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Pennsylvania Federal Court Holds Title Insurance Company Did Not Have Duty to Defend Border Wall Claim Banner Image

Pennsylvania Federal Court Holds Title Insurance Company Did Not Have Duty to Defend Border Wall Claim

Month: September 2018

Pennsylvania Federal Court Holds Title Insurance Company Did Not Have Duty to Defend Border Wall Claim

Posted on by rd_admin

The United States District Court for the Eastern District of Pennsylvania recently held that a title insurance company did not breach its policy when it denied an insured’s claim regarding coverage for a litigation about a wall that encroached on a neighbor’s property.  See 631 N. Broad St., LP v. Commonwealth Land Title Ins. Co., 2018 WL 4051798 (E.D. Pa. Aug. 23, 2018).  In the case, the insured owner purchased the insured property in 2015, and the title insurance company issued a title insurance policy.  The insured later requested a zoning variance from the city in order to convert the existing office building on the property into residential apartments, and part of the proposed plan included demolishing a wall on the southern border of the property.  The neighbor to the south opposed the application, arguing that the wall was partially on the neighbor’s property and that the insured could not demolish it.  The insured then sued the neighbor seeking a declaratory judgment that the insured was the sole owner of the wall and had the right to demolish it.  The neighbor opposed the action, arguing that it owned the portion of the wall on its own property.  The insured filed a claim with the title insurance company seeking coverage of its litigation expenses.  The title insurance company denied coverage, invoking the policy’s survey exception and stating that it “had no obligation to provide coverage under the Policy because an accurate and complete survey would have disclosed the encroachment or boundary dispute relating to the South Wall.”  The neighbor—who also had a policy with the same title insurance company—also filed a claim, which the company accepted.  After the court in the underlying action held that part of the wall was on the neighbor’s property and that the insured could not demolish it, the insured brought this action against the title insurance company for breach of contract, among other claims.  The parties cross-moved for summary judgment.

The Court granted the title insurance company’s motion for summary judgment and denied the insured’s.  First, it found that the title insurance company did not have a duty to defend the insured because the neighbor’s claim to ownership of the wall was limited to the portion of the wall on its own property, and “cannot reasonably be construed to be making a claim against land located on” the insured property.  Second, the Court found that, even if the title insurer had a duty to defend, the policy’s survey exception applied because “we find it beyond genuine dispute that a complete and accurate survey of the [insured property] in 2015 (had one been obtained) would have revealed to [the insured] that the South Wall encroached onto the [neighboring] Property.”  Third, the Court held that the insured’s quasi-estoppel claim also should be dismissed because the title insurer’s decision to defend the neighbor was not inconsistent with its decision to deny coverage to the insured.  “[N]ot only did [the insured] claim the portion of the South Wall located on the [insured property], it also claimed the portion of the South Wall located on the [neighboring] Property. This triggered Commonwealth’s duty to defend [the neighbor], whereas [the neighbor] never made a claim that triggered Commonwealth’s duty to defend [the insured].”  Finally, the Court found that the bad faith claim should be dismissed because the title insurance company properly denied coverage.

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

Florida Appellate Court Finds Attorney May Be Liable to Lender for Erroneous Legal Description Prepared by Title Agent

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The Florida Court of Appeals recently held that an attorney was not entitled to summary judgment dismissing a legal malpractice claim brought by a lender regarding an erroneous legal description on a mortgage, despite the fact that the attorney had not prepared the legal description himself.  See JBJ Inv. of S. Fla., Inc. v. S. Title Grp., Inc., 2018 WL 3301673 (Fla. Dist. Ct. App. July 5, 2018).  This action concerns a $135,000 loan made by a lender to a borrower and secured by five properties.  The lender used a title agent to handle the loan closing, and the title agent hired an attorney to prepare the note and mortgage.  Although the attorney prepared these documents, the title agent prepared the legal descriptions attached to the mortgage.  After the borrower defaulted and the lender commenced a foreclosure action, the lender discovered that the legal descriptions contained a duplicate description for one of the five properties and completely omitted the description of the most valuable property.  The lender then brought this action against the title agent and the attorney.  The attorney filed a motion for summary judgment, arguing that the legal malpractice claim should be dismissed because (i) there was not attorney-client relationship with the lender because the attorney was retained by the title agent; and (ii) even if a relationship existed, it was the agent who prepared the faulty legal descriptions.  The trial court found that the attorney was not responsible for preparing the legal description and granted the attorney’s motion.

On appeal, the Court reversed.  First, it found that although the lender and the attorney never met, an attorney-client relationship nonetheless may have been formed when the title agent—acting as the lender’s agent—met with and retained the attorney to prepare these documents.  Second, the Court found that “a reasonable jury could find that, once the [attorney] undertook to prepare the mortgage, [he] agreed by implication to ensure that the mortgage encumbered the correct real estate. Even though the title agent agreed to prepare the legal descriptions, [the attorney] arguably had the ultimate responsibility to review that work product for accuracy where he was retained to prepare the mortgage and he charged a separate fee for this service.”  The Court further noted that the mortgage incorporated the legal descriptions, and “was therefore a part of the mortgage that the [attorney] agreed to prepare.”  As such, the Court reversed the trial court’s decision granting the attorney’s motion for summary judgment.

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

New Jersey Appellate Court Affirms Dismissal of Foreclosure When Predecessor Mistakenly Discharged Mortgage

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New Jersey’s Appellate Division recently affirmed the dismissal of a foreclosure complaint when the lender’s predecessor mistakenly discharged the mortgage at issue and the property subsequently was encumbered with a new mortgage.  See U.S. Bank National Association, v. Wishnia, et al.., 2018 WL 4262061 (N.J. Super. Ct. App. Div. Sept. 7, 2018).  In the case, the Wishnias encumbered their home with three mortgages to MERS.  In March 2006 they encumbered the property with a mortgage securing a $2 million loan (the “First Mortgage”), in May 2006 they encumbered the property with a mortgage securing a $1 million loan (the “Second Mortgage”) and in 2007 they encumbered the property with a mortgage securing a $1.5 million loan (the “Third Mortgage”).  In 2007, MERS executed a discharge of mortgage.  Although the discharge referenced the date of the Second Mortgage, the amount and recording information were that of the First Mortgage and the First Mortgage was mistakenly discharged.  MERS discharged the Second and Third Mortgages in 2013 and 2014.  In 2010, MERS assigned the First Mortgage to plaintiff, although the recording information in the assignment corresponded with the Second Mortgage, which was not discharged at that time.  Plaintiff then brought a foreclosure action but, again, the information in the complaint and lis pendens listed the recording information for the Second Mortgage.  This action was dismissed in 2013 for lack of prosecution.  In 2014—with the foreclosure action dismissed and all three mortgages discharged—the Wishnias conveyed the property to their wholly-owned LLC that then encumbered the property with a mortgage securing two notes totaling $1.8 million.  In 2015, plaintiff reinstated the foreclosure complaint and sought to reinstate the First Mortgage and establish its priority over the 2014 mortgage.  The new lender moved for summary judgment, and the trial court granted the motion, finding that the new lender was a bona fide encumbrancer for value.

On appeal, the Appellate Division affirmed the trial court’s decision.  Among other things, it found that the new lender “would not have been aware of any interest plaintiff claims to have had in the property and [was] justifiably permitted to rely upon the title search inasmuch as there were no extraordinary, suspicious, or unusual facts to prompt any further inquiry. Rather, there were three prior mortgages with three recorded discharges cancelling all three mortgages.”  The Court further found that plaintiff had not acted diligently, and that it “cannot hide behind the mistakes of others while it sat idly by and did nothing for almost five years before attempting to rectify the error, and was, in fact, complicit in perpetuating the error.”  Accordingly, the Court found that the complaint was properly dismissed.

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

Third Circuit Holds That Title Companies Are Only Obligated to Defend Covered Claims Under Pennsylvania Law

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In a
precedential opinion issued on September 10, 2018, the United States Court of
Appeals for the Third Circuit reversed the District Court and held that, under
Pennsylvania law, an insurer’s duty to defend turned on allegations within the
four corners of the complaint, and a title insurer is only bound to defend
claims in the complaint that it specifically covered. See Lupu v.
Loan City, LLC, et. al., v. Stewart Title Guaranty Company, 2018 WL 4290048
(3d Cir. Sep. 10, 2018). This opinion is significant in the Third Circuit’s
application of Pennsylvania law to hold that title insurance companies are only
required to defend covered claims, a departure from the law involving other
general liability insurance companies that held as to the duty to defend in
Pennsylvania, “in for one, in for all.”

This case involves a residential property owned by Adrian Lupu
(“Lupu”), who refinanced his home loan and mortgage with Loan City, LLC (“Loan
City”). The loan and mortgage then were transferred multiple times before
eventually being transferred to the current holder, Ocwen Loan Servicing, LLC
(“Ocwen”). Stewart Title Guaranty Company (“Stewart”) provided title insurance
on the loan. After defaulting, Lupu sued to void the instruments evidencing his
debt. Lupu initially challenged, among other things, the use of the MERS System
to transfer mortgages. Lupu repeatedly amended his claims and, after filing the
Third Amended Complaint, Lupu made accusations in his answers to
interrogatories that Loan City created, notarized and recorded forged mortgage
documents, and that the original mortgage was never recorded. In the Fourth
Amended Complaint, Lupu made an express reference to this allegation of forgery.
The District Court ultimately dismissed his action, and no appeal was filed.

After Lupu made his forgery allegations in his interrogatory
answers, Ocwen sought coverage from Stewart under the title policy. Stewart
denied, stating that the complaint itself did not raise any covered claims.
Ocwen then filed a third-party complaint against Stewart seeking coverage.
After Lupu filed the Fourth Amended Complaint in which he expressly made
forgery allegations, Stewart agreed to defend the forgery claim, but no others.
Ocwen continued its action against Stewart seeking coverage on all claims.

After cross-motions for summary judgment, the District Court
applied the “four corners” rule and held that Stewart had no duty to defend
claims in the Third Amended Complaint, but had a duty to defend the forgery
allegations in the Fourth Amended Complaint as covered by the title policy. The
District Court further held that the “in for one, in for all” rule applied by
Pennsylvania courts in insurance cases required Stewart to defend against all
claims in the Fourth Amended Complaint because at least one claim was covered
by the title policy. This appeal followed.

On appeal, the Third Circuit affirmed in part and reversed in
part, holding that, while the “four corners” rule still applied, the “in for
one, in for all" rule did not apply for title insurance policies. As to
the “four corners” rule, the Third Circuit reasoned that, based on common
law precedent as well as efficiency and policy, the question of whether a
claim against an insured is potentially covered is best answered by comparing
the four corners for the insurance contract to the four corners of the
complaint. The Third Circuit also noted and affirmed that, unlike other states,
the Pennsylvania court system has no exception to the four corners rule where
the insurer knows or should know the allegations in the complaint conflict with
the facts. Accordingly, the Third Circuit held Stewart’s duty to defend did not
arise until after the forgery allegations were pled in the Fourth Amended
Complaint.

More significantly, the Third Circuit also held that title
insurance companies are not required to defend claims that their policies do
not cover, and that the “in for one, in for all” rule does not apply to title
insurance cases. This is a ground-breaking departure from the rule for general
liability insurance since, the Third Circuit reasoned, title insurance is more
narrow than general liability insurance and is backward-looking. While the
Pennsylvania Supreme Court has not created a title-policy exception to the “in
for one, in for all” rule yet, the Third Circuit predicts that it will
be based on state law, court decisions, and policy. Thus, the matter was
remanded to the District Court to determine which claims are within the scope
of the title policy.

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

Seventh Circuit Holds Debt Collector Did Not Violate FDCPA by Sending Motion Papers Directly to Represented Debtor in Compliance with State Rules

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The United States Court of Appeals for the Seventh Circuit recently reversed a district court’s decision granting a debtor’s motion for summary judgment and held that the defendant debt collector did not violate the Fair Debt Collection Practices Act (“FDCPA”) by sending motion papers directly to the debtor when the debtor was represented by an attorney who had not filed a notice of appearance.  See Holcomb v. Freedman Anselmo Lindberg, LLC, 2018 WL 3984544 (7th Cir. Aug. 21, 2018).  In the case, the debtor defaulted on her credit card, and the defendant debt collector filed an action against her.  Although the debtor initially appeared pro se, she later retained an attorney who sent the debt collector a letter informing the debt collector of the representation.  Nonetheless, the attorney did not file an appearance with the court, although he did attend two hearings on the debtor’s behalf.  The debt collector later moved for a default judgment and served the motion papers on both the attorney and the debtor.  The debtor then brought this action alleging a violation of the FDCPA, which prohibits a debt collector from directly contacting a consumer who is represented by counsel “[w]ithout the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction.”  See 15 U.S.C. 1692c.  The debt collector responded by arguing that Rule 11 of the Illinois Supreme Court Rules states that “[i]f a party is represented by an attorney of record, service shall be made upon the attorney. Otherwise service shall be made upon the party,” and that the attorney’s failure to file a notice of appearance meant the debt collector was required to serve the motion papers on the debtor.  The district court rejected this argument as “hyper-technical” and granted the debtor’s motion for summary judgment.

On appeal, the Seventh Circuit reversed.  The Court found that Illinois courts have clearly established that “a lawyer can become an attorney of record within the meaning of Rule 11 only by filing a written appearance or other pleading with the court,” and that attorneys who “simply represent[]” parties without filing a notice are not attorneys of record under Rule 11.  As such, Rule 11 expressly required that the debt collector here serve its papers on the debtor directly.  Thus, although the debt collector contacted the debtor directly, it had the “express permission of a court of competent jurisdiction” via the Court Rules and fell into the FDCPA’s safe harbor, and the Court found that the debt collector did not violate the FDCPA.

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

Massachusetts Federal Court Dismisses Borrower’s Wrongful Foreclosure and Predatory Lending Claims

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The United States District Court for the District of Massachusetts recently dismissed a borrower’s complaint against a lender, finding that the lender did not wrongfully foreclose on the borrower or engage in predatory lending.  See Healy v. U.S. Bank, N.A. for LSF9 Master Participation Tr., 2018 WL 3733934 (D. Mass. Aug. 3, 2018).  In the case, the borrower executed a loan agreement secured by a mortgage on his house in 2004.  In 2013, he defaulted on the loan, and the note and mortgage were assigned to the defendant lender thereafter.  After the lender sent the borrower a notice of intention to foreclose, the plaintiff brought this action alleging wrongful foreclosure and predatory lending, among other claims.  After discovery, the parties cross-moved for summary judgment.

The Court granted the lender’s motion and dismissed the action.  First, the Court dismissed the wrongful foreclosure count arising out of the borrower’s claim that the note and mortgage had been separated.  Even if the documents were separated, they were unified before this action was commenced, which is sufficient under Massachusetts law.  In that vein, the Court rejected the borrower’s claim that the assignment was invalid because there was robo-signing in the chain of title, holding that the lender had established that it had been assigned the mortgage before commencing the action and that the borrower therefore did not have standing to challenge the assignment.  Second, the Court held that any predatory lending claims must be dismissed because the lender was assigned the note and mortgage and did not have any part in the original loan.  Finally, the Court held that the lender did not breach any duties to the borrower by initiating the foreclosure after the borrower submitted a modification request.

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

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