Diversified Mortgage Investors v. U. S. Life Title Insurance Company of New York

VAN GRAAFEILAND, Circuit Judge:

This is an appeal from an order of the United States District Court for the Southern District of New York which granted plaintiff a preliminary injunction and denied defendant’s motion to dismiss the complaint. The preliminary injunction permanently amended the provisions of a policy of title insurance between appellant and appellee by negating several of the terms and conditions contained therein. For the reasons hereafter discussed, we think this relief which was final in nature was improperly granted in this interim order; and we reverse that portion of the order. Defendant’s motion to dismiss was properly denied; and, as to that portion of the order, we affirm.

No testimony was introduced in the District Court, and we, like the District Judge, must attempt to sketch in the factual background of the dispute from the affidavits and the pleadings. From these, it appears that plaintiff-appellee, Diversified Mortgage Investors (DMI), is a real estate investment trust and defendant-appellant, U. S. Life Title Insurance Company of New York (USL), is a title insurance company with a branch office in the City of Albany. Beginning in 1971, DMI made a number of mortgage loans to Sleepy Hollow Lake, Inc. for the development of a recreational housing community in Greene County, New York. Although it is not clear from the motion papers how many loans were made, an affidavit submitted on behalf of USL indicates that DMI was the mortgagee in four separate mortgages totaling in excess of twenty-one million dollars.

In any event, the first mortgage conveyed to DMI was for twelve million dollars, covering loans to be made in installments; and USL was requested to issue a title insurance policy in the amount of five million dollars with an endorsement to increase coverage up to twelve million dollars “upon receipt of applicable premiums and proof of no intervening liens or encumbrances.” This policy was issued on September 29, 1971, in the face amount of five million dollars, and USL says that this amount was not increased thereafter by the payment of any additional premiums.

In 1974, Sleepy Hollow Lake, Inc. defaulted on its mortgage payments, and it was found that almost two million dollars in mechanic’s liens had been filed against the mortgaged property. On January 21, 1975, a number of these lienors started a mechanic’s lien foreclosure action in Supreme Court of Greene County, in which DMI, as an apparent prior lien holder, was not named a defendant. When that action appeared on the Greene County trial calendar in April 1975, a motion was made to amend the complaint to bring in DMI as a defendant and to allege the priority of the mechanic’s liens over its mortgage because of the failure of DMI to file a building loan statement as required by N.Y. Lien Law § 22 (McKinney 1966). This section provides that a building loan contract, containing certain specified information, must be filed in the office of the clerk of the county in which the land is situated and that, if it is not so filed, the interest of each party to the contract in the real property affected thereby shall be subject to subsequently filed liens. USL was asked to undertake the defense of this action on behalf of DMI and did so, taking the position that the loan agreement which it insured was not a building loan contract.

DMI also demanded of USL that it settle with the mechanic’s lienors and secure the discharge of their liens. When USL refused to do this, DMI commenced the action below and refused thereafter to cooperate with USL in the defense of the state foreclosure action. DMI’s complaint in the District Court is for a declaratory judgment: (1) declaring that USL negligently failed to record the building loan agreement by reason of which it is “liable for all costs and expenses incurred in disposing” of the mechanic’s liens;¹ (2) directing USL to immediately take all steps necessary to restore the priority of DMI’s mortgage lien, “including settling, discharging or bonding of existing mechanic’s liens so that they are properly cleared of record” or in the alternative permitting DMI to do so without prejudice to its rights under its insurance policy; and (3) awarding DMI damages for the negligence and bad faith of USL.

DMI then moved for a preliminary injunction which would require USL to discharge forthwith the mechanic’s liens or alternatively would permit DMI to do so without prejudice to its rights under its policy of title insurance. DMI claimed that unless the liens were settled or otherwise disposed of to clear the record title immediately, its entire investment would be rendered worthless, asserting that the value of the uncompleted project is in the neighborhood of only $1.2 million. It further claimed that it could advance no more funds to complete the project, even though it was willing to do so, since any further advances would be inferior to the mechanic’s liens. The District Judge granted such motion to the extent that he permitted DMI to settle, bond or otherwise dispose of the mechanic’s liens without prejudice to any rights of USL “other than a disclaimer based upon lack of consent to settlement of the liens.” It is this portion of the order which we reverse.²

Although it seems clear from the District Judge’s short opinion that he felt little or no prejudice would accrue to USL from the order, it is also clear that he undertook to rewrite the contract between the parties by, in effect, eliminating therefrom certain clauses and provisions upon which the parties had agreed. These were the customary indemnity provisions reserving to the insurer its rights to defend any action relating to the interest insured in order to prevent or reduce loss;³ requiring the insured to provide it with this opportunity;⁴ and disclaiming coverage for any liability voluntarily assumed by the insured in settling any claim or suit without the written consent of the company.⁵

In proceeding to rewrite the contract between the parties, the District Judge said that he was preserving the rights of the litigants. We do not agree. A title insurance policy is a contract between insurer and insured, and the rights of the parties are as provided for therein. Udell v. City Title Ins. Co., 12 App.Div.2d 78, 80, 208 N.Y.S.2d 504 (1st Dept. 1960). The parties having agreed upon their own terms and conditions, “the courts cannot change them and must not permit them to be violated or disregarded.” Whiteside v. North American Accident Ins. Co., 200 N.Y. 320, 325, 93 N.E. 948, 950 (1911); Bronen v. New York Abstract Co., 19 App.Div.2d 821, 243 N.Y.S.2d 664 (1st Dept. 1963) (mem.). Provisions such as the foregoing, which reserve to the insurer the control of litigation and settlement, have been consistently enforced. 7A Appleman, Insurance Law and Practice § 4714, at 587 (1962); 14 Couch on Insurance 2d § 51:19, at 521 (1965); 15 Couch, supra, § 57:172, at 803 (1966); 45 C.J.S. Insurance § 937, at 1071 (1946); Kennelly v. London Guarantee and Accident Co., 184 App.Div. 1, 171 N.Y.S. 423 (1st Dept. 1918); Freed v. Inland Empire Ins. Co., 154 F.Supp. 855, 859 (D.Utah 1957); Ohio Casualty Ins. Co. v. Ross, 222 F.Supp. 292, 296 (D.Md.1963).

Accordingly, an insured who does not comply with the terms of his policy by preserving for his insurer the opportunity to defend or compromise, is usually not entitled to recover under his contract. 9 Appleman, supra, § 5216, at 22 (1943); Schefflin v. Title Guarantee and Trust Co., 262 App.Div. 913, 28 N.Y.S.2d 838 (2d Dept. 1941) (mem.), aff’d, 292 N.Y. 533, 54 N.E.2d 381 (1944) (mem.). The order appealed from, while attempting to “preserve” the rights of all the parties, irrevocably altered them. It permanently deprived USL of a contractual defense which, under normal circumstances, would be a valid one. This, we think, is not the proper function of an interim injunction order. Whatever the merits of DML’s claim that USL should not be allowed unreasonably to rely on the consent disclaimer in the contract, a determination of the validity of that disclaimer in any particular case should await full explication of the facts at trial.

The purpose of a preliminary injunction is to maintain the status quo pending a final determination on the merits. Danielson v. Local 275, Laborers Int’l Union, 479 F.2d 1033, 1037 (2d Cir. 1973); American Mercury v. Kiely, 19 F.2d 295, 297 (2d Cir. 1927). It provides relief which is “interlocutory, tentative, provisional, ad interim, impermanent, mutable, not fixed or final or conclusive, characterized by its for-the-time-beingness.” Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 742 (2d Cir. 1953). It should not be used as a device for creating a new contract between the parties or deciding questions of contract breach, properly determinable after trial. Unicon Management Corp. v. Koppers Co., 366 F.2d 199, 204 (2d Cir. 1966); Foundry Services, Inc. v. Beneflux Corp., 206 F.2d 214, 216 (2d Cir. 1953); Interphoto Corp. v. Minolta Corp., 295 F.Supp. 711, 723 (S.D.N.Y.), aff’d, 417 F.2d 621 (2d Cir. 1969) (per curiam); 43 C.J.S. Injunctions § 77, at 547 (1945). It is not an adjudication on the merits, Benson Hotel Corp. v. Woods, 168 F.2d 694, 696 (8th Cir. 1948); Walker Memorial Baptist Church v. Saunders, 285 N.Y. 462, 474, 35 N.E.2d 42 (1941), and it should not grant relief properly awarded only in a final judgment. Dunn v. Retail Clerks Int’l Ass’n, 299 F.2d 873, 874 (6th Cir. 1962); Miami Beach Federal Savings & Loan Ass’n v. Callander, 256 F.2d 410, 415 (5th Cir. 1958); Dorfmann v. Boozer, 134 U.S.App.D.C. 272, 414 F.2d 1168, 1173 n. 13 (1969); Knapp v. Walden, 367 F.Supp. 385, 388 (S.D.N.Y.1973); Heldman v. United States Lawn Tennis Ass’n, 354 F.Supp. 1241, 1249 (S.D.N.Y.1973).

Furthermore, it is well settled that a preliminary injunction is an extraordinary remedy that should not be granted except upon a clear showing that there is a likelihood of success and irreparable injury, Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319, 323 (2d Cir.), cert. denied, 394 U.S. 999, 89 S.Ct. 1595, 22 L.Ed.2d 777 (1969); Sanders v. Air Line Pilots Ass’n Int’l, 473 F.2d 244, 248 (2d Cir. 1972), or that there is an important and difficult issue to be determined justifying more deliberate investigation and that the “balance of hardships tips decidedly toward the party requesting the temporary relief.” Checker Motors Corp. v. Chrysler Corp., supra, 405 F.2d at 323; Gulf & Western Industries, Inc. v. Great A. & P. Tea Co., Inc., 476 F.2d 687, 692-99 (2d Cir. 1973); San Filippo v. United Bro. of Carpenters & Joiners, 525 F.2d 508 (2d Cir. 1975).

Whatever DMI’s chances of success on the merits of its claims may be, an issue upon which we express no opinion, we are hard pressed to find any irreparable harm which is causally related to USL’s reliance on its contractual rights. DMI has made absolutely no showing that it could not have disposed of the mechanic’s liens without the district court’s prior assurance that USL’s refusal to consent would be an invalid defense to an action on the policy. There may be very practical reasons why this procedure may be unavailable to DMI, but it has made no showing of such reasons on the record of this case. DMI’s sole claim throughout has been that it cannot secure nor can it advance any more funds toward the project’s completion until the mechanic’s liens have been discharged. That may be so; but, if DMI wishes the Sleepy Hollow project to move ahead, it has the right to settle with the mechanic’s lienors, despite the opposition of USL, and to litigate the effect of the settlement upon its contractual rights at trial. We make no present determination as to what effect, if any, such a settlement will have upon DMI’s eventual right of indemnity under its title policy or on its claim against USL based upon negligence and bad faith. This determination must await full development of all the facts. Our holding now is limited to a declaration that on the facts presented by affidavit to the District Court, USL should not have been precluded by a preliminary injunction order from relying in the future on the lawful provisions of its insurance contract.

We are, of course, reluctant to disturb the order of the district court which is substantially one of discretion. However, as in Dopp v. Franklin National Bank, 461 F.2d 873 (2d Cir. 1972), this is not a case where there was an evidentiary hearing below and the credibility of witnesses played an essential part in the District Judge’s determination, and we therefore exercise more latitude in review. See also San Filippo v. United Bro. of Carpenters & Joiners, supra. We have concluded that the affidavits submitted in support of DMI’s motion for a preliminary injunction showed insufficient casually related irreparable injury to support the District Judge’s order which permanently deleted from the title insurance policy those provisions giving the insurer the control of litigation and settlement and that it was an abuse of discretion for the District Judge to grant such final relief in this interim order.

Finally, although DMI could very well have cooperated with USL in the state foreclosure suits and perhaps have had a resolution of the priority question in its favor many months ago, DMI was not precluded from federal suit. Its complaint against USL, seeking damages for negligence and bad faith as well as declaratory relief, states a cause of action. USL’s motion to dismiss the complaint was properly denied.

We reverse that part of the district court order granting plaintiff-appellee preliminary injunctive relief and affirm that part of the order denying defendant-appellant’s motion to dismiss the complaint.⁶

1 . In addition to issuing a title policy, USL also attended to the filing of the mortgage papers.

2 . On the facts submitted to him by affidavit, the District Judge was correct in refusing to order USL to discharge the mechanic’s liens. A title insurance policy is a contract of indemnity, not of guaranty. Such a policy entitles the insured to indemnity only to the extent that its security is impaired and to the extent of the resulting loss which it sustains. 45 C.J.S. Insurance § 969 at 1162 (1946); 13 Couch on Insurance 2d § 48:108 at 582 (1965); Annot., 60 A.L.R.2d 872, 976 (1958); Grimsey v. Lawyers Title & Ins. Corp., 38 A.D.2d 572, 328 N.Y.S.2d 474 (2d Dep’t 1971) (mem.), modified on other grounds, 31 N.Y.2d 953, 341 N.Y.S.2d 100 (1972) (mem.); Goode v. Federal Title & Ins. Corp., 162 So.2d 269 (Fla.Ct.App.1964); Ring v. Home Title Guaranty Co., 168 So.2d 580 (Fla.Ct.App.1964); Sattler v. Philadelphia Title Ins. Co., 192 Pa.Super. 337, 162 A.2d 22 (Super.Ct.1960); Wheeler v. Equitable Trust Co., 221 Pa. 276, 70 A. 750 (1908). Because there are unresolved issues as to the value of the mortgaged property and the priority and provability of liens, determination of the extent of the insurer’s obligation must await trial.

3 . “This company shall have the right and may, at its own cost, maintain or defend any action or proceeding relating to the title or interest hereby insured, or upon or under any covenant or contract relating thereto which it considers desirable to prevent or reduce loss hereunder.”

4 . “In all cases where this policy requires or permits this company to prosecute or defend, the insured shall secure to it the right and opportunity to maintain or defend the action or proceeding, and all appeals from any determination therein, and give it all reasonable aid therein, and hereby permits it to use therein, at its option, its own name or the name of the insured.”

5 . “No claim for damages shall arise or be maintainable under this policy . . for liability voluntarily assumed by the insured in settling any claim or suit without the written consent of this company.”

6 . We are unable to accept the dissent’s eleventh hour contention that this Court lacks jurisdiction to adjudicate the instant appeal. Neither the terminology utilized nor the substance of the order permit the conclusion that Judge Weinfeld’s order was intended to constitute a partial grant of the declaratory judgment ultimately sought. The relief applied for below by plaintiff was cast in the form of a claim for preliminary injunction. See Abercrombie & Fitch Co. v. Hunting World, Inc., 461 F.2d 1040, 1043 (2d Cir. 1972) [Timbers, C. J., concurring]. More importantly, Judge Weinfeld’s order speaks clearly in terms of “preserving” the rights of the litigants “during the pendency of this action.” The obvious intention of 28 U.S.C. § 1292(a)(1) was to permit an appeal from just such an interlocutory order that “temporarily” grants part or all of the ultimate relief prayed for in the complaint. 9 Moore’s Federal Practice ¶ 110.20[1] at 232 (1975).