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California Appellate Court Affirms Judgment for Title Insurer After Insured Conveyed Its Interest in Foreclosure Sale Banner Image

California Appellate Court Affirms Judgment for Title Insurer After Insured Conveyed Its Interest in Foreclosure Sale

Month: September 2017

California Appellate Court Affirms Judgment for Title Insurer After Insured Conveyed Its Interest in Foreclosure Sale

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In an action brought by foreclosure sale purchasers against the foreclosing bank’s title insurer based on the title insurer’s refusal to defend and indemnify the bank in an underlying action, the California Court of Appeal, Fifth District, recently affirmed summary judgment in favor of the title insurer finding, among other things, that coverage under the policy had terminated upon the conveyance of the property at the foreclosure sale.  See Hovannisian v. First Am. Title Ins. Co., 14 Cal. App. 5th 420 (Ca. Ct. App. 2017).  In the case, plaintiffs purchased property at a foreclosure sale, and subsequently discovered that there was a first priority deed of trust on the property that was not extinguished by the foreclosure.  Plaintiffs sued the foreclosing bank.  The bank made a claim with the title insurer under its title insurance policy, but the insurer refused to indemnify or defend the bank.  After the bank assigned any claim it had to plaintiffs, the plaintiffs brought the instant action against the title insurer.  Plaintiffs asserted two causes of action: breach of contract and bad faith.  The title insurer subsequently filed a summary judgment motion, arguing that coverage had been terminated upon the sale of the property and there were no benefits due under the policy.  The trial court agreed with the title insurer, finding that the policy did not provide the bank a defense or indemnity for the claims asserted in the underlying action, and therefore, the claims failed.

On appeal, plaintiffs argued that the trial court erred in finding the breach of contract claim lacked merit and that the bank’s title insurance claim fell within the policy’s coverage for losses or damage the bank incurred due to “[t]he priority of any lien or encumbrance over the lien of the Insured Mortgage.”  The Court rejected plaintiffs’ arguments, and affirmed the lower court’s decision.  The policy stated that coverage continued after the conveyance of title “only so long as the Insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money Mortgage given by the purchaser from the Insured, or only so long as the Insured shall have liability by reason of covenants of warranty made by the Insured in any transfer or conveyance of the estate or interest. This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an indebtedness secured by a purchase money Mortgage given to the Insured.”  Thus, because the foreclosure sale had conveyed the property “without warranty, express or implied,” coverage terminated.  The Court further rejected plaintiffs’ arguments that the loss was still covered because it “occurred” before the conveyance of the property as it concerned a prior-recorded encumbrance.  The bank never made a claim regarding this issue and any loss was suffered by plaintiffs post-conveyance.  Thus, because there is no potential coverage under the policy or a duty to defend, the court found plaintiffs’ breach of contract claim is without merit.  Further, because the policy provides no coverage for the claims asserted in the underlying action, there cannot be a bad faith claim as a matter of law.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

New York Supreme Court Holds Residential Construction Violated Restrictive Covenant

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The Supreme Court of New York, Richmond County recently granted a permanent injunction prohibiting a residential homeowner from construction of an “extended chimney” because it would violate a neighbor’s restrictive covenant.  See Fiore v. Fabozzi, 56 Misc. 3d 1220(A) (N.Y. Sup. Ct. 2017).  In the case, the petitioners owned two neighboring properties.  In 2003, they sold one of the properties to the respondent, but added a handwritten restrictive covenant to the deed that stated, “[n]o additions or alterations above one story or 17.00 feet to the top of roof of any structure as measured from the existing basement floor elevation shall be made to any part of the subject premises.”  The covenant, which was to protect the petitioners’ ocean view, further stated that it would remain in effect as long as the petitioners lived in their home.  In 2016, the respondent began construction on a “gazebo structure and chimney” on his property, and the petitioners filed an action to enjoin the construction.

During a hearing on the matter, the respondent admitted that he agreed to the covenant, but did not believe it affected his construction.  The Court disagreed.  First, it found that the restriction was enforceable because it provides a benefit to the petitioners and there were no changed circumstances that rendered the purpose of the covenant incapable of being accomplished.  Second, it rejected the respondent’s argument that the gazebo and chimney were not “additions or alterations,” holding that they were more than just “minor alteration[s] or ordinary repair[s]” to the property.  Finally, the Court determined that the covenant properly should be read as prohibiting any “additions or alterations above one story or 17.00 feet to the top of roof of any structure,” whichever is greater.  Accordingly, the Court held that the respondent was enjoined from constructing the chimney, which was greater than one story or 17 feet from the floor of the basement.  The gazebo, which was greater than 17 feet from the basement floor but less than one story, did not violate the covenant and could be built.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Maryland Federal Court Holds Insured Lender’s Late Notice Barred Title Insurance Claim

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The United States District Court for the District of Maryland recently held that an insured lender’s title insurance claim was barred because the insured did not provide notice of the claim to the title insurance company until after the property was sold in a foreclosure sale. See Wells Fargo Bank, N.A., as Trustee for Soundview Home Loan Trust 2007-OPT1, Asset-Backed Certificates, Series 2007-OPT1, 2017 WL 3868693 (D. Md. Sept. 5, 2017). In 1994, the borrowers obtained a loan that was secured by a deed of trust on their home. They refinanced their loan in 2006, and a portion of the proceeds was used to satisfy the 1994 loan and discharge the 1994 deed of trust, which was replaced with a new deed of trust. In 2007, the borrowers again refinanced, this time through the plaintiff insured’s predecessor-in-interest. The 2007 loan proceeds satisfied the 2006 loan, and the 2006 deed of trust was discharged and replaced with a 2007 deed of trust. In connection with the 2007 closing, the defendant title insurance company issued a title insurance policy.

Unbeknownst to the parties, however, a company owned by the borrowers had obtained a loan and executed another deed of trust on the property in 1998, which had not been discovered or discharged (the “1998 Deed of Trust”). In 2008, the lender on this 1998 loan sent a letter to the title insurance company stating, “our mortgage is still in 1st lien position and has not been released” and asking that the issue be “addressed.” The title insurance company investigated the issue and sent a letter to the lender in response, stating that the 1998 Deed of Trust could not encumber the property because the borrowers’ corporation did not have title. That lender did not respond and, in 2011, it commenced a foreclosure action on the 1998 Deed of Trust. Although the insured received notice of the foreclosure, it did not oppose and did not file a claim with the title insurance company until after the property was sold at a foreclosure sale. The title insurance company denied the claim, citing the insurance policy’s notice provision, which requires prompt notice of any title claim and further states that “[i]f prompt notice shall not be given to [the insurer], then as to the Insured, all liability of [the insurer] shall terminate with regard to the matter or matters for which prompt notice is required; provided, however, that failure to notify [the insurer] shall in no case prejudice the rights of any Insured under the policy unless [the insurer] shall be prejudiced by the failure and then only to the extent of the prejudice.” The insured then filed this action, and the parties cross-moved for summary judgment.

The court granted the title insurance company’s motion and denied the insured’s, holding that the claim was barred under the title insurance policy’s notice provision. First, the court held that, if given timely notice, the title insurance company could have challenged the 1998 Deed of Trust on the grounds that the corporation did not have any ownership in the property to encumber. Second, the court found that the title insurance company could have challenged the priority of the 1998 Deed of Trust on the theory of equitable subrogation, arguing that the proceeds from the 2007 loan satisfied the 2006 loan, which had satisfied the 1994 loan. Although the insured argued that the title insurance company had to establish that these defenses would have prevailed “with certainty,” the court rejected this argument, holding that the title insurance company only had to prove that its defenses were “credible” and “potentially outcome-determinative.” Finally, the court held that the title insurance company was not estopped from denying coverage because of the 2008 letter it received, holding: (i) the title insurance company investigated the issue and found the claim to be without merit; (ii) there was no loss suffered by the insured at the time of the letter and no indication that a foreclosure proceeding was imminent; and (iii) the policy did not require the title insurance company to give notice to the insured of a potential loss.

For a copy of this decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Arizona Court of Appeals Affirms Summary Judgment for Mortgagee Under Replacement Doctrine, but Reverses Application of Equitable Subrogation

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In an action regarding lien priority between two lenders, the Court of Appeals of Arizona recently affirmed the trial court’s application of the replacement doctrine and concluded that plaintiff’s deed of trust takes priority over defendant’s deed of trust, but reversed the trial court’s application of the doctrine of equitable subrogation in favor of plaintiff, on the grounds that plaintiff’s predecessor in interest had actual knowledge of defendant’s junior lien but failed to take the proper steps to ensure it was satisfied and released.  See US Bank, N.A. v. JPMorgan Chase Bank, N.A., 398 P.3d 118 (Ariz. Ct. App. 2017).  In the case, non-party borrowers obtained a $200,000 home equity line of credit (the “HELOC”) from defendant’s predecessor in interest in 1997, which was secured by a deed of trust on the borrowers’ home (the “HELOC Deed of Trust”).  In 2004, the borrowers executed a note and deed of trust in favor of plaintiff’s predecessor in interest in the amount of $387,000 (the “2004 Note” and “2004 Deed of Trust”).  At that time, defendant’s predecessor in interest executed and recorded a subordination agreement, waiving the HELOC Deed of Trust’s priority in favor of the 2004 Deed of Trust.  In 2005, the borrowers executed a new note and deed of trust for $682,000 in favor of plaintiff’s predecessor in interest (the “2005 Note” and “2005 Deed of Trust”), using $384,040.34 from the loan proceeds to pay off the 2004 Note.  The 2004 Deed of Trust was released.  Another portion of the loan proceeds ($211,148.30) was used to pay off the HELOC; however, the payment was $3,452.13 short of what was required to pay off the HELOC, which remained open.  The borrowers continued to take advances on the HELOC, resulting in an unpaid balance of more than $203,000 by 2013.  The borrowers subsequently defaulted on the 2005 Note and the trustee began non-judicial foreclosure proceedings.  Plaintiff, as holder of the 2005 Note and 2005 Deed of Trust, filed a complaint seeking lien priority pursuant to the doctrines of replacement and equitable subrogation, as well as unjust enrichment and estoppel.  Plaintiff subsequently moved for summary judgment on its replacement and equitable subrogation claims.  Defendant opposed, arguing that its HELOC Deed of Trust was recorded before the 2005 Deed of Trust and not subordinated, and should be granted priority. The court granted plaintiff’s motion, concluding that “equity favors subordinating [defendant’s] lien to [plaintiff’s] lien” and defendant appealed.

On appeal, the Court of Appeals acknowledged that, while previously-recorded deeds of trust normally take priority over later deeds of trust, the equitable doctrines of replacement and subrogation may permit a later-recorded deed of trust to assume priority over an earlier deed of trust.  Analyzing each argument in turn, the Court first rejected defendant’s argument that the HELOC Deed of Trust is superior to the 2005 Deed of Trust under the rule of “first in time, first in right.”  The Court found that the borrowers used the 2005 Note proceeds to satisfy and replace the 2004 Note and 2004 Deed of Trust and, therefore, application of the replacement doctrine is appropriate.  Accordingly, the 2005 Deed of Trust retained priority over the HELOC Deed of Trust to the extent of $384,040.34 – the amount paid on the 2004 Note from the proceeds of the 2005 loan.  The Court further noted that defendant suffers no prejudice from the application of the replacement doctrine because the HELOC Deed of Trust maintains the same position it occupied before the 2005 Deed of Trust replaced the 2004 Deed of Trust.  Second, the Court agreed with defendant’s argument that equitable subrogation does not apply because plaintiff’s predecessor was aware of defendant’s lien “and failed to take proper steps to ensure that it was satisfied and released.”  Equitable subrogation generally only applies when one fully discharges a debt secured by a mortgage; here, because the Court found that plaintiff’s predecessor in interest did not fully discharge the obligation secured by the HELOC Deed of Trust, equitable subrogation does not apply and the HELOC Deed of Trust retained priority over the 2005 Deed of Trust for any amount above $384,040.34.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

New Jersey’s Appellate Division Affirms Trial Court’s Decision That Lender Was Entitled to Equitable Subrogation and Spouse Ratified Mortgage

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The New Jersey Appellate Division recently affirmed a lower court’s decision that a lender would be equitably subrogated to the position of an earlier mortgage despite the mortgagee’s spouse’s claim that she was unaware of any mortgage, and that the spouse had ratified the mortgage.  See Reibman v. Myers, 164 A.3d 1080 (N.J. Super. Ct. App. Div. 2017).  In the case, plaintiff’s father-in-law purchased a house for plaintiff and her husband in 2001, and plaintiff contributed some of the down payment.  In 2005, plaintiff’s father-in-law conveyed the property to plaintiff’s husband.  The husband immediately obtained a $225,000 loan, secured by a mortgage on the property.  Six months later, the husband executed a deed conveying the property to himself and plaintiff jointly, and four months after that allegedly forged plaintiff’s signature on a deed conveying it back to himself.  He then mortgaged the property again and received a $347,000 loan, which satisfied the first mortgage.  In January 2006, he again executed a deed transferring the property back to himself and plaintiff.  In June 2006, he obtained a mortgaged of $437,500, which paid off the prior mortgage.  Although plaintiff held title to the property at this point and the husband stated he was married in the loan application, he later certified that he was the sole owner of the property and it was not his marital residence.  Thus, plaintiff did not execute this mortgage.  Plaintiff claims to have been unaware of all of these transactions until after they occurred.  In 2012, she filed a complaint against her husband and the lender, alleging negligence, fraud, unjust enrichment, breach of fiduciary duty and other claims.

The trial court first granted the lender’s motion for summary judgment that there was an equitable mortgage on the property in the amount of $224,000 retroactive to the first mortgage, plus interest, taxes and other expenses.  After trial, the court determined that plaintiff benefited from, acquiesced to and ratified the lender’s mortgage and it equitably reformed the mortgage to include plaintiff.  On appeal, the Appellate Division affirmed.  First, it rejected plaintiff’s argument that the mortgage was subject to her right to the property under New Jersey’s Joint Possession Statute, which states that “[o]ne who acquires an estate or interest in real property from an individual whose spouse is entitled to joint possession thereof does so subject to such right of possession” unless the spouse agrees to subordinate.  N.J.S.A. 3B:28–3.  Although the Court acknowledged that she was protected by the Statute when her father-in-law conveyed the property to her husband, it found that the deed conveying the property from her husband to plaintiff and her husband cancelled any right to joint possession under the Statute.  Second, the Court agreed that the lender was entitled to equitable subrogation, even though it did not directly pay off the original $225,000 mortgage that encumbered the property when plaintiff first acquired title.  Equitable subrogation still applied because the lender paid off a prior lender who had paid off the first lender.  Third, the Court affirmed that plaintiff was an equitable mortgagor because “she reaped the benefits of the mortgage by renovating the property, living in the marital home without paying tax or homeowner’s insurance, and never questioned where [the husband] obtained the significant funds to renovate the home[.]”  Finally, the Court agreed that plaintiff had ratified the loan and mortgage because “it would have been impossible for plaintiff to participate in renovating the house to such an extent without knowing there was a source of funds coming into the household, which had not been earned[.]”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Florida Federal Court Holds Insured’s Bad Faith Claim Is Premature

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The United States District Court for the Middle District of Florida recently held that an insured’s bad faith claim must be abated because the insured had not yet prevailed on its underlying breach of contract claim.  See Stewart Title Guar. Co. v. Machado Family Ltd. P’ship No. 1, 2017 WL 3622006 (M.D. Fla. Aug. 23, 2017).  In the case, the insured was the assignee of a title insurance policy and a mortgage on a 1,300-acre property in Central Florida.  The insured’s borrowers defaulted on the mortgage and filed for bankruptcy protection.  As part of the settlement in the bankruptcy action, the borrowers agreed to convey the property to the insured, however, the insured then discovered errors in the legal description of the property, which prevented the transfer of the property.  The insured filed a claim with the title insurance company, but the company allegedly responded only with a “handful of emails and a few telephone calls” and nothing more.  Almost two years later, the insured prevailed in the bankruptcy action and obtained the property.  The title insurance company then agreed to pay the insured’s attorneys’ fees for the bankruptcy action, but the parties could not reach an agreement as to any additional damages the insured may have suffered “such as diminution of value of the Property resulting from timber taken by the [borrowers].”  The title insurance company filed this action, seeking a declaratory judgment that it had no further obligations under the title insurance policy.  The insured filed a counterclaim alleging breach of contract and bad faith.

The title insurance company moved to dismiss the bad faith claim as premature because there had not been a determination as to liability.  The insured opposed, arguing that the title insurance company was estopped from asserting coverage defenses because it had already made a payment under the policy.  The Court agreed with the title insurance company and held that a bad faith claim cannot accrue until the insured prevails on its underlying liability argument.  However, the Court held that the bad faith claims should be abated rather than dismissed.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

New York Federal Court Denies Defendants’ Motion for Reconsideration or Leave to File Interlocutory Appeal of Court Order Denying Motion to Dismiss FDCPA Claim

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The United States District Court for the Southern District of New York recently denied defendants’ motion for reconsideration of the Court’s order denying defendants’ motion to dismiss plaintiff’s claim alleging violations of the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §1692 et seq. or, alternatively, their request for certification to file an interlocutory appeal.  See Toohey v. Portfolio Recovery Assocs., LLC, 2017 WL 2271548 (S.D.N.Y. 2017).  In the case, plaintiff alleged that, after she defaulted in a state debt collection lawsuit initiated by defendants, defendants submitted an affidavit of merit that was allegedly false, deceptive, or misleading.  Specifically, plaintiff argued that the affidavit gave the impression that defendants had reviewed account-level documentation evidencing her debt when they did not even possess any such documentation.  Plaintiff alleged that the submission of the affidavit allowed defendants to obtain a default judgment against plaintiff, which they used to garnish plaintiff’s wages.  Upon her discovery of this issue, plaintiff filed a putative class action alleging, among other claims, a violation of the FDCPA for the allegedly false affidavit.  Defendants moved to dismiss the action, and the Court dismissed some of plaintiff’s claims, but not her claims under the FDCPA.  Defendants moved for reconsideration or, alternatively, requested certification to file an interlocutory appeal.

Defendants’ motion for reconsideration contained four arguments: (1) plaintiff’s lawsuit was filed after the expiration of the FDCPA’s one-year statute of limitations and equitable tolling does not apply; (2) plaintiff lacks standing because she failed to adequately plead a concrete injury-in-fact; (3) plaintiff inappropriately relied on a Consent Order entered with the Consumer Financial Protection Bureau to make her allegations; and (4) FDCPA liability cannot be predicated on good faith representations made to a court, rather than a debtor.  With respect to the first, third and fourth arguments, the Court found that defendants failed to demonstrate that the Court overlooked any matters or controlling authority warranting reconsideration of the Court’s initial decision.  With respect to defendants’ argument about standing, the Court held that the Supreme Court’s Spokeo decision makes clear that plaintiff has alleged a violation of a procedural right that resulted in a concrete harm: plaintiff alleged that defendants submitted a false, deceptive, or misleading affidavit to procure a judgment that they would otherwise have been unable to obtain.  Therefore, the Court found that plaintiff did allege that defendants’ purported FDCPA violation changed the outcome of the state-court collection action, thereby genuinely harming her.  Finally, the Court denied defendants’ request for certification to file an interlocutory appeal, holding that defendants fail to establish a “substantial ground for difference of opinion” sufficient to grant interlocutory appeal.

For an analysis of the original decision, please click here.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

New Jersey to Establish Food Waste Reduction Plan

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New Jersey formally joined the national conversation regarding food waste earlier this summer, but the specifics of how food waste will be regulated in New Jersey are not yet clear.  In 2015, the United States Environmental Protection Agency (“EPA”) announced an initiative to cut domestic food waste in half by 2030 and many states across the country have their own initiatives to reduce food waste.  On July 21, New Jersey Governor Chris Christie signed legislation adopting the EPA’s goal of cutting the amount of food waste in New Jersey in half by 2030.  In passing the law, the Legislature detailed the societal and environmental burdens of excessive food waste in New Jersey and identified the reduction of food waste as a “moral imperative.”  The legislation, however, does not explain how the State should accomplish this goal.

Instead, the legislation requires the New Jersey Departments of Environmental Protection and Agriculture (the “Agencies”) to develop and commence implementation of a plan to accomplish this goal within one year.  In developing this plan, the Agencies are required to hold three public meetings and are encouraged to consult with appropriate stakeholders.  Interestingly, the legislation does not explicitly delegate authority to the Agencies to enact rules regarding food waste reduction, but it does require the Agencies to develop recommendations for further administrative or legislative action necessary to achieve the goal.  Consequently, it will be interesting to observe how the Agencies interpret the scope of their authorities to “implement” the plan within one year.

The State of New Jersey also recently overhauled its electronic waste program.  This overhaul was designed to put the onus on electronic manufacturers to bear the cost and obligation of recycling electronic waste.  It seems likely that New Jersey also will place the primary burden of food waste reduction on the commercial sector.  In fact, separate legislation already has been proposed to require large food waste generators to recycle their waste.  Under this other legislation, a large food waste generator currently includes any commercial food wholesaler, supermarket, resort, conference center, banquet hall, restaurant, educational or religious institution, military installation, prison, hospital, medical facility, or casino.  If the Agencies consider such a recycling mandate, they should also consider the practical consequences, including the need for enhanced recycling and collection infrastructure and appropriate guidance regarding best practices.

There are many possible approaches that the New Jersey Departments of Environmental Protection and Agriculture may suggest to reduce food waste.  The ongoing national dialogue regarding food waste reduction may serve as a guide for New Jersey in other ways as well.  For instance, many states, including New Jersey, have already initiated other programs to reduce food waste.  These programs include proliferation of residential food waste collection programs, composting facilities, food labelling programs, and nonprofit education programs.  It is important that interested stakeholders participate and comment in the public meetings that will be held over the next year to shape the future of food waste reduction programs in New Jersey.

For more information, please contact any attorney in our Environmental Practice Group.

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