Bank of America, N.A. v. Chicago Title Insurance Company

Filing 122

MEMORANDUM Opinion and Order. Signed by the Honorable Mary M. Rowland on 4/17/2020. Mailed notice. (dm, )

IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
BANK OF AMERICA, N.A., a
national banking association, as
successor-in-interest to LaSalle
Bank, N.A., in its individual
capacity and as authorized Agent,

Case No. 17-cv-00407
Judge Mary M. Rowland

Plaintiff,
v.
CHICAGO TITLE INSURANCE
COMPANY, a Nebraska
corporation, as successor-ininterest to Ticor Title Insurance
Company,
Defendant.
MEMORANDUM OPINION & ORDER
Before the Court are the parties’ cross-motions for summary judgment. For
the reasons stated below, Bank of America’s motion [92] is granted and Chicago
Title Insurance Company’s (“Chicago Title”) motion [103 & 104] is denied.
BACKGROUND
1. The Kendall Marketplace Transaction
In 2007, Cannonball, LLC (“Cannonball”) sought to build and develop a
shopping center in Yorkville, Illinois called Kendall Market Place. (Dkt. 94 ¶ 5).
LaSalle Bank, Bank of America’s predecessor in interest, and Cannonball entered

1

into a construction loan agreement for Kendall Marketplace. (Id.). The loan was
secured by a Construction Mortgage on the property. (Id.).
In connection with its development of Kendall Marketplace, Cannonball sold
approximately ten and a half acres to Home Depot pursuant to a Real Property
Purchase Agreement (“Purchase Agreement”). (Dkt. 94 ¶ 5). Section 22(h) of the
Purchase Agreement required Cannonball to reimburse Home Depot for excess
taxes imposed by Yorkville—the SSA Tax Reimbursement Obligation. 1 (Dkt. 102 ¶¶
19-20). It also granted Home Depot the right to place a lien on Cannonball’s
Property for untimely payment of the SSA tax and stated, “Section 22(h) shall
survive the Closing” and the SSA Tax Reimbursement Obligation “shall be a
covenant which shall run with the land and bind Seller’s grantees, successors and
assigns.” (Id.). Cannonball and Home Depot also executed a development agreement
(“Development Agreement”) that recites Cannonball’s obligations under Section
22(h) of the Purchase Agreement. In addition, Section 12.4 of the Development
Agreement expressly provides that Home Depot’s rights would be subordinate to the
Mortgage: “such lien shall be subordinate to the lien of any first mortgage or deed of
trust.” (Dkt. 94 ¶ 7).
Cannonball, Home Depot, and LaSalle Bank also entered into a payment and
priority agreement (“Payment and Priority Agreement”) that expressly limited
LaSalle Bank’s obligations. (Dkt. 94 ¶ 8). It provided that the “Lender shall have no

“Yorkville issued and sold bonds to provide money to assist in the development of the shopping
center with on-and off-site improvements. To recover the money, Yorkville imposed against all tracts
within the shopping center a special tax that was called the ‘Special Service Area Tax’ or the ‘SSA
tax.’” Bank of America, N.A. v. Cannonball LLC, 2014 Il App (2d) 130858, ¶ 6.

1

2

obligations to the City or any of the Anchors under the Development agreements
unless Lender expressly assumes Developer’s obligations thereunder in writing.”
(Id. at ¶ 9).
2. The Title Insurance Policy
In connection with the Mortgage, LaSalle Bank purchased an insurance
policy with Ticor Title’s policy-issuing agent, Near North National Title (“NNNT”).
(Dkt. 102 ¶ 35). LaSalle Bank’s attorney, Stephen Malato negotiated the insurance
policy. (Id. at ¶ 10). LaSalle Bank sought to insure the superiority of the Mortgage
over other interests. The insuring clause provides:
SUBJECT TO THE EXCLUSIONS FROM COVERAGE, AND
EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B
AND THE CONDITIONS AND STIPULATIONS, TICOR TITLE
INSURANCE COMPANY, a California corporation, herein called the
Company, insures, as of Date of Policy shown in Schedule A, against
loss or damage, not exceeding the Amount of Insurance stated in
Schedule A, sustained or incurred by the Insured by reason of:
***
2. Any defect in or lien or encumbrance on the title;
***
6. The priority of any lien or encumbrance over the lien of the insured
mortgage.
(Dkt. 94 ¶ 19). On May 3, 2007, prior to closing of the Kendall Marketplace
Transaction, Mr. Malato sought a Special Endorsement providing “assurances that
the lender’s lien is superior to the liens that might come out of the site development
agreements.” (Dkt. 102 ¶¶ 36-37). NNNT responded by email, stating: “An
endorsement for the Home Depot Lien Rights is not a problem, it is subordinate to

3

the lien of the construction mortgage.” 2 (Id. at ¶ 42). The requested Special
Endorsement states:
The company hereby insures the insured that the priority of the lien of
the mortgage insured in this Policy will not be impaired by the
recordation of a lien document asserting lien rights arising under any
of the following documents:
***
1. The Home Depot Site Development Agreement recorded May 24,
2007 as document 20070016696;
***
Nothing contained in this Policy of this endorsement should be
construed as insuring the validity of the right to lien as created under
the agreements described therein.
This endorsement is issued as part of the policy. Except as it expressly
states, it does not (i) modify any of the terms and provisions of the
policy, (ii) modify any prior endorsements, (iii) extend the Date of
Policy or (iv) increase the Amount of Insurance. To the extent a
provision of the policy or a previous endorsement is inconsistent with
an express provision of this endorsement, this endorsement controls.
Otherwise, this endorsement is subject to all of the terms and
provisions of the policy of any prior endorsements.
(Dkt. 102 ¶ 45).
The

Policy

includes

an

additional

endorsement

titled,

“ALTA

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ENDORSEMENT.” (Dkt. 94 ¶ 22). The ALTA 9 Endorsement insured LaSalle Bank
against loss if an instrument listed on Schedule B contains a “covenant, conditions
or restrictions on the land” and “provides for a private charge or assessment.” (Dkt.
94 ¶22). That endorsement stated:
Chicago Title maintains that “Mr. Malato’s email and its attached Development Agreement excerpt
made no reference to the tax reimbursement and lien rights” (Dkt. 104, 5), and that “[t]here is no
evidence that [NNNT] received the Purchase Agreement or the full Development Agreement prior to
Closing.” (Dkt. 102 ¶ 46). Bank of America contests this assertion, claiming that NNNT was advised
and knew of the Purchase Agreement, the Development Agreement, and LaSalle Bank’s intention
that the Mortgage would be superior to all other rights. (Dkt. 94 ¶ 16). Bank of America also notes
that the Policy includes references to the Memoranda of the Purchase Agreement and the
Development Agreement, the documents of which NNNT claims it was unaware. (Dkt. 111, 8).
2

4

The Company hereby insures the insured against loss or damage
which the insured shall sustain by reason of the following:
1. The existence, at Date of Policy, of any of the following:
(A) Covenants, conditions or restrictions under which the lien of
that mortgage referred to in Schedule A can be divested,
subordinated, or extinguished, or its validity, priority or
enforceability impaired.
(B) Unless expressly excepted in Schedule B:
***
(2) Any instrument referred to in Schedule B as
containing covenants, conditions or restrictions on the
land which in addition, … (iii) provides for a private
charge or assessment.
(Id.). Schedule B, Part II of the Policy states:
In addition to the matters set forth in Part I of this schedule, the title
to the estate or interest in the land described or referred to in schedule
A is subject to the following matters, …:
***
4. Memorandum of Agreement recorded May 15, 2007 as document
number 200700016696 by and between Cannonball LLC, an Illinois
limited liability company, and Home Depot U.S.A., Inc., a Delaware
Corporation, are parties to (1) a Real Property Purchase Agreement
and (2) a Development Agreement, and the terms and provisions
contained therein.
Note: Contains a provision to create a lien on the Land.
***
6. Memorandum of Development Agreement recorded May 15, 2007 as
document number 200700016698 by and between Cannonball LLC, an
Illinois limited liability company, and Home Depot U.S.A., Inc., a
Delaware corporation and the terms and provisions contained therein.
Note: Contains a provision to create a lien on the Land.
(Id.).
3. The Closing of the Kendall Marketplace Transaction
On May 24, 2007, the Purchase Agreement, Development Agreement, and the
Construction Mortgage were recoded—in that order—with the Office of the Kendall
5

County Recorder. (Dkt. 94 ¶ 17). On that same day, Ticor Title issued the title
insurance policy (the “Policy”). (Id.).
Prior to the closing, Cannonball, HomeDepot and LaSalle Bank engaged in
email correspondence. Chicago Title argues the email string shows that LaSalle
Bank had actual knowledge of Home Depot’s tax reimbursement rights under the
Purchase Agreement, and that LaSalle Bank consented to the recording of Home
Depot’s tax reimbursement and lien rights prior to recording of the Mortgage. (Dkt.
102 ¶¶ 47, 48, 58, 73). Bank of America argues the same email string shows that
Mr. Malato repeatedly stated his understanding that the sequence of recording
would not impact the Bank’s eventual rights upon foreclosure with respect to the
SSA Tax Reimbursement Obligation. 3 (Dkt. 94 ¶ 11). Bank of America additionally
argues that LaSalle did not intend for the lien to be an encumbrance that runs with
the land, even though it allowed the lien to be recorded first—a fact Chicago Title
contests.
4. The Foreclosure Action and Appeal

The email string is between Home Depot’s counsel and Cannonball’s counsel. Home Depot stated it
intended its rights to tax reimbursement to survive a foreclosure, and it would either need LaSalle
Bank’s consent to subordinate the mortgage or it would need to record its lien right first. (Dkt. 102
¶¶ 55-57). The complete email string was forwarded to Mr. Malato, asking whether the Bank had a
preference for the recording sequence. Mr. Malato replied: “Yes to recording before the mortgage.
Our relative rights are addressed in the Payment and Priority Agreement.” (Id. at ¶ 55). As noted
above, the Payment and Priority Agreement expressly limited LaSalle Bank’s obligations. (Dkt. 94 ¶
9). In a separate email string addressing the same question, Mr. Malato stated: “The Home Depot
Site Development Agreement provided for a lien, but it was expressly subordinate to the lien of a
first mortgage. So we would be ok with the sales tax payments being secured in the manner provided
in the SDA.” (Dkt. 102 at ¶ 57). In any event, in the state court foreclosure action, Bank of America
conceded that Cannonball and Home Depot intended the encumbrance to run with the land: “Bank of
America does not contest that Cannonball and Home Depot intended the covenants to run with the
land and there is no doubt that they intended as such.” Bank of America, N.A. v. Cannonball LLC,
2014 Il App (2d) 130858, ¶ 23.
3

6

Eventually, Cannonball defaulted on its loan obligation. (Dkt. 94 ¶ 24). Bank
of America sought to foreclose the Construction Mortgage in the Circuit Court of
Kendall County. (Dkt. 102 ¶ 69). Home Depot filed a counterclaim seeking a
declaration that the SSA Tax Reimbursement Obligation ran with the land and was
binding on the grantees, successors and assigns of Cannonball, including Bank of
America. (Dkt. 94 ¶ 24). The trial court denied Home Depot’s motion for summary
judgment on the SSA Tax Reimbursement Obligation issue, holding that the SSA
Tax Reimbursement Obligation was personal between Cannonball and Home Depot
and was not a covenant that ran with the land. (Id.).
Home Depot appealed. The Appellate Court reversed the trial court’s order in
part, concluding that Home Depot’s SSA Tax Reimbursement Obligation and lien
rights are covenants that run with the land and binding on Bank of America. The
Appellate Court ruled that “Home Depot’s tax reimbursement and lien rights are
part of agreements that Bank of America’s predecessor was aware of when it
entered into the construction loan agreement with Cannonball.” Bank of America,
N.A. v. Cannonball LLC, 2014 Il App (2d) 130858, ¶ 29. The Appellate Court further
stated:
In this case, the LaSalle Bank mortgage was recorded on the same day,
but after, Home Depot’s memorandum of the purchase agreement and
memorandum of the development agreement were recorded. Further,
LaSalle Bank had actual knowledge of the documents containing Home
Depot’s tax reimbursement and lien rights before it recorded its
mortgage, because the purchase and development agreements were
part of the closing documents. The effective date of a mortgage is the
date of the recording…Thus Home Depot’s tax reimbursement and lien
rights, being in effect before the mortgage and running with the land,
were not extinguished by foreclosure.
7

Id. at ¶ 31 (internal citations omitted). In addition, the Appellate Court
acknowledged that Home Depot’s lien was subordinate to the Construction
Mortgage under Section 12.4 of the Development Agreement, but rejected Bank of
America’s argument that the lower priority of Home Depot’s lien resulted in
termination of those rights upon foreclosure. The Court stated:
Nothing in the provision at issue indicates the parties’ intent to
extinguish the Home Depot’s tax reimbursement and lien
rights…Rather, the plain and ordinary meaning of the language
indicates only that Home Depot’s lien was ‘assigned a lower’ priority
than Bank of America’s first mortgage lien. Therefore, Home Depot’s
tax reimbursement and lien rights were not extinguished by section
12.4 of the development agreement.
Id. (internal citations omitted).
Chicago Title defended Bank of America in the foreclosure action and on
appeal. (Dkt. 102 ¶ 76). Because of the encumbrance, Bank of America “sold the
property for less than its value had the title been free and clear.” (Dkt. 93, 1). Bank
of America now seeks an order that Chicago Title breached the Policy by failing to
reimburse Bank of America for its financial loss. (Id. at 15).
LEGAL STANDARD
Summary judgment should be granted when “the movant shows that there is
no genuine dispute as to any material fact and the movant is entitled to judgment
as a matter of law.” Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S.
317, 322-23 (1986). A genuine dispute as to any material fact exists if “the evidence
is such that a reasonable jury could return a verdict for the nonmoving party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The party seeking
8

summary judgment has the burden of establishing that there is no genuine dispute
as to any material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In
considering cross-motions for summary judgment, the Court must construe all
inferences in favor of the party against whom the motion under consideration is
made. Allen v. City of Chi., 351 F.3d 306, 311 (7th Cir. 2003).
Summary judgment is a particularly appropriate mechanism for resolving
cases involving the interpretation of written contracts. International Union of
United Auto., Aerosapce and Agric. Implement Workers of Am. v. Rockford
Powertrain, Inc., 350 F.3d 698, 703 (7th Cir. 2003). “Because contracts are
interpreted as a matter of law, claims that turn on the interpretation and
construction of a contract, rather than on disputed material facts, are suitable for
resolution on a motion for summary judgment.” W. Bend Mut. Ins. Co. v. Procaccio
Painting & Drywall Co., Inc., 928 F. Supp. 2d. 976, 981 (N.D. Ill. 2013), aff’d on
other grounds, 794 F.3d 666 (7th Cir. 2015) (citing Kmart Corp. v. Footstar, Inc., No.
09 CV 3607, 2012 WL 1080262, at *12 (N.D. Ill. Mar. 30, 2012)).
DISCUSSION
The parties have filed cross-motions for summary judgment. Bank of America
argues that the express language of the Policy covers the loss from the encumbrance
and that Chicago Title breached the Policy by failing to reimburse Bank of America
for its loss. Chicago Title argues that Bank of America is barred from recovering
under the known loss doctrine and under Exclusion 3(a), which excludes coverage

9

for encumbrances “created, suffered, assumed or agreed to by the insured claimant.”
(Dkt. 104, 8).
In the instant case there are few, if any, material facts in dispute. In Illinois,
the construction of an insurance policy is a question of law. County Mut. Ins. Co. v.
Livorsi Marine, Inc., 222 Ill. 2d 303, 311, 856 N.E.2d 338, 342 (Ill. 2006); Outboard
Marine Corp. v. Liberty Mutual Ins. Co., 154 Ill.2d 90, 108 (1992). An insurance
policy is to be construed as a whole, “giving effect to every provision, if possible,
because it must be assumed that every provision was intended to serve a purpose.”
Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill. 2d 352, 362, 860 N.E.2d 307,
314 (Ill. 2006). “If the words used in the policy are clear and unambiguous, they
must be given their plain, ordinary, and popular meaning.” Cent. Ill. Light Co. v.
Home Ins. Co., 213 Ill. 2d 141, 153, 821 N.E.2d 206, 213 (Ill. 2004). “Although
insurance policies are construed liberally in favor of coverage, this rule of
construction comes into play only when the policy language is ambiguous.” Livorsi
Marine, 222 Ill. 2d at 311.
1. The Text of the Policy
Bank of America argues that the Policy expressly covers an encumbrance
such as the SSA Tax Reimbursement Obligation. It notes that the insuring clause
insures against “[a]ny … encumbrance on the title” and insures “[t]he priority of
any … encumbrance over the lien of the insured mortgage.” (Dkt. 94 ¶ 19). Bank of
America further argues that Schedule B of the Policy specifically insures that the
agreements listed on Schedule B, Part II are “subordinate to the lien or charge of

10

the insured mortgage.” (Id. at ¶ 23). The Memoranda of both the Home Depot
Purchase Agreement and Development Agreement are listed on Schedule B, Part II
of the policy, and thus, according to Bank of America, they are covered. Schedule B,
Part I provides that loss or damage “by reason of” the documents listed on that
schedule is not covered. But as Bank of America notes, none of the documents
containing the SSA Tax Reimbursement Obligation (such as the Purchase
Agreement and the Development Agreement) are listed on Schedule B, Part I.
According to Bank of America, the inclusion of the Home Depot Agreements on
Schedule B, Part II but not on Schedule B, Part I demonstrates the Policy’s clear
and express intent to cover any loss resulting from the Home Depot Agreements
and lien. Finally, Bank of America argues that the ALTA 9 Endorsement insures
against loss or damage by reason of “[a]ny instrument referred to in Schedule B as
containing any covenant, conditions or restrictions on the land” which also “provides
for a private charge or assessment.” (Id. at ¶ 22). As stated previously, the Home
Depot Memoranda of the Purchase Agreement and Development Agreement, both of
which include covenants and encumbrances and provide for a private assessment,
are listed in Schedule B, Part II. Thus, Bank of America argues, the SSA Tax
Reimbursement Obligation is covered by the ALTA 9 Endorsement.
Chicago Title offers a different reading of Schedule B, Part II. Chicago Title’s
main argument is that Schedule B, Part II “actually excepts the tax reimbursement
and lien rights from coverage, insuring only the priority of the Mortgage over liens
arising out of the Purchase Agreement and the Development Agreement.” (Dkt. 110,

11

7). This argument hinges on the phrase “the Company insures that such matters
are subordinate to the lien or charge of the insured mortgage upon said estate or
interest,” contained in Schedule B, Part II. Chicago Title reads this language as
providing that the Mortgage takes priority over the lien, not that Home Depot’s
rights would be extinguished by a possible foreclosure. 4 To be clear, the Illinois
Appellate Court already determined that the Home Depot lien is an encumbrance
that runs with the land and would not be extinguished upon foreclosure. 5 The issue
in the instant motion is whether the insurance policy issued by NNNT covers a loss
arising out of the Home Depot lien. The arguments put forth by Bank of America
demonstrate that the Policy covers such a loss. The Court is unpersuaded by
Chicago Title’s reading of Schedule B, Part II. The language cited does not mean
that Schedule B, Part II excepts coverage. On the contrary, when the two parts of
Schedule B are read together, Schedule B, Part II clearly provides for coverage of
the listed documents. The Court is persuaded that had the parties intended to
except the Home Depot liens from coverage, they would have included them in
Schedule B, Part I. They did not do so.
Chicago Title’s next argues that the Special Endorsement limits coverage by
merely insuring that the Mortgage takes priority over certain liens. Chicago Title
cites to the text of the Special Endorsement to claim that the Special Endorsement

In support, Chicago Title cites to testimony from John Lamberts: “The placing of a document on
Schedule B, Part II does not guarantee its eradication by reason of a foreclosure… [I]t’s saying that
lender has first dibs on the proceeds when there is a foreclosure sale…” (Dkt. 110, 7-8).
5
The Illinois Appellate Court reached this determination based on the language of the agreements
between Home Depot and Cannonball. Bank of America, N.A. v. Cannonball LLC, 2014 Il App (2d)
130858, ¶ 29.
4

12

controls and trumps all other Policy provisions. The Special Endorsement states:
“[t]o the extent a provision of the policy or a previous endorsement is inconsistent
with an express provision of this [Special Endorsement], this [Special Endorsement]
controls.” (Dkt. 110, 8).
Bank of America responds that the Special Endorsement does not limit
coverage and should not be read in a way that negates the Policy’s other insuring
clauses. See Sagar Megh Corp. v. United National Ins. Co., 999 F. Supp.2d 1018,
1025 (N.D. Ill) (“An insurance policy and its endorsements are read together to
ascertain the meaning of an insurance contract”) (citing Mank v West American Ins.
Co., 249 Ill.App.3d 827 (Ill. App. Ct. 1983)). Despite the fact that the Special
Endorsement states that it controls in the event of a conflict, Bank of America notes
that the Special Endorsement is intended to expand coverage, not limit it.
According to Bank of America, “when a special endorsement removes other coverage
it states such. Here it does not.” (Dkt. 113, 14). Bank of America additionally cites
to the testimony of Mr. Malato, who negotiated the Policy on behalf of LaSalle
Bank. Mr. Malato testified that he did not intend for the Special Endorsement to
modify other parts of the Policy and instead it was “supposed to be additional
coverage, not limiting in anyway.” (Dkt. 113, 14). The record supports Mr. Malato’s
testimony that LaSalle Bank requested the Special Endorsement prior to closing to
further ensure the Mortgage would be protected by the Policy. (Dkt. 102 ¶¶ 36-37).
The Court is unpersuaded by Chicago Title’s arguments and agrees with
Bank of America’s reading of the Policy. The Court is particularly persuaded by the

13

fact that the Purchase Agreement and Development Agreement are listed in
Schedule B, Part II, and not Schedule B, Part I. Additionally, the ALTA 9
Endorsement clearly provides coverage for the Home Depot lien. 6

Finally, the

Court concurs that the Special Endorsement expands coverage under the Policy; it
does not serve to limit the other Policy provisions. There is no indication, other than
Chicago Title’s arguments, in the text of the Policy or in the record that the Special
Endorsement was an attempt to limit coverage. In fact, the evidence presented
establishes the opposite. (Dkt. 113, 13-14). The text of the Policy covers the SSA Tax
Reimbursement Obligation.
Having determined that the Policy provides coverage, the Court next turns to
Chicago Title’s arguments under the known loss doctrine and Exclusion 3(a).
2. The Known Loss Doctrine
Illinois courts repeatedly state that “insurance is based on contingent risks.”
Allianz Ins. Co. v. Guidant Corp., 355 Ill.App.3d 721, 734 (2005). The “known loss
doctrine” allows insurers to defeat claims relating to any undisclosed losses that
were already realized at the policy’s inception. Central Mut. Ins. Co. v. Useong
Intern., Ltd., 394 F.Supp.2d 1043 (N.D. Ill. 2005). When the insured knows or has
reason to know when it purchases an insurance policy that there is a substantial
probability that it will suffer or has already suffered a loss, the risk ceases to be
contingent and becomes an uninsurable “known loss.” Id. (citing Outboard Marine
Corp. v. Liberty Mutual Ins. Co., 154 Ill.2d 90, 103 (1992)). The Illinois Supreme
Chicago Title fails to address Bank of America’s arguments that coverage is provided in the ALTA 9
Endorsement. So while the Court is persuaded the ALTA 9 Endorsement provides an additional
basis to find coverage is required, Chicago Title has waived any argument to the contrary.
6

14

Court has stated that the known loss doctrine may be invoked if the insured “knew
or had reason to know…that there was a substantial probability that loss or
liability would ensue due to the [conduct] for which it is seeking coverage.” Id. “The
purpose of the known loss doctrine is to prevent the insured from obtaining
insurance on a loss that has already occurred or is certain to occur in the future,
without the knowledge of the insurer.” Sagar Megh Cor. v. United National Ins. Co.,
999 F.Supp.2d 1018, 1025-26 (N.D. Ill. 2013). “There is no bright-line test to
determine whether and at what point in time the insured knew or had reason to
know of the substantial probability of the loss at issue. The extent of the insured’s
knowledge of the loss must be determined on a case-by-case basis.” Outboard
Marine Corp., 154 Ill.2d at 104. It is the insurer’s burden to show that a known loss
exists. Central Mut. v. Useong, 394 F.Supp.2d at 1050.
Chicago Title argues that Bank of America’s loss is uninsurable under the
known loss doctrine because LaSalle Bank knew or had reason to know that Home
Depot’s lien rights would cause a loss in the event of foreclosure. In support of this
assertion, Chicago Title notes that when LaSalle Bank purchased the Policy, it had
agreed to record the Home Depot Agreements before the Mortgage. 7 (Dkt. 102 ¶¶
47, 48, 58, 73). Thus, according to Chicago Title, LaSalle Bank knew of the potential
loss, which shifted the risk from a contingent one to a risk of which LaSalle Bank
knew or should have known. (Dkt. 104, 8).

In support, Chicago Title cites to the Illinois Appellate Court opinion which held that “LaSalle
Bank had actual knowledge of the documents containing Home Depots tax reimbursement and lien
rights before it recorded its mortgage, because the purchase and development agreements were part
of the closing documents.” Bank of America, N.A. v. Cannonball LLC, 2014 Il App (2d) 130858, ¶ 31.

7

15

In response, Bank of America argues that, in order to trigger the known loss
doctrine, the insured must know at the time it purchased the policy that a specific
event will lead to liability, and that knowledge of a specific event itself is
insufficient to bar coverage. Outboard Marine Corp., 154 Ill.2d at 104-106; Zurich
Specialties London Ltd. v. Village of Bellwood, No. 07 C 2171, 2011 WL 248444, at
*12 (N.D. Ill. Jan. 26, 2011). Bank of America relies on Zurich Specialties London
Ltd. v. Village of Bellwood, where the insured engaged in illegal wiretapping
beginning in 1994. 2011 WL 248444, at *12. As early as 2000, the Village was on
notice that the wiretapping may be unlawful and notified its insurer. Id. In 2001, an
individual sued the Village. Id. The insurers argued that the known loss doctrine
precluded coverage because the Village knew of the illegal wiretapping several
years before the inception of the policies. Id. The court disagreed, stating “mere
knowledge of the [illegal wiretapping], however, does not clearly establish that the
insured knew of a substantial probability of loss [at the inception of the policy]. The
issue is not whether the insured knew of the taping but rather whether they knew
or had reason to know that a probable loss would occur due to the taping.” Id.
(citing Outboard Marine Corp., 154 Ill.2d at 104-106); see also Spearman Indus.,
Inc. v. St. Paul Fire and Marine Ins. Co., 138 F.Supp.2d 1088, 1100 (N.D. Ill. 2001)
(declining to apply the known loss doctrine because, although the insured’s roof
suffered preexisting wear and tear, the insured could not have known when it
bought the policy that a storm would damage its roof several months later). 8
The known loss doctrine “applies only where the insured is aware of a threat of loss so immediate
that it might be stated that the loss was already in progress and such was known at the time of
8

16

Bank of America asserts that the same reasoning applies here. It claims that
at the time LaSalle Bank purchased the Policy, “everyone involved hoped and
expected that the development would be a success. Failure of the project, and the
need for Bank of America to file a foreclosure action was not on the horizon.” (Dkt.
113, 10). Bank of America claims that at the time it purchased the Policy, the risk of
loss was too remote to trigger the known loss doctrine, and that LaSalle Bank’s
knowledge of the Home Depot lien rights is insufficient to trigger the known loss
doctrine under Zurich. Chicago Title counters that “[w]hile the financial loss was
realized when Bank of America sold the Property, the actual loss began at Closing
when the value of the Mortgaged Property was diminished by the recording of the
encumbrance ahead of the Mortgage.” (Dkt. 115, 3).
Although LaSalle Bank knew of the encumbrance on the property and knew
that the encumbrance would be recorded before the Mortgage, the loss and
corresponding need for coverage would not occur until the Property was sold at a
foreclosure sale. At the inception of the Policy, this loss was too speculative to
trigger the known loss doctrine. 9 Accordingly, the Court finds the known loss
doctrine does not apply.

application or issuance of the policy.” 3 Eric Mills Holmes, Holmes’s Appleman on Insurance 2d 16.4
at 290 (1998).
9 Chicago Title’s arguments under the known loss doctrine fail for an additional reason. Even if
Chicago Title is correct, and the SSA Tax Reimbursement Obligation constitutes a known loss,
NNNT knew of this loss when it issued the Policy. “The purpose of the known loss doctrine is to
prevent the insured from obtaining insurance on a loss that has already occurred or is certain to
occur in the future, without the knowledge of the insurer.” Sagar Megh Corp. v. United National Ins.
Co., 999 F.Supp.2d 1018, 1025-26 (N.D. Ill. 2013). As discussed below, the record suggests that
NNNT had knowledge of the Home Depot Lien rights, as the Memoranda of the Purchase Agreement
and Development Agreement were listed on Schedule B of the Policy NNNT issued. The purpose of

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3. Exclusion 3(a)
The text of the Policy provides several exclusions from coverage. The only
relevant exclusion for the instate case is Exclusion 3(a), which provides that
Chicago Title need not pay for any claims for damage that rise out of encumbrances
“created, suffered, assumed or agreed to by the insured claimant.” (Dkt. 102 ¶ 8).
The “created or suffered” exclusion “is a standard one in title insurance contracts,
and it is apparently ‘[o]ne 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) (citing Palomar,
Title Insurance Law, § 6:10) (applying Indiana law). In Illinois, “[t]he burden is on
the insurer to establish that a policy exclusion applies,” and “[e]xclusion provisions
that limit or exclude coverage must be construed liberally in favor of the insured
and strictly against the insurer.” Czapski v. Maher, 2011 IL App (1st) 100948, ¶ 17.
Chicago Title argues that Exclusion 3(a) applies because LaSalle Bank
“created, suffered, assumed or agreed to” the SSA Tax Reimbursement Obligation
when it knew that the covenant running with the land existed 10 and consented to
recording the Home Depot Agreements before its Mortgage. Chicago Title also
argues that LaSalle Bank had actual knowledge of, yet failed to disclose to NNNT,
the Purchase Agreement and lien rights, thus acting inequitably. Bank of America
provides several arguments in response: 1) Exclusion 3(a) is limited to intentional

the known loss doctrine would be thwarted if Chicago Title could avoid coverage for a claim it
actually knew about.
10 As described above, the Illinois Appellate Court determined that LaSalle Bank had actual
knowledge of the documents creating the covenant running with the land because those documents
were part of the closing documents. Bank of America, N.A. v. Cannonball LLC, 2014 Il App (2d)
130858, ¶ 31.

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or wrongful acts, and there is no evidence of intentional or wrongful acts here, 2)
Exclusion 3(a) cannot apply because NNNT knew of the SSA Tax Reimbursement
Obligation, and 3) Exclusion 3(a) requires an express or implied agreement, neither
of which is present here.
In summarizing the majority approach on this exclusion, the Seventh Circuit
stated, “the ‘created or suffered’ language is intended to protect the insurer from
liability for maters caused by the insured’s own misconduct, breach of duty, or
otherwise inequitable dealings.” Home Federal Sav. Bank, 695 F.3d at 732-33
(compiling cases). The Seventh Circuit further noted:
The cases discussing the applicability of the ‘created or suffered’
exclusion generally have stated that the insurer can escape liability
only if it is established that the defect, lien or encumbrance resulted
from some intentional misconduct or inequitable dealings by the
insured or the insured either expressly or impliedly assumed or agreed
to the defects or encumbrances in the course of purchasing the
property involved. The courts have not permitted the insurer to avoid
liability if the insured was innocent of any conduct causing the loss or
was simply negligent in bringing about the loss.
Id. (quoting Brown v. St Paul Title Ins. Co., 634 F.2d 1103, 1107-08 n.8 (8th Cir.
1980) (applying Missouri law)); see also Shamrock Bank of Florida v. First American
Title Ins. Co., No. 13 C 92, 2014 WL 1304694, at * 14 (S.D. Ill. Mar. 28, 2014)
(applying Illinois law and relying on Home Federal Sav. Bank, 695 F.3d at 732-33).
Despite this description from the Seventh Circuit, Chicago Title relies on the
First Circuit case of American Title Ins. Co v. Lane Powell PC, 764 F.3d 114 (1st
Cir. 2014). Unlike the Seventh Circuit, Lane Powell does not require that the
insured engage in misconduct or inequitable dealings. Id. at 122. That case held

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that Exclusion 3(a) applied because the insured’s employees testified and “candidly
admitted that they were well aware that Lane Powell’s mortgage would be junior to
the [other] mortgages.” Id. This Court declines to follow this out-of-circuit reasoning
and follows the Seventh Circuit’s guidance on the exclusionary language. Further,
even if this Court followed Lane Powell, that case is largely distinguishable. The
insureds in Lane Powell admitted that their mortgage was junior to other
mortgages. Id. In contrast, the insureds in this case repeatedly maintained that
their Mortgage was superior to Home Depot’s lien, only consented to the recording
order on the assumption that the superiority of their Mortgage was memorialized in
the Payment and Priority Agreement, and sought a Special Endorsement stating
that their Mortgage was superior to any lien rights. (Dkt. 102 ¶¶ 37, 42, 47-48, 5558, 73; Dkt. 94 ¶ 11). Despite the fact that LaSalle Bank had actual knowledge of
the encumbrance, the record demonstrates that the insureds repeatedly asserted
their Mortgage’s superiority—a situation quite different from Lane Powell.
Chicago Title claims that it has demonstrated intentional misconduct and
inequitable dealings on the part of LaSalle Bank. (Dkt. 104, 8-9). According to
Chicago Title, NNNT never received the Purchase Agreement prior to issuing the
insurance policy because LaSalle Bank withheld these documents. 11 (Id.; Dkt. 102 ¶
46). It is therefore “inequitable for LaSalle Bank to claim coverage for an
encumbrance of which it knew and failed to disclose.” (Dkt. 115, 8). Bank of America
points out that NNNT listed the Memoranda of the Purchase Agreement and
NNNT also notes that it could not have discovered the Home Depot lien rights by searching the
record “because the encumbrance did not exist prior to Closing.” (Dkt. 115, 10-11).

11

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Development Agreement on Schedule B of the Policy. In fact, Schedule B, Part II of
the Policy includes the following underlined language after listing the Memoranda
of the Purchase Agreement and the Development Agreement: “Note: Contains a
provision to create a lien on the land.” (Dkt. 110, 7) (emphasis in original). Thus,
Bank of America argues, NNNT had constructive notice of the agreements and the
fact that they resulted in liens. (Dkt. 94 ¶ 22). The Court agrees with Bank of
America. It is not credible for NNNT to list documents in an insurance Policy it
issued, and then claim it was unaware of the contents of those documents. On the
contrary, NNNT must be deemed to have knowledge of documents it listed in its
own policy. Ultimately, the record does not support Chicago Title’s arguments; there
is no evidence of intentional misconduct or inequitable conduct by LaSalle Bank
here.
Finally, Chicago Title argues that LaSalle Bank assumed or agreed to the
encumbrance because it knew that the encumbrance would run with the land and
allowed the encumbrance to be recorded before the Mortgage. Bank of America
provides a suite of arguments in response: it neither expressly nor impliedly agreed
to the encumbrance; any agreement to create an encumbrance must comply with
the statute of frauds; there was no meeting of the minds to create an encumbrance
that runs with the land as evidenced by Mr. Malato’s repeated statements that the
Mortgage would be superior to any liens; agreeing to the order of recordation was
conditioned on the Payment and Priority Agreement; and Chicago Title has not

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demonstrated

an

implied

agreement.

Of

course,

Chicago

Title

provides

counterarguments to each of these points.
However, the Court need not reach these arguments. The record does not
support the assertion that LaSalle Bank expressly or impliedly agreed to the
encumbrance. And as noted above, the majority of courts require some level of
culpable conduct on the part of the insured. “[C]ourts have not permitted the
insurer to avoid liability if the insured was innocent of any conduct causing the loss
or was simply negligent in bringing about the loss.” Home Federal Sav. Bank, 695
F.3d at 732-33. Such is the case here. The record at most indicates that LaSalle
Bank may have been negligent in its dealing with Home Depot and the recording
order. Chicago Title has not carried its burden of showing that the Exclusion
applies.
4. Reformation
In the event the Court disagrees with Chicago Title’s arguments and holds
that the Policy provides coverage, Chicago Title asks the Court to reform the Policy.
(Dkt. 104, 13). Chicago Title claims that if the Policy insures the loss caused by the
encumbrance, that coverage is the result of a mutual mistake. In support, Chicago
Title relies on the same arguments regarding coverage under Schedule B, Part II
and the Special Endorsement. Namely, that Schedule B, Part II excepts coverage
and that the Special Endorsement controls, limits coverage, and represents the
coverage “bargained for” by the parties. (Dkt. 115, 13-14). Bank of America counters
with the familiar arguments: the primary insuring clause, Schedule B, Part II, and

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the ALTA 9 Endorsement provide coverage; LaSalle Bank intended for these
provisions to provide coverage; and Mr. Malato repeatedly expressed his
understanding that the Mortgage would take priority over any liens and sought a
Special Endorsement to that effect. (Dkt. 111, 14-15).
“[I]nsurance policies may be reformed for the same reasons as any other
written contract.” Board of Trustees of U. of Ill. v. Ins. Corp. of Ireland, Ltd., 969
F.2d 329, 332 (7th Cir. 1992) (applying Illinois law). Under Illinois law, a contract
may be reformed when the requesting party demonstrates by clear and convincing
evidence that the document contains a provision that was not agreed upon and is
the result of a mutual mistake of fact. Wheeler-Dealer, Ltd. v. Christ, 379 Ill.App.3d
864, 869 (2008). The purpose of reformation is to change a written instrument by
inserting some omitted provision or deleting an existing provision so the document
conforms to the original agreement between the parties. Id. (citing Schaffner v. 514
West Grant Place Condominium Ass’n, 324 Ill.App.3d 1033, 1044 (2001)). “The
mistake must be one of fact, not of law, and it must be mutual and common to both
parties.” Wheeler-Dealer, 379 Ill.App.3d at 869 (citing Sheldon v. Colonial Carbon
Co., 116 Ill.App.3d 797, 800 (1983)). “The mutual v. unilateral mistake distinction is
an important one in a reformation analysis, as courts have been ‘reluctant to allow
a party to avoid a contract on the ground of [unilateral] mistake, even as to a basic
assumption, if the mistake was not shared by the other party.’” Anco v. ACCO
Brands USA LLC, No. 10 C 4275, 2012 WL 774945, at *4 (N.D. Ill. Mar. 7, 2012)

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(citing Young v. Verizon’s Bell Atl, Cash Balan Plan, 667 F.Supp.2d 850, 894 (N.D.
Ill. 2009), aff’d 615 F.2d 808 (7th Cir. 2010)).
Chicago Title has not demonstrated by clear and convincing evidence that a
variance exists between the parties’ original agreement and the writing of the
Policy. See Briarcliffe Lakeside Townhouse Owners Ass’n v. Wheaton, 170 Ill.App.3d
244, 251 (1988). Given Mr. Malato’s testimony, the various emails, and the text of
the policy, the record indicates that at most Chicago Title has demonstrated that it
made a mistake, and a unilateral mistake is not a ground for avoiding the contract.
Praxair, Inc. v. Hinshaw & Culbertson, 235 F.3d 1028, 1034-35 (7th Cir. 2000). The
Court will not reform the Policy.
CONCLUSION
For the reasons stated above, Bank of America’s motion for summary
judgment [92] is granted and Chicago Title’s motion for summary judgment [103 &
104] is denied.
E N T E R:
Dated: April 17, 2020
MARY M. ROWLAND
United States District Judge

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