Relating to Real Estate
“Collateral,” but Not as We Normally Use That Word: Collateral Litigation Rule Applies, but Collateral Source Rule Does Not
Eastern Shore Title Company v. Ochse, ––– A.3d –––, No. 16 Sept. Term 2016, 2017 WL 2361793 (Md. May 31, 2017), has the factual background that would be of interest to real estate lawyers and other real estate professionals. However, the Court of Appeals based its opinion on two principles of more interest to litigators.
In 1919, a deed was executed in favor of Dorchester County for a county road, and the deed was recorded in the land records. The deed included a clause that stated that if the road were abandoned, the property would revert to the grantors. Over time, the affected property was divided, and in 1998 William and Jessie Henry created a five acre parcel and contracted to sell it to Steven and Shari Ochse.
Eastern Shore Title Company (“Eastern Shore Title”) performed a title search, but it did not find the 1919 deed. It prepared a title binder which led to a title insurance policy from Chicago Title Insurance Company in favor of the Ochses. At the time of the closing of their purchase of the property, the Ochses noted that their deed indicated that the driveway in front of their house was subject to the rights of others. As it turned out, there were rights in favor of others under the 1919 deed, but the Ochses were told that the issue related to the front of the property involved only utility easements. After a second title search, Eastern Shore Title again failed to find the 1919 deed.
The Ochses brought an action against the Henrys in the Circuit Court for Dorchester County in December 2007. In February 2008, counsel for the Henrys mailed the Ochses a copy of the 1919 deed, and for the first time the Ochses learned of the nature of the title defect. In April 2008 the Ochses added Dorchester County to the litigation as a party. In October 2008, the Circuit Court held that Dorchester County owned the 30-foot strip of land in fee simple. In September 2009, the Circuit Court denied to the Ochses the relief that they sought and instead awarded the Henrys $100,200 in attorneys’ fees under a fee-shifting clause in the contract of sale.
The Ochses appealed to the Court of Special Appeals. While the case was stayed, the Dorchester County Council passed a bill quitclaiming its interest in the 30-foot strip. Once this occurred, the only real loss of the parties was their attorneys’ fees.
The Court of Special Appeals found that the Henrys had breached the contract of sale, and the court, therefore, vacated the award of attorneys’ fees to the Henrys. Therefore, the Ochses were the prevailing party, and when the case went back before the circuit court on remand, that court awarded the Ochses approximately $350,000 in attorneys’ fees. This action was subsequently appealed to the Court of Special Appeals, and it was remanded to the Circuit Court again.
In June 2010, during the pendency of their litigation with the Henrys, the Ochses sued Eastern Shore Title and Chicago Title in the Circuit Court for Talbot County. That court found that Chicago Title breached its contract with the Ochses because it did not provide a defense in the Henry litigation. The court found that Eastern Shore Title was negligent by not finding the 1919 deed.
The Circuit Court awarded $417,947 to the Ochses from Chicago Title and $215,710.60 from Eastern Shore Title. But it reduced these amounts by the $215,710.60 paid by the Henrys to the Ochses in the Henry litigation.
The case was appealed to the Court of Special Appeals, and then the Court of Appeals granted cert. The Court of Appeals found that the collateral litigation doctrine applies because the wrongful conduct of the defendant forced the plaintiff into litigation with a third party. Therefore, as an exception to the “American rule” which provides each party bears its own litigation expenses, the court ruled that the Henrys were liable for the attorney’s fees incurred by the Ochses. Further, the Court of Appeals held that the Circuit Court had properly found that attorneys’ fees in the Henry litigation were reasonable and incurred in good faith.
The Court of Appeals next considered whether the collateral source rule applied. If so, the trial court should not have considered the payment by the Henrys of attorneys’ fees to the Ochses. However, for public policy reasons, the collateral source rule, which bans the consideration of payments to a litigant from an insurance company or another source, is limited to tort actions. The underlying matter in the subject case was a contract action, and the Court of Appeals held that the collateral source rule does not apply in this case so the attorneys’ fees paid by the Henrys needed to be taken into account. Further, the collateral litigation doctrine only permits recovery of attorneys’ fees to the extent actually incurred, and upon payment by the Henrys, the Ochses had not suffered a loss from their own attorneys’ fees.
For questions, please contact Ed Levin (410) 576-1900.