Equity Income Partners, Lp v. Chicago Title Insurance Comp.

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
EQUITY INCOME PARTNERS, LP, an No. 14-15388
Arizona Limited Partnership;
GALILEO CAPITAL PARTNERS D.C. No.
LIMITED, a Cayman Islands 2:11-cv-01614-
Exempted Company, SMM
Plaintiffs-Appellants,
v. ORDER
CERTIFYING
CHICAGO TITLE INSURANCE QUESTIONS TO
COMPANY, a Delaware THE ARIZONA
Corporation, SUPREME
Defendant-Appellee. COURT
Filed July 12, 2016
Before: Andrew J. Kleinfeld, Johnnie B. Rawlinson,
and Andrew D. Hurwitz, Circuit Judges.
Order
2 EQUITY INCOME PARTNERS V. CHICAGO TITLE
SUMMARY *
Certification to Arizona Supreme Court
The panel certified the following questions of law to the
Arizona Supreme Court pursuant to Ariz. Rev. Stat. § 12-
1862:
1. When a lender purchases property by
full-credit bid at a trustee’s sale, does
Section 9 [of the standard form lender’s
title insurance policies] apply, or does
Section 2 apply?
2. Is a full-credit bid at a trustee’s sale a
“payment” or “payment[] made” under
sections 2 or 9 of the policies?
3. To what extent does a full-credit bid at a
trustee’s sale either (a) terminate
coverage under section 2(a)(i) of the
policies, or (b) reduce coverage under
Section 2 and any possible liability under
section 7?
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
EQUITY INCOME PARTNERS V. CHICAGO TITLE 3
ORDER
The issue for decision in this diversity case is whether a
lender’s full-credit bid at an Arizona trustee’s sale
constitutes payment under a lender’s title insurance policy.
Arizona law is dispositive, but unsettled. We therefore
request the Arizona Supreme Court to interpret, under
Arizona law, the provisions of a standard form lender’s title
insurance policy. See Ariz. Rev. Stat. §§ 12-1861 to -1867;
Ariz. Sup. Ct. R. 27.
I. Factual and Procedural Background
We summarize the material facts and procedural history
as they relate to the questions to be certified.
In May 2006, Scott Mead and Keith Vertes
(“Borrowers”), obtained two $1.2 million loans from Equity
Income Partners Limited Partnership (“Equity”) to purchase
two adjacent parcels (the “Properties”) in Maricopa County,
Arizona. LER 6, 174–83, 343, 351; IER 19–30. 1 The loans
were each secured by deeds of trust. 2 LER 187, 198. At the
time, the Properties were collectively appraised as worth
over $3,000,000. IER 54–77. Borrowers purchased owner’s
title insurance from Transnation Title Insurance Company;
LER 14, 169; Lenders purchased an American Land Title
Association Loan Policy (10-17-92) with ALTA
1
The Lenders’ excerpts of record are denominated “LER __” and the
Insurer’s excerpts of record are denominated “IER __.”
2
The deeds of trust were each recorded with an assignment of
beneficial interest of an undivided eighty percent interest to Galileo
Capital Partners, Ltd. IER 19–29, 32–53, 79, 91. We refer to Equity and
Galileo collectively as “Lenders.”
4 EQUITY INCOME PARTNERS V. CHICAGO TITLE
Endorsement – Form 1 Coverage from Ticor Title Insurance
Company. 3 IER 371–85. Ticor’s successor-in-interest is
Chicago Title Insurance Company (“Insurer”). IER 267.
In September 2006, Borrowers learned that they did not
have legal access to the Properties, and so informed
Transnation. LER 170, 287–88. Transnation sued Maricopa
County, the owner of the surrounding land, in an attempt to
establish access. IER 353.
In January 2007, Lenders submitted a claim to Insurer.
LER 310. In February 2007, Insurer denied the claim,
stating that Lenders had not provided evidence of “any
actual loss.” LER 311–12.
Borrowers failed to make payments on the loans. IER
134. In March 2007, Lenders noticed trustees’ sales for the
Properties. See Ariz. Rev. Stat. § 33-808; see also IER 501–
06. Shortly before the scheduled sales, Borrowers asked
Transnation to make the loan payments. IER 248–49. With
Lenders’ agreement, Transnation began making interest-
only monthly payments “until the access issue is resolved.” 4
IER 134–35.
In March 2010, the Superior Court found in favor of
Maricopa County in Transnation’s suit seeking access to the
Properties. IER 265. Transnation stopped making payments
3
The parties agree this is a standard form lender’s insurance policy; no
endorsements or exceptions are at issue.
4
At Borrowers’ request, Lenders extended the due date on the loans
from November 2007 to July 2011. IER 508–22, 136–147; LER 291–
302. The trustee’s sale was likewise postponed. LER 289–302; see Ariz.
Rev. Stat. § 33-810.
EQUITY INCOME PARTNERS V. CHICAGO TITLE 5
on the loans in August 2010, and Borrowers made no further
payments. 5 IER 267–68. On January 18, 2011, Lenders
purchased the Properties at two trustees’ sales through full-
credit bids totaling over $2.6 million.6 See Ariz. Rev. Stat.
§§ 33-810(A), 33-811 (providing for credit bids); see also
IER 536–37; LER 315, 324.
In October 2010, Lenders submitted a claim to Insurer
for the $1.2 million amount of each loan. LER 305–09. In
July 2011, Lenders filed this suit in Maricopa County
Superior Court; Insurer removed to the United States District
Court for the District of Arizona. LER 320–30, 355–65.
In August 2011, Insurer obtained an appraisal of the
Properties which set the diminution of value of the parcels
caused by the lack of ingress/egress at $343,000 as of the
foreclosure sale date. LER 127–29. Insurer issued Lenders
a check for that amount and stated that it considered the
matter concluded. LER 122–25, 128, 132.
In September 2012, the district court ruled that Lenders
“suffered loss at the time they made the loans in reliance
upon the Policies,” in 2006. LER 37–41.
Insurer then obtained appraisals for the diminution of
value of the Properties because of the lack of ingress or
egress as of the loan date, May 16, 2006; that diminution of
value was collectively appraised at $1,346,000. IER 743–
49.
5
By then, Lenders had been paid over $1.4 million in interest. IER
267–68.
6
The bids were for $1,310,315.84 and $1,310,409.34. IER 536–40.
6 EQUITY INCOME PARTNERS V. CHICAGO TITLE
On January 31, 2013, Insurer filed a motion for partial
summary judgment, arguing, inter alia, that Lenders’ full-
credit bids should be “treated as actual payments of the
principal of the indebtedness . . . thus reducing the amount
of title insurance.” IER 333–34. On February 1, 2013,
Lenders filed a second motion for partial summary
judgment, arguing that the loss amount was $1,003,000 – the
result of subtracting the $343,000 payment Insurer had
already made from the $1,346,000 diminution of value as of
May 16, 2006 in Insurer’s second appraisal. IER 714–20,
744, 748, 824.
On December 11, 2013, the district court granted
Insurer’s motion, ruling that Lenders’ “credit bids
constituted payments on the ‘principal of the indebtedness,’
thereby ‘reducing the amount of insurance pro tanto.’”
Memorandum of Decision and Order, Equity Income
Partners, L.P. v. Chi. Title Ins. Co., No. 2:11-cv-1614-SMM
(D. Ariz. Dec. 11, 2013) (“Decision and Order”), ECF No.
123 at 11 (alteration omitted) (quoting policy § 9(b)); see
also LER 16. Discussing a prior decision from the District
of Arizona, the district court said that “the Arizona Supreme
Court’s decision in Nussbaumer [v. Superior Court ex rel.
McGuire, 489 P.2d 843, 845–46 (Ariz. 1971)] necessarily
assumes full-credit bids extinguish the debtor’s obligation to
lender.” Decision and Order at 12 (citing M & I Bank, FSB
v. Coughlin, 805 F. Supp. 2d 858, 867–68 (D. Ariz. 2011));
see also LER 17. Assuming it was “unambiguous” that the
amount of insurance under the policies was limited to “the
satisfaction of the underlying mortgage,” the court held that
by submitting full-credit bids, Lenders’ “payments to
themselves” reduced the amount of insurance to nothing,
because they had extinguished “the security interest and
EQUITY INCOME PARTNERS V. CHICAGO TITLE 7
borrower’s debt.” Decision and Order at 13; see also LER
18. 7
At the parties’ request, the court entered final judgment
“with respect to the entire breach of contract claim” and
stayed further proceedings. Order, Equity Income, No. 2:11-
cv-1614-SMM, ECF No. 127 at 4; see also IER 1195.
Lenders timely appealed the district court’s grant of partial
summary judgment to Insurer to the Ninth Circuit. LER 420.
II. Policy Language
The Insurer’s policy “insures . . . against loss or damage,
not exceeding the Amount of Insurance . . . sustained or
incurred by the insured by reason of . . . [u]nmarketability of
the title; [or] [l]ack of a right of access to and from the
land.” 8 IER 371. Section 9 of the policy states:
9. Reduction of Insurance; Reduction or
Termination of Liability
(a) All payments under this policy, except
payments made for costs, attorneys’ fees
and expenses, shall reduce the amount of
the insurance pro tanto. However, any
payments made prior to the acquisition of
7
See Decision and Order at 13 (citing A.R.S. §§ 33-801(5), 33-814(D);
M & I Bank, FSB v. Coughlin, 805 F. Supp. 2d 858, 865–68 (D. Ariz.
2011); ING Bank, FSB v. Mata, 2:09-cv-748-GMS, 2009 WL 4672797,
at *4–6 (D. Ariz. Dec. 3, 2009); 333 W. Thomas Med. Bldg. Enters. v.
Soetantyo, 976 F. Supp. 1298, 1301 (D. Ariz. 1995); and Nussbaumer v.
Superior Court ex rel. McGuire, 489 P.2d 843, 845–46 (Ariz. 1971)).
8
There are two title insurance policies, one for each parcel, with
identical terms. IER 363–85.
8 EQUITY INCOME PARTNERS V. CHICAGO TITLE
title to the estate or interest as provided in
Section 2(a) of these Conditions and
Stipulations shall not reduce pro tanto the
amount of the insurance afforded under
this policy except to the extent that the
payments reduce the amount of the
indebtedness secured by the insured
mortgage.
(b) Payment in part by any person of the
principal of the indebtedness, or any other
obligation secured by the insured
mortgage, or any voluntary partial
satisfaction or release of the insured
mortgage, to the extent of the payment,
satisfaction or release, shall reduce the
amount of insurance pro tanto. The
amount of insurance may thereafter be
increased by accruing interest and
advances made to protect the lien of the
insured mortgage and secured thereby,
with interest thereon, provided in no
event shall the amount of insurance be
greater than the Amount of Insurance
stated in Schedule A.
(c) Payment in full by any person or the
voluntary satisfaction or release of the
insured mortgage shall terminate all
liability of the Company except as
provided in Section 2(a) of these
Conditions and Stipulations.
IER 374. In turn, section 2, titled “Continuation of
Insurance,” provides:
EQUITY INCOME PARTNERS V. CHICAGO TITLE 9
(a) After Acquisition of Title. The coverage
of this policy shall continue in force as of
Date of Policy in favor of (i) an insured who
acquires all or any part of the estate or interest
in the land by foreclosure, trustee’s sale,
conveyance in lieu of foreclosure, or other
legal manner which discharges the lien of the
insured mortgage; [or] (ii) a transferee of the
estate or interest so acquired from an insured
corporation, provided the transferee is the
parent or wholly-owned subsidiary of the
insured corporation, and their corporate
successors by operation of law and not by
purchase, subject to any rights or defenses the
Company may have against any predecessor
insureds. . . .
....
(c) Amount of Insurance. The amount of
insurance after the acquisition or after the
conveyance shall in neither event exceed the
least of: (i) the Amount of Insurance stated
in Schedule A; [or] (ii) the amount of the
principal of the indebtedness secured by the
insured mortgage as of Date of Policy,
interest thereon, expenses of foreclosure,
amounts advanced pursuant to the insured
mortgage to assure compliance with laws or
to protect the lien of the insured mortgage
prior to the time of acquisition of the estate or
interest in the land and secured thereby and
reasonable amounts expended to prevent
deterioration of improvements, but reduced
by the amount of all payments made . . . .
10 EQUITY INCOME PARTNERS V. CHICAGO TITLE
IER 372–73. Other potentially relevant policy provisions
are sections 7 and 10. Section 7 provides:
7. Determination and Extent of Liability
This policy is a contract of indemnity against
actual monetary loss or damage sustained or
incurred by the insured claimant who has
suffered loss or damage by reason of matters
insured against by this policy and only to the
extent herein described.
(a) The liability of the Company under this
policy shall not exceed the least of: (i) the
Amount of Insurance stated in Schedule A,
or, if applicable, the amount of insurance as
defined in Section 2(c) of these Conditions
and Stipulations; (ii) the amount of the
unpaid principal indebtedness secured by the
insured mortgage as limited or provided
under Section 8 of these Conditions and
Stipulations or as reduced under Section 9 of
these Conditions and Stipulations, at the time
the loss or damage insured against by this
policy occurs, together with interest thereon;
or (iii) the difference between the value of the
insured estate or interest as insured and the
value of the insured estate or interest subject
to the defect, lien or encumbrance insured
against by this policy.
(b) In the event the Insured has acquired the
estate or interest in the manner described in
Section 2(a) of these Conditions and
Stipulations or has conveyed the title, then
EQUITY INCOME PARTNERS V. CHICAGO TITLE 11
the liability of the Company shall continue as
set forth in Section 7(a) of these Conditions
and Stipulations.
IER 373. Section 10 provides:
10. Liability Noncumulative
If the insured acquires title to the estate or
interest in satisfaction of the indebtedness
secured by the insured mortgage, or any part
thereof, it is expressly understood that the
amount of insurance under this policy shall
be reduced by any amount the Company may
pay under any policy insuring a mortgage to
which exception is taken in Schedule B
[listing 2006 tax liens, water rights, items on
a boundary survey, etc., see IER 378] or to
which the Insured has agreed, assumed, or
taken subject, or which is hereafter executed
by an insured and which is a charge or lien on
the estate or interest described or referred to
in Schedule A [listing Borrower’s mortgage],
and the amount so paid shall be deemed a
payment under this policy.
IER 374.
III. Parties’ Arguments
Lenders argue that the district court erred because
(1) section 9 of the policy does not define “payment” and,
because the policies were drafted by Insurer, the word must
be interpreted in Lenders’ favor because their full-credit bid
did not involve the payment of any money, and (2) the
court’s holding “is in direct conflict with the provisions of
12 EQUITY INCOME PARTNERS V. CHICAGO TITLE
Section 10 of the Policies” which make “clear that even if
the insured releases its insured mortgage in exchange for title
to the secured property, coverage under the policy is not
extinguished; it is simply subject to being reduced by any
payments the insurer may make on other excepted
mortgages or prior, superior liens.”
Insurer, on the other hand, argues that the district court
“correctly concluded that by acquiring the Property by full
credit bids, Equity effectively paid to itself the outstanding
balance of the debt, as well as interest and the costs of
foreclosure, in exchange for title to the property.” Because
Lenders were paid in full, Insurer argues, “Equity’s full-
credit bids at the trustee’s sale reduced Equity’s
compensable damages under the title insurance policies to
zero.”
IV. Certified Questions and Further Proceedings
Based on the foregoing, we respectfully certify the
following questions to the Arizona Supreme Court pursuant
to Ariz. Rev. Stat. § 12-1862:
1. When a lender purchases property by
full-credit bid at a trustee’s sale, does Section
9 apply, or does Section 2 apply?
2. Is a full-credit bid at a trustee’s sale a
“payment” or “payment[] made” under
sections 2 or 9 of the policies?
3. To what extent does a full-credit bid at a
trustee’s sale either (a) terminate coverage
under section 2(a)(i) of the policies, or
(b) reduce coverage under Section 2 and any
possible liability under section 7?
EQUITY INCOME PARTNERS V. CHICAGO TITLE 13
Our framing of the questions is not intended to restrict the
Arizona Supreme Court’s consideration of these issues and
the Court should reformulate the questions presented as it
sees fit. Amaker v. King Cty., 540 F.3d 1012, 1019 (9th Cir.
2008).
The Clerk of Court is hereby ordered to transmit
forthwith to the Arizona Supreme Court, under official seal
of the United States Court of Appeals for the Ninth Circuit,
the original and six copies of this order; at the request of the
Clerk of the Arizona Supreme Court, the Clerk of Court shall
transmit copies of such portions of the record as the Arizona
Supreme Court deems necessary to a determination of the
certified questions.
Further proceedings in the Ninth Circuit are stayed
pending the Court’s decision on whether it will accept
review, and if so, receipt of the answer to the certified
questions. The case is withdrawn from submission until
further order. The panel will resume control and jurisdiction
over the case and the certified questions either when the
Court answers the certified questions or declines to answer
the questions. The parties shall file a joint report informing
this court of the Arizona Supreme Court’s decision to
decline to answer, or, of its answers to the certified
questions.
V. Counsel of Record
Counsel of record for Plaintiffs-Appellants are as
follows:
Dennis I. Wilenchik
Tyler Quinn Swensen
Wilenchik & Bartness PC
2810 North Third Street, Suite 103
14 EQUITY INCOME PARTNERS V. CHICAGO TITLE
Phoenix, Arizona 85004
Phone number (602) 606-2810
Counsel of record for Defendants-Appellees are as
follows:
Daniel E. Fredenberg
Fredenberg Beams
4747 N. 7th Street, Suite 402
Phoenix, Arizona 85014
Phone number (602) 595-9299
Patrick J. Davis
Nathaniel B. Rose
Fidelity National Law Group
2355 E. Camelback Road, Suite 900
Phoenix, Arizona 85016
Phone number (602) 889-8150
It is so ORDERED.
Johnnie B. Rawlinson
United States Circuit Judge, Presiding