Deutsche Bank v. Stewart Title 12-CV-106-JD 01/31/13 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Deutsche Bank National Trust Company

v. Civil No. 12-cv-106-JD Opinion No.

Stewart Title Guaranty Company

O R D E R

Deutsche Bank National Trust Company ("Deutsche Bank") seeks

a declaratory judgment pursuant to RSA 491:22 that Stewart Title

Guaranty Company ("Stewart Guaranty") must provide title

insurance coverage for the quiet title action filed against

Deutsche Bank by Adel Fadili, Fadili v. Deutsche Bank. 12-cv-68- JD (D.N.H. February 22, 2012). Stewart Guaranty moves for

judgment on the pleadings on the ground that Exclusion 3 (a) in

the policy precludes coverage. Deutsche Bank objects.1

1Stewart Guaranty filed a reply, and Deutsche Bank's motion to file a surreply is granted. The surreply was considered here. Standard of Review

After filing an answer to the complaint, a party may move

for judgment on the pleadings.2 Fed. R. Civ. P. 12(c) . The

court uses the same standard as is used for a motion to dismiss

under Federal Rule of Civil Procedure 12(b)(6). Collins v. Univ.

of N.H..

, 13 (1st Cir. 2011). Under the applicable

standard, the court takes the well-pled allegations as true,

views all of the facts in the light most favorable to the non­

moving party, and determines whether the complaint alleges facts

to support a claim "that is plausible on its face." Downing v.

Glove Direct LLC,

(1st Cir. 2012) (internal

quotation marks omitted).

Background

This case and two related cases arose from the sale of property within the Fadili family in which the sellers intended

to sell, the buyers intended to buy, and the mortgagee intended

to encumber a parcel containing a house, the House Lot, but the

deeds of conveyance and mortgage documents described a different

parcel, the Vacant Lot. The property is located in Alton, New

Hampshire.

2Although Stewart Guaranty titles its motion as a motion to dismiss, it had filed its answer before filing the motion.

2 In the first conveyance, Adel Fadili sold property to his

son, Amir Fadili, in 2002, intending to sell the House Lot.

Stewart Title Company prepared the warranty deed from Adel to

Amir, which described the Vacant Lot, not the House Lot. In

2006, Amir sold the property to his sister, Alia Fadili, again by

warranty deed that described the Vacant Lot. Alia obtained a

mortgage on the property through Long Beach Mortgage Company, and

the mortgage described the Vacant Lot.

Stewart Guaranty, which is alleged to be related to Stewart

Title Company, issued a loan title insurance policy to Long Beach

and its successors or assigns. The policy issued by Stewart

Guaranty listed the Vacant Lot as the property subject to Long

Beach's mortgage.

In October of 2002, just after Adel sold the property to

Amir, the Town of Alton issued a tax deed conveying the Vacant Lot to the town. Before Amir's sale to Alia, in October of 2005,

the Town of Alton issued a tax deed conveying the Vacant Lot to

Adel. Adel filed for bankruptcy protection in August of 2005,

and the Chapter 7 Trustee discovered that Adel was the record

owner of the House Lot, which was not encumbered by any liens.

The Trustee notified all interested parties that he intended to

sell the House Lot as part of the bankruptcy. Washington Mutual,

as servicer of the Long Beach mortgage, and Alia objected to the

3 sale of the House Lot. The Bankruptcy Court authorized the sale

of the House Lot, overruling the objections to the sale.

After the House Lot was sold, Deutsche Bank as the successor

to Long Beach brought suit against Alia, seeking to foreclose on

the mortgage on the Vacant Lot and seeking an award of damages

from Stewart Guaranty and Stewart Title for negligence and breach

of contract. Deutsche Bank v. Fadili, et al., 09-cv-385-JD (D.N.H. Nov. 16, 2009). In that action, Deutsche Bank

acknowledged that at the time of the sale in 2006, when the

mortgage was granted, it thought the mortgage encumbered the

House Lot, not the Vacant Lot. The court granted motions for

summary judgment filed by Stewart Guaranty and Stewart Title

Company, concluding that the negligence and breach of contract

claims against Stewart Title were barred by the statute of

limitation and failed on the merits and that the breach of contract claims against Stewart Guaranty failed on the merits.

The court denied Alia's motion for summary judgment, leaving

alive Deutsche Bank's claim for a declaratory judgment that it

held a mortgage on the Vacant Lot. The court stated, "[Deutsche

Bank] may not have intended to take a mortgage on the vacant lot,

but it surely intended to take a mortgage on some piece of

property to secure the loan it made to [Alia] Fadili."

Summary Judgment Order, doc. no. 76, at *45.

4 Adel filed a quiet title action in state court that was

removed to this court in which he claims a superior interest over

Deutsche Bank to the Vacant Lot and seeks to remove the mortgage

from the property. Fadili v. Deutsche Bank. 12-cv-68-JD (D.N.H. February 22, 2012). Deutsche Bank filed this suit for a

declaratory judgment that under the terms of the title insurance

policy issued to Long Beach, Stewart Guaranty must provide a

defense to Deutsche Bank and indemnification for losses incurred

in the quiet title action.3

Discussion

Deutsche Bank seeks a declaratory judgment that Stewart

Guaranty must provide indemnity and a defense for Deutsche Bank

in Adel's quiet title action. Stewart Guaranty moves for

judgment on the pleadings based on Exclusion 3 (a) in the policy

issued to Deutsche Bank. Deutsche Bank argues that the exclusion

does not apply.

In a declaratory judgment action brought pursuant to RSA

491:22 to determine insurance coverage, the insurer bears the

3Deutsche Bank is the successor in interest to Long Beach on the mortgage issued to Alia when she bought the property from her brother, Amir. To avoid confusion, the court will use Deutsche Bank to include Long Beach in referring to actions taken before Deutsche Bank became the successor in interest.

5 burden of showing that there is no coverage for the claim.

Rivera v. Liberty Mut. Fire Ins. Co..

(2012).

Under New Hampshire law, "an insurer's obligation to its insured

is determined by whether the cause of action against the insured

alleges sufficient facts in the pleadings to bring it within the

express terms of the policy." Progressive N. Ins. Co. v.

Argonaut Ins. Co.,

(2011). While insurers may limit coverage through exclusions, when asserting an exclusion to

avoid coverage, the insurer must show that it applies. Rivera,

. Therefore, the inquiry begins by examining the

policy language. Progressive,

.

The title insurance policy issued by Stewart Guaranty to

Deutsche Bank insures, subject to exclusions and exceptions,

"against loss or damage . . . sustained or incurred by the

insured by reason of," among other things: "1. Title to the estate or interest described in Schedule A being vested other than as stated therein; 2. Any defect in or lien or encumbrance

on the title; . . . [and] 5. The invalidity or unenforceability

of the lien of the insured mortgage upon the title." Policy,

Complaint Ex. 1, at 1. Exclusion 3(a) provides that "[t]he

following matters are expressly excluded from the coverage of

this policy and the Company will not pay loss or damage, costs,

attorneys' fees or expenses which arise by reason of: . . . 3.

6 Defects, liens, encumbrances, adverse claims or other matters:

(a) created, suffered, assumed or agreed to by the insured

claimant." Id. at 2.

"The 'created or suffered' exclusion is a standard one in

title insurance contracts, and it is apparently one of the most

litigated clauses in the field." Home Fed. Sav. Bank v. Ticor

Title Ins. Co.,

(7th Cir. 2012) (additional

quotation marks and citation omitted). The majority of courts

have held that "the 'created or suffered' language is intended to

protect the insurer from liability for matters caused by the

insured's own intentional misconduct, breach of duty, or

otherwise inequitable dealings . . . ."

Am. Title Ins. Co.

v. East West Fin..

(1st Cir. 1994). The

exclusion does not apply to mistakes, negligence, or shoddy

practices by the insured. Fifth Third Mortg. Co. v. Chicago Title Ins. Co.,

(6th Cir. 2012); Chicago

Title Ins, v. Resolution Tr. Corp..

(8th Cir.

1995). Further, for the exclusion to bar coverage, the insured

must have been aware of and must have agreed to the title defect

before the title insurance policy issued. See Stewart Title Guar. Co. v. Nat'l Enters., Inc.,

, at *2 (9th Cir.

Dec. 17, 1997); Walsh Sec., Inc. v. Cristo Prop. Mgmt., Ltd.,

, 421 (D.N.J. 2012) .

7 In the underlying action, Adel seeks a declaratory judgment

that he owns the Vacant Lot free of the mortgage, dated April 27,

2006, from Alia to Deutsche Bank. Count I, titled as a petition

to quiet title, asks that the cloud on the title to the Vacant

Lot caused by Deutsche Bank's mortgage be removed because of a

mutual mistake of fact about what property was being sold and was

subject to the mortgage; because the seller, buyer, and mortgagee

of the property did not intend the House Lot as the subject of

the conveyance; and because Alia did not have valid title to the

Vacant Lot when the property was mortgaged. Count II seeks a

declaration that the mortgage does not encumber the Vacant Lot on

the ground that Deutsche Bank did not intend to acquire a

mortgage on the Vacant Lot. Count III asserts that no mortgage

was created because Alia did not hold a valid title to the Vacant

Lot when the mortgage was received and recorded.

In its motion for judgment on the pleadings, Stewart

Guaranty asserts that Exclusion 3 (a) applies to bar title

insurance coverage because Deutsche Bank agreed "that the

mortgage does not encumber the Vacant Land [sic]." Stewart

Guaranty contends that Deutsche Bank agreed to the defect "that

the mortgage encumbers the House Lot not the Vacant Land."

Stewart Guaranty also argues that if Deutsche Bank "agreed to a

mortgage on a property other than that actually described in the

8 mortgage," then it agreed to the defect. Based on those

descriptions of the circumstances, Stewart Guaranty contends that

Exclusion 3 (a) applies because Adel can succeed in the quiet

title action only if he proves that Deutsche Bank intended the

mortgage to encumber the House Lot, not the Vacant Lot.

Deutsche Bank asserts that Stewart Guaranty's theory is

inapplicable in this case because Deutsche Bank did not

intentionally create or agree to the defect in title, which

exists because the wrong property description was provided by

Stewart Title. Deutsche Bank further argues that intentional

misconduct, not negligence, is required to implicate Exclusion

3(a). Because Adel's claims in the underlying action are based

on the parties' mistake about which property was being sold and

mortgaged and do not allege an intent or agreement to describe the wrong property in the conveyancing and mortgaging documents,

Deutsche Bank contends that coverage in the underlying action is

not barred by Exclusion 3 (a) .

As is stated above, Exception 3(a) applies to intentional

misconduct by an insured, not to negligence or mistake. A claim

in an underlying action, based on a mutual mistake of fact as to

what property was conveyed because of an error in the

conveyancing documents, does not implicate Exclusion 3(a). See First Am. Title Ins. Co. v. MacLaren, L.L.C.,

, at

9 *4-*5 (D. Del. Mar. 9, 2012); see also Mercantile-Safe Deposit &

Tr. Co. v. Chicago Title Ins. Co..

, at *8-*9 (D. Md. Mar. 20, 2007) .

The deed at issue in this case describes the Vacant Lot,

based on the property description provided by Stewart Title in

2002. As a result, Deutsche Bank's mortgage documents and

Stewart Guaranty's insurance policy for the 2006 conveyance also

describe the Vacant Lot. Neither the claims nor the allegations

in Adel's complaint in the underlying quiet title action suggest

that Deutsche Bank intended to obtain a mortgage on the Vacant

Lot or created, intended, or agreed to the alleged mistake in the

property description that lead to the current dispute.

Therefore, Exception 3(a) would not apply.

Stewart Guaranty argues, however, that Adel's quiet title

action is analogous to a situation when the buyer in a sale and leaseback transaction sought coverage from its title insurer for

an action brought against it by the property seller who was seeking to recharacterize the transaction as a mortgage rather

than a sale of the property. See Ticor Title Ins. Co. of Calif, v. FFCA/IIP 1988 Prop. Co..

(N.D. Ind.

1995). In that case, the court held that the claim in the underlying recharacterization action implicated Exclusion 3 (a)

because to succeed, the seller would have to show that the buyer

10 intended to obtain a mortgage on the property, rather than fee

simple as the deed showed. The court reasoned that if the buyer

intended to obtain a mortgage but knowingly participated in the

purchase and sale transaction, the buyer created, suffered,

assumed, or agreed to the defect in the title created by the

difference between the parties' alleged intent and the deed.

at 642 .

In this case, as alleged in the underlying action, the

parties agreed and intended to convey and mortgage the House Lot.

The defect occurred because the property description provided by

Stewart Title is allegedly inconsistent with the parties' intent.

Adel does not allege, nor will he need to prove, that Deutsche

Bank was aware of the mistake in the property description in 2006

at the time of the mortgage transaction or that Deutsche Bank

intentionally proceeded with the transaction, knowing it

pertained to the Vacant Lot, despite intending to obtain a

mortgage on the House Lot. Therefore, the circumstances in this

case are not analogous to those in Ticor Title, as argued by

Stewart Guaranty.

Stewart Guaranty has not carried its burden, for purposes of

its motion for judgment on the pleadings, of showing that

Exclusion 3 (a) applies in this case to bar coverage for Deutsche Bank in the underlying quiet title action.

11 Conclusion

For the foregoing reasons, the plaintiff's motion for leave

to file a surreply (document no. 27) is granted, and the

defendant's motion to dismiss (document no. 15) is denied.

SO ORDERED.

Uoseph A. DiClerico, Jr. United States District Judge

January 31, 2013 cc: Peter G. Callaghan, Esquire Edmond J. Ford, Esquire Kenneth D. Wacks, Esquire

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