Sandwiches, Scalia, and the ALTA 9 Endorsement
by Patrick Hicks, ATG Law Clerk
Is a burrito a sandwich?
It is a food that you eat with your hands and it is essentially meat and bread, but we commonly do not think of a burrito as a sandwich. Most people probably do not think about the question of a burrito’s classification as a food item at all. But for attorneys who deal with use restrictions on property, it can be a very relevant question.
Attorneys representing the fast food chain Panera Bread Co. tried to argue that tortillas are bread and that anything with bread and a filling constituted a sandwich for the purposes of a contract they had with a shopping center. White City Shopping Center, LP v. PR Restaurants, LLC, 21 Mass.L.Rptr. 565 (Mass.Super.2006). Panera’s lease had a sandwich “exclusivity clause” that sought to prevent the shopping center from leasing space to any other sandwich restaurants, although it did not define the word “sandwich”. When the Mexican-style chain Qdoba moved into the shopping center, Panera sued on the grounds that burritos were in violation of the exclusivity clause. Both sides brought in food experts to testify to whether the burrito was a sandwich. Ultimately, the judge in the case relied on the good old Webster’s dictionary, which defined a sandwich as meat between two slices of bread. Since a burrito is only a single tortilla, it was not a sandwich. This case illustrates the importance of careful drafting and gives an example of the fine distinctions attorneys need to be aware of when dealing with use restrictions.
This issue has become increasingly important in the title insurance industry thanks to the recent controversy surrounding the ALTA 9 Series Endorsement. Standard practice in the title insurance industry has been that when using the ALTA 9 as a standard form for a title insurance policy, listing the name of an instrument would be enough to include all the clauses of that instrument as exceptions to coverage. But in a series of decisions beginning in February 2011, a Third Circuit Appellate Court found that the plain language of the form was contrary to the standard practice of the industry and required that individual sections of an instrument be listed out in order to be excluded from coverage. Nationwide Life Ins. Co. v. Commonwealth Land Title Ins. Co., 687 F.3d 620 (C.A.3 (Pa.) 2012). The specific clause in question in the case was a use restriction clause.
The American Land Title Association (ALTA), a trade association for the title insurance industry founded in 1907, has created standardized policy forms for more than 80 years. Title agents who are members of ALTA pay for the cost of the forms as part of their membership fees. One of the forms available from ALTA is the ALTA Endorsement - Form 9 (Restrictions, Encroachments, Minerals). This endorsement is usually required by lenders, and up until the Third Circuit’s decision was a standard part of a title insurance policy.
In July 2012, a U.S. Court of Appeals in the Third Circuit dealt the title industry a huge blow when it upheld a District Court’s ruling that the ALTA 9 Endorsement “insures against any loss sustained from an instrument that is covered by the [endorsement]” and decided that a use restriction clause was not excluded from coverage even though it was contained in a Declaration of Restrictions that was listed as excluded from coverage. Nationwide, 687 F.3d at 625. The case centered around a title insurance policy that was issued by Commonwealth Land Title Insurance Co. (“Commonwealth”) to Nationwide Life Insurance Co. (“Nationwide”) for property in the Franklin Mills Mall in Philadelphia, Penn. In 1988 a group called PMI Associates bought the property from its previous owner Liberty Mills Limited Partnership (“Liberty Mills”). At the time of the purchase, PMI and Liberty Mills entered in to a Declaration of Restrictions. There was also a “Master Declaration” that existed between Liberty Mills and a different entity called Liberty Mills Residual Limited Partnership, which was in charge of governing all the stores in the mall. Liberty Mills eventually conveyed its interests to Franklin Mills Limited Partnership (“Franklin Mills”), which was the entity that invoked the use restriction in the case.
In 2001 PMI borrowed $3.5 million from Nationwide and put up the mall property as collateral. Title insurance was purchased from Commonwealth and included an ALTA 9 Endorsement. In 2003 PMI defaulted on the loan and Nationwide gained ownership through a deed in lieu of foreclosure. Nationwide then attempted to sell the property to Ironwood, Real Estate, LLC (“Ironwood”), which proposed to turn the space into a technical school. Franklin Mills objected, arguing that the language in the Declaration of Restrictions required the property to be used “only for the purposes of a variety or general merchandise store,” and that a technical school would be a violation. Nationwide then submitted a claim to Commonwealth stating that the property was unusable and unsalable because of the use restrictions. Commonwealth denied the claim and Nationwide filed suit.
The Declaration of Restrictions was specifically listed in Schedule B of Commonwealth’s title insurance policy, making it an exception to what was covered. Commonwealth filed a motion to dismiss, which was granted by the district court and Nationwide appealed. The Court of Appeals for the Third Circuit then reversed and remanded that decision, issuing a holding that was a direct divergence from longstanding practice in the title insurance industry. The court held that listing the Declaration of Restrictions in Schedule B was not enough, that instead Commonwealth needed to individually list each restriction contained in the declaration in order for them to be excluded from coverage.
On remand, the U.S. District Court for Eastern District of Pennsylvania was compelled to accept the higher court’s ruling and said that “The Endorsement does not restrict its coverage to specific provisions within such instruments” as the Declaration of Restrictions. Nationwide Life Ins. Co. v. Commonwealth Land Title Ins. Co., 2011 WL 611802 at *15 (E.D.Pa., 2011). In other words, Commonwealth had to cover the losses and damages incurred by Nationwide because the specific restriction that the property be used “only for the purposes of a variety or general merchandise store” contained in the Declaration of Restriction was not specifically listed in Schedule B.
Commonwealth appealed again and the district court certified a question for the appellate court asking “Whether the American Land Title Association 9 Endorsement provides title insurance coverage for whole instruments listed in Schedule B or whether the scope of coverage is limited to particular types of encumbrances.” Nationwide, 687 F.3d at 623. The specific provision that the court looked at was ¶ 1(b)(2) of the ALTA 9. The ALTA 9 states as follows:
Commonwealth will insure Nationwide “against loss or damage sustained by reason of: [¶ 1] The existence at Date of Policy of any of the following:… [¶ 1(b)] Unless expressly excepted in Schedule B… [¶ 1(b)(2)] Any instrument referred to in Schedule B as containing covenants, conditions or restrictions on the land which, in addition, (i) establishes an easement on the land; (ii) provides a lien for liquidated damages; (iii) provides for a private charge or assessment; (iv) provides for an option to purchase, a right of first refusal or the prior approval of a future purchaser or occupant.”
The Declaration of Restrictions contained an option to purchase and a right of first refusal and so it fell under the [¶ 1(b)(2) restrictions and therefore needed to be specifically listed on Schedule B. Commonwealth argued then that only the portions of the Declaration having to do with the option to purchase or right of first refusal should be included in coverage but the court disagreed. According to the court the plain language of the ALTA 9 dictated that that “the ALTA 9 Endorsement provides coverage to losses arising from entire instruments that fit within its plain language, not just the ¶ 1(b)(2) restrictions within those instruments that have not been expressly excepted. If ¶ 1(b)(2) was not intended to cover losses arising due to entire instruments, then the phrase “any instrument” would have been omitted, as it was in ¶ 1(b)(1), (3), (4), and (5) of the same ALTA 9 Endorsement.” Id. at 624. Commonwealth of course argued that this interpretation of the ALTA 9 was contrary to the intention of the parties and that the ruling made the endorsement “provide far more coverage to the insured” than it was designed to. Id. But the court remained adamant, stating that “caselaw requires us to follow the plain language of the ALTA 9 Endorsement rather than deferring to industry custom and usage.” Id. Like in White City Shopping Center, if language is found to be unambiguous the court decided to only interpret it as to its plain meaning, regardless of what the parties may have thought they were agreeing to.
The title insurance industry was understandably stunned. This “erroneous interpretation” of the ALTA 9 Endorsement “deviated from prevailing understanding and long standing custom, practice and usage in the title insurance and real estate industry.” Jim Gosdin, Form Revisions Made to Meet Industry, Insured Needs, Title News 12 (April 2012). Listing an agreement of restrictions or covenants or conditions on Schedule B had always been understood to include all the restrictions included in the agreement. The Third Circuit’s decision led to something of an absurd result. If the restrictions within the agreement were not excluded from coverage by listing the agreement itself --- then why would the agreement have even been listed? The decision rendered the act of listing the agreement meaningless.
While some legal scholars argue that the plain meaning approach to textual interpretation is correct, not everyone agrees that the strict approach, taken by courts such as the ones in Nationwide and White City Shopping Center, is ideal. Supreme Court Justice Antonin Scalia falls into the former camp and has specifically praised the White City Shopping Center decision. See Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts. In Scalia’s view, judges should take a passive role and rely only on “textual originalism” to interpret text at issue in cases. Scalia believes judges should “look for meaning in the governing text, ascribe to that text the meaning that it has borne from its inception, and reject judicial speculation about both the drafters’ extra-textually derived purposes and the desirability of the fair reading’s anticipated consequences.” Id. This textual originalism jurisprudence relies frequently on using dictionary definitions to ascertain meaning. So in Scalia’s view, White City Shopping Center was properly decided because it did not matter what the parties thought sandwiches meant, the word sandwich is unambiguous and by its dictionary definition a burrito was not a sandwich.
Others have questioned this judicial philosophy and have argued that such an approach allows too much room for judges to hide behind originalism when really they are only using it to gain an outcome that supports their beliefs. Debra Cassens Weiss, Textual Originalism and the Great Sandwich Debate: Posner Reviews Scalia, ABA Journal (Aug 30, 2012 10:47 AM). In a review of Scalia’s book, Reading Law, 7th Circuit Justice Richard A. Posner criticized Scalia’s defense of originalism and specifically condemned Scalia’s view of White City Shopping Center. Richard A. Posner, The Incoherence of Antonin Scalia, New Republic (Aug. 24, 2012). For one thing, Posner argues, Scalia fails to take into account the other circumstances of the case. The dictionary definition of "sandwich" was not the only factor the judge used to reach a decision. There was also testimony from various experts who claimed that a burrito was distinct from a sandwich. But even if the court had relied solely on the dictionary definition, Posner argues that the definition used was blatantly wrong. A club sandwich, for example, has three slices of bread and so if one was using the strict Webster definition it would not qualify as a sandwich. Also a hamburger is usually considered a sandwich but it uses buns instead of slices of bread so it too would not qualify. Instead of relying so stringently on dictionary definitions, Posner argues that judges need to “consider the range of commonsensical but non-textual clues to meaning that come naturally to readers trying to solve an interpretive puzzle” Id. He feels that trying to ascertain meaning in cases like this is too complicated to just have a dictionary be the sole determining factor in interpretation. “Dictionaries are mazes in which judges are soon lost.” Posner writes, “A dictionary-centered textualism is hopeless.” Id.
Neither Scalia nor Posner talk about ALTA 9 or the Nationwide case, but based on their debate over sandwiches it seems probable that they would be in disagreement over the outcome of the case. Using Scalia’s strict plain meaning approach the case is rightly decided because the language of the ALTA 9 form does support the conclusion that the endorsement insures against any loss sustained from an instrument covered in ¶ 1(b)(2). Posner, on the other hand, would likely find this result to be an example of textual originalism, “reveling in absurdity” because it renders the custom and practice of an entire industry worthless because of two carelessly written words. Id. In relying solely on the plain language approach the Court in Nationwide ignores intent, custom, usage, practice, and Posner might argue, common sense.
ALTA has since revised the ALTA 9 Endorsement, which “will ensure that the effect of [Nationwide] will be limited” to title insurance policies featuring the old form. Nationwide, 687 F.3d at 625. And so far no other circuits have followed the Third Circuit’s interpretation of the ALTA 9 Endorsement. But ATG member attorneys should be aware of the decision and make sure they are using the revised ALTA 9 Form. Remember to draft carefully and never assume that a court will know what you meant by an important term, even a word as simple as “sandwich.”
ATG has adopted the following ALTA 9 series of endorsements recently promulgated by ALTA:
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ALTA 9-06: Restrictions, Encroachments, Minerals – Loan Endorsement (ALTA 9-06) | This endorsement insures the insured lender, unless excepted on Schedule B, against loss due to:
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A violation of a covenant that:
- divests, subordinates, or extinguishes the lien of the mortgage;
- results in the mortgage being invalid, unenforceable, or lacking priority; or
- results in a loss of the lender’s title acquired in satisfaction of the mortgage.
- A violation of an enforceable covenant.
- The enforced removal of an improvement that violates a building setback line.
- A notice of violation of an environmental covenant, but only to the extent of the violation contained in the notice.
- An encroachment of an improvement on the insured land onto adjoining land or an easement.
- An encroachment of an improvement located on the adjoining land onto the insured land.
- A final court order requiring removal of an encroachment onto the adjoining land.
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Damage to an improvement:
- that encroaches onto an easement when the damage is due to the exercise of the right to maintain the easement for its intended purpose; or
- resulting from the use of the surface of the land for the extraction of minerals.
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A violation of a covenant that:
- ALTA 9.1-06: Covenants, Conditions, and Restrictions – Unimproved Land – Owner’s Endorsement | This endorsement provides extensive coverage on an Owner Policy for any violation of an enforceable covenant, including environmental protection, unless an exception is raised on Schedule B identifying the violation.
- ALTA 9.2-06: Covenants, Conditions, and Restrictions – Improved Land – Owner’s Endorsement | This endorsement provides the same coverage as the ALTA 9.1 (above), plus it includes coverage for the enforced removal of an improvement that violates a building setback line, unless an exception is raised on Schedule B identifying the violation.
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ALTA 9.3-06 Covenants, Conditions, and Restrictions – Loan Policy Endorsement | This endorsement insures the insured lender, unless excepted on Schedule B, against loss due to:
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A violation of a covenant that:
- divests, subordinates, or extinguishes the lien of the mortgage;
- results in the mortgage being invalid, unenforceable, or lacking priority; or
- results in a loss of the lender’s title acquired in satisfaction of the mortgage.
- A violation of an enforceable covenant;
- The enforced removal of an improvement that violates a building setback line; or
- A notice of violation of an environmental covenant, but only to the extent of the violation contained in the notice.
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A violation of a covenant that:
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ALTA 9.4-06 Restrictions, Encroachments, And Minerals – Unimproved Land – Owner’s Endorsement | This endorsement insures the insured owner, unless excepted on Schedule B, against loss due to:
- A violation at Date of Policy of an enforceable covenant;
- A covenant that (i) establishes an easement on the Land; (ii) provides for an option to purchase, a right of first refusal, or the prior approval of a future purchaser or occupant; or (iii) provides a right of reentry, possibility of reverter, or right of forfeiture because of violations on the Land of any enforceable covenants, conditions, or restrictions;
- An encroachment onto the insured land of any improvements from adjoining land; or
- A recorded notice of violation of an enforceable covenant relating to environmental protection, to the extent the violation referred to in the notice.
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ALTA 9.5-06 Restrictions, Encroachments, And Minerals – Improved Land – Owner’s Endorsement | This endorsement provides the same coverage to an owner as that of the ALTA 9.4-06, with additional coverage for loss due to:
- Damage to the improvements on the land due to a permitted use of an easement for the extraction of minerals; or
- The enforced removal of any improvement due to a violation of a covenant or the encroachment of the improvement onto adjoining land or a building setback line.
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ALTA 9.6 Private Rights – Loan Endorsement | This endorsement insures an insured lender against the enforcement of a covenant containing a private right (option to purchase, right of first refusal, prior approval of a future purchase or occupation, or a private charge or assessment) resulting in:
- The invalidity, unenforceability, or lack of priority of the insured mortgage; or
- The loss of title acquired in satisfaction of the indebtedness secured by the insured mortgage.
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ALTA 9.7 Restrictions, Encroachments, and Minerals – Land Under Development – Loan Endorsement (approved Member use only) | This endorsement insures the insured lender against loss due to:
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A violation of a covenant that:
- divests, subordinates, or extinguishes the lien of the mortgage;
- results in the mortgage being invalid, unenforceable, or lacking priority; or
- results in a loss of the lender’s title acquired in satisfaction of the mortgage.
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Unless excepted on Schedule B,
- a violation of an enforceable covenant by an improvement or future improvement;
- the enforced removal of an improvement or future improvement that violates a building setback line;
- a notice of violation of an environmental covenant, but only to the extent of the violation contained in the notice;
- an encroachment of an improvement or future improvement onto adjoining land or an easement; or
- an encroachment of an improvement located on the adjoining land onto the insured land.
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Damage to an improvement or future improvement:
- that encroaches onto an easement when the damage is due to the exercise of the right to maintain the easement for its intended purpose; or
- resulting from the use of the surface of the land for the extraction of minerals.
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A violation of a covenant that:
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ALTA 9.8 Restrictions, Encroachments, and Minerals – Land Under Development – Owner Endorsement (approved Member use only) | This endorsement insures, unless excepted on Schedule B, the insured owner against loss due to:
- A violation of an enforceable covenant by an improvement or future improvement;
- The enforced removal of an improvement or future improvement that violates a building setback line; or
- A notice of violation of an environmental covenant, but only to the extent of the violation contained in the notice.
To discuss any questions about the ALTA 9 Endorsement or covenants, conditions or restrictions in the chain of title, Contact an Underwriter.
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