Twin Cities Metro-Certified Development Company v. Stewart Title Guaranty Company, Stewart Title of Minnesota, Inc.

STATE OF MINNESOTA
IN COURT OF APPEALS
A14-1714
Twin Cities Metro-Certified Development Company,
Respondent,
vs.
Stewart Title Guaranty Company,
Appellant,
Stewart Title of Minnesota, Inc.,
Defendant.
Filed August 10, 2015
Reversed and remanded
Hooten, Judge
Hennepin County District Court
File No. 27-CV-14-561
Mark E. Duea, Christopher L. Olson, Geck, Duea & Olson, PLLC, White Bear Lake,
Minnesota (for respondent)
Brian M. Sund, Eric G. Nasstrom, Ryan R. Dreyer, Morrison Sund PLLC, Minnetonka,
Minnesota (for appellant)
Considered and decided by Hooten, Presiding Judge; Halbrooks, Judge; and
Reilly, Judge.
SYLLABUS
In order to sustain actual loss under a lender’s policy of title insurance, an insured
junior mortgagee must establish that, given the existence of a senior mortgage, equity
remained in the property that secured its loan.
OPINION
HOOTEN, Judge
On appeal from summary judgment, appellant insurer argues that respondent
insured sustained no loss under a lender’s title insurance policy and that the district court
erred in its interpretation of what constitutes a covered loss under the policy. Because the
district court misconstrued the definition of actual loss under the policy, we reverse and
remand.
FACTS
In October 2007, Red Wing Lodging obtained a $3.8 million loan from lender
Prime Security Bank to develop a hotel in Red Wing as part of a loan program run by the
United States Small Business Administration. In return, Red Wing Lodging granted a
mortgage on its real property in Red Wing (the Property) to Prime Security Bank.
In October 2008, respondent Twin Cities Metro-Certified Development Company
(TCM), acting as the loan servicer for the Small Business Administration, loaned Red
Wing Lodging $1.5 million in exchange for a mortgage on the Property. This junior
mortgage reduced the debt held by Prime Security Bank to $2,376,000. In connection
with its mortgage, TCM purchased a title insurance policy from appellant Stewart Title
Guaranty Company (Stewart),1 insuring TCM against “[a]ny defect in or lien or
encumbrance” upon its title to the Property. The policy specifically excluded from
1
While there are two Stewart Title companies named as parties in this action, the district
court dismissed Stewart Title of Minnesota from this suit, and that ruling was not
appealed by TCM. Therefore, “Stewart” will refer to the sole remaining defendant in this
action, Stewart Title Guaranty Company.
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coverage any “loss or damage” to TCM which arose from Prime Security Bank’s prior
mortgage.
In June 2009, a construction contractor filed a district court action seeking to
foreclose on its previously filed mechanic’s lien on the Property. Three other contractors
joined the suit, asserting similar mechanics’ liens on the Property. Prime Security Bank
defended against this action, but TCM was not a party. In August 2010, a district court
determined that all of the lien claims were valid and part of a single project that dated
back to March 23, 2007, prior to both the Prime Security Bank and TCM mortgages.
This district court entered judgments in the total amount of $252,927.07 in favor of the
lien claimants. Prime Security Bank then foreclosed on its mortgage and bought the
Property at a June 2011 sheriff’s sale for $2,462,048.54.
On July 15, 2011, TCM obtained an appraisal that valued the Property at $3.5
million. On December 8, 2011, TCM redeemed2 the Property from Prime Security Bank
for $2,391,551.51 and contemporaneously sold the Property for $3,505,175.62 to a third
party. The closing statement for the sale stated that the Property’s land and
improvements had a value of $2.35 million, with the remaining value of the sale derived
from personal property, goodwill, franchise rights, and signage. At the time, more than
$1.4 million in principal debt remained on TCM’s mortgage on the Property. As part of
the transaction, TCM was required to satisfy the outstanding mechanics’ lien judgments
2
TCM redeemed the Property under Minn. Stat. § 580.24(a) (2014), which gives junior
mortgagees and lienholders a limited period within which to redeem a mortgaged
property after the sheriff’s sale occurs and the mortgagor’s redemption period has
expired.
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in the amount of $265,362.71. In total, TCM claimed that it lost $576,510.01 in
connection with its redemption and sale of the Property.3 In April 2012, counsel for
TCM submitted an indemnification claim to Stewart for reimbursement of $265,362.71,
plus interest and attorney fees, under the title insurance policy. Stewart denied coverage.
On January 13, 2014, TCM sued Stewart, claiming that Stewart breached the title
insurance policy by failing to indemnify TCM for the mechanics’ lien judgments that
TCM had to satisfy before selling the Property. The parties brought cross-motions for
summary judgment, and the district court granted partial summary judgment in favor of
TCM. The district court concluded that TCM had suffered a covered loss under the title
insurance policy as a result of the liability resulting from the mechanics’ liens. Stewart
later stipulated to the dismissal of its remaining defenses regarding the circumstances of
TCM’s claim notice to Stewart, and the district court entered judgment in the amount of
$360,833.22 in favor of TCM, which included the amount of mechanics’ liens plus
prejudgment interest and attorney fees. This appeal followed.
ISSUES
I. Did the district court err by concluding that TCM suffered a covered loss
under the title insurance policy and by granting partial summary judgment in its favor?
3
Based upon the district court’s findings, TCM suffered this net loss according to the
following calculation:
$3,505,175.62 sale price of the Property
-$2,391,551.51 amount TCM paid to redeem the Property
-$ 265,362.71 satisfaction of mechanics’ lien judgments
-$1,424,771.41 outstanding debt on TCM’s mortgage of the Property
($576,510.01) net loss claimed by TCM
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II. Are there any remaining genuine issues of material fact?
ANALYSIS
On appeal, Stewart challenges the district court’s grant of partial summary
judgment in favor of TCM. “We review a district court’s grant of summary judgment de
novo to determine whether any genuine issue of material fact exists and whether the
district court erred in applying the law.” Larson v. Nw. Mut. Life Ins. Co., 855 N.W.2d
293, 299 (Minn. 2014). In conducting our review, we view the evidence in the light most
favorable to the nonmoving party. Remodeling Dimensions, Inc. v. Integrity Mut. Ins.
Co., 819 N.W.2d 602, 610 (Minn. 2012). “If issues of fact exist, the fact that the parties
have brought cross motions for summary judgment will not obviate the need for trial of
the factual questions.” St. Paul Fire & Marine Ins. Co. v. Nat’l Comput. Sys., Inc., 490
N.W.2d 626, 630 (Minn. App. 1992), review denied (Minn. Nov. 17, 1992).
I.
Stewart’s primary argument on appeal is that the district court erred in determining
that TCM suffered an insured loss under the terms of the title insurance policy. We
interpret insurance contracts de novo, including the issue of whether provisions in a
policy are ambiguous. Latterell v. Progressive N. Ins. Co., 801 N.W.2d 917, 920 (Minn.
2011). An insurance policy provision is ambiguous only when it is “reasonably subject
to more than one interpretation,” and we interpret unambiguous policy language “in
accordance with its plain and ordinary meaning.” Id. (quotations omitted). Any
ambiguities in the policy are construed in favor of the insured. Evelyn I. Rechtzigel Trust
ex rel. Rechtzigel v. Fid. Nat’l Title Ins. Co., 748 N.W.2d 312, 316 (Minn. App. 2008),
5
review denied (Minn. July 15, 2008). In a suit asserting the breach of a policy, “the
insured bears the initial burden of demonstrating coverage, [but] the insurer carries the
burden of establishing the applicability of exclusions.” Travelers Indem. Co. v.
Bloomington Steel & Supply Co., 718 N.W.2d 888, 894 (Minn. 2006). “Insurance
contract exclusions are construed narrowly and strictly against the insurer.” Id.The district court concluded, and the parties appear to agree, that the first-in-
priority mechanics’ liens that encumbered the Property were a risk covered by the policy.
The lender’s title insurance policy here insured TCM “against loss or damage . . .
sustained or incurred by the insured by reason of . . . [t]he lack of priority of the lien of
the Insured Mortgage upon the Title over any other lien or encumbrance.” Because the
mechanics’ liens had priority over, and thus encumbered, the title of the Property, the
liens were a risk insured against by the policy.
However, title insurance “does not guarantee that the covered condition does not
exist,” but rather serves to “indemnify the insured if the insured suffers any damages as a
result of the condition.” Mattson Ridge, LLC v. Clear Rock Title, LLP, 824 N.W.2d 622,
631 (Minn. 2012) (emphasis added); see also Gibraltar Sav. v. Commonwealth Land Title
Ins. Co., 905 F.2d 1203, 1205 (8th Cir. 1990) (“A title policy is a contract of indemnity,
not of guaranty, and provides reimbursement for actual loss only.” (quotation omitted)).
By issuing a title insurance policy, the insurer agrees “to indemnify the insured up to a
specified amount against loss caused by encumbrances upon or defects in the title to real
property in which the insured has an interest.” 1 Joyce Palomar, Title Ins. Law § 1:8, at
22 (2014–15 ed.). Here, the policy states that it “is a contract of indemnity against actual
6
monetary loss or damage sustained or incurred by [TCM] who has suffered loss or
damage by reason of matters insured against by this policy.” (Emphasis added.)
Accordingly, TCM will succeed on its coverage claim only if it suffered an actual loss
caused by a covered risk—the mechanics’ liens. The policy further limits this actual loss
to “the least of” (1) the amount of insurance, (2) the amount of debt secured by the
mortgage, or (3) “the difference in value of the Title as insured and the value of the Title
subject to the risk insured against by this policy.” This third clause controls the amount
of actual loss in this case, as neither party contends that the financial impact of the
mechanics’ liens on the value of the Property is greater than the amount of insurance or
mortgage debt.
Accordingly, it is crucial in this case to explain the difference in actual loss under
a title insurance policy purchased by the mortgagee of a property, like TCM, as opposed
to a title insurance policy purchased by the owner of a property. Under an owner’s policy
of title insurance, the actual loss of the insured is simply “the difference in value of the
[p]roperty as insured and its value without the defect in the title.” Mattson Ridge, 824
N.W.2d at 633 (emphasis added). This is because “[t]he fee interest of an owner is
immediately diminished by [the] presence of [a] lien since resale value will always reflect
the cost of removing the lien.” Blackhawk Prod. Credit Ass’n v. Chi. Title Ins. Co., 423
N.W.2d 521, 525 (Wis. 1988).
Citing Mattson Ridge, TCM urges that we affirm the district court’s calculation
that TCM suffered a loss of $265,361.71, which was the amount that the Property was
devalued by the mechanics’ liens. If TCM had been the Property’s owner and had
7
purchased an owner’s title insurance policy from Stewart, this actual loss calculation
would be correct; TCM would have suffered an actual loss under such a policy as soon as
the mechanics’ liens attached to the Property.
But, as straightforward as that analysis would be, it is incorrect in this case. The
formula provided in Mattson Ridge does not apply here because TCM is a mortgagee
insured by a lender’s title insurance policy. A mortgagee suffers actual loss under a
lender’s title insurance policy only to “the extent to which the insured debt is not repaid
because the value of security property is diminished or impaired by outstanding lien
encumbrances or title defects covered by the title insurance.” Cale v. Transamerica Title
Ins., 275 Cal. Rptr. 107, 109 (Cal. Ct. App. 1990); see also 11 Lee R. Russ & Thomas F.
Segalla, Couch on Insurance § 159:6 (3d ed. 2005) (“[T]he insured under such a policy
incurs loss only if the security for the loan proves inadequate to pay off the underlying
insured debt due to the presence of undisclosed defects.”). To recover for actual loss,
TCM needed to show not only that the Property was devalued due to the mechanics’
liens, but also that such a loss of value actually reduced the equity that TCM was able to
recover from the Property in satisfaction of its mortgage.
Ascertaining whether an actual loss occurred in this case is further complicated by
the fact that TCM was not the only mortgagee that became subject to the mechanics’
liens. TCM’s mortgage was junior to Prime Security Bank’s mortgage interest of $2.39
million, and the policy specifically excludes from coverage any losses or damages
“which arise by reason of” Prime Security Bank’s prior mortgage or from “[d]efects,
liens, encumbrances, adverse claims or other matters . . . resulting in no loss or damage to
8
the Insured Claimant.” The question we must resolve is whether the superior interest of
the Prime Security Bank mortgage, independent of the mechanics’ liens, could preclude
TCM from suffering any “actual monetary loss or damage” due to the encumbrance of
the mechanics’ liens.
TCM urges us to follow the reasoning of the district court, which concluded that
whether the Prime Security Bank mortgage subsumed the equitable value of the Property
is irrelevant under the policy, as “TCM experience[d] a loss . . . because of the insured
mechanics’ liens[,] not because of the uninsured [Prime Security Bank] mortgage.”
Stewart, on the other hand, argues that the calculation of actual loss begins and ends with
the Prime Security Bank mortgage that “consumed all of the . . . Property’s equity,”
leaving no equity in the Property for TCM to lose as a result of the mechanics’ liens.
This appears to be an issue of first impression in Minnesota. Accordingly we “may also
look for guidance from foreign jurisdictions that have addressed the issue.” Swanson v.
Swanson, 856 N.W.2d 705, 708 (Minn. App. 2014).
The weight of relevant authorities supports Stewart’s argument that TCM can only
recover under the policy if, when calculating the value of the mortgage without
accounting for the mechanics’ liens, the value of the property exceeded the uninsured-
against senior mortgage of Prime Security Bank so that the TCM mortgage remained
secured by some amount of equity. As explained by the Wisconsin Supreme Court:
If the interest held by [the insured] was valueless without the
superior lien, it cannot claim any lost value because the lien
existed. Conversely, if the security interest held by [the
insured] had established value, the greatest amount it can
recover as a mortgagee for the title defect under its policy of
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title insurance is the value of the interest held in the land up to
the stated policy limits of the insurance.
Blackhawk Prod. Credit Ass’n, 423 N.W.2d at 526. The Wisconsin Supreme Court
applied this formula because a junior mortgagee, like TCM, “has as security for its
mortgage only the mortgagor’s equity, the value of the mortgage[d] property in excess of
the amount of the first mortgage.” Id.; see also Karl v. Commonwealth Land Title Ins.
Co., 24 Cal. Rptr. 2d 912, 920 (Cal. Ct. App. 1993) (“Thus, [Lender] cannot make
[insurer] pay for his bad investment judgment in securing his loan with a hovel whose
value would not satisfy even the first lien.” (quotation omitted)), review denied (Cal.
Mar. 17, 1994); V. Woerner, Annotation, Measure, Extent, or Amount of Recovery on
Policy of Title Insurance, 60 A.L.R.2d 972, 996–98 (1958) (providing this rule and
collecting cases).
We hold that, in order for a junior mortgagee to sustain an actual loss under a
policy of lender’s title insurance, the junior mortgagee must retain equity in the
mortgaged property notwithstanding any defects in title covered by the policy. If the
junior mortgagee has already lost all equity in its property due to the presence of a senior
mortgagee or lienholder whose interest is excluded under the title insurance policy, the
junior mortgagee does not then suffer an actual loss when a covered title defect further
reduces the property’s value. In sum, because the title insurance policy insures the
repayment of the insured’s debt, the insured cannot suffer a loss if repayment of that debt
is already impossible due to a superior, excluded mortgage or lien that subsumes any
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equity that would otherwise be utilized to satisfy, in part or in whole, the insured’s
mortgage.
Applying this interpretation of the policy and viewing the facts in the light most
favorable to Stewart, the value of the Property was $2.35 million, as represented in the
December 2011 sale documents. Prime Security Bank’s mortgage interest was $2.39
million, as this was the amount TCM paid to redeem the Property. Under this set of facts,
no equity remained in the Property to secure TCM’s mortgage after Prime Security Bank
foreclosed its mortgage. Because the Property no longer held any remaining value with
which to satisfy that mortgage, it made no difference for the purpose of calculating actual
loss whether the Property was further encumbered by $265,362.71 in superior mechanics’
liens; TCM had no remaining equity to “lose” as the result of those liens and therefore
did not sustain an actual loss covered by the policy.
We conclude that the district court erred in its interpretation of the policy and, to
the extent that the district court’s grant of partial summary judgment in favor of TCM
was predicated upon this erroneous interpretation, we reverse the judgment.
II.
Stewart further contends that we should direct the district court to grant summary
judgment in its favor. Stewart argued to the district court that the Property was valued at
$2.35 million, relying on the December 2011 sales documents which allocated that
amount as the price of the land and buildings on the Property. TCM argued that the
Property should be valued at $3.5 million, and it asserts on appeal that it provided the
district court with evidence sufficient to establish a genuine issue of material fact
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regarding the Property’s value, which included a July 15, 2011 appraisal that indicated
that the Property was worth $3.5 million and an affidavit from a TCM loan servicing
officer noting that TCM had obtained this appraisal. Stewart claims that these documents
are insufficient to raise a genuine issue of material fact because they constitute
inadmissible hearsay and lack foundational reliability and proper authentication.
“Evidence offered to support or defeat a motion for summary judgment must be
such evidence as would be admissible at trial.” Hopkins by LaFontaine v. Empire Fire &
Marine Ins. Co., 474 N.W.2d 209, 212 (Minn. App. 1991). Ordinarily, we would review
the district court’s evidentiary ruling on admissibility for an abuse of discretion. Doe v.
Archdiocese of St. Paul, 817 N.W.2d 150, 164 (Minn. 2012). However, we are without
the benefit of a district court ruling on the admissibility of these documents or its ruling
on whether this evidence was sufficient to raise a genuine issue of material fact, as
resolution of these issues was unnecessary to the district court’s summary judgment
analysis. While the district court used Stewart’s proposed value for the Property in its
analysis, the district court noted that it accepted Stewart’s valuation “[b]ecause it d[id]
not change the outcome of this case” under the district court’s calculation of actual loss
under the policy.
But, because we now hold that actual loss under a lender’s title insurance policy
requires there to be equity in the property securing the subject mortgage, the resolution of
this case now hinges on the determination of whether there was remaining equity in the
Property after the satisfaction of Prime Security Bank’s mortgage interest. If TCM is
able to establish that the Property’s value was greater than Prime Security Bank’s
12
mortgage interest, independent of the mechanics’ liens on the Property, it will have
suffered actual loss under the policy to the extent that the mechanics’ liens reduced that
equity amount and accordingly reduced the satisfaction of TCM’s mortgage debt. See
Blackhawk Prod. Credit Ass’n, 423 N.W.2d at 526.
“[A] reviewing court generally may consider only those issues that the record
shows were presented to and considered by the [district] court.” Funchess v. Cecil
Newman Corp., 632 N.W.2d 666, 673 (Minn. 2001) (emphasis added). Because
Stewart’s evidentiary challenges were not addressed by the district court, we remand for
further proceedings, which may include the district court’s ruling on these disputed
evidentiary issues and a determination of whether there are any genuine issues of material
fact requiring resolution by trial. 4
DECISION
The district court erred in its interpretation of the lender’s title insurance policy
and its conclusion that TCM was entitled to recovery under the policy as a matter of law.
Accordingly, we reverse the district court’s grant of partial summary judgment in favor of
TCM and remand the case for further proceedings consistent with this decision.
Reversed and remanded.
4
We give no opinion on how the Property should be valued, given that the parties did not
argue or brief that issue before this court.
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