DIRT Development for Friday, September 12, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

TITLE INSURANCE; MECHANICS’ LIENS; PRIORITY: Absent clear and unambiguous language in a title insurance policy, a court will not interpret the provisions of the policy so as to limit coverage for loss or damage arising out of mechanic’s liens on “removable improvements” and fixtures. GCI GP, LLC v. Stewart Title Guaranty Co., ___ S.W.3d ___, 2009 Westlaw 943777 (Tex. Ct. App. 2009).

Paul Frame (“Frame”) bought a residence in 1997 and hired Aspen Custom Builders (“Aspen”) for certain renovations.  On August 24, 2001, while the renovations were still being made, Frame executed a promissory note in the amount of $4,319,731.39 to Comerica Bank-Texas (“Comerica”), which was secured by a deed of trust.  In September 2001, Comerica purchased a mortgagee title insurance policy from Stewart Title Guaranty Co. (“Stewart Title”).  Aspen performed work on the house until 2003 when it stopped due to non-payment and filed a mechanic’s lien against the property.  Also in 2003, Frame defaulted on the promissory note, and on August 12, 2003, Comerica noticed the property for foreclosure sale.  On August 29, 2003, Aspen filed suit against Frame and Comerica.  On the same day, Comerica sold the note and deed of trust to GCI GP, LLC (“GCI”) for $4,000,000.  On September 2, 2003, GCI proceeded with the scheduled foreclosure sale and purchased the property for $2,000,000.  Aspen t

hen amended its suit naming GCI as a party.

In its suit, Aspen claimed it had a contract with Frame to make improvements to the house, and that the labor it performed commenced on June 18, 1997, and therefore the inception date of Aspen’s mechanic’s lien predated Comerica’s note and the date of the title policy.  Aspen sought a declaratory judgment that its lien was superior to Comerica’s note.  Alternatively, Aspen sought foreclosure on the fixtures that could be removed without damage if the trial court found that Comerica’s lien was superior to Aspen’s.  Here is the text of this alternative plea for relief:

“foreclosure on the fixtures that could be removed without damage, including palm trees, pool equipment, air conditioning units, electrical control panels, appliances, wine cooler units, a fireplace mantel, decorative columns, mahogany columns and paneling, custom carved moldings, an elevator, light fixtures, bathtubs or whirlpools, stained glass domes and panels, window treatments, a steam unit, a dry sauna, water heaters, safes, cabinets, marble or granite or composite countertops, plumbing valves and fixtures, exterior stone (not installed), antique entry doors, wrought-iron fencing, landscape plants, carpet in the guest house, and windows and doors.”

Concurrently, GCI demanded that Stewart Title provide indemnification against Aspen’s claims and a defense to Comerica and GCI. Stewart Title provided counsel to defend GCI, but limited such counsel’s representation to defending GCI, as it refused to prosecute a counterclaim filed by GCI in the lawsuit.  After reviewing the facts of the case, a Stewart Title attorney informed GCI that the mechanics lien on the property had been extinguished by the foreclosure sale, but that Aspen may have a claim as to the “removables.” Stewart Title also informed GCI that “removables” may not be covered under GCI’s policy.  According to GCI, Stewart Title informed GCI that it would contribute “zero” to any settlement reached between GCI and Aspen.  Nonetheless, GCI entered into a settlement agreement with Aspen regarding Aspen’s liens wherein GCI agreed to pay $300,000 in exchange for Aspen’s dismissal of all claims against GCI with prejudice and a release of liens.

On December 30, 2003, Stewart Title sent a letter to GCI denying coverage related to the settlement payment, prompting GCI to sue Stewart Title for breach of the insurance contract and its duty of good faith and fair dealing.  Stewart Title filed a motion for summary judgment, asserting that the title policy did not cover suits filed by contractors who were not paid for “removable” improvements that could be removed without causing material damage to the property and contending that the items subject to Aspen’s claims were personal property and therefore not covered by the policy.  Stewart Title’s arguments were premised on the contention that the title policy only covers “risks and claims ‘against the land that is insured.’”  The policy also defined land as “the land described [in the policy], and improvements affixed thereto that by law constitute real property.” GCI filed its own motion for summary judgment, asserting that the policy insured it against “loss or damage sustained

 by the lack of priority of [its] lien,” and, alternatively, that coverage still existed for “removables” because they are no longer personal property once affixed to the land. The trial court granted Stewart Title’s motion for summary judgment, and GCI appealed.

On appeal, the court looked closely at the construction of the title insurance policy, focusing on two of the eight specifically-provided circumstances which would result in Stewart Title indemnifying GCI for loss or damages.  One provision of the policy stated that Stewart Title would indemnify GCI for losses incurred by reason of “[t]he priority of any lien or encumbrance over the lien of the insured mortgage.” A second provision stated that Stewart Title would indemnify GCI for losses incurred due to the “[l]ack of priority of the lien of the insured mortgage over any statutory or constitutional mechanic’s, contractor’s, or materialman’s lien for labor or material having its inception on or before Date of Policy.” 

In analyzing these provisions, the court first noted the general rule of construction in interpreting Texas insurance contracts: courts must “consider the entire contract ‘in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless.’”  With respect to insurance contracts, courts generally “adopt the interpretation that most favors coverage.”  The court noted that an “intent to exclude coverage must be expressed in ‘clear and unambiguous language.’”  Applying these general principles, the court concluded that interpreting the entire title policy as limiting coverage of loss or damage to only “risks and claims ‘against the land that is insured’” would be too narrow an interpretation and would be unsupported by the plain language of the policy, and to do so would have nullified the specific coverage of the policy and rendered it meaningless.

Accordingly, the court looked to Texas statutory and case law to determine the priority of the liens in question, and what effect “removables” have on such priority.  After reviewing Texas case law, the court held that mechanics liens have priority “over a prior lien, encumbrance, or mortgage on the land when improvements made could be removed without material injury to the land . . .,” and concluded that the subject policy, which specifically covered mechanic’s liens, was intended to indemnify for loss or damage arising out of mechanic’s liens on “removable improvements” (including fixtures).

Comment: Reading between the lines, it appears that Texas law permitted GCI’s mortgage to prime the mechanic’s lien on the land itself, but not on the “removables.”  Missouri has a somewhat similar “bifurcated” lien concept. 

One of the problems in the case, which the editor could not resolve by studying the opinion, is the distinction in Texas between “removables” and “fixtures.”  First, it seems clear that GCI’s lien covered land, including items that, outside of Texas at least, would be fixtures, and that typically some things that are fixtures can be removed without damage to the land, and could be termed “removables.”

It also seems clear that Aspen’s lawsuit involved lots of things that in fact constituted fixtures, at least at common law. Look at the list in Aspen’s complaint, quoted above. It may be, though, that Texas mechanic’s lien law has a definition of “removables” that excludes all fixtures.  This doesn’t appear so from the language or outcome of the case, but it may have been uncertainty about this issue that led Stewart Title to deny coverage.

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