In a decision approved for publication, the United States Court of Appeals for the Tenth Circuit recently reversed a District Court and found that a title insurance company did not have a duty to defend an insured lender in an action alleging that the borrower’s conveyance of deeds of trust to the lender was fraudulent. See Banner Bank v. First Am. Title Ins. Co., 2019 WL 924792 (10th Cir. Feb. 26, 2019). In the case, the insured bank provided loans to a borrower who executed deeds of trust from two of his LLCs to the bank as collateral. The title insurance company, First American, issued policies in connection with these transactions. The SEC later filed an enforcement action against the borrower and his companies, alleging that he used his businesses to operate a Ponzi scheme. A Receiver was appointed to represent the borrower’s creditors, and the Receiver brought an action against the bank challenging the deeds of trust and alleging that neither LLC received “reasonably equivalent value” for the deeds of trust. The bank submitted a claim to First American, who denied the claim under policy exclusion 6, which excludes “[a]ny claim, by reason of operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien . . . is (a) a fraudulent conveyance or fraudulent transfer, or (b) a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy.” The bank eventually settled with the Receiver and brought this action against First American for breach of contract and breach of the implied covenant of good faith and fair dealing in failing to defend and failing to indemnify. After the parties cross-moved for summary judgment, the District Court granted the bank’s motion, finding that First American had a duty to defend and indemnify under the policy. The District Court also awarded the bank about $290,000 in attorneys’ fees.
On appeal, the Tenth Circuit reversed. The Court applied the “eight corners” rule in interpreting the duty to defend, which requires it to look at the four corners of the policy and the four corners of the complaint. First, it found that the Receiver’s complaint sought only “to avoid . . . [the] transfer of the deeds of trust as a fraudulent conveyance. . . . [and that] the allegations in the complaint are that [the borrower] was operating a wide-scale Ponzi scheme, and the transfer of the deeds was in furtherance of it and to defraud his creditor.” Based on this reading of the complaint, the policy excluded coverage and First American could not be liable for failure to defend. The Court denied the bank’s claim that the complaint also could be read as challenging the borrower’s authorization to convey these deeds of trust on the companies’ behalf. Second, the Court found that First American did not have a duty to indemnify because this duty is narrower than the duty to defend. In doing so, it rejected the bank’s argument that the settlement agreement between the bank and Receiver demonstrated that the Receiver’s action was covered under the policy. “The duty to defend is broader than the duty to indemnify, but the duty to defend is determined from the face of the Receiver’s complaint. If the Receiver’s complaint was not enough to establish a duty to defend, how could the settlement agreement later create liability for indemnification? The Bank’s position reverses the normal timeline, and it would effectively allow the duty to defend to attach retroactively.” Third, the Court found that because First American had no duty to defend or indemnify, it could not have breached the duty of good faith and fair dealing by investigating and denying the bank’s claim. Finally, the Court reversed the holding for damages and attorneys’ fees, and ordered that the District Court vacate its prior orders and enter judgment in favor of First American.