First Midwest Bank v. Stewar Title Company ( 2006 )

Docket No. 100162.
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
FIRST MIDWEST BANK, N.A., Appellant, v. STEWART TITLE
GUARANTY COMPANY, Appellee.
Opinion filed January 20, 2006.
JUSTICE McMORROW delivered the judgment of the court,
with opinion.
Chief Justice Thomas and Justices Freeman, Fitzgerald, Kilbride,
Garman, and Karmeier concurred in the judgment and opinion.
OPINION
In this appeal we are asked to decide whether the plaintiff, First
Midwest Bank (First Midwest), may recover economic losses from
defendant, Stewart Title Guaranty Company (Stewart Title), in a suit
for negligent misrepresentation based on Stewart Title=s issuance of a
title commitment and policy of title insurance. The circuit court of
Cook County held that First Midwest could not state a cause of action
for negligent misrepresentation against Stewart Title and granted
Stewart Title=s section 2B615 motion to dismiss with prejudice. The
appellate court affirmed that ruling. 355 Ill. App. 3d 546. We granted
First Midwest=s petition for leave to appeal (177 Ill. 2d R. 315) and
now affirm the judgment of the appellate court.
BACKGROUND
The facts of this case are not in dispute. In July 1995, John and
Glenda Bergeron made an offer to purchase certain residential
property in Green Oaks, Illinois, with the intention that the property
would be used for their residence, but also as the home office of their
architectural and interior design business, Downeast Design Group,
Inc. (DDG). The Bergerons then applied to First Midwest for a
$300,000 loan toward the purchase of the property, making First
Midwest aware of the property=s planned use.
In conjunction with the real estate transaction, a commitment for
title insurance was obtained from Stewart Title, through its agent,
Clear Title, Inc. (Clear Title). Stewart Title issued the title
commitment on August 24, 1995, naming the Bergerons and First
Midwest as the proposed insureds. Pursuant to this commitment,
Stewart Title agreed that, upon receipt of certain fees and premiums,
it would provide a policy of title insurance to the Bergerons in the
amount of $425,000 and a lender=s policy of title insurance to First
Midwest in the amount of $300,000. The commitment also provided
that both policies would contain Aour comprehensive endorsement
number 1 (without exceptions).@ After receiving a copy of the title
commitment, First Midwest=s loan committee approved the $300,000
loan to the Bergerons.
The closing on the real estate transaction took place on October 5,
1995, at which time the Bergerons executed a $300,000 promissory
note to First Midwest and a $300,000 mortgage to First Midwest
Mortgage Corporation. Subsequently, Stewart Title issued the title
insurance policies as promised. Neither the title commitment, nor the
policies of title insurance, indicated that there were any restrictive
covenants recorded against the property.
In July 1996, the Bergerons applied for and obtained an
additional $300,000 loan from First Midwest. These funds were to be
used for the construction of a free-standing garage/office space on the
property, adjacent to the residence. In connection with this loan, First
Midwest secured from Intercounty National Title Insurance Company
(Intercounty Title), through its agent, Clear Title, Inc., a second title
commitment and policy of title insurance in the amount of $300,000.
In January 1997, the Bergerons obtained a building permit from
the Village of Green Oaks and, thereafter, construction began on the
garage/office structure. A need for additional funds arose and the
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Bergerons applied, once again, to First Midwest. Upon the request for
additional funds, First Midwest approved a $752,000 Awraparound
loan@ to the Bergerons in May 1997. This loan consolidated and
replaced the $300,000 acquisition loan and the $300,000 construction
loan, as well as provided the additional funds to the Bergerons and
DDG. In connection with this wraparound loan, First Midwest
secured a new title commitment from Intercounty Title in the amount
of $752,000. This title commitment contained no exclusions
concerning a restrictive covenant affecting the property.
As part of the process of procuring the $752,000 wraparound
loan, the Bergerons executed a disbursement request and
authorization, instructing First Midwest to disburse $296,853.28 to
First Midwest Mortgage Corporation to pay off the acquisition loan.
As a result, on June 13, 1997, First Midwest sent a check in the
amount of $296,853.28 to First Midwest Mortgage Corporation and
on July 2,1997, First Midwest Mortgage Corporation notified the
Bergerons that the $300,000 acquisition loan had been paid in full
and the mortgage had been released.
In October 1997, the Bergerons and First Midwest received their
policies of title insurance from Intercounty Title in connection with
the wraparound loan. Apparently, through these policies, the
Bergerons and First Midwest learned, for the first time, that the
Bergerons= property was encumbered by a restrictive covenant that
had been recorded against the land in 1945. This restrictive covenant
provides that no part of the property may be used for business or
commercial purposes. Because the Bergerons could not use their
property as they had intended, they defaulted on their loan to First
Midwest. 1 First Midwest foreclosed on the property, but was unable
1
We note here that the restrictive covenant was not the only reason the
Bergerons were prevented from using their property for their business. The
size of the building constructed on the property and its use as office space
also violated Village of Green Oaks zoning ordinances. The Bergerons
attempted to have the zoning ordinances amended but were unsuccessful.
Thereafter, the Village sued the Bergerons to have the newly constructed
garage/office structure removed. The Bergerons were able to reach a
settlement with the Village which allowed them to keep the structure as
long as they agreed not to operate their business on the premises. In 1998,
the Bergerons filed suit against Stewart Title and Clear Title, as well as the
previous property owners and others who had been involved in the initial
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to recoup the full value of its $752,000 wraparound loan to the
Bergerons.
In May 1999, First Midwest filed a three-count complaint against
Stewart Title and Clear Title, alleging that it would not have loaned
money to the Bergerons had it known of the restrictive covenant
against the property. In count I of the complaint, First Midwest
brought a declaratory judgement action seeking to hold Stewart Title
liable on the policy of title insurance. First Midwest also alleged
negligent misrepresentation and fraudulent misrepresentation in
counts II and III, respectively.
In a second amended complaint, First Midwest added Intercounty
Title as a defendant. Subsequently, however, both Clear Title and
Intercounty Title declared bankruptcy. For this reason, Clear Title
and Intercounty Title are no longer parties to the proceedings.
Stewart Title moved for the dismissal of First Midwest=s second
amended complaint against it. In this motion, dismissal of counts II
and III was sought pursuant to section 2B615 of the Code of Civil
Procedure (735 ILCS 5/2B615 (West 1998)). With regard to count II,
Stewart Title argued that the allegations in the complaint were legally
insufficient to set forth a claim for negligent misrepresentation
because: (1) First Midwest did not allege, nor could it show, that
Stewart Title made any false statements in the title commitment upon
which First Midwest reasonably relied; and (2) Stewart Title is not in
the business of supplying information for the guidance of others in
their business transactions and, therefore, cannot be sued in tort
pursuant to the Moorman doctrine. See Moorman Manufacturing Co.
v. National Tank Co., 91 Ill. 2d 69 (1982) (no recovery in negligence
for purely economic losses). With regard to count III, Stewart Title
argued that First Midwest failed to state a legally valid claim for
fraudulent misrepresentation because First Midwest did not allege,
nor could it show, that Stewart Title knew its title search was
incorrect.
The circuit court of Cook County entered an order on March 3,
2000, granting Stewart Title=s motion to dismiss counts II and III with
sale of the property.
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prejudice. The court did not state its reasons for granting this relief.
Subsequently, on January 23, 2003, Stewart Title moved for
summary judgment on count I of First Midwest=s second amended
complaint. In this motion, Stewart Title argued that no action could
be brought against it based on the policy of title insurance because
the note and mortgage, which was secured by the lender=s policy of
title insurance issued by Stewart Title, had been paid off in June
1997. The title insurance policy, by its own terms, provided that
payment of the insured mortgage terminated the policy of title
insurance. Thus, Stewart Title argued, it could not be held liable on
the policy.
On June 13, 2003, the circuit court granted Stewart Title
summary judgment in its favor on count I of First Midwest=s second
amended complaint. First Midwest moved for reconsideration, but
that motion was denied. The June 13, 2003, and March 3, 2000,
orders became final and appealable on September 22, 2003. First
Midwest filed a notice of appeal from these orders on October 21,
2003.
In the appellate court, First Midwest appealed the trial court=s
grant of summary judgment to Stewart Title and the dismissal with
prejudice of count II. 2 First Midwest argued that the refinancing of
the $300,000 acquisition loan did not terminate Stewart Title=s
liability under the policy because the original indebtedness was never
extinguished but, rather, was incorporated into the new Awraparound@
loan. First Midwest also argued that a cause of action for negligent
misrepresentation had been stated because a title company, like
Stewart Title in this case, is in the business of providing information
when it issues a title commitment which fails to disclose
encumbrances to title.
The appellate court affirmed the orders of the trial court. 355 Ill.
App. 3d 546. Two justices upheld the dismissal of count II based on a
finding that Stewart Title was not in the business of supplying
information when it issued the title commitment to First Midwest.
2
First Midwest did not appeal the dismissal of the fraudulent
misrepresentation claim.
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355 Ill. App. 3d at 562. The third justice, Justice Quinn, specially
concurred, agreeing that count II was properly dismissed, but for
different reasons. Justice Quinn believed that a title company is in the
business of supplying information when it issues a title commitment
and that the majority=s holding to the contrary was unnecessary dicta
because, in the case at bar, First Midwest could not maintain a
negligent misrepresentation action against Stewart Title due to the
fact that the title commitment and insurance policy had terminated.
355 Ill. App. 3d at 563-64 (Quinn, J., specially concurring in part &
dissenting in part).
First Midwest filed a petition for leave to appeal, which we
granted. We also permitted the American Land Title Association
(ALTA) to file an amicus curiae brief in support of Stewart Title.
ANALYSIS
Initially, we note that First Midwest has abandoned its claim with
regard to count I. In this court, First Midwest does not challenge the
appellate court=s ruling that summary judgment was properly granted
to Stewart Title because the release of the mortgage terminated
Stewart Title=s liability under the policy of title insurance. The only
question before us in this appeal is whether First Midwest=s claim
against Stewart Title for negligent misrepresentation, set forth in
count II of the second amended complaint, was properly dismissed
pursuant to section 2B615 of the Code of Civil Procedure.
When a claim has been dismissed for failure to state a cause of
action pursuant to section 2B615 of the Code, the critical inquiry on
review is Awhether the allegations of the complaint, when construed
in the light most favorable to the plaintiff, are sufficient to establish a
cause of action upon which relief may be granted.@ Vitro v. Mihelcic,
209 Ill. 2d 76, 81 (2004); Jarvis v. South Oak Dodge, Inc., 201 Ill. 2d
81, 86 (2002). Thus, the issue before us is one of law and our review
is de novo. Vitro, 209 Ill. 2d at 81.
Negligent Misrepresentation
To state a claim for negligent misrepresentation, a plaintiff must
allege: (1) a false statement of material fact; (2) carelessness or
negligence in ascertaining the truth of the statement by the party
making it; (3) an intention to induce the other party to act; (4) action
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by the other party in reliance on the truth of the statement; (5)
damage to the other party resulting from such reliance; and (6) a duty
on the party making the statement to communicate accurate
information. Board of Education of the City of Chicago v. A, C & S,
Inc., 131 Ill. 2d 428, 452 (1989). See also Fox Associates, Inc. v.
Robert Half International, Inc., 334 Ill. App. 3d 90, 94 (2002);
Neptuno Treuhand-Und Verwaltungsgesellschaft Mbh v. Arbor, 295
Ill. App. 3d 567, 572-74 (1998). Where, as here, purely economic
damages are sought, this court has imposed a duty on a party to avoid
negligently conveying false information only if the party is in the
business of supplying information for the guidance of others in their
business transactions. Brogan v. Mitchell International, Inc., 181 Ill.
2d 178, 183-84 (1998); Moorman Manufacturing Co. v. National
Tank Co., 91 Ill. 2d 69, 89 (1982).
In the case at bar, First Midwest alleged in its second amended
complaint that Stewart Title was in the business of supplying
information for the guidance of others when it issued its title
commitment and policy of insurance and, accordingly, had a duty to
provide accurate information. First Midwest further alleged that, due
to Stewart Title=s carelessness or negligence, it Afailed to include in
either the title commitment or the title insurance policy, the existence
of restrictive covenants which encumbered title to@ the Bergerons=
property and that First Midwest, having relied upon the title
commitment, was induced to act and, as a result, suffered economic
losses in the amount of $1 million.
First Midwest contends that all of the necessary elements of a
negligent misrepresentation claim are set forth in count II of its
second amended complaint and that the appellate court erred when it
affirmed the dismissal of the complaint based on its finding that
Stewart Title was not in the business of supplying information when
it issued its title commitment. According to First Midwest, when a
title insurance company issues a title commitment it is a Apure
information provider,@ like a real estate broker or appraiser (see Duhl
v. Nash Realty Inc., 102 Ill. App. 3d 483 (1981)), a surveyor (Rozny
v. Marnul, 43 Ill. 2d 54 (1969)), or a home inspector (Perschall v.
Raney, 137 Ill. App. 3d 978 (1985)). Thus, when a title insurance
company, such as Stewart Title in this case, fails to conduct a proper
title search and provides inaccurate information concerning the
condition or marketability of title regarding property for which a title
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commitment is being issued, it may be held liable in tort for negligent
misrepresentation. Thus, in the case at bar, First Midwest argues that
it should be allowed to maintain a negligent misrepresentation action
against Stewart Title to recover its economic losses as an exception to
the Moorman doctrine. In support of this position, First Midwest
relies heavily on Notaro Homes, Inc. v. Chicago Title Insurance Co.,
309 Ill. App. 3d 246, 257 (1999).
Stewart Title, to the contrary, agrees with the appellate court in
the case at bar that a title company, when providing a title
commitment, is not in the business of supplying information for the
guidance of others. Stewart Title contends, therefore, that the
exception to the Moorman doctrine does not apply and First
Midwest=s negligent misrepresentation claim was properly dismissed
because it had no duty to list all of the defects, liens and
encumbrances affecting the property.
Stewart Title also argues that First Midwest failed to allege
sufficient facts in support of the Afalse statement@ and Areasonable
reliance@ elements of a negligent misrepresentation cause of action.
See Grund v. Donegan, 298 Ill. App. 3d 1034, 1037 (1998) (to avoid
dismissal plaintiff must allege sufficient facts in support of each
element of a cause of action). However, upon closer examination of
these arguments, we find that they are contingent upon Stewart Title=s
claim that it had no duty, contractual or otherwise, to include in its
title commitment a listing of all defects, liens, and encumbrances
affecting the Bergerons= land. We conclude, therefore, that the
threshold issue to be resolved in the case at bar is whether First
Midwest sufficiently alleged that Stewart Title had a duty to convey
accurate information, arising from the fact that, when it issued its title
commitment, it was in the business of supplying information for the
guidance of others in their business transactions. We now address this
issue.
The Economic Loss Doctrine
In Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d
69 (1982), we observed that, at common law, purely economic loss
was generally not recoverable in tort and that this Aeconomic loss
rule@ prevailed in most jurisdictions throughout the United States. We
concluded that Acontract law, which protects expectation interests,
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provides the proper standard when a qualitative defect is involved.@
Moorman, 91 Ill. 2d at 81. Accordingly, we held that a party Acannot
recover for solely economic loss under the tort theories of strict
liability, negligence and innocent misrepresentation.@ Moorman, 91
Ill. 2d at 91.
We recognized three exceptions to this general rule: (1) where the
plaintiff sustained damage, i.e., personal injury or property damage,
resulting from a sudden or dangerous occurrence (Moorman, 91 Ill.
2d at 86); (2) where the plaintiff=s damages are proximately caused
by a defendant=s intentional, false representation, i.e., fraud
(Moorman, 91 Ill. 2d at 88-89); and (3) where the plaintiff=s damages
are proximately caused by a negligent misrepresentation by a
defendant in the business of supplying information for the guidance
of others in their business transactions (see Moorman, 91 Ill. 2d at
89). See In re Chicago Flood Litigation, 176 Ill. 2d 179, 199 (1997).
When setting forth the third exception for negligent misrepresentation
claims, we cited Rozny v. Marnul, 43 Ill. 2d 54 (1969), wherein we
held that the plaintiffs could recover in tort for their economic losses
proximately caused by their reliance on a plat of survey, which
carried an Aabsolute guarantee@ and which contained inaccurate
information.
Since Moorman, the proper application of the negligent
misrepresentation exception has been discussed by this court on
several occasions. In Anderson Electric, Inc. v. Ledbetter Erection
Corp., 115 Ill. 2d 146 (1986), the plaintiff contracted with a third
party to install certain electrical units that were manufactured by
defendant. Plaintiff improperly installed the units and was required to
redo much of its work. Plaintiff sought recovery of its economic
losses from defendant based on defendant=s alleged negligent
performance of a service, i.e., defendant=s failure to supervise and
inspect the installation process. Defendant had a contract with the
third party to perform these services, but plaintiff had no direct
contractual relationship with defendant. We applied Moorman to
preclude the plaintiff from recovering in tort, even though plaintiff
was unable to recover from defendant in contract. Anderson Electric,
115 Ill. 2d at 153. We also rejected plaintiff=s attempt to bring its
negligence claim within the negligent misrepresentation exception,
stating Ait simply cannot be said [that defendant] was in the business
of supplying information for the guidance of others in business
transactions and had made negligent misrepresentations.@ Anderson
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Electric, 115 Ill. 2d at 154.
Thereafter, in 2314 Lincoln Park West Condominium Ass=n v.
Mann, Gin, Ebel & Frazier, Ltd., 136 Ill. 2d 3d 302 (1990), we again
employed the economic loss doctrine, this time to deny a tort claim
for architectural malpractice. The plaintiff in 2314 Lincoln Park West
had argued that Aan architect supplies information to be used by
others@ and, therefore, the malpractice claim fell within the
misrepresentation exception to the Moorman rule. 2314 Lincoln Park
West, 136 Ill. 2d at 313. In rejecting this claim, we held that Awhile it
may be the case that an architect does in fact supply information
relied on by others, we do not believe that the character of that
function should be overstated.@ 2314 Lincoln Park West, 136 Ill. 2d at
313. Explaining further, we held that Athe economic loss rule attempts
to define the contours of duty@ (2314 Lincoln Park West,136 Ill. 2d at
315), and since an architect=s responsibilities are defined by contract,
its duty Ashould be measured accordingly@ (2314 Lincoln Park West,
136 Ill. 2d at 317).
Subsequently, in Fireman=s Fund Insurance Co. v. SEC Donohue,
Inc., 176 Ill. 2d 160, 168 (1997), we addressed the negligent
misrepresentation exception to the Moorman doctrine directly,
explaining that the focus must be on whether the defendant is in the
business of supplying information as opposed to providing something
tangible. Fireman=s Fund Insurance Co., 176 Ill. 2d at 169. We
concluded that when the negligent misrepresentation is contained
within information which is incidental to a tangible product, such as
an architect=s drawings or, as in that case, plans for a water supply
system, the accuracy of such information can be memorialized in
contract terms and, thus, the Moorman negligent misrepresentation
exception to the economic loss doctrine does not apply. Fireman=s
Fund Insurance Co., 176 Ill. 2d at 169; see also Tolan & Son, Inc. v.
KLLM Architects, Inc., 308 Ill. App. 3d 18, 28 (1999). In short, the
negligent misrepresentation exception to the Moorman doctrine is not
applicable if the information supplied is merely ancillary to the sale
of a product. Fireman=s Fund Insurance Co., 176 Ill. 2d at 168.
In the case at bar, we must decide the nature of a title
commitment, for it is the nature of the title commitment that will
define the parameters of the title insurer=s duty. If, as First Midwest
contends, a title insurer, when it issues a title commitment,
undertakes a duty to perform a title search and to provide the results
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of that title search for the guidance of others in their business
transactions, then it would be appropriate to find that First Midwest
could recover its losses resulting from its reliance upon
representations made within the title commitment. Under these
circumstances, the negligent misrepresentation exception to the
Moorman economic loss rule would apply. If, however, the title
commitment is, as Stewart Title argues, simply an offer to provide a
policy of title insurance in accordance with the terms stated in the
commitment, then the negligent misrepresentation exception would
not apply.
ALTA, in the amicus brief submitted to this court, offers us some
necessary insight into the nature of a title commitment in Illinois. As
ALTA explains, First Midwest is treating a title commitment like an
abstract of title, which is categorically different from a title
commitment. According to ALTA, when an abstract of title is
requested for a property, the abstracter examines the record and
makes a summary of title, disclosing all defects, liens and
encumbrances affecting that property. The sole purpose of an abstract
of title is to provide information regarding the title. Thus, in this
instance, the failure to provide accurate information would be
actionable in tort.
ALTA further explains, however, that it is not the purpose of a
title commitment to provide a listing of all defects, liens and
encumbrances affecting the property. A title commitment is simply a
promise to insure a particular state of title. To the extent that the title
commitment contains information concerning the title, such
information is provided to give notice of the limitations to the risk
that the title insurer is willing to insure. See also 1 Am. Jur. 2d
Abstracts of Title '2 (2005); 1 M. Keller, Title Insurance and Other
Title Evidence, in Basic Real Estate Practice (Ill. Inst. for Cont. Legal
Educ. 1995).
We have reviewed the record and studied the title commitment
which Stewart Title issued. We agree that the title commitment does
not contain, nor does it purport to contain, a listing of all defects,
liens, and encumbrances affecting title to the property at issue here.
Schedule B of the title commitment states: ASchedule B of this policy
or policies to be issued will contain the exceptions shown on inside
cover of this Commitment and the following exceptions, unless same
are disposed of to the satisfaction of the Company.@ It then lists
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certain encumbrances which would not be covered if a policy of title
insurance were to issue without further action. Nowhere does the
commitment contain any guarantee concerning the performance of a
title search. In fact, such a guarantee would be counterintuitive since
the purpose of the title commitment is to set forth the terms for
issuing a policy of title insurance and the purpose of the policy of
title insurance is to insure against the risk of undiscovered defects,
liens, and encumbrances.
We conclude, therefore, that a title insurer is not in the business
of supplying information when it issues a title commitment or a
policy of title insurance and, accordingly, the negligent
misrepresentation exception to the Moorman doctrine does not apply.
The scope of a title insurer=s liability is properly defined by contract.
We realize that our conclusion here conflicts with the appellate
court=s ruling in Notaro Homes, Inc. v. Chicago Title Insurance Co.,
309 Ill. App. 3d 246 (1999). In Notaro, the court held, without any
analysis, that when a title insurer issues a commitment it is in the
business of supplying information for the guidance of others. As we
have explained, this premise is incorrect. Thus, to the extent that
Notaro relied on this incorrect premise in reaching its determinations,
we overrule Notaro.
Having decided that, in the case at bar, Stewart Title was not in
the business of supplying information when it issued its title
commitment to First Midwest Bank, we affirm the appellate court=s
ruling that First Midwest=s claim for negligent misrepresentation was
properly dismissed pursuant to section 2B615 of the Code of Civil
Procedure. For this reason, we need not reach any of the additional
matters asserted in support the appellate court=s judgment.
CONCLUSION
In the case at bar, First Midwest Bank failed to state a cause of
action against Stewart Title for negligent misrepresentation. We
affirm the judgment of the appellate court, upholding the dismissal
with prejudice of count II of plaintiff=s second amended complaint.
Appellate court judgment affirmed.
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