First American Title Insurance v. Lane Powell PC

United States Court of Appeals
For the First Circuit
No. 13-2012
FIRST AMERICAN TITLE INSURANCE COMPANY,
Plaintiff, Appellee,
v.
LANE POWELL PC,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Torruella, Circuit Judge,
Souter,* Associate Justice,
and Thompson, Circuit Judge.
John R. Neeleman, with whom Lane Powell PC and Steven A. Ross
were on brief, for appellant.
Jason A. Manekas, with whom Bernkopf Goodman LLP was on brief,
for appellee.
August 22, 2014
*
Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
TORRUELLA, Circuit Judge. Defendant-Appellant Lane
Powell PC ("Lane Powell") appeals the District Court of
Massachusetts' grant of summary judgment in favor of Plaintiff-
Appellee First American Title Insurance Company ("First American").
Lane Powell, a Washington-based law firm, contracted with First
American for the latter to provide title insurance on two mortgages
that Lane Powell took as security from Charles Crovo ("Crovo"), a
client who was indebted to Lane Powell for a considerable amount of
attorney's fees. Though the letter of the insurance policies in
question seemingly provides coverage for priority liens, First
American denied Lane Powell coverage upon foreclosure of liens that
were superior to those of Lane Powell.
Upon Lane Powell's request for indemnification, First
American sought declaratory judgment in Massachusetts state court,
essentially arguing that coverage for priority liens was never
intended by either party. Lane Powell removed the action to
federal district court. On cross-motions for summary judgment, the
district court granted judgment in favor of First American. Ruling
from the bench, the district court found that because Lane Powell
was aware of the prior mortgages, it could not expect to receive
coverage it did not bargain for. We agree.
I. Background
Charles Crovo and others engaged Lane Powell for legal
representation regarding a number of commercial disputes that are
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unrelated to this matter. As Lane Powell's unpaid invoices for
attorney's fees accumulated, Lane Powell and Crovo entered into an
amended fee arrangement in April of 2011. By way of the
arrangement, Crovo granted mortgages to Lane Powell over two
properties in Massachusetts as security for payment of the fees
owed -- the West Tisbury Mortgage and the Newton Mortgage.
There was some discussion between Crovo and Lane Powell
regarding the equity on the West Tisbury and Newton properties, as
well as regarding liens on both properties that would be superior
to Lane Powell's mortgages. Lane Powell understood that these
superior liens would take priority over its mortgages and accepted
the inferior positions.
In August of 2011, Lane Powell retained a Massachusetts
firm, Coogan Law Office ("Coogan"), to examine title to the West
Tisbury and Newton properties, to assist Lane Powell with recording
a mortgage over each property, and to facilitate the issuance of a
lender's policy of title insurance for each property in favor of
Lane Powell. For purposes of the tasks requested of Coogan,
paralegal Kate Iiams ("Iiams") of Lane Powell, and employees Lori
Pfingst and Jennifer Cutrer of Coogan handled most communications.
There was apparently little or no direct dialogue between the
attorneys of each firm.
Coogan carried out the title searches for each property
and reported to Lane Powell that the West Tisbury property was
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encumbered by a mortgage in favor of ING Bank ("ING Mortgage"), and
the Newton property was encumbered by two mortgages -- one in favor
of JP Morgan Chase Bank ("Chase Mortgage") and one in favor of
Raymond C. Green, Inc. ("Green Mortgage").
On or about September 7, 2011, Coogan provided Lane
Powell with a commitment for title insurance ("West Tisbury
Commitment") and a draft title insurance policy for the West
Tisbury Property ("Draft West Tisbury Policy"). The West Tisbury
Commitment identifies the ING Mortgage as an encumbrance to be
discharged. The Draft West Tisbury Policy, however, does not
specifically except the ING Mortgage from coverage.
On September 7, 2011, Iiams of Lane Powell wrote Coogan
to inform him that Lane Powell did not "expect the existing lien of
$1,950,000 with ING Bank to be paid off or released on the [West
Tisbury] property." Jennifer responded on behalf of Coogan that
"if that mortgage is remaining and the mortgage we are putting on
will be in addition to that one then we have to charge the full
rate." On September 13, 2011, First American, by way of its agent
Coogan, issued the West Tisbury policy of title insurance ("West
Tisbury Policy") to Lane Powell. Like the West Tisbury Commitment,
the West Tisbury Policy does not specifically except the ING
Mortgage from coverage.
Coogan never provided Lane Powell with a commitment for
title insurance or a draft policy for the Newton property, though
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it did inform Lane Powell of the Chase and Green Mortgages that
encumbered the Newton property when it reported on the results of
its title search in August of 2011. On October 30, 2011, Lori from
Coogan wrote Iiams from Lane Powell and asked whether Lane Powell
intended to pay off the Chase and Green Mortgages: "will this
mortgage be paying off any of the outstanding mortgages on the
property? (in order to qualify for a refinance rate?)." In
response, Iiams, on behalf of Lane Powell, confirmed it would not
be paying off any existing mortgages on the Newton property. On
March 30, 2012, Coogan relayed to Lane Powell a policy of title
insurance for the Newton Property ("Newton Policy"). The Chase and
Green Mortgages are not excepted from coverage under the Newton
Policy.
Crovo defaulted on his debt to Lane Powell, as well as on
debts owed to ING Bank and Raymond Green, Inc., leading the latter
two to foreclose on their respective mortgages over the West
Tisbury and Newton properties. Lane Powell recovered no proceeds
from these foreclosures. On October 3, 2012, Lane Powell notified
First American of its claim under the Newton Policy. First
American responded on October 5, 2012, informing Lane Powell that
First American would afford it coverage according to the terms of
the Newton Policy. Shortly thereafter, however, on November 9,
2012, First American reneged, and it denied coverage under the
Newton Policy. As to the West Tisbury Policy, though it remains
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unclear when exactly the parties discussed the matter, First
American denied coverage from the outset.
First American filed for declaratory judgment in
Massachusetts state court, seeking reformation of the West Tisbury
and Newton Policies on grounds of mutual mistake. First American
also argued that a clause in the policies, Exclusion 3(a), excludes
from coverage the mortgages superior to Lane Powell's. The
underlying theory is that the true intent of both parties was to
except the superior liens from coverage under the policies. The
policies do not read this way, First American contends, because of
a mere clerical error overlooked by First American when it reduced
the policies to writing -- a simple case of scrivener's error.
Lane Powell removed the action to the District Court of
Massachusetts and discovery ensued. The parties elicited
deposition testimony from Brian Powell ("Powell") and John Neeleman
("Neeleman"), both partners at Lane Powell, and from Iiams.
Powell reviewed title to the West Tisbury and Newton
properties in connection with Lane Powell's efforts to record its
mortgages and secure title insurance over both properties. Powell
testified that he was aware that both properties were encumbered by
mortgages that would be superior to Lane Powell's. He also
understood that, because of Lane Powell's inferior position, its
potential to recover proceeds from the foreclosure of superior
liens depended on the amount of equity in each property. Powell
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thus conceded that Lane Powell's mortgages would be in junior
positions and that foreclosure of the senior liens might result in
no recovery for Lane Powell at all.
Neeleman's written communications to Powell show that he
was also aware that Lane Powell's mortgages would be inferior to
prior encumbrances on both the West Tisbury and Newton properties.
Neeleman also testified, however, that in his mind, the rank of
Lane Powell's mortgages in the land registry bore no relation to
the title insurance policies. Finally, Neeleman testified that,
upon receiving notice of the foreclosures, he reviewed both title
insurance policies and "thought it was interesting" that they did
not except the prior mortgages from coverage.
Iiams testified that she was charged with inquiring with
Coogan as to the price of the Newton Policy, and that she
understood that the policy premium would be higher if Lane Powell
decided not to pay off the prior mortgages. Thus, Iiams was also
aware of the senior mortgages.
Lane Powell moved for summary judgment on May 29, 2013.
Lane Powell argued that the prior mortgages in question are not
excepted from the West Tisbury or Newton policies, and, as per the
letter of the policies, First American must provide it coverage.
First American cross-moved for summary judgment, advancing its
theory that despite the letter of the policies, neither it nor Lane
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Powell ever intended that the mortgages superior to Lane Powell's
would be covered under the policies.
The district court held a hearing on the parties' cross-
motions and, from the bench, granted summary judgment in favor of
First American. As to the district court's reasoning, we are left
only with the following words the court addressed to counsel for
Lane Powell: "You people are attorneys here, and you agree that
they had knowledge, but you say that because of this error First
American is on this policy to make, to reimburse you for a
situation of which you had knowledge." Lane Powell's timely appeal
followed.
II. Discussion
Review of a district court's grant of summary judgment on
cross-motions for summary judgment is de novo. Barnes v. Fleet
Nat'l Bank, N.A., 370 F.3d 164, 170 (1st Cir. 2004). "Cross-
motions for summary judgment require us to determine whether either
of the parties deserves judgment as a matter of law on facts that
are not disputed." Sch. Union No. 37 v. United Nat'l Ins. Co., 617
F.3d 554, 559 (1st Cir. 2010) (alterations and internal quotations
marks omitted).
We sit in diversity jurisdiction, and thus apply the law
of Massachusetts to this case. OneBeacon America Ins. Co. v.
Travelers Indem. Co. of Ill., 465 F.3d 38, 41 (1st Cir. 2006).
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A. Reformation and mutual mistake
The facts, as they have been recited, are essentially
undisputed. First American claims it is not liable to Lane Powell
under the Newton or West Tisbury policies. Despite the letter of
the policies to the contrary, First American says that the parties'
intent was to except from coverage the ING Mortgage from the West
Tisbury Policy, and the Chase and Green Mortgages from the Newton
Policy -- the letter of the policies is the result of a mutual
mistake. Accordingly, First American would have us reform the
policies and except these liens from coverage, so as to reflect
what it purports was the true intent of the parties: to insure Lane
Powell against the risk of defects in title arising from
encumbrances other than the existing senior mortgages.
"Insurance policies may be reformed under the same
principles as any other contract." Caron v. Horace Mann Ins. Co.,
466 Mass. 218, 222, 993 N.E.2d 708, 711 (2013). "In order to
prevail on a motion for summary judgment on a claim for reformation
due to mutual mistake, the moving party must establish that the
undisputed material facts fully, clearly, and decisively show a
mutual mistake." Id. at 221 (citation omitted); OneBeacon, 465
F.3d at 41 ("The critical limitation in a contract reformation case
is the burden of proof: to be entitled to reformation, a party must
establish that the undisputed facts fully, clearly, and decisively
show a mutual mistake."). "The mutual mistake doctrine exists to
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effectuate the agreement intended by the parties to a contract
where the contract language fails to capture that agreement."
Caron, 466 Mass. at 223. "Central to this doctrine is the
fundamental underpinning that the parties had reached an agreement
on a point which they intended to enshrine in the written contract
but which, for some reason, was mistakenly omitted from that
written contract." Id. A court will not grant reformation unless
the movant has shown "that the parties expressed agreement and an
intention to be bound in accordance with the terms that [it is]
asked to establish and enforce." Sancta Maria Hosp. v. City of
Cambridge, 369 Mass. 586, 595, 341 N.E.2d 674, 681 (1976); see also
Caron, 466 Mass. at 223-24.
First American posits that Lane Powell unequivocally
assented and agreed to policies that excepted from coverage the ING
Mortgage and the Chase and Green Mortgages, respectively. This is
made clear, First American argues, by the acts of Lane Powell
leading up to the recording of the mortgages and issuing of the
West Tisbury and Newton Policies. In the words of First American,
Lane Powell was aware of the senior mortgages, was told by Crovo
that its mortgages would occupy junior positions, "confirmed its
own understanding it would occupy junior positions, had its own
real estate department review title and analyze the equity
available for such junior positions, confirmed both internally and
externally to both its counsel and First American's issuing agent
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that it would not be satisfying the senior mortgages, and then
recorded its mortgages." First American argues that this evinces
Lane Powell's consent to except these prior mortgages from
coverage. According to First American, the letter of the West
Tisbury and Newton Policies -- not excepting the prior mortgages
from coverage -- is the result of a clerical error by First
American and does not represent the true intent of either party.
Therefore, First American suggests that if the policies are not
reformed, Lane Powell stands to receive a windfall that neither
party ever intended or bargained for.
First American's reformation argument fails, squarely.
Chiefly, it cannot point to any evidence on the record that Lane
Powell ever agreed to, much less manifested an intent, to have the
ING, Chase, or Green Mortgages excepted from the West Tisbury and
Newton Policies, respectively. Sancta Maria, 369 Mass. at 596.
The evidence indicates that Lane Powell was indeed aware that its
mortgages would occupy junior positions to the record mortgages
already existing on the West Tisbury and Newton properties. First
American would have us conclude that this amounts to Lane Powell's
consent to except these superior mortgages from the policies.
Nonetheless, as the record shows, Lane Powell never conveyed any
such consent to First American.
Specifically as to the West Tisbury property, Lane Powell
knew from its initial negotiations with Crovo that the property was
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encumbered by an existing mortgage. Coogan confirmed to Lane
Powell the existence of the ING Mortgage. Lane Powell readily
assumed the subordinate rank for its mortgage.
Coogan then issued to Lane Powell the West Tisbury
Commitment and the West Tisbury Draft Policy. Though the West
Tisbury Commitment required that Lane Powell discharge the ING
Mortgage, the record does not show that the parties exchanged any
thoughts on this particular document. Regardless of Lane Powell's
awareness of the contents of the West Tisbury Commitment, it made
no manifestation to First American that it agreed to except the ING
Mortgage from coverage.
Subsequently, before issuance of the West Tisbury Policy,
and in response to Lane Powell's indication that it would not be
paying off the ING Mortgage, Coogan indicated that "if that
mortgage is remaining and the mortgage we are putting on will be in
addition to that one then we have to charge the full rate." This
is perhaps a suggestion from First American's agent to Lane Powell
that, given Lane Powell's decision to not discharge the ING
Mortgage, coverage would extend and the resulting premium would be
higher. Indeed, First American issued the West Tisbury Policy
shortly afterwards, with no exception for the ING Mortgage, and it
charged Lane Powell the higher premium. Notwithstanding whatever
this exchange might have meant to either party, it certainly does
not "fully, clearly, and decisively show" that Lane Powell
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communicated to First American that it consented to an exception
for the ING Mortgage. See Caron, 466 Mass. at 222 (internal
quotation marks omitted).
The Newton Policy involved a similar narrative. First
American admittedly did not provide Lane Powell with a commitment
or a draft policy during the Newton Policy negotiations. A similar
exchange did take place between Lane Powell and Coogan regarding
coverage, discharge of prior liens, and the premium to be charged.
Coogan asked whether Lane Powell intended to pay off the Chase and
Green Mortgages "in order to qualify for a refinance rate." Iiams
responded on behalf of Lane Powell that it would not be discharging
the existing mortgages on the Newton Property. Coogan, on behalf
of First American, issued the Newton Policy to Lane Powell with no
exception for the Chase or Green Mortgages and charging the higher
premium. There is no indication that Lane Powell manifested to
First American that it agreed to except the Chase and Green
Mortgages from coverage.
We stress that, for purposes of Lane Powell's
negotiations with Crovo and its interactions with Coogan related to
the title searches and recording of mortgages over the West Tisbury
and Newton properties, it is undisputed that Lane Powell accepted
that the West Tisbury Mortgage would be subordinate to the ING
Mortgage, and that the Newton Mortgage would be subordinate to the
Chase and Green Mortgages. Nonetheless, these undisputed facts are
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not probative of Lane Powell's purported manifestation of its
expectation that the ING, Chase, and Green mortgages would be
excepted from coverage. Caron, 466 Mass. at 222.
B. Exclusion 3(a)
First American also argues that since Lane Powell agreed
with Crovo to assume mortgages with inferior positions on both the
West Tisbury and Newton Policies, any loss due to the foreclosure
of any of the superior mortgages is excluded from coverage by
Exclusion 3(a). Exclusion 3(a) is a clause within a section of the
respective policies titled "Exclusions From Coverage." It provides
that: "The following matters are expressly excluded from the
coverage of this policy and the Company will not pay loss or damage
which arise by reason of: 3. Defects, liens, encumbrances, adverse
claims or other matters: (a) created, suffered, assumed or agreed
to by the Insured Claimant." Exclusion 3(a) is standard language
in most title insurance policies.
Ostensibly, the letter of Exclusion 3(a) would seem to
bar coverage of the ING, Chase, and Green mortgages. Lane Powell
indeed agreed with Crovo to take out mortgages over the West
Tisbury and Newton properties that were inferior in rank to the
existing mortgages on both properties. Furthermore, Powell's and
Neeleman's own testimony confirms Lane Powell's knowledge of the
superior ING, Chase, and Green mortgages, and that its own
mortgages over the West Tisbury and Newton properties would be in
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junior positions, respectively. It is clear then, that Lane Powell
"assumed" and "agreed to" junior positions for the West Tisbury and
Newton Mortgages. Nat'l Cred. Union Admin. v. Ticor Title Ins.
Co., 873 F. Supp. 718, 728 (D. Mass. 1995) (holding that the
insured-mortgagor "suffered, assumed or agreed to" an existing
superior mortgage where officers were aware of the superior
mortgage and agreed to a junior position, thus barring coverage
under Exclusion 3(a) despite error in title insurance policy).
In Ticor, plaintiff National Credit Union Administration
("NCUA"), a liquidating agent and successor to a defunct credit
union and, consequently, an insured-mortgagor under a title
insurance policy issued by defendant Ticor to the credit union,
sought declaratory judgment that the title policy it held was in
full force and effect. Id. at 720. The title insurance policy
listed the former credit union's lien as a first mortgage, even
though a superior mortgage encumbered the property offered as
security to the extant credit union -- the result of a clerical
error on the part of Ticor. Id. at 722. NCUA's suit was prompted
by foreclosure of the prior mortgage. Id. Ticor, the issuer of
the title insurance policy, countered that, since the credit union
was aware of the prior mortgage and agreed to a junior position
with the debtor and owner of the encumbered property, Exclusion
3(a) applied to bar coverage for foreclosure of the prior lien.
Id. at 726. The district court held in favor of Ticor, finding
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that the credit union's officers were aware of the prior mortgage
and knowingly agreed to a junior position. Id. at 728 ("Given the
extensive involvement of the officers in arranging for the two
mortgages, the undisputed evidence supports Ticor's position that
[the credit union]'s officers intentionally 'suffered, assumed, or
agreed to' the first mortgage."). A contrary outcome, the court
reasoned, would result in an unwarranted and entirely unintended
windfall for the insured. Id.Consistent with this reasoning, we find that First
American has carried its burden of showing that Exclusion 3(a)
applies and, accordingly, the policies do not provide coverage for
the ING, Chase, or Green Mortgages. See id. at 726 (citing Todisco
v. Nat'l Fire Ins. Co. of Hartford, 356 Mass. 736, 736-37, 254
N.E.2d 787, 788 (1970)). First American has put forth testimony
from two witnesses, both partners at Lane Powell, who -- although
to varying degrees -- were directly involved in equity and title
analysis of both the Newton and West Tisbury properties, and who
candidly admitted that they were well aware that Lane Powell's
mortgages would be junior to the ING, Chase, and Green Mortgages.
An insured party "assumes" or "agrees" to a lien pursuant to
Exclusion 3(a) when it takes property that is subject to an
existing encumbrance it has knowledge of. See Am. Title Ins. Co.
v. E. W. Fin., 16 F.3d 449, 455-56 (1st Cir. 1994); Lawyers Title
Ins. Corp. v. Doubletree Partners, L.P., 739 F.3d 848, 868 (5th
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Cir. 2014) ("An insured only 'assumes' the defect if it has
'knowledge of the specific title defect assumed.'"). It is clear
then, that Lane Powell "assumed" and "agreed to" the prior
mortgages on the West Tisbury and Newton properties. See Ticor,
873 F. Supp. at 728.
To find otherwise would effectively morph the title
insurance the parties agreed to into a credit insurance policy of
sorts that Lane Powell did not pay for, and that neither party
intended. More importantly, extending coverage to the loss
incurred by Lane Powell caused by the foreclosure of the superior
mortgages would result in a windfall to Lane Powell that neither
party ever expected or agreed to. See id. (citing Brown v. St.
Paul Ins. Corp., 634 F.2d 1103, 1107 n.8 (8th Cir. 1980)). Equity
will simply not have it.
Lane Powell mounts two challenges to this result, both
unpersuasive. First, Lane Powell contends that under Chicago Title
Ins. Co. v. Resolution Trust Corp., 53 F.3d 899 (8th Cir. 1995), in
order to avoid coverage and for Exclusion 3(a) to apply, First
American must show that Lane Powell engaged in affirmative
misconduct. To the extent that Chicago Title is an Eighth Circuit
case based entirely on Minnesota law, we are not bound by the
learned court's reasoning in that case, though we may opt to find
it persuasive. More importantly, however, and contrary to Lane
Powell's rather nearsighted reading, Chicago Title does not stand
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for the proposition that, in order for Exclusion 3(a) to apply, the
insurer must show intentional misconduct on the part of the
insured. Though our sister circuit recognized that other courts
have taken slightly varying views on the matter, it squarely held
that Exclusion 3(a) "bars coverage where there has been misconduct
or inequitable behavior on the part of the lender" as well as
"where the lender assumes or agrees to liens, or where the lender
stands to receive an inequitable windfall." Id. at 905.
Second, Lane Powell argues that First American cannot
marshal evidentiary support for its Exclusion 3(a) theory because
an integration clause in the West Tisbury and Newton Policies bars
the use of parol evidence to show that Exclusion 3(a) applies.
This flight of fancy fails as a matter of logic. The parol
evidence rule prohibits the use of evidence of prior or
contemporaneous agreements that is proffered in an attempt to
challenge, change, or broaden an integrated writing. See, e.g.,
Gifford v. Gifford, 354 Mass. 247, 249, 236 N.E.2d 892, 893 (1968).
However, First American's evidentiary effort serves to forward its
theory of why Exclusion 3(a) applies -- which the parol evidence
rule does not prohibit -- and is not an affront to the letter or
meaning of the clause.
III. Conclusion
First American has not shown that Lane Powell ever
communicated its expectation that the superior mortgages over the
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West Tisbury and Newton properties would be excepted from coverage.
However, First American has conclusively shown that Lane Powell was
well aware that its bargain with Crovo for security of its debt
would result in junior mortgages. Exclusion 3(a) clearly excludes
such encumbrances from coverage. Accordingly, the district court's
grant of summary judgment in favor of First American is affirmed.
AFFIRMED.
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