with the knowledge of the insured lender.
Holding: A California Court of Appeals held that, since the trustee of the owner’s personal trust also acted as the manager for the lender, the lender had knowledge of the existence of the grant deed causing the potential title defect and, thus, the defect is excluded from the title insurer’s coverage. [RNT Holdings, LLC v. United General Title Insurance Company (2014) 230 CA4th 1289]