Stewart Title Guaranty Company v. Credit Suisse
Filing
128
MEMORANDUM DECISION AND ORDER granting in part and denying in part 68 Motion for Partial Summary Judgment; granting 72 Motion for Leave to File. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (krb)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
STEWART TITLE INSURANCE
COMPANY, a Texas corporation,
Case No. 1:11-cv-227-BLW
Plaintiff,
MEMORANDUM DECISION &
ORDER
v.
CREDIT SUISSE, Cayman Islands
Branch,
Defendant.
INTRODUCTION
The Court has before it a motion for partial summary judgment and a motion to
amend to add a claim for punitive damages, both filed by defendant Credit Suisse. The
Court heard oral argument on June 26, 2013, and the motions are now at issue. For the
reasons described below, the Court will grant the motion to amend to add a claim for
punitive damages, and grant in part the motion for partial summary judgment.
SUMMARY
Defendant Credit Suisse loaned $250 million to Tamarack Resort, LLC to build a
ski resort. Credit Suisse secured its loan with two mortgages on the resort property, and
obtained title insurance from Stewart Title. With the resort only partially completed,
Tamarack defaulted on the loan, leaving most of the contractors unpaid. The contractors
filed liens on the resort property, and those liens were later determined to be superior to
MEMORANDUM DECISION AND ORDER - 1
Credit Suisse’s two mortgages. Stewart Title filed this action seeking a declaratory
judgment that it is not required by the title insurance policy to indemnify Credit Suisse
for any loss due to these superior liens.
In the pending motions, Credit Suisse challenges Stewart Title’s reliance on the
policy’s exclusions to avoid coverage, and seeks to add a claim for punitive damages.
The Court will take up the pending motions after first reviewing the factual background
of this litigation.
FACTUAL BACKGROUND
On May 19, 2006, Tamarack and Credit Suisse signed a Credit Agreement setting
forth the Loan of $250 million from Credit Suisse to Tamarack to build a ski resort. The
Loan was secured by two mortgages on most of the 3,608 acres on which the resort was
to be built. On the same day the Loan was issued, Stewart Title, through its subsidiary,
AmeriTitle, issued Credit Suisse a lender’s title insurance policy (“the Policy”) on the
mortgaged land. The Policy was worth $227,000,000.00 and did not contain the standard
exceptions for mechanics’ liens and creditors’ rights.
Before the Credit Agreement was signed, Credit Suisse and Stewart Title
negotiated over the terms of the Policy. On April 20, 2006, Stewart issued a
“Commitment to Provide Title Insurance,” which functioned as a draft of the Policy.
Between issuing the Commitment and issuing the Policy, Stewart and Credit Suisse
negotiated Schedule B, the list of specific exclusions to the Policy. Stewart also
requested an appraisal of Tamarack from Credit Suisse and the list of accounts payable
from the Loan documents. Credit Suisse gave Stewart an appraisal that another firm –
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Cushman & Wakefield – had prepared for financing purposes. Credit Suisse also
directed Stewart to communicate with Tamarack to obtain the Schedules from the Loan
documents.
Tamarack had contracted with multiple builders and architects to begin
construction on portions of the resort prior to May 19, 2006. Notably, Banner/Sabey II,
LLC, a general contractor, had begun construction of the Village Plaza in early April of
2006.
This becomes important because under Idaho law a contractor who has not been
paid can file a mechanic’s lien that attaches to the real property and takes priority over
liens or mortgages that attached after the date the contractor began the work at issue.
Thus, a company providing title insurance has a vested interest in knowing the date
contractors began work on a project and whether that date is prior in time to any
mortgages covered by the title insurance.
Stewart obtained lien waivers from some, but not all, of the contractors prior to
issuing the Policy. Banner/Sabey II and MHTN, the architect of the Village Plaza
project, did not sign waivers until several months after the Policy was issued.
Banner/Sabey II had signed a contract with Tamarack in March of 2006, but had made
the contract contingent on financing, which came in the form of Credit’s Suisse’s Loan.
The Loan documents reflected this fact: at the time the Loan and Policy were issued
Banner/Sabey II and MHTN were listed under Schedule 2.9, the accounts payable
schedule, but were not listed under Schedule 1.1(e), the list of contractors, or Schedule
4.33, the list of material contracts.
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The Loan was set to mature on May 19, 2011. Long before that date, however,
Tamarack defaulted on the Loan. Credit Suisse filed a foreclosure action in Idaho state
court and tendered to Stewart Title the defense against multiple competing liens.
Stewart Title accepted the tender and defended Credit Suisse in the state court
foreclosure action. On May 1, 2009, the state court held that the lien waivers signed by
Banner/Sabey II and other contractors only waived the right to a lien for work performed
before the Loan documents were recorded, but not for later performed work.
On June 29, 2009, Stewart withdrew its defense of Credit Suisse against a
vendee’s lien held by BAG Property Holdings, LLC. On May 11, 2011, the state court
entered findings concluding that certain mechanics’ liens worth around $13 million were
valid and had priority over Credit Suisse’s mortgages. On May 17, 2011, Stewart
withdrew its defense of Credit Suisse against these mechanics’ liens and, on the next day
filed this lawsuit. Stewart generally seeks a declaration that it does not need to indemnify
Credit Suisse for any loss due to these superior mechanics’ and vendees’ liens.
In a motion now before the Court, Credit Suisse seeks summary judgment that: (1)
The Policy affords coverage for mechanics’ liens ; (2) The Policy may not be rescinded
or voided under I.C. § 41-1811 for Credit Suisse’s alleged fraud; (3) The Policy affords
coverage for the statutory BAG vendee’s liens; (4) Exclusion 3(a) is inapplicable; (5)
Exclusion 3(b) is inapplicable; (6) Stewart Title’s common law fraud claim fails as a
matter of law; (7) The Policy cannot be terminated for Credit Suisse’s failure to provide a
proof of loss; (8) The Policy cannot be terminated due to impairment of subrogation
rights; (9) The Policy cannot be terminated due to Credit Suisse’s failure to provide
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requested information; and (10) Stewart Title breached its duty to defend Credit Suisse
against the mechanics’ liens and BAG vendee’s liens. The Court will address each of
these claims.
ANALYSIS
Mechanic’s Lien Coverage
The Policy provides that Stewart would protect Credit Suisse “against loss or
damage . . . sustained or incurred by the insured by reason of . . . lack of priority of the
lien of the insured mortgage over any statutory lien for services, labor or material.” See
Policy (Exhibit 79) at p.1. This coverage is made subject to any separate exclusion or
exception that may be applicable. Id.
The mechanic’s liens claimed by Banner/Sabey II and MHTN are statutorily
created by § 45-501 of the Idaho Code. The clear language of the Policy, quoted above,
covers mechanic’s liens, like those held by Banner II and MHTN, subject to the separate
provisions in the Policy on Exclusions and Exceptions. Credit Suisse is entitled to a
partial summary judgment on this issue.
Fraud
In its complaint, Stewart Title accuses Credit Suisse of fraud and seeks on that
basis to rescind the Policy. Under Idaho law, a court may annul an insurance policy if it
finds that the insured misrepresented, omitted, or concealed facts that were consequential
to the risk insured against. See Idaho Code § 41-1811. Under this statute, a
misrepresentation, omission, or concealment by an insured will not prevent recovery
unless (a) it was made fraudulently; (b) it was “material to the acceptance of the risk;” or
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(c) the insurance company would not have issued the policy had it known of the
misrepresentation, omission or concealment. Id.
The statute “describes the only circumstances in which a contract for insurance is
voidable.” Robinson v. State Farm, 45 P.3d 829, 837 (Id.Sup.Ct. 2002). Thus, to the
extent that Stewart is relying on any common law claim of fraud apart from Idaho Code
§ 41-1811, those assertions must be stricken.
Stewart argues that Credit Suisse made two material misrepresentations that
amount to insurance fraud under Idaho law. First, Stewart argues that Credit Suisse
provided a misleading appraisal, intending to deceive Stewart into issuing the Policy.
Second, Stewart argues that Credit Suisse knew, but failed to reveal, facts that gave
priority to mechanic’s liens filed by contractors Banner/Sabey II and MHTN over Credit
Suisse’s mortgages, and that this failure deceived Stewart into agreeing to cover those
mechanics’ liens in the Policy.
Fraud – Appraisal
Stewart argues that Credit Suisse provided a misleading appraisal of Tamarack
Resort’s value “with the intent to induce Stewart to issue a lender’s title policy without
standard exceptions for creditors’ rights claims and mechanics liens.” Complaint (Dkt.
No. 1) at ¶¶ 18-21. Stewart argues that it would not have issued the Policy if it had
known the “the true facts about the nature of the Appraisal.” Id. at ¶ 57. Stewart also
argues that Credit Suisse concealed another appraisal it had in its possession that
accurately assessed the fair market value of Tamarack.
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A title insurance company, like any other type of insurance company, is permitted
to seek information from an insurance applicant in order to assess the risk it is assuming.
When assessing risk, the insurer frames the questions it asks of an applicant, and is
responsible for the clarity of those questions. See Wardle v. Int'l Health & Life Ins. Co.,
551 P.2d 623, 626 (Id.Sup.Ct. 1976). Any ambiguity in the questions will be construed
against the insurer. Id. The insurer is not limited to an initial set of inquiries; ambiguous
responses by the applicant may, and should, prompt follow-up questions by the insurer to
clarify the responses. Transamerica Premier Ins. Co. v. Miller, 41 F.3d 438, 442 (9th
Cir. 1994) (“[A]n insurer’s issuance of a policy in the face of what appears to be a lack of
sufficient information to allow the insurer to determine its risks estops the insurer from,
or waives the insurer’s right to, cite that lack of information as a ground for avoiding
coverage”). The applicant has a corresponding duty to answer the insurer’s questions in
good faith. Wardle, 551 P.2d at 626. When deciding whether an applicant has met this
responsibility, a court must determine whether the applicant reasonably could have been
expected to understand that it was required to disclose certain information in response to
the direct question posed by the insurer. Id.
Here, there was no contractual requirement for Credit Suisse to provide an
appraisal to Stewart Title in order to obtain title insurance. Credit Suisse provided the
appraisal in response to a simple request by Stewart Title, through its agent AmeriTitle,
in an email sent May 4, 2006. See E-mail (Dkt 88-2). The email asked, “Do you have a
current appraisal?” In response, Credit Suisse sent AmeriTitle, via Federal Express on
May 4, 2006, a copy of the appraisal prepared for them by Cushman and Wakefield in
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April of 2006. See Transmittal Letter (Dkt. No. 71-36). Credit Suisse’s transmittal letter
simply stated, “As you requested, enclosed is a copy of the appraisal of Tamarack.” Id.
The Appraisal itself states “[t]he function of the report is for financing.” It states
that it can be relied upon by (1) “any qualified institutional buyer,” (2) “accredited
investor,” (3) “Rating Agency,” or (4) “other lender in determining whether to purchase
all or a participating interest in loans secured by the property.” See Appraisal (Dkt. 7137) at p. 2. The Appraisal does not represent that it can be relied upon by a title
insurance company.
Moreover, the Appraisal is clear that its purpose is to estimate the “Total Net
Value” of the Tamarack Resort. See Appraisal (Dkt. 71-37) at pp. 2, 4. It specifically
warns that “[t]his is not the Market Value of the property.” Id. The Appraisal defines
Total Net Value “as the sum of the market value of the bulk lots of the entire planned
community, as if all of the bulk lots were complete (in terms of backbone and
infrastructure) and available for sale to merchant builders.” Id. at 14.
Stewart now argues that the “Total Net Value” figure estimated by the Appraisal -$824 million – “is wildly inaccurate and had nothing to do with the market value of the
[Tamarack Resort] Project at any time.” See Stewart Brief (Dkt. No. 87) at p. 7. Stewart
cites to the reports of its experts concluding that “the term ‘Total Net Value’ is
misleading because it is an “unfamiliar term defined in a confusing manner without any
reference or source.” Id. at p. 8. Stewart accuses Credit Suisse of not providing a more
accurate appraisal – that estimated the market value to be $284 million – despite having it
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in their possession. These circumstances, Stewart argues, create a genuine issue of
material fact on the fraud claim that precludes summary judgment.
The Court disagrees. The Appraisal clearly states, as quoted above, that it is not
estimating current market value and is to be used for financing purposes. Credit Suisse
made no representation to Stewart about the Appraisal, and so Stewart cannot argue that
it was misled by anything other than the language of the Appraisal. If that language was
confusing – as Stewart’s experts assert – the case law cited above put the burden on
Stewart to ask clarifying questions. It failed to do so, and therefore waived its right to
object now. See generally Wardle, 551 P.2d at 628 (holding that failure of insurer to ask
clarifying questions about heart murmur precluded claim that nondisclosure of that
condition was misleading under I.C. § 41-1811).
This conclusion is not altered by Credit Suisse’s failure to provide Stewart with
another appraisal that Credit Suisse had in its possession. That appraisal was prepared
not for Credit Suisse but for SG Americas Securities LLC. See Draft Appraisal (Dkt. No.
88-12). Moreover, the appraisal states on the front page that it is only a “Draft” – there is
no indication in the record that Credit Suisse had a final version in its possession at the
time Stewart asked for an appraisal.
The Court will therefore grant Credit Suisse’s motion for partial summary
judgment to the extent it seeks to preclude Stewart from rescinding the Policy based on
the Appraisal Credit Suisse did provide or on the appraisal that it did not provide.
Fraud – Knowledge of the Contractors
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Credit Suisse seeks partial summary judgment that it did not commit fraud by
failing to reveal that Banner/Sabey II and MHTN had started work prior to the issuance
of the Policy, giving them liens superior to Credit Suisse’s two mortgages. Stewart
responds that there are at least questions of fact concerning its claim that Credit Suisse’s
failure was intended to mislead Stewart into issuing a Policy that it would not have issued
if Credit Suisse had revealed its knowledge.
In Idaho, a mechanic’s lien attaches to a piece of property when the contractor
begins work or first furnishes materials. Ultrawall, Inc. v. Washington Mut. Bank FSB,
25 P.3d 855. (Id.Sup.Ct 2001). Here, Banner/Sabey II was the general contractor for the
construction of the Village Plaza II project, and MHTN was the architect. In the
foreclosure action discussed above, the Idaho state court found that both began work
prior to the recording of Credit Suisse’s mortgages and thus had priority over those
mortgages.
If Stewart knew, or should have known, that these two entities had started work
before the mortgages were recorded and the Policy was issued, Stewart cannot rescind the
Policy for Credit Suisse’s failure to reveal that same knowledge. When “an insurance
company has knowledge of facts which would justify a rescission of the policy at the
time the policy is issued, but takes no steps to rescind it, the company waives the right
later to insist upon those facts in avoidance of the policy.” Indus. Indem. Co. v. U. S. Fid.
& Guar. Companies, 454 P.2d 956, 960 (Id.Sup.Ct. 1969). Even partial knowledge can
put an insurer on notice that it should inquire further, and it will be deemed to have
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knowledge of those facts that “an inquiry pursued with ordinary diligence and
understanding would have disclosed.” Id. at 961.
It is undisputed that before issuing the Policy, Stewart had been told by
Tamarack’s Controller Rod Mourant, and by Tamarack’s CFO, Jonathan Zurkoff, that
Banner/Sabey would be the general contractor on the Village Plaza II project but that the
contract was not yet final. See Cole Deposition (Dkt. No. 71-2) at pp. 107-08. Stewart
also knew that “some money was owed on the Village as there was some construction
onsite,” and that “Banner/Sabey was owed money . . . .” Id. at p. 281-82. On the day
before the Policy was issued, Anne Griffith, Tamarack’s attorney, emailed Stewart the
final schedules to the Credit Agreement. See E-mails (Dkt. No. 71-43). While
Banner/Sabey II and MHTN were not listed on the schedule of contractors, they were
listed on the accounts payable schedule, showing that Banner/Sabey II was owed
$589,386.77 and MHTN was owed $1,031898.84. See Schedule 2.9 (Dkt. No. 71-43) at
p. 4.
There may be some question as to whether Stewart actually knew that the
contractors had begun work by a certain date. But there is no question that the
undisputed facts listed above put Stewart on inquiry notice. A diligent inquiry would
have revealed what work was done and when that work started, crucial facts that would
give any mechanic’s lien based on that work priority over the two mortgages. Stewart
must be held to knowledge of these facts, and thus cannot claim that Credit Suisse
committed fraud by failing to reveal the same facts. See Indus. Indem, 454 P.2d at 961.
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Stewart argues, however, that Credit Suisse had a duty under the Commitment to
notify Stewart of its knowledge that work had begun early. That Commitment states as
follows:
If [Credit Suisse] has or acquires actual knowledge of any defect, lien,
encumbrance, adverse claim or other matter affecting the estate or interest
or mortgage thereof covered by this Commitment other than those shown in
Schedule B hereof, and shall fail to disclose such knowledge to [Stewart] in
writing, [Stewart] shall be relieved from liability for any loss or damage
resulting from any act of reliance hereon to the extent [Stewart] is
prejudiced by failure to so disclose such knowledge.
See Commitment (Dkt. No. 81-19) at p. 5. This provision does not save Stewart’s fraud
claim. It applies only when Stewart Title is “prejudiced” by Credit Suisse’s failure to
disclose its knowledge about liens. A party cannot be “prejudiced” by an opponent’s
failure to reveal facts of which the party is aware. Because Stewart is on inquiry notice
of the facts regarding what work was done and when it started, Stewart was not
prejudiced by any failure of Credit Suisse to reveal its own knowledge of those same
facts, and hence the provision is inapplicable.
Conclusion on Stewart’s Fraud Claim
For the reasons expressed above, the Court will grant Credit Suisse’s motion for
partial summary judgment precluding Stewart from relying on Idaho Code 41-1811(b) or
a common law fraud claim to rescind the Policy.
Applicability of the 3(a) Exclusion
Credit Suisse next seeks to dismiss Stewart’s claim that the Policy does not cover
the mechanic’s liens held by Banner/Sabey II and MHTN because they fall under
exclusion 3(a) of the Policy. Exclusion 3(a) excludes from coverage “defects, liens,
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encumbrances, adverse claims or other matters . . . created, suffered, assumed or agreed
to by the insured claimant.” See Policy (Dkt. No. 71-50) at p. 2. Stewart argues that
Credit Suisse “created” or “suffered” the Banner/Sabey II and MHTN liens because it
had knowledge of all the underlying facts which gave rise to the liens.
Exclusion 3(a) is a standard one in title insurance contracts and is “one of the
most litigated clauses in the field.” Home Federal Sav. Bank v. Ticor Title Ins. Co., 695
F.3d 725, 732 (7th Cir. 2012) (quoting Palomar, Title Insurance Law § 6:10 (2012)). By
excluding coverage when the insured creates a defect in the title, the language
“exclude[es] matters that are the insured’s own darn fault.” Palomar, Title Insurance
Law, supra, at § 6:10. For example, the exclusion applied where an insured created a
defect in title by obtaining an equitable lien rather than purchasing the property outright.
Transamerica Title Ins. Co. v. Alaska Fed. Sav. & Loan, 833 F.2d 775, 776 (9th Cir.
1987).
There is no evidence here that Credit Suisse played any part in the creation of the
mechanic’s liens filed by Banner/Sabey II and MHTN. Accordingly, the Court will
grant Credit Suisse’s motion to dismiss this claim.
Applicability of the 3(b) Exclusion
Credit Suisse next seeks to dismiss Stewart’s claim that the Policy does not cover
the mechanics’ liens held by Banner/Sabey II and MHTN because they fall under
exclusion 3(b) of the Policy. Exclusion 3(b) excludes from coverage:
Defects liens, encumbrances, adverse claims or other matters . . . not
known to the Company, not recorded in the public records at Date of
Policy, but known to the insured claimant and not disclosed in writing to
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the Company by the insured claimant prior to the date the insured claimant
became an insured under this policy.
See Policy (Dkt. No. 71-50) at p. 2. This provision only applies to defects “not known to
[Stewart Title].” As explained above, Stewart Title was on inquiry notice of the facts that
would establish the priority of the mechanic’s liens. Hence, this exclusion is
inapplicable. The Court will therefore grant Credit Suisse’s motion for summary
judgment on this issue.
Coverage of the BAG Vendee’s Liens
As part of its motion for partial summary judgment, Credit Suisse seeks
declaratory relief establishing that the vendee liens filed by BAG Property Holdings,
LLC (referred to as the BAG liens) are covered by the Policy. The state court, in the
foreclosure proceeding, held that the BAG liens totaling about $2 million had priority
over Credit Suisse. In this lawsuit, Stewart Title claims that the Policy contains an
exception that denies coverage for the BAG liens. Credit Suisse asks the Court to find
that the exception does not apply to the BAG liens.
The BAG liens had their origins in an agreement by Tamarack to sell portions of
the Project to BAG pursuant to two written contracts. BAG paid Tamarack $2 million as
a deposit under the two contracts. Tamarack defaulted and BAG asserted vendee’s liens
under I.C. §45-804 to recover its $2 million deposit. That statute gives a purchaser a lien
for any amount he paid an owner as part of the purchase price where the sale ultimately
does not take place:
One who pays to the owner any part of the price of real property, under an
agreement for the sale thereof, has a special lien upon the property,
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independent of possession, for such part of the amount paid as he may be
entitled to recover back, in case of a failure of consideration.
See Idaho Code § 45-804. The statute requires, by its terms, “an agreement for the sale
[of the real property],” and BAG based its liens on two recorded documents setting forth
the sale terms with Tamarack: (1) a Memorandum of Agreement, and (2) a Notice of
Option. In the state court foreclosure action, BAG claimed that its liens were superior to
Credit Suisse’s mortgages because BAG’s two documents were recorded before the
mortgages were recorded. The state court agreed. See State Court Decision (Dkt. No.
71-20) at pp. 84-99. The state court concluded that (1) BAG did not waive its liens, (2)
BAG’s liens had priority over Credit Suisse, and (3) the liens were not barred by the
doctrines of equitable-estoppel, quasi-estoppel or unjust enrichment. Id.
In this lawsuit, Stewart Title argues that the Policy excludes coverage for the BAG
liens. Stewart Title points to Schedule B of the Policy that states as follows:
This policy does not insure against loss or damage . . . which arise by
reason of . . . .
***
103. MEMORANDUM OF AGREEMENT between Tamarack Resort,
LLC . . . and Bayview Financial, L.P.
***
106. NOTICE OF OPTION AGREEMENT, between Tamarack Resort,
LLC . . . and Bayview Financial, L.P.
See Schedule B (Dkt. No. 71-50). In its complaint, Stewart Title seeks a
declaratory judgment that this provision excludes coverage for the BAG liens,
which “arise by reason of” the two recorded agreements listed there.
Credit Suisse now seeks a partial summary judgment denying this
declaratory relief. Credit Suisse argues that because the state court relied on Idaho
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Code § 45-804 to uphold the validity of the BAG liens, those liens “arose by
reason of” the statute, not by reason of the instruments listed in Schedule B.
Credit Suisse also argues that the language of Schedule B is ambiguous because it
says nothing about Idaho Code § 45-804, and that this ambiguity must be
construed against the insurer and in favor of coverage.
“Whether a contract is ambiguous is a question of law, but interpreting an
ambiguous term is an issue of fact.” Potlatch Educ. Ass'n v. Potlatch Sch. Dist. No. 285,
148 Idaho 630, 633, 226 P.3d 1277, 1280 (2010) (citations omitted). A Court should find
a specific policy provision ambiguous if “it is reasonably subject to conflicting
interpretations.” City of Boise v. Planet Ins. Co., 878 P.2d 750, 755 (Idaho 1994).
Here, the language is not ambiguous. The exception covers any loss that arises by
reason of the two agreements. The BAG liens arose by reason of the two agreements.
The statute creating the legal basis for the lien – Idaho Code § 45-804 – requires “an
agreement for the sale [of the real property].” The two agreements were thus
indispensable to the creation of the statutory liens; no liens would have arisen without
them. Thus, the liens arose by reason of the two agreements; the language of the
exception is not “reasonably subject to conflicting interpretations.” City of Boise, 878
P.2d at 755. . The Court will accordingly deny Credit Suisse’s motion for partial
summary judgment on this issue.
Absence of a Proof of Loss
Credit Suisse next seeks summary judgment on Stewart’s claim that Credit Suisse
failed to provide a proof of loss. Stewart’s complaint seeks a judicial declaration “[t]hat
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Credit Suisse’s claims for defense and indemnity under the Policy are excluded or not
covered because there is no proof of loss or damage.” See Complaint (Dkt. No. 1) at
¶51(d). The Policy requires Credit Suisse to provide Stewart Title with a “signed and
sworn to” proof of loss or damage and to “describe the defect in, or lien or encumbrance
on the title, or other matter . . . which constitutes the basis of loss or damage.” See Policy
(Dkt. No. 71-50) at p.3 ¶ 5. Stewart argues Credit Suisse has not met this requirement of
the policy because they have provided no proof of actual loss, as required by the Policy.
Until a foreclosure sale is held, and the amount received for the real property is
established, Credit Suisse has not actually suffered any loss, Stewart argues.
That requirement, Stewart argues, is contained in Section 8(b):
In the event of any litigation, including litigation by the Company or with
the Company’s consent, the Company shall have no liability for loss or
damage until there been a final determination by a court of competent
jurisdiction and disposition of all appeals therefrom, adverse to the title or
to the lien of the insured mortgage, as insured.
See Policy (Dkt. No. 71-50) at p. 4.1 It is true, as Stewart claims, that the precise loss
cannot be fixed until the foreclosure sale is held, and that sale has recently been delayed
once again for a few months. However, Credit Suisse’s expert, Philip Cook, concludes
that Credit Suisse has suffered financial losses as a result of Stewart Title’s actions. See
Cook Report (Dkt. No. 102-28). at ¶¶ 6, 24, 25. In Cook’s opinion, Stewart Title’s
actions reduced the value of the land and prejudiced Credit Suisse’s rights in the
1
Stewart Title cites an unpublished Ninth Circuit case decided in 1997 interpreting a similar provision. This
citation is prohibited by Ninth Circuit Rule 36-3(c).
MEMORANDUM DECISION AND ORDER - 17
foreclosure action. Id. These losses exist regardless of what occurs at the foreclosure
sale, according to Credit Suisse.
Given this record, the Court cannot make any definitive ruling on whether Credit
Suisse has suffered a loss. Generally, it is difficult to calculate loss in a case like this
until the foreclosure sale takes place. Karl v. Commonwealth Land Title Ins. Co., 24
Cal.Rptr.2d 912 (Cal.App.1993) (“the earliest a loss can be claimed on a lender’s policy
is at the time of completion of foreclosure”); see also, Hodas v. First American Title Ins.
Co., 696 A.2d 1095, 1097 (Me.1997) (“The presence of a title defect immediately results
in a loss to the holder of a fee interest since resale value will always reflect the cost of
removing the defect. In contrast, the holder of a loan policy incurs a loss only if the
security for the loan proves inadequate to pay off the underlying insured debt due to the
presence of undisclosed defects.”).
Generally Section 8(b) would preclude any finding of liability against Stewart
Title until the foreclosure sale took place. While the expert Cook concludes that Credit
Suisse has suffered a loss now, the full extent of the loss will not be known until the
foreclosure sale occurs. This does not stop the law suit from proceeding because
coverage issues can be resolved before any liability is assessed, and it is liability not
coverage that Section 8(b) addresses. But the Court cannot make any final determination
of liability – and set damages at a sum certain – until the foreclosure is completed.
Accordingly, the Court cannot grant summary judgment on this issue to Credit Suisse at
this time.
Impairment of Subrogation Rights
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Credit Suisse next seeks to dismiss Stewart’s assertion “[t]hat in refusing and
failing to pursue its remedies against the Guarantors, Credit Suisse forfeited its claims
under the Policy.” See Complaint (Dkt. No. 1) at p. 19. Credit Suisse argues that there is
no basis for this assertion in the Policy, and Stewart did not respond in its briefing or
argument. The Court concludes that Credit Suisse had no duty to pursue Stewart’s
subrogation rights and will therefore grant summary judgment on this issue.
Failure to Provide Information
Credit Suisse next seeks to dismiss Stewart’s assertion “[t]hat Credit Suisse
violated its specific obligation to provide to Stewart all documents, etc. reasonably
pertaining to the claimed loss and by such refusal forfeited coverage under the Policy.”
Complaint Dkt. 1 ¶ 51(k). Stewart seeks a declaration that Credit Suisse violated
paragraph five of the Policy, which provides:
[T]he insured claimant shall produce for examination, inspection and
copying, at such reasonable times and places as may be designated by any
authorized representative of the Company, all records, books, ledgers,
checks, correspondence and memoranda, whether bearing a date before or
after Date of Policy, which reasonably pertain to the loss or damage. . . .
Failure of the insured claimant to submit for examination under oath,
produce other reasonably requested information or grant permission to
secure reasonably necessary information from third parties as required in
this paragraph, unless prohibited by law or governmental regulation, shall
terminate any liability of the Company under this policy as to that claim.
See Complaint (Dkt. No. 71-50) at p. 3. Credit Suisse seeks to preclude Stewart Title
from relying on this provision in any way. However, this provision discusses Credit
Suisse’s obligation to produce material relating to the “loss or damage,” and as just
MEMORANDUM DECISION AND ORDER - 19
discussed, that is a continuing obligation that has not yet been completed. For that
reason, summary judgment on this issue must be denied.
Duty to Defend
Credit Suisse finally seeks to dismiss Stewart’s claim that it “has never had and
does not have a duty to defend . . . Credit Suisse under the terms of the Policy.” See
Complaint (Dkt. No. 1) at ¶ 51(i). Credit Suisse argues that, as a matter of law, Stewart
breached its duty to defend by assuming the duty and then dropping it before obtaining a
court ruling that there was no coverage.
“The duty to defend arises upon the filing of a complaint whose allegations, in
whole or in part, read broadly, reveal a potential for liability that would be covered by the
insured’s policy.” Hoyle v. Utica Mut. Ins. Co., 48 P.3d 1256, 1260-61 (Id.Sup.Ct.
2002). So long as “an arguable potential exists for a claim covered by the policy . . . the
insurer must . . . defend the suit.” Id. at 1261 (quoting Kootenai County v. W. Cas. and
Sur. Co., 750 P.2d 87, 89 (Id.Sup.Ct. 1988)).
Credit Suisse argues that once an insurer begins to defend – as Stewart Title did
here – it cannot later drop the defense until a court determines that no coverage exists.
Credit Suisse cites no Idaho case so holding. Indeed, Hoyle suggests just the opposite: It
holds that when “there is no potential for coverage” the insurer is not required to “tender
a defense until the lack of coverage is established.” Id. at 1260.
This case law requires an insurer to provide a defense so long as an “arguable
potential” for coverage exists. Id. at 1261. When no “arguable potential” for coverage
exists, the insurer is free to drop its defense. Id. Credit Suisse’s argument that an insurer
MEMORANDUM DECISION AND ORDER - 20
is locked into defending its insured once it assumes a defense until a court rules on
coverage issues is not supported by the case law it cites. Accordingly, the Court will
deny Credit Suisse’s motion on this issue.
Conclusion on Credit Suisse’s Motion for Partial Summary Judgment
The Court will therefore grant in part Credit Suisse’s motion for summary
judgment. The Court will grant the motion to the extent it seeks a ruling, as a matter of
law, that (1) subject to the provisions for Exceptions and Exclusions, the Policy covers
the mechanic’s liens filed by Banner/Sabey II and MHTN; (2) Stewart Title cannot raise
as a defense to coverage that Credit Suisse committed fraud; (3) Stewart Title cannot
raise as a defense to coverage the provisions of Exclusions 3(a) and 3(b); and (4) Stewart
Title cannot raise as a defense to coverage Credit Suisse’s failure to pursue its remedies
against Guarantors.
The Court will deny Credit Suisse’s motion to the extent it seeks a ruling, as a
matter of law, that: (1) The BAG Vendee’s Liens are covered by the Policy; (2) Stewart
Title cannot raise as a defense Credit Suisse’s failure to provide proof of loss; (3)
Stewart Title breached its duty to defend.
Credit Suisse’s Motion to Amend to Add Claim for Punitive Damages
The Court turns next to Credit Suisse’s motion to amend its counterclaim to
include a claim for punitive damages. Whether a party should be allowed to amend a
pleading to seek punitive damages is a substantive question controlled by Idaho law. See
Doe v. Cutter Biological, 844 F. Supp. 602, 610 (D.Id. 1994). The trial court decides, in
its discretion, whether to submit the punitive damages issue to the jury. See Manning v.
MEMORANDUM DECISION AND ORDER - 21
Twin Falls Clinic & Hosp., Inc., 830 P.2d 1185, 1190 (Id.Sup.Ct. 1992). An award of
punitive damages ultimately requires a bad act and a bad state of mind. See Todd v.
Sullivan Const. LLC, 191 P.3d 196, 201 (Id.Sup.Ct. 2008). The defendant must (1) act in
a manner that was an extreme deviation from reasonable standards of conduct with an
understanding of—or disregard for—the likely consequences, and must (2) act with an
extremely harmful state of mind, described variously as with malice, oppression, fraud,
gross negligence, wantonness, deliberateness, or willfulness. Myers v. Workmen’s Auto
Ins. Co., 95 P.3d 977, 983 (Id.Sup.Ct. 2004).
At trial, the party alleging punitive damages must satisfy this standard by clear and
convincing evidence. See Idaho Code § 6–1604(1). However, for purposes of the motion
to amend, the party seeking to add a claim for punitive damages does not need to meet
this high burden; the party need only show “a reasonable likelihood of proving facts at
trial sufficient to support an award of punitive damages.” See Idaho Code § 6–1604(2).
The Idaho Supreme Court has laid out five specific factors that play a
determinative role in deciding whether there is sufficient evidence to support a punitive
damages award: (1) the presence of expert testimony; (2) whether the unreasonable
conduct actually caused harm to the party seeking punitive damages; (3) whether there is
a special relationship between the parties; (4) proof of a continuing course of oppressive
conduct; and (5) proof of the actor’s knowledge of the likely consequences of the
conduct. See Cuddy Mountain Concrete Inc. v. Citadel Constr. Inc., 824 P.2d 151, 16061 (Id.Ct.App. 1992).
MEMORANDUM DECISION AND ORDER - 22
In this case, Credit Suisse seeks punitive damages because Stewart Title
unreasonably delayed its denial of coverage, preventing a settlement with the lien
claimants in the foreclosure action and reducing the value of the land. Credit Suisse
supports these arguments with the affidavits of its experts. This record, Credit Suisse
argues, is sufficient to support a finding that there is a reasonable likelihood that Credit
Suisse will be able to prove at trial the requisite extreme deviation from reasonable
standards and an extremely harmful state of mind. The Court will evaluate Credit
Suisse’s motion in light of the standards discussed above.
Punitive Damages – Special Relationship
The special relationship factor between Stewart Title and Credit Suisse is easily
established. Idaho Law acknowledges a special relationship between the insurer and
insured that requires the parties to deal in good faith. See Cuddy, 824 P.2d at 160-61.
Stewart Title and Credit Suisse were in a special relationship as insurer and insured that
required good faith dealings.
Punitive Damages – Expert Testimony
Credit Suisse’s expert is Albert Rush, a licensed attorney who worked for First
American Title Insurance Company from 1982 to 2011. See Rush Report (Dkt. No. 10229). During his time with the company, Rush handled thousands of title insurance
claims, including claims in Idaho. Id. His opinion is that Stewart Title’s conduct toward
Credit Suisse was “an extreme deviation from reasonable standards of conduct for title
insurers.” Id. at ¶¶ 18-22.
MEMORANDUM DECISION AND ORDER - 23
Stewart Title’s expert concludes just the opposite. In his opinion, Stewart Title
acted reasonably in engaging counsel to defend Credit Suisse before determining if the
law suits were covered by the insurance policy. See Thomson Report (Dkt. No. 91-1) at ¶
2. His opinion is that Rush has made legal conclusions that are inaccurate and fail to
conform to Idaho law. Id.
The Court need not resolve the conflicts in the experts’ testimony. It is enough
that Credit Suisse’s motion to amend is supported by the testimony of an expert. This
factor therefore weighs in favor of granting the amendment. See Kuhn v. Coldwell
Banker, 245 P.3d 992, 1004 (Id.Sup.Ct. 2010) (affirming amendment to include punitive
damages supported by affidavit of expert).
Punitive Damages – Actual Harm
Credit Suisse’s expert, Philip Cook, concludes that Credit Suisse suffered
financial losses as a result of Stewart Title’s actions. See Cook Report (Dkt. No. 102-28).
at ¶¶ 6, 24, 25. More specifically, he opines that Credit Suisse suffered losses as a result
of Stewart’s failure to settle claims in the foreclosure action, and that Stewart’s actions
have reduced the value of the land.
Stewart Title responds that the punitive damages claim is unripe until the
foreclosure sale takes place. However, as discussed above, Cook’s expert testimony
creates questions on this issue. Accordingly, this issues does not weigh in favor of either
party.
Punitive Damages – Knowledge of the Likely Consequences & Continuous Course
of Oppressive Conduct
MEMORANDUM DECISION AND ORDER - 24
As the insurance company, Stewart Title is in a superior position and understands
the important financial consequences of failing to defend or indemnify Credit Suisse
against the lien claims on the Tamarack property. See White v. Unigard Mut. Ins. Co.,
730 P.2d 1014, 1018 (Idaho 1986). In both first-party and third-party insurance
situations the “contract and the nature of the relationship give the insurer an almost
adjudicatory responsibility.” Id. The insurer is responsible for evaluating the claim,
determining whether the claim falls within the coverage provided, and determines
whether to settle or litigate based on the merits. Id. “Although the insured is not without
remedies if he disagrees with the insurer, the very invocation of those remedies detracts
significantly from the protection or security which was the object of the transaction.” Id.
Therefore, in insurer/insured cases, there is a presumption that the insurance company has
knowledge of the probable consequences of its actions. See id.
Credit Suisse has submitted the opinions of its expert Albert Rush that Stewart
Title’s conduct was an extreme deviation from the standards associated with title
insurance transactions. Id. The Court will briefly summarize his testimony.
First, Stewart Title “had a duty to timely and properly investigate its coverage for
claims” from Credit Suisse. See Rush Report, supra at p. 3. Rush concludes that Stewart
Title unreasonably delayed deciding coverage issues, and that this injured Credit Suisse.
Id. at ¶ 15.
Second, Stewart Title “had a duty to timely and properly assert any reservation of
rights and explain the bases” for that reservation. Id. at ¶ 5. Stewart Title defended and
indemnified Credit Suisse for over a year without asserting any reservation of rights. Id.
MEMORANDUM DECISION AND ORDER - 25
Third, Stewart Title “had a duty to settle any of the lien claims for which liability
was reasonably clear.” Id. at ¶ 6. Stewart Title in bad faith did not inform Credit Suisse
within a reasonable time of their decision not to settle the Banner/Sabey lien. Id.
Because Stewart Title did not give equal consideration to Credit Suisse’s interests in
settling, despite their counsel’s recommendation, Stewart Title subjected Credit Suisse to
increased financial risk. Id.
Fourth, Stewart Title “had a duty to timely file an action for declaratory relief to
determine the coverage questions” regarding the liens. Id. at ¶ 7. Stewart Title failed to
disclose it was evaluating coverage, and when it did determine that the claims were not
covered, did not timely communicate this to Credit Suisse. Id.
Fifth, “[i]t was improper and unreasonable for Stewart Title to channel all
communications between counsel that it retained to represent the insured and principals
of the insurer through outside counsel retained by the insurer.” Id. at ¶¶ 8-9. Faegre
Baker, counsel hired by Stewart Title to assist with Credit Suisse’s claims, participated in
a conference call with Credit Suisse’s counsel and then filed the complaint for
declaratory judgment to deny coverage under the policy. Rush asserts that counsel
cannot both represent the insured and file a complaint against the insured without
violating the “relationship of common trust and goals.” Id.
Sixth, Stewart Title had a duty to “pursue settlement of lien claims as to which
Stewart believed it had some coverage defense.” Id. at ¶ 9. When an insurer agrees to
provide a defense for a claim it has the duty to give equal consideration to the interests of
the insured and insurer, even if there is a reservation of rights. Id. Stewart Title acted in
MEMORANDUM DECISION AND ORDER - 26
bad faith, in the opinion of Rush, when it put its own interests ahead of Credit Suisse in
refusing to settle the Banner/Sabey claims. Stewart title knew an adverse decision would
result in negative impacts for Credit Suisse in other pending lien claims. Id. Credit
Suisse also alleges Stewart title’s denial of coverage was in direct response to this
adverse outcome, and Stewart Title had planned to deny coverage from the beginning of
the litigation if there was an adverse outcome. Id.
Seventh, once an insurance company “agrees to defend and indemnify [it] may not
later change its determination based on facts known to the insurer at the time the insurer
so agrees.” Id. at ¶ 15. Credit Suisse claims that Stewart title had all the necessary
information to make the coverage findings at the time the claims were tendered by Credit
Suisse. Id. at ¶ 7. Finally, Stewart Title extended an unreasonable offer in bad faith in
September 2010.
Given these opinions of Credit Suisse’s expert, there is a reasonable likelihood
that Credit Suisse can establish that Stewart Title engaged in a continuous course of
oppressive conduct and knew of the likely consequences of its actions.
Weighing All Factors
On the whole, looking at all the factors, the Court finds that they weigh in favor of
allowing the amendment. The Court will therefore grant Credit Suisse’s motion and
allow the addition of a claim for punitive damages.
ORDER
In accordance with the Memorandum Decision set forth above,
MEMORANDUM DECISION AND ORDER - 27
NOW THEREFORE IT IS HEREBY ORDERED, that Credit Suisse’s motion for
partial summary judgment (docket no. 68) is GRANTED IN PART AND DENIED IN
PART. It is granted to the extent it seeks a ruling, as a matter of law, that (1) subject to
the provisions for Exceptions and Exclusions, the Policy covers the mechanic’s liens filed
by Banner/Sabey II and MHTN; (2) Stewart Title cannot raise as a defense to coverage
that Credit Suisse committed fraud by providing a misleading appraisal, by not providing
another appraisal, and by not revealing its knowledge as to when work began by Banner/
Sabey II and MHTN; (3) Stewart Title cannot raise as a defense to coverage the
provisions of Exclusions 3(a) and 3(b); and (4) Stewart Title cannot raise as a defense to
coverage Credit Suisse’s failure to pursue its remedies against Guarantors. The motion
will be denied in all other respects.
IT IS FURTHER ORDERED that Credit Suisse’s motion for leave to file an
amended counterclaim to assert punitive damages (docket no. 72) is GRANTED.
DATED: August 29, 2013
_________________________
B. Lynn Winmill
Chief Judge
United States District Court
MEMORANDUM DECISION AND ORDER - 28
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