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.
Reporter’s 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 reporter’s 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.
Editor’s 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.
Parties posting messages to DIRT are posting to a source that is readily
accessible by members of the general public, and should take that fact into
account in evaluating confidentiality issues.
ABOUT DIRT:
DIRT is an internet discussion group for serious real estate professionals.
Message volume varies, but commonly runs 5 15 messages per work day.
Daily Developments are posted every work day. To subscribe, send the message
subscribe Dirt [your name]
to
listserv@listserv.umkc.edu
To cancel your subscription, send the message signoff DIRT to the address:
listserv@listserv.umkc.edu
for information on other commands, send the message Help to the listserv
address.
DIRT has an alternate, more extensive coverage that includes not only commercial
and general real estate matters but also focuses specifically upon residential
real estate matters. Because real estate brokers generally find this service
more valuable, it is named “BrokerDIRT.” But residential specialist attorneys,
title insurers, lenders and others interested in the residential market will
want to subscribe to this alternative list. If you subscribe to BrokerDIRT, it
is not necessary also to subscribe to DIRT, as BrokerDIRT carries all DIRT
traffic in addition to the residential discussions.
To subscribe to BrokerDIRT, send the message
subscribe BrokerDIRT [your name]
to
listserv@listserv.umkc.edu
To cancel your subscription to BrokerDIRT, send the message signoff BrokerDIRT
to the address:
listserv@listserv.umkc.edu
DIRT is a service of the American Bar Association Section on Real Property,
Probate & Trust Law and the University of Missouri, Kansas City, School of Law.
Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of
Law, UMKC School of Law, but Professor Randolph grants permission for copying or
distribution of Daily Developments for educational purposes, including
professional continuing education, provided that no charge is imposed for such
distribution and that appropriate credit is given to Professor Randolph, DIRT,
and its sponsors.
DIRT has a WebPage at:
http://cctr.umkc.edu/dept/dirt/
-----
To be removed from this mailing list, send an email message to listserv@listserv.umkc.edu
with the text SIGNOFF BROKERDIRT.
Please email manager@listserv.umkc.edu if you run into any problems.
See <http://www.umkc.edu/is/cs/listserv/unsubscribing.htm> for more information.