Adam Leitman Bailey, P.C., Successfully Defends Title Company Against Frivolous Negligence Claim Based On Uninsured Risk, Wins Attorneys’ Fees

By Adam Leitman Bailey

Adam Leitman Bailey, P.C. prevailed for its client, a leading title insurer in New York and nationally, in federal court litigation arising from the conveyance of a home in Westchester County, New York, that contained undisclosed lead contamination. Plaintiffs, the new homeowners, brought suit in the U.S. District Court for the Southern District of New York, alleging violations of the federal Residential Lead-Based Hazard Reduction Act against the home sellers, the sellers’ closing attorney, and the sellers’ real estate broker and agent. Plaintiffs alleged that the defendants did not disclose the presence of known lead-based hazards before Plaintiffs’ purchase of the residence. Plaintiffs sought damages related to the cost of repairs to the home and any resulting medical expenses.

Plaintiffs also sued Adam Leitman Bailey, P.C.’s client, the title company, for negligence under New York law. The title company had conducted the title search on the property on behalf of Plaintiffs and their mortgage lender. When the title search came up clean, the title company certified to Plaintiffs that the sellers stood ready to convey good and marketable title to the property. At the closing, the title company issued to Plaintiffs a title policy written on behalf of one of the nation’s premier title underwriters. Plaintiffs did not attempt to submit a claim under the title insurance policy, which did not insure against the risk of lead contamination. Rather, Plaintiffs contended that they could sue the title company for negligence based on a title search that did not reveal a history or presence of lead in the property, including prior citations for lead contamination by the Westchester County Department of Health.

At the outset, Adam Leitman Bailey, P.C. endeavored to persuade Plaintiffs’ counsel to drop the negligence claim because no title company had ever been held liable in negligence for running a title search that failed to uncover lead-based paint or other lead contamination. As the Court would later highlight in its decision, Adam Leitman Bailey, P.C. satisfied the requirements of Rule 11 of the Federal Rules of Civil Procedure by notifying Plaintiffs’ counsel in writing that the negligence claim against the title company was frivolous because the certificate of title had merged in the subsequently issued title insurance policy, and the title company did not have a duty to search for or disclose lead-based paint hazards. Adam Leitman Bailey, P.C.’s letter further notified Plaintiffs’ counsel of its intent to file a motion for sanctions in the event that Plaintiffs did not withdraw their negligence claim against the title company. Nevertheless, Plaintiffs’ counsel persisted.

Accordingly, in compliance with all applicable rules of federal civil procedure, Adam Leitman Bailey, P.C., filed separate motions for summary judgment and for sanctions, taking care not to file its sanctions motion papers with the Court until Plaintiffs had been given a 21-day “safe harbor” period in which to withdraw their negligence claim without penalty. Plaintiffs did not withdraw, and vigorously opposed both motions.

In a 42-page Memorandum Opinion and Order, Southern District Judge Paul G. Gardephe granted Adam Leitman Bailey, P.C.’s motions and awarded summary judgment to the title company dismissing Plaintiffs’ negligence claim, as well as a cross-claim for contribution asserted by the home-seller defendants. And, in what was surely a stunning reversal for Plaintiffs’ counsel, the Court awarded sanctions against Plaintiffs’ counsel in the amount of the title company’s attorneys’ fees and costs incurred following the filing of Plaintiffs’ complaint in the action, including fees and costs for the motion for sanctions. The Court’s ruling was remarkable because it is extremely rare – almost unheard of – for a Court to award all of a party’s attorneys’ fees and costs in an action based on the filing of a frivolous cause of action. Such a result is virtually unprecedented in the New York state courts. Even in federal court where Rule 11 applies, there are hundreds if not thousands of reported decisions in which the district court dismissed a complaint as baseless but refrained from awarding Rule 11 sanctions. But not in this case.

Adopting all of Adam Leitman Bailey’s factual and legal arguments, the Court concluded that “Plaintiffs’ negligence claim against [the title company] violates Federal Rule of Civil Procedure 11(b)(2), because the claim is not ‘warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law.’” The Court found it was clear that the Certificate of Title issued by the title company to Plaintiffs merged with the title insurance policy, and that a negligence claim arising out of the title search was thus foreclosed. The Court further found that the title company did not owe Plaintiffs a duty to search for lead-based paint in the property, or to determine whether there were municipal records revealing such contamination. The Court also determined that there was no evidence that the law concerning those matters was unsettled, and that Plaintiffs’ counsel had failed to cite any case holding a title agent liable for a negligent title search where a merger provision was in place, let alone any case holding a title agent liable in negligence for failure to discover lead-based paint. Furthermore, Plaintiffs’ counsel failed to identify any public policy considerations supporting the negligence claim against the title company or to present any good faith argument for the reversal or modification of existing law. Accordingly, as the Court found, “[i]t should have been apparent from the outset of this litigation that Plaintiffs’ negligence claim against [the title company] was baseless.”

Adam Leitman Bailey, P.C.’s written submissions proved so persuasive that the Court granted the firm’s motions on the papers without oral argument.

Adam Leitman Bailey, Scott J. Pashman, and Danny Ramrattan represented the title company on behalf of Adam Leitman Bailey, P.C.

Published decision

Adam Leitman Bailey, P.C.