Deutsche Bank National Trust Company, Trustee for Long Beach Mortgage Loan Trust, 2006-5 v. Stewart Title Guaranty Company

Filing 31

ORDER granting 27 Motion for Leave to File Surreply in Support of Objection to Defendant's Motion to Dismiss; denying 15 Motion to Dismiss for Failure to State a Claim. So Ordered by Judge Joseph A. DiClerico, Jr.(dae)

UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF NEW HAMPSHIRE

Deutsche Bank National
Trust Company
v.

Civil No. 12-cv-106-JD
Opinion No. 2013 DNH 014

Stewart Title Guaranty Company
O R D E R
Deutsche Bank National Trust Company (“Deutsche Bank”) seeks
a declaratory judgment pursuant to RSA 491:22 that Stewart Title
Guaranty Company (“Stewart Guaranty”) must provide title
insurance coverage for the quiet title action filed against
Deutsche Bank by Adel Fadili, Fadili v. Deutsche Bank, 12-cv-68JD (D.N.H. February 22, 2012).

Stewart Guaranty moves for

judgment on the pleadings on the ground that Exclusion 3(a) in
the policy precludes coverage.

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Deutsche Bank objects.1

Stewart Guaranty filed a reply, and Deutsche Bank’s motion
to file a surreply is granted. The surreply was considered here.

Standard of Review
After filing an answer to the complaint, a party may move
for judgment on the pleadings.2

Fed. R. Civ. P. 12(c).

The

court uses the same standard as is used for a motion to dismiss
under Federal Rule of Civil Procedure 12(b)(6).
of N.H., 664 F.3d 8, 13 (1st Cir. 2011).

Collins v. Univ.

Under the applicable

standard, the court takes the well-pled allegations as true,
views all of the facts in the light most favorable to the nonmoving party, and determines whether the complaint alleges facts
to support a claim “that is plausible on its face.”

Downing v.

Glove Direct LLC, 682 F.3d 18, 22 (1st Cir. 2012) (internal
quotation marks omitted).

Background
This case and two related cases arose from the sale of
property within the Fadili family in which the sellers intended
to sell, the buyers intended to buy, and the mortgagee intended
to encumber a parcel containing a house, the House Lot, but the
deeds of conveyance and mortgage documents described a different
parcel, the Vacant Lot.

The property is located in Alton, New

Hampshire.

2

Although Stewart Guaranty titles its motion as a motion to
dismiss, it had filed its answer before filing the motion.
2

In the first conveyance, Adel Fadili sold property to his
son, Amir Fadili, in 2002, intending to sell the House Lot.
Stewart Title Company prepared the warranty deed from Adel to
Amir, which described the Vacant Lot, not the House Lot.

In

2006, Amir sold the property to his sister, Alia Fadili, again by
warranty deed that described the Vacant Lot.

Alia obtained a

mortgage on the property through Long Beach Mortgage Company, and
the mortgage described the Vacant Lot.
Stewart Guaranty, which is alleged to be related to Stewart
Title Company, issued a loan title insurance policy to Long Beach
and its successors or assigns.

The policy issued by Stewart

Guaranty listed the Vacant Lot as the property subject to Long
Beach’s mortgage.
In October of 2002, just after Adel sold the property to
Amir, the Town of Alton issued a tax deed conveying the Vacant
Lot to the town.

Before Amir’s sale to Alia, in October of 2005,

the Town of Alton issued a tax deed conveying the Vacant Lot to
Adel.

Adel filed for bankruptcy protection in August of 2005,

and the Chapter 7 Trustee discovered that Adel was the record
owner of the House Lot, which was not encumbered by any liens.
The Trustee notified all interested parties that he intended to
sell the House Lot as part of the bankruptcy.

Washington Mutual,

as servicer of the Long Beach mortgage, and Alia objected to the
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sale of the House Lot.

The Bankruptcy Court authorized the sale

of the House Lot, overruling the objections to the sale.
After the House Lot was sold, Deutsche Bank as the successor
to Long Beach brought suit against Alia, seeking to foreclose on
the mortgage on the Vacant Lot and seeking an award of damages
from Stewart Guaranty and Stewart Title for negligence and breach
of contract.

Deutsche Bank v. Fadili, et al., 09-cv-385-JD

(D.N.H. Nov. 16, 2009).

In that action, Deutsche Bank

acknowledged that at the time of the sale in 2006, when the
mortgage was granted, it thought the mortgage encumbered the
House Lot, not the Vacant Lot.

The court granted motions for

summary judgment filed by Stewart Guaranty and Stewart Title
Company, concluding that the negligence and breach of contract
claims against Stewart Title were barred by the statute of
limitation and failed on the merits and that the breach of
contract claims against Stewart Guaranty failed on the merits.
The court denied Alia’s motion for summary judgment, leaving
alive Deutsche Bank’s claim for a declaratory judgment that it
held a mortgage on the Vacant Lot.

The court stated, “[Deutsche

Bank] may not have intended to take a mortgage on the vacant lot,
but it surely intended to take a mortgage on some piece of
property to secure the loan it made to [Alia] Fadili.”
Summary Judgment Order, doc. no. 76, at *45.
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Id.,

Adel filed a quiet title action in state court that was
removed to this court in which he claims a superior interest over
Deutsche Bank to the Vacant Lot and seeks to remove the mortgage
from the property.
February 22, 2012).

Fadili v. Deutsche Bank, 12-cv-68-JD (D.N.H.
Deutsche Bank filed this suit for a

declaratory judgment that under the terms of the title insurance
policy issued to Long Beach, Stewart Guaranty must provide a
defense to Deutsche Bank and indemnification for losses incurred
in the quiet title action.3

Discussion
Deutsche Bank seeks a declaratory judgment that Stewart
Guaranty must provide indemnity and a defense for Deutsche Bank
in Adel’s quiet title action.

Stewart Guaranty moves for

judgment on the pleadings based on Exclusion 3(a) in the policy
issued to Deutsche Bank.

Deutsche Bank argues that the exclusion

does not apply.
In a declaratory judgment action brought pursuant to RSA
491:22 to determine insurance coverage, the insurer bears the

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Deutsche Bank is the successor in interest to Long Beach on
the mortgage issued to Alia when she bought the property from her
brother, Amir. To avoid confusion, the court will use Deutsche
Bank to include Long Beach in referring to actions taken before
Deutsche Bank became the successor in interest.
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burden of showing that there is no coverage for the claim.
Rivera v. Liberty Mut. Fire Ins. Co., 163 N.H. 603, 606 (2012).
Under New Hampshire law, “an insurer’s obligation to its insured
is determined by whether the cause of action against the insured
alleges sufficient facts in the pleadings to bring it within the
express terms of the policy.”

Progressive N. Ins. Co. v.

Argonaut Ins. Co., 161 N.H. 778, 780 (2011).

While insurers may

limit coverage through exclusions, when asserting an exclusion to
avoid coverage, the insurer must show that it applies.

Rivera,

163 N.H. at 606.

Therefore, the inquiry begins by examining the

policy language.

Progressive, 161 N.H. at 780.

The title insurance policy issued by Stewart Guaranty to
Deutsche Bank insures, subject to exclusions and exceptions,
“against loss or damage . . . sustained or incurred by the
insured by reason of,” among other things: “1.

Title to the

estate or interest described in Schedule A being vested other
than as stated therein;
on the title; . . .

2.

[and] 5.

Any defect in or lien or encumbrance
The invalidity or unenforceability

of the lien of the insured mortgage upon the title.”
Complaint Ex. 1, at 1.

Policy,

Exclusion 3(a) provides that “[t]he

following matters are expressly excluded from the coverage of
this policy and the Company will not pay loss or damage, costs,
attorneys’ fees or expenses which arise by reason of: . . .
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3.

Defects, liens, encumbrances, adverse claims or other matters:
(a) created, suffered, assumed or agreed to by the insured
claimant.”

Id. at 2.

“The ‘created or suffered’ exclusion is a standard one in
title insurance contracts, and it is apparently one of the most
litigated clauses in the field.”

Home Fed. Sav. Bank v. Ticor

Title Ins. Co., 695 F.3d 725, 732 (7th Cir. 2012) (additional
quotation marks and citation omitted).

The majority of courts

have held that “the ‘created or suffered’ language is intended to
protect the insurer from liability for matters caused by the
insured’s own intentional misconduct, breach of duty, or
otherwise inequitable dealings . . . .”

Id.; Am. Title Ins. Co.

v. East West Fin., 16 F.3d 449, 455 (1st Cir. 1994).

The

exclusion does not apply to mistakes, negligence, or shoddy
practices by the insured.

Fifth Third Mortg. Co. v. Chicago

Title Ins. Co., 692 F.3d 507, 511-12 (6th Cir. 2012); Chicago
Title Ins. v. Resolution Tr. Corp., 53 F.3d 899, 905 (8th Cir.
1995).

Further, for the exclusion to bar coverage, the insured

must have been aware of and must have agreed to the title defect
before the title insurance policy issued.

See Stewart Title

Guar. Co. v. Nat’l Enters., Inc., 1997 WL 800294, at *2 (9th Cir.
Dec. 17, 1997); Walsh Sec., Inc. v. Cristo Prop. Mgmt., Ltd., 858
F. Supp. 402, 421 (D.N.J. 2012).
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In the underlying action, Adel seeks a declaratory judgment
that he owns the Vacant Lot free of the mortgage, dated April 27,
2006, from Alia to Deutsche Bank.

Count I, titled as a petition

to quiet title, asks that the cloud on the title to the Vacant
Lot caused by Deutsche Bank’s mortgage be removed because of a
mutual mistake of fact about what property was being sold and was
subject to the mortgage; because the seller, buyer, and mortgagee
of the property did not intend the House Lot as the subject of
the conveyance; and because Alia did not have valid title to the
Vacant Lot when the property was mortgaged.

Count II seeks a

declaration that the mortgage does not encumber the Vacant Lot on
the ground that Deutsche Bank did not intend to acquire a
mortgage on the Vacant Lot.

Count III asserts that no mortgage

was created because Alia did not hold a valid title to the Vacant
Lot when the mortgage was received and recorded.
In its motion for judgment on the pleadings, Stewart
Guaranty asserts that Exclusion 3(a) applies to bar title
insurance coverage because Deutsche Bank agreed “that the
mortgage does not encumber the Vacant Land [sic].”

Stewart

Guaranty contends that Deutsche Bank agreed to the defect “that
the mortgage encumbers the House Lot not the Vacant Land.”
Stewart Guaranty also argues that if Deutsche Bank “agreed to a
mortgage on a property other than that actually described in the
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mortgage,” then it agreed to the defect.

Based on those

descriptions of the circumstances, Stewart Guaranty contends that
Exclusion 3(a) applies because Adel can succeed in the quiet
title action only if he proves that Deutsche Bank intended the
mortgage to encumber the House Lot, not the Vacant Lot.
Deutsche Bank asserts that Stewart Guaranty’s theory is
inapplicable in this case because Deutsche Bank did not
intentionally create or agree to the defect in title, which
exists because the wrong property description was provided by
Stewart Title.

Deutsche Bank further argues that intentional

misconduct, not negligence, is required to implicate Exclusion
3(a).

Because Adel’s claims in the underlying action are based

on the parties’ mistake about which property was being sold and
mortgaged and do not allege an intent or agreement to describe
the wrong property in the conveyancing and mortgaging documents,
Deutsche Bank contends that coverage in the underlying action is
not barred by Exclusion 3(a).
As is stated above, Exception 3(a) applies to intentional
misconduct by an insured, not to negligence or mistake.

A claim

in an underlying action, based on a mutual mistake of fact as to
what property was conveyed because of an error in the
conveyancing documents, does not implicate Exclusion 3(a).

See

First Am. Title Ins. Co. v. MacLaren, L.L.C., 2012 WL 769601, at
9

*4-*5 (D. Del. Mar. 9, 2012); see also Mercantile-Safe Deposit &
Tr. Co. v. Chicago Title Ins. Co., 2007 WL 892103, at *8-*9 (D.
Md. Mar. 20, 2007).
The deed at issue in this case describes the Vacant Lot,
based on the property description provided by Stewart Title in
2002.

As a result, Deutsche Bank’s mortgage documents and

Stewart Guaranty’s insurance policy for the 2006 conveyance also
describe the Vacant Lot.

Neither the claims nor the allegations

in Adel’s complaint in the underlying quiet title action suggest
that Deutsche Bank intended to obtain a mortgage on the Vacant
Lot or created, intended, or agreed to the alleged mistake in the
property description that lead to the current dispute.
Therefore, Exception 3(a) would not apply.
Stewart Guaranty argues, however, that Adel’s quiet title
action is analogous to a situation when the buyer in a sale and
leaseback transaction sought coverage from its title insurer for
an action brought against it by the property seller who was
seeking to recharacterize the transaction as a mortgage rather
than a sale of the property.

See Ticor Title Ins. Co. of Calif.

v. FFCA/IIP 1988 Prop. Co., 898 F. Supp. 633, 635 (N.D. Ind.
1995).

In that case, the court held that the claim in the

underlying recharacterization action implicated Exclusion 3(a)
because to succeed, the seller would have to show that the buyer
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intended to obtain a mortgage on the property, rather than fee
simple as the deed showed.

The court reasoned that if the buyer

intended to obtain a mortgage but knowingly participated in the
purchase and sale transaction, the buyer created, suffered,
assumed, or agreed to the defect in the title created by the
difference between the parties’ alleged intent and the deed.

Id.

at 642.
In this case, as alleged in the underlying action, the
parties agreed and intended to convey and mortgage the House Lot.
The defect occurred because the property description provided by
Stewart Title is allegedly inconsistent with the parties’ intent.
Adel does not allege, nor will he need to prove, that Deutsche
Bank was aware of the mistake in the property description in 2006
at the time of the mortgage transaction or that Deutsche Bank
intentionally proceeded with the transaction, knowing it
pertained to the Vacant Lot, despite intending to obtain a
mortgage on the House Lot.

Therefore, the circumstances in this

case are not analogous to those in Ticor Title, as argued by
Stewart Guaranty.
Stewart Guaranty has not carried its burden, for purposes of
its motion for judgment on the pleadings, of showing that
Exclusion 3(a) applies in this case to bar coverage for Deutsche
Bank in the underlying quiet title action.
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Conclusion
For the foregoing reasons, the plaintiff’s motion for leave
to file a surreply (document no. 27) is granted, and the
defendant’s motion to dismiss (document no. 15) is denied.

SO ORDERED.

____________________________
Joseph A. DiClerico, Jr.
United States District Judge
January 31, 2013
cc:

Peter G. Callaghan, Esquire
Edmond J. Ford, Esquire
Kenneth D. Wacks, Esquire

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