Stewart Title Guaranty Co. v. Dude
708 F.3d 1191, 2013 WL 677220 (2013)
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Rule of Law:
A plaintiff's reliance on a defendant's fraudulent misrepresentation is justifiable, even if the plaintiff is a sophisticated party that could have discovered the truth through investigation, when the defendant makes an affirmative false statement and the truth is not reasonably ascertainable from public records due to a defect in recording.
Facts:
- In 2003, Harald Dude secured a $1.9 million loan from Washington Mutual, collateralized by a house he owned in Aspen.
- Shortly thereafter, Dude sought a $500,000 loan from Wells Fargo and was required to complete a form for its title insurer, Stewart Title.
- Knowing Stewart Title's search had not discovered the Washington Mutual loan, Dude intentionally concealed its existence on the form to secure the new loan.
- In 2006, Dude, his wife, and their real estate agent, David Lester, arranged to sell the Aspen property, again using Stewart Title for the transaction.
- Stewart Title’s title search once more failed to uncover the Washington Mutual loan because the loan documents had been defectively recorded with no legal description of the property.
- On a new form, Dude and his co-conspirators again deliberately concealed the Washington Mutual loan, intending to receive the sale proceeds that should have been paid to the bank.
- After the sale closed, Dude stopped making payments on the Washington Mutual loan.
- Washington Mutual then threatened foreclosure against the new owner, Rosalina Yue, who made a claim on her policy with Stewart Title, which ultimately paid Washington Mutual approximately $1.95 million.
Procedural Posture:
- Stewart Title brought a diversity lawsuit against Harald Dude, his company, and others in federal district court.
- All defendants except for Dude and his company settled or sought bankruptcy protection prior to trial.
- The case proceeded to a jury trial against Dude and his company.
- The jury returned a verdict in favor of Stewart Title, finding Dude and his company liable for fraudulent misrepresentation and awarding both actual and punitive damages.
- The district court dismissed a separate fraudulent concealment claim brought by Stewart Title.
- Dude and his company (appellants) appealed the judgment on the fraudulent misrepresentation verdict to the U.S. Court of Appeals for the Tenth Circuit.
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Issue:
Under Colorado law, is a title insurance company's reliance on a seller's fraudulent misrepresentation that no other loans exist on a property justifiable, when the company's own title search failed to uncover a defectively recorded loan?
Opinions:
Majority - Gorsuch, Circuit Judge.
Yes, the title insurance company's reliance was justifiable. To prevail on a fraudulent misrepresentation claim in Colorado, a plaintiff must prove its reliance was justifiable. The court rejected both of Dude's arguments that Stewart Title's reliance was unjustifiable. First, Dude's claim that Stewart Title knew he was lying about other loans failed because the form specifically asked for disclosure of loans other than those already discovered by Stewart Title's search, a point supported by testimony from a company examiner. Second, Dude's argument that Stewart Title had 'constructive notice' from public records was unavailing because the Washington Mutual loan was defectively recorded, lacking a legal description. Citing Colorado law, the court held that a defectively recorded deed does not provide constructive notice even to a bona fide purchaser, and a fraud victim should not be held to a higher standard of diligence.
Analysis:
This decision clarifies the 'justifiable reliance' element in fraud claims, particularly for sophisticated plaintiffs like title insurers. It reinforces the principle that the law of fraud protects victims from deliberate falsehoods and does not impose a universal duty to investigate every representation, especially when the defendant actively conceals information. The ruling limits the 'constructive notice' defense by holding that a plaintiff is not charged with knowledge of information in a public record if that record is defective. This precedent strengthens the position of fraud victims by focusing on the conduct of the defendant rather than the investigative diligence of the plaintiff.
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