Daily Development for Monday, April 26, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

TITLE INSURANCE; COVERAGE; DUTY TO DEFEND: Insured lender's security interest in personal property is not covered by a title insurance policy, even where the policy description of the 'insured interest' and the insured deed of trust contain references to personal property

In The Matter Of: Biloxi Casino Belle, Inc. (First American Title Insurance Co. v. First Trust National Association), ___ F.3d ___ (5th Cir. 2004).

Through an attorney agent, First American issued title insurance in connection with projects for construction of "floating casinos" in Tunica and Biloxi, Mississippi. The Tunica casino boat was to be built on site, while the Biloxi boat was to be built in Gulfport and later towed to its permanent site in Biloxi.

To finance these projects, Belle Casinos, Inc. ("BCI") issued $75 million in mortgage notes, underwritten by Bear Stearns & Co. The notes were issued under an indenture agreement between BCI as issuer/borrower and First Trust National Association ("First Trust") as indenture trustee for the holders of the mortgage notes. It was the responsibility of First Trust to oversee disbursements and construction of the two projects, and generally protect the interests of the mortgage holders. In furtherance of these responsibilities, First Trust relied on Bear Stearns to arrange for loan policies of title insurance through our attorney agent and, in turn, Bear Stearns was represented by the law firm of Gibson, Dunn & Crutcher ("Gibson Dunn").

Ultimately, these projects would fail, but only the Biloxi project is involved in this case.

With respect to the Biloxi project, the title agent closed the loan transaction and issued a First American commitment on or about October 12, 1993. About a month later, the agent forwarded the policy to Gibson Dunn. Of particular interest, the policy (at Schedule A, Item 4) identified "the instruments creating the estate or the interest in real estate which is hereby insured" by reference to an attached rider, which in turn listed a Leasehold Deed of Trust (intended to be insured) as well as various UCC-1 Financing Statements (not intended to be insured). The Leasehold Deed of Trust created security interests in leased land as well as the usual boilerplate list of personal property items, including "ships" and "boats." The UCC-1 Financing Statements described the same personal property, including "ships" and "boats."

The original policy submitted to Gibson Dunn was later revised with changes suggested by Gibson Dunn and by the agent. In the last revision, references to the UCC-1 Financing Statements were eliminated, leaving the Leasehold Deed of Trust as the only instrument listed under Schedule A, Item 4. The final policy was forwarded to First Trust.

Construction and operation of the Biloxi project was undertaken under sublease agreements by a subsidiary of BCI called Biloxi Casino Belle, Inc. ("BCBI"). Thus, BCI agreed to advance a portion of loan proceeds to BCBI, taking back BCBI's promissory note.

The projects were doomed by, among other things, cost overruns. In time, the lion's share of loan proceeds were exhausted by the Tunica project. When funding stopped, only the shell of the Biloxi boat had been built in Gulfport. In fact, the Biloxi boat was never finished and never towed to its intended site.

The general contractor for the Biloxi project was White Construction. In June 1994, White Construction filed a Mississippi statutory watercraft lien against the unfinished Biloxi boat. One month later, White Construction filed suit to enforce its lien and, in August 1994, BCI and BCBI filed Chapter 11 bankruptcy. Numerous lawsuits ensued, and were joined in the bankruptcy proceedings.

In October 1994, First Trust sent a letter to First American giving notice of the lien lawsuit. Seeing no coverage issue, First American acknowledged the letter and expressed understanding that First Trust was not requesting a defense to this lawsuit. At the time, First American and First Trust were both looking at the final policy, only. In fact, First Trust was not aware of differences between the final policy and its earlier version. So, at that time, First Trust did not press for coverage.

By December 1996, First Trust was aware of the original (erroneous) policy and now requested a defense against the lien claims. First American agreed to provide a defense, subject to a reservation of rights. Later, in March 1997, First American filed an adversary complaint in the BCBI bankruptcy, seeking a declaratory judgment that the claims of White Construction against First Trust were not covered by the title policy.

In March 2000, on cross-motions for summary judgment, the bankruptcy court held that First American was liable to First Trust in the amount of $1.4 million. In so holding, the court said the Biloxi boat was property covered by the original title policy, and subsequent revisions of the policy to state otherwise were unavailing because (a) Gibson Dunn did not have authority to agree to reduction of the coverage, and (b) deletion of references to the UCC-1 Financing Statements from the final policy was not done in accordance with the policy's Conditions and Stipulations, paragraph 14(c), requiring amendment of the policy by a writing to be attached to the policy and signed by a "validating officer or authorized signatory of the Company."

First American appealed, and the federal district court affirmed the bankruptcy court decision. Again, First American appealed.

The Court of Appeals (Fifth Circuit) reversed, holding that the title policy covers interests in land, only, and cannot be interpreted to cover what is purely personal property.

The Court approached the case as involving interpretation of contracts under Mississippi law, and concluded the title policy is "unambiguous." First, the Court discussed the insuring provision under which First Trust claimed coverage. This provision reads:
"First American Title Insurance Company...insures...
against loss or damage...incurred by reason of:

...
7. Lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material ...arising from an improvement or work related to the land...."

The Court explained the term "land" means the real property described in Schedule A of the policy, "but does not include property beyond the bounds of the area described in Schedule A." This excludes the boat under construction in Gulfport.

Likewise, and more importantly, the Court said the Biloxi boat cannot be covered "within the term 'insured mortgage'" as defined in the policy. In this connection, the Court cited policy Schedule A, Item 4, which describes the insured interest as follows:
"4. The instruments creating the estate or the interest in real estate which is hereby insured are described as follows:

SEE ATTACHED RIDER"

Turning to the "attached rider," the Court noted reference to the Leasehold Deed of Trust, which creates security interests in both real and personal property. Since Item 4 refers only to "real estate," the Court concluded it is not intended to cover the personal property component of the security given by the Leasehold Deed of Trust.

The Court emphasized that its holding could not be affected by references to UCC-1 Financing Statements in the original policy, because the policy so clearly covers only interests in "land," "real estate" and "real property." And the Court noted, the UCC-1 does not create security interests but instead "is a method of giving notice of the existence of a security interest created by a security agreement."

Since the allegations in the lien lawsuit were so "clearly outside of the policy's coverage," the Court concluded First American was not liable--not even for First Trust's costs of defense.

Reporterís Comment: This is a long-awaited and much-appreciated decision. For First American, it was mainly a fight over principles. The lower courts simply ignored the policy language, and failed to recognize the fundamental nature of title insurance.

It's also nice to know that not every error in a policy must be corrected by the method described in paragraph 14(c) of the Conditions and Stipulationss.

Another unusual thing here was involvement of the American Land Title Association. For the first time in the reporterís memory, ALTA appeared as amicus on a brief to present the title industry position in a lawsuit. This is done by state land title associations, from time to time, but not by ALTA.

Editorís Comment: The lower court opinion in this case was the subject of the DIRT DD for 7/16/03 (on the DIRT Website www.umkc.edu/DIRT)

The reporter for this item was Bert Rush writing in LandSakes - the First American in house newsletter.)

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.


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