Case of the Week: Is a Credit Bid a Payment?

In the case of Equity Income Partners v. Chicago Title Ins. Co., the Supreme Court of Arizona ruled that a lender who purchases property at a trustee’s sale via a full credit bid was still entitled to obtain payment from the title insurer.

The lender issued two loans to a borrower to purchase two parcels of land, and purchased title insurance to protect the lender against any defects in title or an inability to access the land. The land was found to be entirely surrounded by land owned by Maricopa County, and the borrowers had no right to access it.

After the borrowers defaulted, the lender purchased the land at a trustee’s sale with a full credit bid, which allowed them to bid the amount of the debt owed to them by the borrower. The lender then submitted a claim to Chicago Title Insurance, but the title insurer refused to pay.

Is a Credit Bid a Payment?

The title insurance policy clearly stated that it remained in effect if the lender acquired the property. However, Chicago Title Insurance argued that the amount of insurance was reduced by any payments received under the policy. Since the full credit bid satisfied the entire debt owed to the lender, the title insurer argued that the policy was terminated.

The court disagreed. It determined that credit bid is not considered a payment under the policy. The insurance policy did not define what constituted a payment, and the court construed the meaning of the term according to the understanding of a layperson. The court also noted that Arizona public policy protects the insureds, and the insurer was in a better position to employ language in the policy that clearly defined what a payment was.

In a full credit bid, the lender receives the property, but not any monetary payments. The lender is only made whole if the fair market value of the property is equal to the amount owed under the loan plus the costs incurred by the lender in enforcing its deed of trust.

The title insurer ended up paying for its failure to clearly define what a payment was. It was deemed responsible for paying the lender the difference between the loan balance and expenses incurred by the lender and the fair market value of the landlocked property.

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