December 2011 Vol. 4, No. 11

Of Note

Federal (Pennsylvania)

Title Insurance

Nationwide Life Ins Co v Commonwealth Land Title Ins Co, 2011 WL 611802 (ED Pa 2011).

Facts:In 1988, PMI Associates (PMI) purchased commercial property from Liberty Mills (later succeeded by Franklin Mills). The parties entered a Declaration of Restrictions (declaration) which restricted the use of the property and gave Liberty Mills the right to refuse approval of future purchasers of the property.

In 2001, PMI took out a $3.5 million loan from Nationwide Life Insurance Company (Nationwide), mortgaged by the property. Nationwide insured its interest in the property by purchasing a title insurance policy from Commonwealth Land Title Insurance (Commonwealth). The policy included an American Land Title Association 9 Endorsement (ALTA 9) that, among other things, covered Nationwide against loss from "a right of first refusal or the prior approval of a future purchaser or occupant" unless "expressly excepted" in Schedule B, which was appended to the policy. Schedule B excepted the declaration, but did not separately except the right to refuse approval of future purchasers.

In 2003, PMI defaulted on its loan from Nationwide. Instead of facing foreclosure proceedings, PMI conveyed the property to Nationwide by fee simple deed. Nationwide attempted to sell the property to Ironwood for $3.8 million. However, Franklin Mills refused to approve the sale pursuant to its rights in the declaration. Nationwide then submitted a claim for coverage to Commonwealth, alleging that Franklin Mills' rights of refusal were covered restrictions that made the property unusable and unsalable. Commonwealth denied the claim stating that it was not covered under the policy.

Nationwide sued Commonwealth, seeking a declaratory judgment and money damages. Commonwealth filed a motion to dismiss, which the district court in the Eastern District of Pennsylvania granted. On appeal, the Third Circuit reversed. The Third Circuit held that in order to "except expressly" from ALTA 9 a right of refusal or other restrictions, the title insurer must list those restrictions specifically in Schedule B. It was not enough for the insurer to merely list in some part of Schedule B the document in which the restrictions were embedded. In addition, the burden was on the insurer to detect the restrictions in the declaration and expressly list those restrictions as exceptions in order to avoid covering loss from them.

The Third Circuit's rationale was based on interpreting the policy based on the plain meaning of the text, its purpose, and industry custom and practice. In regards to the purpose of ALTA 9, lenders choose to pay an additional premium for the ALTA 9 coverage partly because it provides notice of specific matters that may harm their mortgage interests. Thus, it makes sense to require the insurer to except expressly any restrictions it does not want covered under ALTA 9. Additionally, the burden is on the insurer because the existence of title insurance is to complete proper diligence in title search and offer protection to the insurance purchaser. The Third Circuit remanded for further proceedings in the Easter District of Pennsylvania.

After discovery, the parties filed cross-motions for summary judgment.

Holding:The district court granted summary judgment in favor of Nationwide. The court held that the policy issued by Commonwealth to Nationwide covers, without exclusion, the loss suffered by Nationwide as a result of its inability to sell the property.

The court analyzed the scope of coverage of ALTA 9. A plain reading of the language indicates that ALTA 9 covers against loss arising from "an instrument referred to in Schedule B" that contains covenants, conditions, or restriction on the land, as well as, among other items, an option to purchase, a right of first refusal, or a prior approval of a future purchaser or occupant. ALTA 9 does not restrict its coverage to specific provisions within such instruments. Next, the court found that the declaration fell within ALTA 9's scope of coverage because the language in the declaration encompasses use restrictions and indirect restraints on alienation. Therefore, the ALTA 9 covered the entire declaration, unless particular restrictions were "expressly excepted," which Commonwealth did not do, as noted by the Third Circuit.

Moreover, Nationwide did not "assume" or "agree to" the encumbrances for which it is now seeking coverage. First, though the mortgage between PMI and Nationwide acknowledged the declaration, it did not prove that Nationwide had actual knowledge of the contents in the declaration. Additionally, Nationwide purchased title insurance from Commonwealth for the very purpose that Commonwealth would review Nationwide's interest in the title to the property and expressly except any restrictions in the documents it reviewed.

The court found that Nationwide suffered damages because its inability to sell to Ironwood arose directly from the restrictions in the declaration. Nationwide was also entitled to receive appropriate prejudgment interest, but the court declined to rule on the amount of damages and prejudgment interest owed to Nationwide due to insufficient facts to make a proper determination. The court also declined to rule on the issue of whether Commonwealth denied the claim in bad faith due to lack of clear and convincing evidence.

After the issuance of its opinion and pending a damages trial, Commonwealth filed motions for reconsideration and for interlocutory appeal. On March 23, 2011, the district court denied Commonwealth's motion for reconsideration. However, the court granted Commonwealth's motion for interlocutory appeal because it would expedite the resolution of the case. The issue on interlocutory appeal is whether the district court correctly ruled on ALTA 9's scope of coverage.

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