Search Icon
Colorado Federal Court Holds That Federal Deposit Insurance Act Does Not Completely Preempt Claims Against Non-Bank Lender Banner Image

Colorado Federal Court Holds That Federal Deposit Insurance Act Does Not Completely Preempt Claims Against Non-Bank Lender

Month: March 2018

Colorado Federal Court Holds That Federal Deposit Insurance Act Does Not Completely Preempt Claims Against Non-Bank Lender

Posted on by rd_admin

The United States District Court for the District of Colorado recently remanded an action to state court and held that a defendant-lender’s defenses under the Federal Deposit Insurance Act (“FDIA”) do not completely preempt plaintiff’s claims because the FDIA defenses do not apply to non-bank entities and, accordingly, the Court lacked subject matter jurisdiction.  See Meade v. Marlette Funding KKC d/b/a Best Egg, 2018 WL 1417706 (D. Colo. Mar. 21, 2018).  Defendant is a Colorado supervised lender that markets loans to Colorado consumers.  However, the loans are made by a New Jersey bank, who then sells 90% of the loans to defendant or its designees within two days. Plaintiff, Colorado’s Administrator of its Uniform Consumer Credit Code, brought the action against defendant alleging, among other things, that defendant had been charging excessive fees.  Defendant removed the action, claiming that the FDIA completely preempts plaintiff’s claims and that the Court thus has subject matter jurisdiction.  12 U.S.C. §1831d.  Plaintiff then filed a motion to remand, arguing that complete preemption does not apply because defendant is not a bank.

The Court granted plaintiff’s motion and remanded the action.  First, the Court agreed with defendant that, “[o]utside of a few narrow exceptions, a claim that is stated in terms of state law ‘may be removed to federal court in only two circumstances – when Congress expressly so provides . . . or when a federal statute wholly displaces the state-law cause of action through complete pre-emption.”  Second, the Court agreed that, although the Supreme Court has determined that the National Bank Act completely preempts state causes of action in certain circumstances, courts are split on whether this applies to the FDIA in cases involving banks.  Nonetheless, defendant here is a “supervised lender” and not a bank, and courts have found that preemption does not apply for such claims against non-banks, “‘even if the non-bank defendant has a close relationship with a state or national bank.’”  The Court further rejected defendant’s argument that the FDIA completely preempts plaintiff’s claims because the loans to which the alleged overcharges and improper fees relate were made by a bank.  Instead, the Court held that defendant was the “true lender,” regardless of who originated the loan.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Texas Federal Court Holds Exclusion 3(a) Bars Claim of Insured Owner and Bankruptcy Trustee

Posted on by rd_admin

The United States District Court for the Eastern District of Texas recently affirmed a bankruptcy court’s holding that an insured’s claim was barred under the title insurance policy’s exclusion for title risks “created, allowed, or agreed to by” the insured.  See Moser v. Fidelity Nat’l Title Ins. Co., 2018 WL 1413346 (E.D. Tex Mar. 21, 2018).  Kernel and Stanley Thaw (the “Thaws”) were a married couple, and in 2008 a creditor brought an action against Stanley seeking repayment of a debt.  In October 2009, the Thaws executed a contract for deed but did not record it, and in November 2009, the court granted the creditor final judgment and the creditor recorded his judgment.  In June 2011, the Thaws paid off the contract and obtained and recorded the deed, and the title insurance company issued a policy.  In December 2011, Stanley filed for bankruptcy.  In 2013, the bankruptcy trustee sold the property at issue, but the bankruptcy court determined that the creditor’s judgment had attached to the property and that the creditor was entitled to a $500,000 lien on the sale proceeds.  The trustee and Kernel then both filed claims under the title insurance policy, which the title insurance company denied, and they brought an adversary proceeding against the title insurance company.  The bankruptcy court held that coverage was barred under Exclusion 3(a) and Texas’s “fortuity doctrine,” and the trustee and Kernel appealed.

On appeal, the Court affirmed the bankruptcy court’s decision.  First, it affirmed that the claim was barred by Exclusion 3(a) of the policy, which excluded title issues “created, allowed or agreed to” by the insured.  In doing so, it rejected the appellants’ argument that the insureds needed “full and specific knowledge” of the lien for the exclusion to apply.  The Court held that the insureds knew about the debt and the lawsuit, even if they did not know the judgment had been recorded or attached to their property, and that this was sufficient to bar the claim under the policy.  Further, it found that the appellants’ interpretation “would essentially make a title insurer the guarantor of an insured’s debt where, as here, an insured who intentionally refuses to fulfill the insured’s financial obligations later denies knowing that a lien would arise as a consequence.” Second, the Court affirmed that the claim was prohibited by the fortuity doctrine, which “relieves insurers from covering certain behaviors that the insured undertook prior to purchasing the policy.”  As with the Exclusion 3(a) argument, the Court rejected the appellants’ claim that the doctrine did not apply because the insureds lacked actual knowledge of the recording of the judgment.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Superior Court of Pennsylvania Affirms Trial Court’s Granting Summary Judgment in Action to Quiet Title Where Subsurface Rights Were Extinguished After Tax Sale

Posted on by rd_admin

The Superior Court of Pennsylvania recently held that a 1902 tax sale extinguished a party’s subsurface gas, oil, and mineral rights.  See Woodhouse Hunting Club, Inc., v. William Hoyt, et. al., J-A26044-17 (Sup. Ct. Pa. Feb. 2, 2018).  This case involved an action to quiet title of the subsurface oil and gas rights to a tract of land (the “Property”).  In 1891, the Hoyt family acquired title to the Property and subsequently conveyed it to Union Tanning Company, but reserved ownership of the gas, oil, and mineral rights and created a subsurface estate in favor of the Hoyts, their heirs, and assigns.  The Hoyts did not notify the Tioga County commissioner of the severance or their ownership in the subsurface estate.  On August 30, 1902, the Property was sold at a tax sale to Morris Manufacturing Company due to the nonpayment of taxes on both the surface and subsurface estates.  This sale was recorded in the Treasurer’s Sale Book of Unseated Lands.  The tax sale deed was not recorded until January 1903.  On November 17, 1902, after the tax sale but prior to the recording of the tax sale deed, Union Tanning Company executed a second deed to the surface rights of the Property in favor of Morris Manufacturing Company and purportedly reserved mineral and oil rights in favor of the Hoyts and their heirs and assigns.  In 1932, the Property was again sold at tax sale.  C.C. Slaght Lumber Company (“C.C. Slaght”), the record owner at the time, was allowed to redeem the Property in 1935 despite the expiration of the two-year redemption period.  In May 1952, Woodhouse Hunting Club (“Woodhouse”) received title from C.C. Slaght.

In 2011, Woodhouse commenced this action to quiet title against Hoyt Royalty (“Hoyt”), a Colorado LLC formed to manage all rights in the subsurface mineral rights originally owned by the Hoyt brothers and that claimed an interest in the subsurface rights.  In June 2013, Hoyt filed a motion for summary judgment against Woodhouse, arguing that the 1893 deed to Union Tanning Company severed the natural gas, oil, and mineral rights from the disputed land.  The trial court denied the motion, quieted title in favor of Woodhouse as to the entire Property and enjoined Hoyt and its successors from asserting a contrary record title.

On appeal, the Court affirmed.  Firstly, the Court held that a prior Pennsylvania case, Herder Spring Hunting Club v. Keller, 143 A.3d 358 (Pa. 2016), stood for the proposition that, where the owner did not challenge the assessment and the tax sale within the initial two-year redemption period, a challenge to the propriety of the tax sale may not be heard, and if the land is not redeemed within that period, then both surface and subsurface rights are extinguished. Thus, the Court held the trial court did not err in quieting title in favor of Woodhouse. There was no legislation at the time of the 1902 tax sale requiring the purchaser to record the deed or make an official record of his purchase and, importantly, the record contains reliable indicia that the sale properly occurred, including the minutes of the Tioga County Court recorded in the Prothonotary’s Office that show the acknowledgement in open court of the treasurer’s deed conveying the property to Morris Manufacturing Company, along with further records from the Treasurer’s Register Book.  Thus, the sale divested any subsurface interests that may have remained following the 1902 tax sale since the statutory time limit for redemption passed—a process known as “title washing.”  Moreover, the Court held that where the assessment of unseated—or “wild”—property does not specify whether it involves surface or subsurface rights, the tax sale conveys the property in its entirety, which occurred here as well.  The Court further held that collateral attacks on a tax sale may not be raised after the redemption period has passed.  Finally, the Court held petitioners may not raise tax sale defects as a defense to a quiet title action outside of the redemption period.  Accordingly, the trial court’s grant of summary judgment quieting title for Woodhouse was affirmed.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Washington D.C. Appellate Court Holds Foreclosure of Condominium Lien Extinguished First Mortgage Despite Condominium Association’s Representations to the Contrary

Posted on by rd_admin

The District of Columbia Court of Appeals recently held that a condominium association’s foreclosure of a “super-priority” condominium lien extinguished an otherwise first-priority mortgage on the property, despite the fact that the association’s notice of sale and deed to the third-party purchaser stated that the sale was “subject to” the mortgage.  See Liu v. U.S. Bank Nat’l Ass’n, 2018 WL 1095503 (D.C. Mar. 1, 2018).  In the case, the borrower purchased a condominium in 2007 and financed it through a loan from the lender, which was secured by a mortgage on the property.  In 2009, the borrower defaulted on both his loan and his condominium assessments.  Under D.C. Code Ann. § 42-1903.01 et seq. (the “Act”), condominium associations are entitled to super-priority liens for the most recent six months of unpaid assessments.  Thus, beginning in 2011, the association scheduled multiple foreclosure sales under the Act, but cancelled each one after the lender paid the amounts owed.  In 2014, the association again attempted to sell the condominium through a non-judicial foreclosure.  In its advertisements, it stated that the property would be sold “subject to” the lender’s mortgage.  On June 4, 2014, it held a public auction and sold the property for $17,000 to a third-party purchaser, and the deed again stated that the property was sold subject to the mortgage.  The day after the sale, the association received a check from the lender for the unpaid assessments, but it returned the check and informed the lender that the property was sold.  In October 2014, the lender commenced a foreclosure action, and the purchaser defended the action by arguing that the mortgage was extinguished pursuant to both the Act and an August 2014 decision from the District of Columbia Court of Appeals holding that super-priority condominium liens could extinguish mortgages.  See Chase Plaza Condo. Ass’n, Inc. v. JPMorgan Chase Bank, N.A., 98 A.3d 166 (D.C. 2014).  In Chase, however, the advertisements stated that the sale would not be subject to the existing mortgage on the property.  The lender moved for summary judgment and the trial court granted the motion, holding that the law was unclear as to the extinguishment issue at the time of the sale and that the advertisements and deed made it “abundantly clear” that the mortgage was not extinguished.

On appeal, the Court reversed the decision.  First, it held that the Act contains an express anti-waiver provision that states, “[e]xcept as expressly provided by this chapter, a provision of this chapter may not be varied by agreement and any right conferred by this chapter may not be waived.”  Accordingly, the association’s statements that the sale would be subject to the mortgage could not override the plain language of the Act, which called for the mortgage to be extinguished.  Second, the Court held that the purchaser was not equitably estopped from extinguishing the mortgage because the lender could not show that it reasonably relied on the association’s statements, as evidenced by the lender’s attempt to pay the condominium lien. Similarly, the Court held that equitable relief cannot contravene express statutory language.  Finally, the Court noted that the Act was amended in 2017 to require notices under the Act to specify whether the foreclosure sale is for the six-month super-priority lien and not subject to first mortgage, or for more than the six-month lien and subject to the mortgage.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Court of Appeals of California Reverses Dismissal of Title Insurance Company From Case For Allegedly Improper Recording of Release

Posted on by rd_admin

The Court of Appeals of California recently reversed a trial court’s determination dismissing a title insurance company from a case in which the plaintiff alleged that the title insurance company improperly recorded a release.  See SMS Fin. XXIII, LLC v. Cornerstone Title Co., 19 Cal. App. 5th 1092 (Ct. App. 2018).  In the case, a lender made a business loan in 2004 that was secured in part by a deed of trust.  In 2011, the lender assigned the note and the deed of trust to plaintiff.  In 2014, plaintiff prepared to initiate foreclosure on the deed of trust when it learned that, in 2007, the defendant title insurance company had executed and recorded a release of the obligation secured by the deed of trust without the original lender’s authorization.  Plaintiff sued defendant, as well as the other obligors on the loan, seeking payment of the loan, a declaration that the release was void and, in the event the release was valid, damages for defendant’s negligence in executing and recording the release.  Defendant demurred to the negligence cause of action, arguing that plaintiff failed to allege that the tort claims in the cause of action were assigned to it with the loan and deed of trust.  The trial court agreed and dismissed defendant from the case.

On appeal, the Court of Appeals reversed.  The Court held that, in view of the broad language of California Civil Code §2941 regarding the requirements for recording a release of an obligation, plaintiff alleged sufficient facts to state a claim against defendant.  Specifically, if the release was not properly authorized by the original lender, defendant could be liable under subsection (b)(6) of the statute, which states that “[i]n addition to any other remedy provided by law, a title insurance company preparing or recording the release of the obligation shall be liable to any party for damages, including attorney's fees, which any person may sustain by reason of the issuance and recording of the release, pursuant to” prior sections of the statute.  In doing so, the Court rejected defendant’s claim that plaintiff could not bring this action because the assignment to plaintiff did not expressly include the assignment of this tort claim.  Contrary to this argument, the Court held plaintiff has its own potential claim against defendant under the statute by virtue of holding the deed of trust by assignment, regardless of any claims that the lender may have been or may still be able to assert against defendant.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Eighth Circuit Holds Borrowers’ Acknowledgment of Receipt of TILA Disclosure Defeated Their TILA Claim

Posted on by rd_admin

In a decision approved for publication, the United States Court of Appeals for the Eighth Circuit recently affirmed the district court’s decision granting a lender’s motion for summary judgment and holding that the borrowers’ signed acknowledgment that they had received the requisite number of Truth in Lending Act (“TILA”) disclosures created a rebuttable presumption that the borrowers could not overcome.  See Jesinoski v. Countrywide Home Loans, Inc., 2018 WL 1073235 (8th Cir. Feb. 28, 2018).  In the case, the borrowers—a husband and wife—sought to rescind their mortgage based on alleged TILA violations.  Under TILA, the lender was required to “deliver two copies of the notice of the right to rescind to each consumer entitled to rescind[.]”  See 12 C.F.R. 1026.23(b)(1).  According to the borrowers, when they brought their closing file to a mortgage specialist almost three years after the closing, the specialist found only two copies of the TILA disclosure when there should have been four (two disclosures each).  The borrowers claimed to have no personal knowledge of how many disclosures they received.  The borrowers then sought to rescind, and brought this action when the lender denied their request.  The lender moved for summary judgment, based in large part on the acknowledgment executed by both borrowers stating “[t]he undersigned each acknowledge receipt of two copies of” the notice.  The district court granted the motion, finding that this acknowledgment created a rebuttable presumption that the borrowers had received the notice and holding that the borrowers were unable to overcome it.

On appeal, the Eighth Circuit affirmed.  First, it rejected the borrowers’ argument that the acknowledgment was ambiguous because it did not state “[t]he undersigned each acknowledge receipt of two copies each of” the notice. (Emphasis added.)  The Court found that this argument was “a tortured attempt to create ambiguity where none existed.”  Second, the Court held that the borrowers’ claim that the mortgage specialist had informed them that there were only two copies of the notice in the file was “textbook inadmissible hearsay” that could not be used to rebut the presumption created by the acknowledgment.  Accordingly, it affirmed the dismissal of the TILA claim.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Second Circuit Holds Garnishees’ Settlement Agreement Violated Restraining Notices Despite Being Approved by State Court

Posted on by rd_admin

The United States Court of Appeals for the Second Circuit recently affirmed a district court’s holding that third-party garnishees violated restraining notices by disbursing monies pursuant to a settlement agreement approved by the state court.  See CSX Transp., Inc. v. Island Rail  Terminal, Inc., 879 F.3d 462 (2d Cir. 2018).  The underlying breach of contract suit arose out of Island Rail Terminal, Inc.’s (“Island Rail”) 2012 purchase of substantially all of the assets of Emjay Environmental Recycling, Ltd. (“Emjay”).  Maggio Sanitation Services (“Maggio”) and Eastern Resource Recycling, Inc. (“Eastern Resource”) (Maggio, Eastern Resource, and Island Rail, as the “Garnishees”) guaranteed Island Rail’s payment and performance obligations.  In September 2014, the district court entered a judgment in the amount of $1,056,444.15 for plaintiff, CSX Transportation, Inc. (“CSX”) and against Emjay.  At least three other creditors also already held judgments against Emjay at that time.  In November 2014, CSX served the Garnishees with restraining notices, which prohibited them from disposing of any monies owed to Emjay.  In February 2015, the New York State Supreme Court approved a consolidated $2.2 million settlement in two unrelated actions involving Emjay, the Garnishees, and several of Emjay’s other creditors (the “State Settlement”); CSX declined to participate in the settlement discussions.  Under the State Settlement, the Garnishees settled the claims for $2.2 million, which was distributed to three creditors to satisfy their judgments against Emjay.  In June 2015, CSX filed a motion for a turnover order to compel Garnishees to satisfy CSX’s amended judgment against Emjay.  CSX argued that Garnishees were liable to CSX for damages because entering into the State Settlement violated the restraining notices.

The district court granted CSX’s motion in February 2016, and directed the Garnishees to turn over $1,056,444.15 to CSX.  The court also held that, if the Garnishees already had disbursed the funds to the other creditors, CSX was entitled to damages.  In March, CSX moved to enter judgment against the Garnishees, and the Garnishees moved for reconsideration of the district court’s order.  In November 2016, without oral argument or providing a hearing, the district court denied the Garnishees’ motion and granted CSX’s motion.  Garnishees subsequently filed this appeal, arguing that: (i) CSX improperly proceeded by motion under F.R.C.P. 69(a) rather than by instituting a new proceeding pursuant to CPLR article 52; (ii) they did not violate the restraining notices because they transferred funds pursuant to an order of the state court; and (iii) even if they did violate the restraining notices, the district court erred in concluding that CSX suffered damages when CSX was the creditor last in line and in failing to hold a hearing before fixing an amount of damages.

The Second Circuit first determined that CSX was permitted to seek relief from Garnishees by motion under Rule 69(a), so long as the district court otherwise had personal jurisdiction over the Garnishees.  Here, the Garnishees do not contest they are New York corporations, and therefore, personal jurisdiction is clear.  The Court also affirmed the district court’s finding that the Garnishees negligently violated the restraining notices, noting that they were properly served with the restraining notices in November 2014, and the restraining notices’ injunctive effect was still in place when the Garnishees agreed to pay $2.2 million to settle Emjay’s debts in the State Settlement in February 2015.  In doing so, the Court rejected the Garnishees’ claim that C.P.L.R. § 5222(b) permits disbursements if ordered by a court, holding that the statute allows disbursements “pursuant to an order of the court,” which refers only to the court out of which the restraining notice issued. (emphasis added).  Thus, the Court rejected the Garnishees’ claim that a state court could order a garnishee to ignore a federal court’s restraining notice.

However, the Court found that the district court abused its discretion by failing to hold a hearing to resolve factual issues concerning the relative priorities of the judgment creditors, a necessary predicate to determining the proper amount of damages, if any, sustained by CSX.  If the other parties to the State Settlement had priority over CSX, CSX would not have been damaged by the Garnishees’ disbursements because it would not have been entitled to any monies.  Therefore, the Court vacated and remanded the portion of the district court’s judgment fixing the award of damages, and instructed the district court to hold a hearing to resolve factual issues concerning damages.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

United States District Court for the District of Maryland Grants Defendant’s Motion to Dismiss For Class Action Kickback Scheme Based On Statute Of Limitations

Posted on by rd_admin

The United States District Court for the District of Maryland recently held that Plaintiffs’ purported class action claim alleging a kickback scheme against Bank of America, N.A. (“BOA”) was barred by the statute of limitations because Plaintiffs did not meet the requirements for equitable tolling.  See Dobbins v. Bank of Am., N.A., 2018 WL 620456 (D.Md. Jan. 30, 2018).  The case has an extended procedural history.  In the first related action styled Fangman v. Genuine Title, Genuine Title, LLC (“Genuine Title”) was accused of being involved in a kickback scheme along with other named defendants, including BOA.  There, the court held that equitable tolling may be available for the plaintiffs under the Real Estate Settlement Procedures Act (“RESPA”), which offers a one-year statute of limitations, because the facts underlying the claim had been sufficiently concealed from the Fangman plaintiffs despite their due diligence.  Subsequently, highly-publicized enforcement actions arising out of essentially the same kickback scheme were brought by the Consumer Financial Protection Bureau (the “CFPB”) and Maryland Attorney General on January 22, 2015, against Wells Fargo Bank, N.A. and J.P. Morgan Chase Bank, N.A., and on April 29, 2015 directly against Genuine Title.  On May 1, 2015, the CFPB and the Maryland AG announced a settlement with Genuine Title.  In the settlement, which contemplated related litigation by affected consumers, the financial institutions were not required to issue formal notices to the public.

In the case at bar, Plaintiffs filed a class action complaint against BOA on February 23, 2017. Plaintiffs alleged that they closed on their mortgage loan from BOA on December 23, 2010, and that BOA and Genuine Title engaged in a kickback scheme in violation of RESPA.  Plaintiffs sought to represent all individuals in the United States who were borrowers on a federally related mortgage loan originated or brokered by BOA for which Genuine Title provided a settlement service.  BOA filed a Motion to Dismiss based in part on RESPA’s one-year statute of limitations.

As an initial matter, the Court held that it may consider materials not integral to the complaint, namely the court filings from the Fangman suit and the subsequent enforcement actions.  Next, the Court held that RESPA’s one-year statute of limitations would bar this lawsuit, which was filed more than six years after Plaintiffs closed on their loan and a year and a half after Plaintiffs’ counsel processed Genuine Title’s data in connection with the prior actions relating to Genuine Title.  The Court held that, to exercise its powers of equitable tolling, a plaintiff must establish both that he has been pursuing his rights diligently and that some extraordinary circumstance stood in his way and prevented timely filing.  The Court found Plaintiffs did not meet the due diligence and extraordinary circumstances elements.  Plaintiffs’ counsel had access to sufficient information to uncover the scheme, including access to Genuine Title’s buyers’ names, addresses, telephone numbers, property addresses, settlement dates, lender and in some cases mortgage broker information.  Moreover, even assuming that BOA’s non-disclosure of its relationship with Genuine Title constituted fraudulent concealment, Plaintiffs’ counsel had access to this information more than a year before it filed this action because it filed a related suit against BOA in January 2015 and processed the extensive data within the same year.  “[T]his Court cannot ignore the role Plaintiffs’ counsel has played in determining the timing of this action—and the other pending cases related to the Genuine Title kickback scheme.”

The Court further held public information indicated both BOA and Genuine Title were potentially involved in an illegal kickback scheme.  The Fangman court’s holding, in which the defendant’s concealment efforts contributed to unique circumstances warranting equitable tolling, as well as the subsequent publicity from that action, made the circumstances here not unique.  “Plaintiffs’ claim for equitable tolling is not ‘unique’ let alone ‘extraordinary’ when the underlying claims and concealment efforts are nearly identical and when the prior Genuine Title litigation and subsequent media coverage rendered critical information discoverable.”  Accordingly, BOA’s Motion to Dismiss was granted because Plaintiffs’ claim was barred by the statute of limitations and not equitably tolled.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Eighth Circuit Holds Exclusion 3(a) May Bar Title Insurance Claim Regarding Mechanics’ Liens, Even if the Insured Lender’s Conduct Was Not Intentional

Posted on by rd_admin

In a published opinion, the United States Court of Appeals for the Eighth Circuit recently held, among other things, that a title insurance company may deny coverage of an insured lender’s claim relating to mechanics’ liens under Exclusion 3(a) of the title insurance policy, even if the insured lender’s conduct was not intentional. See Captiva Lake Investments, LLC v. Fid. Nat'l Title Ins. Co., 2018 WL 1076745 (8th Cir. Feb. 28, 2018). In the case, a lender loaned over $21 million to a developer and purchased a title insurance policy to protect its security interest. Before and during the construction, the consultant hired by the lender to monitor the project raised a number of issues with the construction project, including that the developer was not providing detailed cost estimates or project schedules and that the consultant believed there would be insufficient funds to complete the project. Nonetheless, the lender disbursed all but $1.2 million of the total loan balance. The developer later went bankrupt before completing the project, and the lender sold its interest to plaintiff. Plaintiff, as successor-in-interest under the policy, filed a claim with the title insurance company seeking coverage for mechanics’ liens on the property. The title insurance company agreed to defend under a reservation of rights, including the right to deny coverage under Exclusion 3(a), which barred claims for liens “created, suffered, assumed or agreed to by the insured claimant.” While this defense was ongoing, plaintiff entered into an agreement to sell the property but the potential purchaser terminated the agreement, allegedly because of the issues with mechanics’ liens. The insured then made another claim that the title insurance company had rendered title unmarketable because it did not resolve the mechanics’ lien claims in a timely manner. This litigation ensued. Plaintiff sought a declaration that the policy covered the mechanics’ liens, that the liens rendered title unmarketable, and that the title insurance company had tortiously interfered with plaintiff’s relationship with its attorneys.

Before trial, the District Court held that Exclusion 3(a) would not apply unless the title insurance company “show[ed] intentional misconduct, breach of duty, or otherwise inequitable dealings by [the insured], or that recovery for individual lien claims would amount to an unwarranted windfall because [the insured] received the benefit of the work reflected in the liens without disbursing payment.” As the District Court found the title insurance company only showed “negligence, mismanagement, maybe downright stupidity or recklessness, but . . . [not] misconduct,” it refused to submit evidence regarding Exclusion 3(a) to the jury. The District Court also found that the title insurance company had an obligation to indemnify plaintiff for the losses resulting from the unmarketability of title or lack of priority caused by the mechanics’ liens—i.e., $6.2 million for the failed sale of the property. Finally, the District Court granted the title insurance company’s motion for summary judgment that it did not tortiously interfere with plaintiff’s relationship with its attorneys.

On appeal, the Eighth Circuit affirmed in part and vacated and remanded in part, with all findings in favor of the title insurance company. With regard to Exclusion 3(a), the Court held that the District Court erred in not submitting evidence of this exclusion to the jury, concluding that “Exclusion 3(a) can apply under Missouri law even if the insured did not engage in intentional misconduct or inequitable dealings.” Citing to a Seventh Circuit decision, the Court held that “title insurance was not built to bear the risk of insufficient construction funding. Because the lender ‘had the authority and responsibility to discover, monitor, and prevent’ the risk of loss, the lender ‘c[ould] be said to have ‘created’ or ‘suffered’ the resulting liens’ under Exclusion 3(a).” See BB Syndication Servs., Inc. v. First Am. Title Ins. Co., 780 F.3d 825 (7th Cir. 2015). Thus, the District Court erred in not allowing the title insurance company to present this defense to the jury.

The Court also held that the District Court erred in finding that the policy’s unmarketability-of-title provision covered post-policy mechanics’ liens. First, it held that there was no evidence that the contractors who were owed money as of the policy date were not paid the money then due or that they then filed mechanics’ liens to recover that money. Second, although the Court acknowledged the “first-spade rule” that allowed mechanics’ liens to apply retroactively to the date on which the work commenced in actions regarding lien priority, it held that this does not determine when mechanics’ liens render title unmarketable. It stated that plaintiff “has not shown that title was rendered unmarketable by mechanics’ liens filed by contractors and suppliers who were owed money as of the Date of Policy. It thus cannot show that it suffered damages caused by Fidelity’s failure to resolve liens that were inchoate as of [the policy date], and which were later filed against the . . . development.”

Finally, the Court affirmed the District Court’s dismissal of plaintiff’s tortious interference with business expectancy claim. Plaintiff had alleged that the title insurance company had not diligently defended the action and intentionally delayed resolution through its control of assigned counsel, which interfered with plaintiff’s relationship with the attorneys. The Court held that the title insurance company had the right to control the litigation under the policy, and there was nothing to indicate it had acted improperly. Although plaintiff wanted to settle the mechanics’ lien claims quickly, the title insurance company “had the right under the policy to decide whether to settle or litigate the mechanics’ lien claims.” Further, there was no evidence that the attorneys did not keep plaintiff well-informed of the defense.

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

New Jersey’s Environmental and Energy Future Under Governor Phil Murphy

Posted on by rd_admin

New Jersey’s environmental and energy policies are headed in a precise, new direction under Governor Phil Murphy.  In fact, following his election in November, Governor Murphy set a series of policy goals, which include: (1) enhancing usage of clean energy; (2) combating climate change; (3) addressing environmental hazards that disproportionately impact low-income communities and communities of color; and (4) safeguarding New Jersey’s natural resources.  Governor Murphy also formed a committee to advise him on environmental issues as he prepared to take office.  This committee wasted little time and, on January 1, 2018, published an extensive report (the “Environment and Energy Report”) that provides recommendations for achieving Governor Murphy’s environmental and energy goals.  In the short time since his inauguration, Governor Murphy has begun to implement these recommendations through executive orders and key appointments to the New Jersey Department of Environmental Protection (“NJDEP”).  As New Jerseyans and the regulated community wait to see what this means for them, the Environment and Energy Report and Governor Murphy’s actions to date may shed some light on what lies ahead.

As noted above, the Environment and Energy Report covers many topics.  During his campaign, Governor Murphy focused on promoting the use of clean energy, and the Environment and Energy Report specifically identifies a goal of achieving 100% clean energy by 2050.  Members of the New Jersey Legislature, including Senators Bob Smith and Richard Codey and Assemblyman Tim Eustace, have been discussing similar goals in connection with proposed legislation but, notably, some of this legislation has set its sights on achieving 100% clean energy usage by a much earlier date, perhaps even as early as 2025.  The Energy and Environment Report also contains a multitude of specific recommendations for enhancing usage of clean energy including, among others, revising New Jersey’s Energy Master Plan, updating building codes, and removing restrictions placed on the solar power market by former-Governor Chris Christie.  The executive summary of the Environment and Energy Report also suggests that the centerpiece of New Jersey’s clean energy future is offshore wind, and Governor Murphy appears to have adopted this recommendation as evidenced by the passage of one of his first executive orders, which directs various state agencies to collaborate on the planning and implementation of “offshore wind projects for the generation of 1,100 megawatts of electric power, the nation’s largest such solicitation to date.”  It will be interesting to see how the implementation of this project progresses, as it will involve significant logistical issues and the intersection of numerous State and federal laws.

The Environment and Energy Report also focuses on “safeguarding” New Jersey’s natural resources through a variety of activities, including reconsidering recent revisions to environmental regulations, ensuring public access to beaches, promoting smart growth, and supporting the listing of the Hackensack River as a Superfund site.  For instance, the report specifically suggests that Governor Murphy direct the NJDEP to reconsider recent revisions to regulations impacting the waters of New Jersey.  The Environment and Energy Report also recommends that the Governor and the NJDEP conduct a thorough review of New Jersey’s Licensed Site Remediation Professionals (“LSRP”) program, which allows private, licensed consultants to supervise the remediation of contaminated sites.  The report does not advocate for the elimination of this program, as some had feared, but it does suggest that there is room for improvement to ensure public health is protected and to make the program more efficient.  New Jersey Legislators and interested stakeholders already had been discussing improvements to the LSRP program prior to Governor Murphy’s election, and these talks are expected to result in proposed legislation in the coming year.  Separately, the Environment and Energy Report also previews a potential shift in policy relating to Natural Resource Damages (“NRD”), recommending that the State “aggressively pursue” NRD cases to compensate for the loss of natural resources as a result of contamination and to direct monies for restoration of affected communities.

In order to carry out some of these goals, Governor Murphy has nominated Catherine McCabe as the Commissioner of the NJDEP.  McCabe is a veteran public administrator and environmental lawyer who has spent more than twenty years working on environmental issues at the federal level for the United States Department of Justice and Environmental Protection Agency.  Debbie Mans, a veteran environmental advocate and lawyer who most recently served as the head of NY/NJ Baykeeper, a water rights group focusing on the NY/NJ Harbor, has been tapped as Deputy Commissioner.

Governor Murphy and his appointees will shape the future of New Jersey’s environmental and energy policy over at least the next four years.  The topics discussed in the Environment and Energy Report, including the examples noted above, suggest a new direction for New Jersey, as well as the potential for expansion of environmental regulation and enforcement activities.

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

Get Our Latest Insights

Subscribe