FYI: DC Highest Court Rules No Duty to Defend Where Insured is Alleged to Not be Bona Fide Purchaser for Value

The District of Columbia Court of Appeals recently held that a title insurance policy excluded coverage for defense costs relating to a separate quiet title action brought by the holder of a prior owner’s unrecorded deed of trust, who alleged that that the insured was not a bona-fide purchaser without notice. 

 

The Court held that there was no duty to provide a defense under the “eight corners rule,” and that the title insurer did not owe the insured a fiduciary duty of disclosure based upon its agent’s examination of title.

 

A copy of the opinion is available at:  http://www.dccourts.gov/internet/documents/13-CV-0216.pdf

 

The insured (“Insured”) made a commercial loan to a borrower (“Borrower”) secured by a deed of trust on Borrower’s property.  Following Borrower’s default, Insured agreed to discharge the debt and pay Borrower $225,000 in exchange for the property.   As a result, Insured obtained title to the property and purchased a title insurance policy insured by Title Insurer.

 

Another lender of Borrower (“Second Lender”) alleged that when Insured made the loan to Borrower, it too had made a loan, but that Second Lender’s deed of trust was not recorded.   Settlement for the unrecorded deed of trust was handled by the same settlement agent who closed Insured’s loan to Borrower, who was also an agent of Title Insurer (“Agent”).  Second Lender alleged that Insured knew of its loan, and filed a lawsuit to quiet title. 

 

Insured made a claim under its title insurance policy.  Title Insurer refused to provide defense coverage, denying the claim under Paragraph 5(a) which precluded payment for matters not insured by the policy, and Paragraph 3(b)’s exclusions of coverage.  Title Insurer subsequently determined that the claim was also excluded under Paragraph 3(a).  Together, those provisions exclude coverage for “defects, liens, encumbrances, adverse claims, or other matters: (a) created, suffered, assumed, or agreed to by the Insured Claimant; [or] (b) not Known to the Company, not recorded in the Public Records at Date of Policy, but Known to the Insured Claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the Insured Claimant became an Insured under this policy[.]”

 

In denying defense coverage, Title Insurer relied upon the “eight corners rule” set forth in Stevens v. United General Title Insurance Co., 801 A.2d 61 (D.C. 2002), which states: “[T]he duty to defend is determined generally by the terms of the insurance policy and the allegations in the complaint against the insured[.]”  In applying the rule, Title Insurer asserted that Paragraphs 5(a) and 3(a) of the policy, when read against the complaint, excluded defense coverage for the quiet title action, because the quiet title action alleged that Insured had knowledge of Second Lender’s unrecorded interest in the property.

 

Insured retained its own counsel, and ultimately prevailed in the quiet title action.  Thereafter, Insured brought suit against Title Insurer seeking damages for breach of the insurance contract and for breach of fiduciary duty because the Second Lender’s loan was settled by Agent, who was agent of Title Insurer.

 

The trial court granted summary judgment in favor of Title Insurer, agreeing that (i) Paragraph 3(b) of the exclusions from coverage excluded the defense of the quiet title lawsuit; and (ii) because the breach of fiduciary duty claim was not based upon the title insurance policy, it was precluded under Paragraph 15(b) which provided that “[a]ny claim of loss or damage that arises out of the status of the [t]itle or by any action asserting such claim shall be restricted to [the] policy.”  Slip Op. at 6-7.

 

Affirming, the Court of Appeals determined that the breach of fiduciary duty claim was not based upon the title insurance contact.  Insured asserted that Agent knew of Second Lender’s loan, and was authorized to issue title insurance on Insurer’s behalf, and therefore contended that Title Insurer owed Insured a fiduciary duty of disclosure beyond the terms of their contractual relationship.  In rejecting this theory, the Court determined that “there is no conflict of interest when an insurer issues title insurance to different buyers of the same property. We are not persuaded that the act of issuing title insurance, and thereby entering into a contractual relationship with the insured, creates a fiduciary duty beyond the terms of the title insurance policy. Consequently, [Insured]‘s breach of fiduciary duty claim fails.”  Slip Op. at 8. 

 

As an additional note, the Court observed that Paragraph 6 of “Schedule B Exceptions from Coverage” provides that “any title search and examination conducted in connection with the issuance of a title insurance policy is solely for the benefit of [Title Insurer].  Accordingly, the title examination that Agent conducted at the time of the first sale was not for Insured ‘s benefit, and he cannot use that title examination as the factual predicate for his breach of fiduciary duty claim.”  Slip Op. at 8.

 

The Court of Appeals also agreed that there was no duty to defend under the “eight corners rule.”  As you may recall, “an insurance company‘s duty to defend depends only upon the facts as alleged to be, so that the insurer‘s obligations should be measured by comparing the policy it issued with the complaint filed in the underlying case.” Slip Op. at 10.  “[T]he obligation to defend is not affected by facts ascertained before suit[,] or developed in the process of litigation[,] or by the ultimate outcome of the suit.”  Id. at 10.  Rather, “[i]f the facts alleged in the complaint . . . would give rise to liability under the policy if proven, the insurer must defend the insured. . . . The rule potentially allows an insurer to deny its insured a defense even if the insurer is aware of facts which, if pleaded, would entitle the insured to a defense . . . .”  Id.at 11.

 

In applying the eight corner’s rule, the Court of Appeals rejected the factual exception test adopted in Fitzpatrick v. American Honda Motor Co., Inc., 575 N.E.2d 90, 93 (N.Y. 1991), which would require the insurer to provide a defense when it has actual knowledge of facts establishing a reasonable possibility of coverage.  Slip Op. at 12.  Explaining that it was wary of the potential for additional collateral proceedings, the Court of Appeals noted that the factual exception test would obligate courts to look beyond the allegations in the complaint to discover the actual facts, or at a minimum, whether the insurer knew or perhaps even should have known of such actual facts; and would place the insured in the position of dictating the theory of the action, including conceivably requiring the carrier to defend a claim the plaintiff has no intention of asserting merely because allegedly there are facts which support such a claim.

 

Thus, the Court of Appeals affirmed the grant of summary judgment in favor of Title Insurer.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

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FYI: Cal App Confirms Borrower Cannot Challenge PSA, No Standing to Challenge Securitization, Declines to Follow Glaski v. Bank of America

The California Appeals Court, Second District, recently affirmed a trial court’s dismissal of a borrower’s complaint to quiet title because the borrower failed to allege either tender to cure her default on the promissory note, or fraud at the time the deed of trust was entered into.

 

Specifically, the Appellate Court held that a party cannot challenge a pooling and servicing agreement to which he or she is not a party.  The Court further held that a borrower has no standing to allege that a mortgage and a deed of trust were improperly securitized and assigned.

 

The Appellate Court also declined to follow Glaski v. Bank of America, (2013) 218 Cal. App. 4th 1079 (“Glaski”), which held that an “obligor may resist foreclosure on any ground that renders an assignment in the chain of title void.”

 

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/B247188.PDF

 

In 2006, plaintiff borrower (“Plaintiff”) executed a promissory note with a mortgage lender (“Lender”) in the amount of $483,000.00 secured by a deed of trust on real property located in Woodland Hills, California.  The deed of trust entitled the Lender to substitute the trustee without notice to the borrower, assign the note to third parties without notice, and sell the property in case of default.

 

In 2007, the Lender went into bankruptcy and subsequently assigned the deed of trust via a pooling and servicing agreement to defendant bank (“Defendant”).  In August of 2008, Defendant served Plaintiff with a notice of default in the amount of $14,711.79. In January 2012, Defendant served Plaintiff with a second notice of default claiming she owed $63,960.80.

 

In August 2012, there was a notice of trustee sale, alleging Plaintiff had an unpaid loan balance of $537,934.03. On September 14, 2012 the property was sold. In February 2013, Defendant transferred the deed of trust to present trustee (the “Trustee”).

 

Plaintiff filed suit on May 14, 2102.  After two successful motions to dismiss, Plaintiff alleged a single cause of action for “Quiet Title.”  The substantive allegations of Plaintiff’s complaint were: (1) the assignment of the deed of trust from the Lender to Defendant was void; (2) the 2103 substitution of the Trustee was void; and (3) the Trustee’s sale of the property was unlawful and invalid.

 

Defendant demurred to Plaintiff’s Second amended complaint on the ground that Plaintiff failed to state a cause of action to quiet title because she failed to allege tender to cure her default on the promissory note.  Defendants further argued that Plaintiff’s allegations were irrelevant without an allegation of tender, or fraud at the time the deed was entered into. Plaintiff also represented that she had not discharged the debt or tendered the amount owed.  As a result, the trial court dismissed Plaintiff’s complaint without leave to amend and Plaintiff appealed.

 

On appeal, Plaintiff claimed the transfer from the Lender to Defendant was void, and therefore Defendant did not have proper title and standing to foreclose.  Plaintiff proceeded to argue she should be given leave to amend for a third time based upon recent changes in the law. 

 

Defendant argued that leave to amend would be futile as Plaintiff could not state a cause of action because she did not have standing to challenge Defendant’s claim to title. Plaintiff argued the transfer of the deed of trust and promissory note to Defendant and the subsequent securitization were improper.

 

The Appellate Court agreed with Defendant stating that “because a promissory note is a negotiable instrument, a borrower must anticipate it can and might be transferred to another creditor.” Herrera v. Federal National Mortgage Assn., (2012) 205 Cal. App. 4th 149. The assignment of the promissory note does not change Plaintiff’s obligations under the promissory note. An impropriety in the transfer of a promissory note only affects the parties to the transaction, not the borrower. Thus, a borrower “lacks standing to enforce any agreements relating to such transactions.” Jenkins v. J.P. Morgan Chase Bank, N.A., (2013) 216 Cal. App. 4th 497, 515 (“Jenkins”).

 

The Appellate Court further explained that “an unrelated third party to the alleged securitization, and any other subsequent transfers of the beneficial interest under the promissory note lacks standing to enforce any agreements. . . relating to such transactions.” Jenkins v. J.P. Morgan Chase Bank, N.A., (2013) 216 Cal. App. 4th 497, 515. 

 

The Appellate Court further held that Plaintiff “would not be the victim of such invalid transfers because her obligations under the note remained unchanged.” Plaintiff cannot “assume the theoretical claims of hypothetical transferors and transferees to assert causes of action from declaratory relief or wrongful foreclosure.”

 

Plaintiff argued that Glaski v. Bank of America, (2013) 218 Cal. App. 4th 1079 (“Glaski”), supported the assertion that a borrower may challenge a non-judicial foreclosure based on allegations that one or more transfers in the chain of title of a trust deed is void. In Glaski, the appellate court held that an “obligor may resist foreclosure on any ground that renders an assignment in the chain of title void.”

 

Although the Appellate Court agreed that Glaski supported Plaintiff’s position, not a single California court has chosen to follow Glaski’s holding.  Thus, the Appellate Court declined to follow Glaski and agreed with the reasoning of Jenkins.

 

Thus, the Appellate Court held Plaintiff had no standing to challenge Defendant’s pooling and servicing agreement, and thus any cause of action for wrongful foreclosure failed as a matter of law. The Court affirmed the trial court’s dismissal of Plaintiff’s second amended complaint.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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FYI: Ill App Ct Rejects Borrower's Argument That Foreclosure Court Lacked Jurisdiction Due to Alleged Defects in Foreclosure Complaint

The Illinois Appellate Court for the Second District recently affirmed a trial court’s rejection of a borrower’s post-judgment petition challenging a judgment of foreclosure for supposed lack of subject matter jurisdiction over the instant matter.

 

Specifically, the Court held the foreclosure plaintiff’s alleged failure to plead standing did not deprive the trial court of subject matter jurisdiction to enter a foreclosure judgment.

 

A copy of the opinion is available at:  https://www.state.il.us/court/R23_Orders/AppellateCourt/2014/2ndDistrict/2130607_R23.pdf

 

On March 25, 2010, the plaintiff mortgagee (“Mortgagee”) filed a complaint to foreclose on property owned by the borrower (“Borrower”).  Borrower appeared pro se and did not file a formal answer.  Instead, Borrower wrote a letter to the judge explaining her circumstances.  On December 20, 2011, the Court granted Mortgagee’s motion for summary judgment.

 

On January 18, 2012, Borrower moved to vacate the summary judgment order arguing she was the victim of “predatory lending.”  The Court denied the motion and the foreclosure sale took place on January 24, 2013.  The sale was confirmed on February 4, 2013.

 

On March 5, 2013, Borrower, now represented by counsel, filed a motion to vacate the sale’s confirmation arguing the original lender misrepresented the terms of the mortgage.  The Court denied Borrower’s motion.

 

On April 19, 2013, Borrower filed a pro se 2-1401 petition seeking to vacate the confirmation of the foreclosure sale.  Borrower argued for the first time the Mortgagee lacked standing to file the complaint because there was no evidence that Mortgagee had any relationship with the original mortgagee.  Borrower also argued it was fraudulent for Mortgagee to allege it was the mortgagee.

 

On May 2, 2013, Mortgagee filed a notice of motion stating it would “present” Borrower’s petition on May 9, 2013.  On May 9, 2013, the Court denied Borrower’s petition.  There was no indication that Borrower was present during the May 9, 2013 hearing.  Borrower filed a notice of appeal on June 10, 2013.

 

On appeal, Borrower asserted two arguments.  First, Borrower argued the denial of her post-judgment petition was premature before Mortgagee had responded.  Borrower also argued the trial court lacked subject matter jurisdiction to hear the foreclosure action, due to alleged pleading defects in the foreclosure complaint.

 

The Court began its analysis by examining Borrower’s argument that the trial court’s judgment was premature because it was entered before the 30 day response period ran.

 

In People v. Laugharn, 233 Ill. 2d 318, 323 (2009), the trial court entered a sua sponte dismissal of a defendant’s post-judgment petition before the 30 days in which the plaintiff could file a response ran. The Illinois Supreme Court held the dismissal “short circuited the proceedings and deprived the [plaintiff] of the time it was entitled to answer or otherwise plead.” Here, Mortgagee and Borrower agreed the 30 day period had not run.

 

Mortgagee argued that under Foutch v. O’Bryan, 99 Ill.2d. 389, 391-92 (1984), the Court must presume the dismissal was not sua sponte because the appeal’s record did not contain a transcript of the May 9, 2013 hearing.  Borrower countered by stating she was not present at the May 9, 2013 hearing, and due to no motion being on file, the trial court must have acted sua sponte.

 

The Court stated “at first glance, it appeared [Borrower] has the right side of the procedural point” – according to the Appellate Court, if the trial court entered judgment then it violated Laugharn, and if the initiative was by Mortgagee, it would be an impermissible unscheduled motion.

 

However, the Court held there is a possibility of a proper sua sponte dismissal.   The Court explained this is possible if Mortgagee made a full waiver of its response rights.  Specifically, if a respondent gave up its rights to respond, the trial court can, without procedural impropriety, properly dismiss a petition sua sponte as allowed by the rule created in People v. Vincent, 226 Ill.2d 1, 11-12 (2007). The Court noted this is a “risky” position because the respondent is left with very few options if a court rules in the petitioner’s favor.

 

The Appellate Court held the above is the procedure that “best matches plaintiff’s notice to defendant stating that on May 9, 2013, it would present Defendant’s petition.” This is what the Court presumed occurred, and thus under Foutch, rejected Borrower’s claim that the judgment was premature.

 

Borrower next argued that the trial court lacked subject matter jurisdiction due to the defects in Mortgagee’s pleading.  Mortgagee cited City National Bank of Hoopeston v. Langley, 161. Ill. App.3d 266, 276-77 for the proposition that an “omission in the complaint of any facts specified in the section 15-1504 of the Code (735 ILCS 5/15-1504) deprives the court of subject matter jurisdiction to decide the matter.”

 

The Appellate Court overruled rejected Mortgagee’s argument because Langley is no longer good law.  Specifically, in Nationstar Mortgage LLC v. Canale, 2014 Ill. App. (2d) 130676, the Court held that “to invoke the court’s subject matter jurisdiction, an initial pleading need only state a justiciable matter” and a claim for foreclosure “even if defectively stated, presents a justiciable matter.”  Thus, the Court held the trial court had subject matter jurisdiction over the foreclosure action and overruled Borrower’s argument.

 

Accordingly, the Appellate Court affirmed the trial court’s ruling.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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