Bank of America, N.A. v. Chicago Title Insurance Company
Memorandum Opinion and order signed by the Honorable Robert W. Gettleman on 5/18/2017: Defendant's motion to dismiss 18 count II is granted. Plaintiff's motion 24 to strike and dismiss defendant's counterclaim and first affirmative defense is denied. Plaintiff's answer to the counterclaim is due by 6/12/2017. Mailed notice (gds)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
BANK OF AMERICA, N.A., a national banking
Association, as successor-in-interest to LaSalle
Bank National Association, in its individual
capacity and as authorized Agent,
CHICAGO TITLE INSURANCE COMPANY, a
Nebraska corporation, as successor-in-interest to
Ticor Title Insurance,
Case No. 17 C 0407
Judge Robert W. Gettleman
MEMORANDUM OPINION AND ORDER
Plaintiff Bank of America, N.A., as successor in interest the LaSalle Bank National
Association, in its individual capacity and as authorized agent, has brought a two count
complaint against defendant Chicago Title Insurance Company as successor in interest to Ticor
Title Insurance Company, for a breach of a title insurance policy.1 Count I is a claim for breach
of contract. Count II is a claim titled “Bad Faith.” Defendant has answered Count I, moved to
dismiss Count II, raised a number of affirmative defenses, and has filed a counterclaim for
declaratory judgment and/or “reformation of the policy to reflect the bargained for coverage.”
Plaintiff has moved to strike and/or dismiss defendant’s counterclaim and first affirmative
defense, both of which assert that Exclusion 3(a) of the underlying policy excludes plaintiff’s
claim. For the reasons described below, defendant’s motion to dismiss Count II of the complaint
Both plaintiff and defendant are successors in interest to the original parties to the
underlying contracts. For ease, the court simply refers to the parties as plaintiff and defendant.
is granted. Plaintiff’s motion to strike and/or dismiss the first affirmative defense and
counterclaim is denied.
In 2007 Cannonball, LLC sought to purchase and develop real property in Yorkville,
Illinois, to build a shopping center called Kendall Marketplace. Plaintiff and Cannonball entered
into a construction loan agreement which was secured by a construction mortgage, security
agreement, assignment of rights and leases and fixture filing (the “mortgage”) on the property.
As part of the project Cannonball sold land to an anchor tenant, Home Depot, pursuant to a real
property purchase agreement (the “purchase agreement”). In that purchase agreement,
Cannonball agreed to reimburse Home Depot for a portion of a special tax imposed on the
property by Yorkville (the “SSA tax”). Paragraph 22(h) of the purchase agreement provided for
the reimbursement, and also provided lien rights to Home Depot should Cannonball fail to timely
pay the reimbursement. That paragraph also provided that Cannonball’s obligation “shall be a
covenant which shall run with the land and bind [Cannonball’s] grantees, successors and assigns
including provisions regarding the SSA tax.”
Cannonball and Home Depot also entered into a “developmental agreement.” That
agreement (§ 7.8(c)) referenced and incorporated § 22(h) of the purchase agreement, and also
Grant of Lien. [Cannonball] hereby grants and conveys to Home Depot a
lien on [Cannonball’s] property to secure the performance by
[Cannonball] of its obligations hereunder. Such lien shall be foreclosed in
accordance with this Article 12.
Priority. The priority of a lien created pursuant to this Article 12 shall be
established solely by reference to the date of recordation of the Memorandum of
Development Agreement pursuant to Section 17.4 below; provided, however,
such lien shall be subordinate to the lien of any first mortgage or deed of trust.
Cannonball, Home Depot, and plaintiff also entered a “payment and priority agreement”
dated May 15, 2007 (as were the other agreements) that provided that “[plaintiff] shall have no
obligations to the City or any of the Development agreement unless [plaintiff] expressly assumes
[Cannonball’s] obligations thereunder in writing.”
On May 24, 2007, the purchase agreement, development agreement, and the mortgage
were recorded in that order with the Kendall County Recorder. Also on May 24, 2007,
defendant issued to plaintiff, the title insurance policy at issue.
Cannonball defaulted under the construction loan agreement and plaintiff sued for
foreclosure in state court. With respect to Home Depot, the foreclosure complaint alleged that
“the recorded and unrecorded claims and interests of this defendant, if any, including but not
limited to any actual or potential rights to record liens or exercise any other rights against the
Property, pursuant to the Home Depot purchase agreement, the Home Depot [development
agreement] or any other agreements, are subordinate and inferior to the lien and interest of
[plaintiff].” Home Depot counterclaimed for a declaration that its rights under the various
agreements ran with the land and were binding on the grantees, successors, and assigns of
Cannonball, including plaintiff. The parties filed cross motions for summary judgment. The
state trial court granted plaintiff’s motion, concluding that plaintiff’s mortgage had priority and
that Home Depot’s tax reimbursement and lien rights were personal between Cannonball and
Home Depot, did not run with property, and would be foreclosed and terminated upon entry of
final order of foreclosure.
The appellate court affirmed in part and reversed in part, agreeing that plaintiff’s
mortgage had priority over any Home Depot lien, but concluded that Home Depot’s tax
reimbursement and lien rights are covenants that run with the land binding on plaintiff and its
successors, and were not extinguished because plaintiff had actual knowledge of the tax
reimbursement and lien rights before plaintiff recorded its mortgage, and because the mortgage
was recorded after the memorandum of agreement and memorandum of development agreement.
See Bank of America, N.A. v. Cannonball, LLC, 2014 IL App. (2d) 130858, 12 N.E.2d 841 (2d
In the instant action, plaintiff claims that as a result of the appellate court ruling, it sold
the property for $1,780,000 less than what it would have sold for absent the SSA tax obligation.
As a result, plaintiff sought indemnity from defendant based on the title insurance policy.
Defendant, which represented plaintiff in the state court action against Home Depot, has denied
coverage and refused to indemnify plaintiff, arguing that plaintiff’s loss is excluded from the
Defendant’s Motion to Dismiss Count II of the Complaint.
In Count II, plaintiff attempts to assert a claim for “Bad Faith,” alleging that for nearly
two years defendant has refused to acknowledge its indemnity obligations without any
reasonable or justifiable basis. It also alleges that defendant has “acted vexatiously,
unreasonably, and in bad faith by refusing to honor its insurance obligations.
Defendant has moved to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a
claim. A motion under Rule 12(b) challenges the sufficiency of the complaint, not its merits.
Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). The court accepts as true all
well-pleaded factual allegations and draws all reasonable inferences in the plaintiff’s favor.
Roberts v. City of Chicago, 817 F.3d 561, 564 (7th Cir. 2016). The complaint must allege
sufficient facts that, if true, would raise a right to relief above the speculative level, showing that
the claim is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 549, 555 (2007). To
be plausible on its face the complaint must plead facts sufficient for the court to draw the
reasonable inference that the defendant is liable for the alleged misconduct. Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009).
Defendant’s motion to dismiss Count II is well taken. First, to the extent that plaintiff
relies on § 155 of the Illinois Insurance Code, which provides for claims against insurers for bad
faith denial of coverage, that statute is unavailable to plaintiff because the Insurance Code
specifically exempts title insurance companies from its provisions. See 215 ILCS 5/451;
Azran v. Fidelity National Financial, Inc., 2016 WL 4124286 *3 (N.D. Ill. Aug. 3, 2016).
Instead, title insurance companies are governed by the Illinois Title Insurance Act, 215 ILCS
155/3, which contains no equivalent to § 155.
Next, to the extent that Count II purports to be a claim for “common law bad faith,” it is
barred by Illinois law. See Voyles v. Sandia Mortgage Corp., 196 Ill.2d 288, 297-98 (2001) (no
independent tort claim for breach of covenant of good faith and fair dealing.).
Thus, to succeed, plaintiff must allege a tort independent from a breach of the policy,
such as fraud or a violation of the Illinois Consumer Fraud Act. Count II contains no such
allegation. Consequently it is dismissed.
Plaintiff’s Motion to Strike and Dismiss Defendant’s Counterclaim and First
Plaintiff has moved under Fed. R. Civ. P. 12(f) and 12(b)(6) to strike and dismiss
defendant’s counterclaim and first affirmative defense, arguing that: 1) that the counterclaim
should be stricken simply because it is duplicative of defendant’s first two affirmative defenses;
and 2) neither the first affirmative defense nor Count I of the counterclaim, both of which seek to
avoid coverage based on an exclusion for encumbrances “created, suffered, assumed or agreed to
by the insured claimant,” state a claim because defendant has not pled that plaintiff’s intentional
misconduct or inequitable behavior created the tax encumbrance at issue. The court rejects both
First, plaintiff is correct that the counterclaim is basically duplicative of defendant’s first
two affirmative defenses. The counterclaim, however, attaches numerous exhibits that are absent
from both plaintiff’s complaint and defendant’s affirmative defenses. Additionally, as both
parties acknowledge, an insurer (defendant) has the burden of proving that a policy exclusion
applies to the plaintiff’s claim. As a result, it is perfectly reasonable and proper for defendant to
raise the exclusion as a defense. And, because (a) plaintiff has alleged that the exclusion does
not apply, and (b) plaintiff raised the exclusion prior to filing the instant action, it is also
reasonable (and perhaps required) that defendant seek a declaration from the court as to the
parties’ rights and obligations under the contract.
Moreover, even if the counterclaim and affirmative defenses are entirely duplicative,
plaintiff will suffer no prejudice by having to respond to the counterclaim. The issue of whether
Exclusion 3(a) applies is the key issue in this case. Striking the counterclaim as redundant
would not remove the issue, and would not save plaintiff any time or money. See e.g., Balmoral
Racing Club, Inc. v. Churchill Downs, Inc. 2011 WL 6009610 *2 (N.D. Ill. Nov. 29, 2011).
Consequently, the court denies plaintiff’s motion to strike the counterclaim as redundant.
Plaintiff’s motion to dismiss both the first affirmative defense and Count I of the
counterclaim for failing to plead that plaintiff’s intentional misconduct or inequitable dealings
resulted in the tax encumbrance, fares no better. Exclusion 3(a) of the policy excludes from
coverage “defects, liens, encumbrances, adverse claims or other matters (a) created, suffered,
assumed, or agreed to by the insured claimant.” The affirmative defense and counterclaim allege
that plaintiff was well aware: (1) of the documents creating the tax encumbrance; (2) that the
documents provided for the encumbrance to run with the land; and (3) the documents that
created the encumbrance were intended to be and were recorded prior to plaintiff’s mortgage.
Indeed, the documents attached by plaintiff to the complaint, and by defendant to its
counterclaim, indisputably demonstrate that plaintiff’s attorney specifically agreed to the order
of recordation so long as the policy included a special endorsement insuring plaintiff that the
“priority” of the mortgage lien would not be impaired by the recording of the Home Depot
agreements. The policy contains such an endorsement. As the Illinois Appellate Court held,
however, priority does not equal extinguishment. Thus, when the property was sold at
foreclosure, the funds were first applied to pay off plaintiff’s mortgage. But because the tax
encumbrance was recorded before the mortgage, the foreclosure could not extinguish it. Bank of
America v. Cannonball, LLC, 2014 Il. App. (2d) at ¶31. By agreeing to the order of recordation,
plaintiff had at least arguably agreed to the encumbrance.
Plaintiff argues to no avail that under Illinois law the exclusion will not be applied to
exclude coverage unless the insured acted intentionally or wrongfully to create the encumbrance.
None of the cases it relies on, however, actually holds that such conduct is required. It is true
that many of the cases in which the exclusion is applied involves such conduct, but none involve
the instant situation. Indeed, Home Federal Savings Bank v. Ticor Title Insurance Co., 695 F.3d
725 (7th Cir. 2012), on which plaintiff relies extensively, at least suggests that the exclusion may
apply to the instant case. The Home Federal court stated, id. at 732-33 (emphasis added),
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.
Defendant has alleged that plaintiff agreed to the encumbrance when it agreed to the
order of recordation. Plaintiff has submitted an affidavit from its lawyer stating that he and
everyone else involved thought and intended that a foreclosure would extinguish Home Depot’s
encumbrance rights. That is obviously not totally correct, because Home Depot argued
differently and persuasively in the foreclosure action. And, the documents submitted to this
court by both parties show that Home Depot always wanted its tax reimbursement and lien rights
to survive a foreclosure. In any event, defendant need not win its case at this stage. It is enough
that it has pled facts that plausibly suggest that Exclusion 3(a) applies. Bell Atlantic Corp., 550
U.S. at 555. Consequently, plaintiff’s motion to strike or dismiss the first affirmative defense
and counterclaim is denied.
For the reasons described above, defendant’s motion to dismiss Count II of the complaint
(Doc. 18) is granted. Plaintiff’s motion to strike and dismiss defendant’s counterclaim and first
affirmative defense (Doc. 24) is denied. Plaintiff is ordered to answer the counterclaim on or
before June 12, 2017.
May 18, 2017
Robert W. Gettleman
United States District Judge
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