First Nat. Bank of Minneapolis v. Fidelity Nat. Title Ins. Co., 77-1119
| Decision Date | 01 March 1978 |
| Docket Number | No. 77-1119,77-1119 |
| Citation | 572 F.2d 155 |
| Parties | FIRST NATIONAL BANK OF MINNEAPOLIS, a National Banking Association, Appellant, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY, a Nebraska Corporation, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Frank F. Pospishil, Abrahams, Kaslow & Cassman, Omaha, Neb., for appellant.
Robert J. Becker, Swarr, May, Smith & Andersen, Omaha, Neb., for appellee.
Before BRIGHT, WEBSTER, * and HENLEY, Circuit Judges.
This litigation commenced after the collapse of a complicated scheme to develop a parcel of real estate. Defendant-appellee Fidelity National Title Insurance Company was the title insurer of the development land, and plaintiff-appellant First National Bank of Minneapolis was the short-term development lender. Their dispute is over who shall bear the monetary losses caused by encumbrances of record that are prior in right to First National's mortgage. First National contends that Fidelity Title insured it as a first lienholder of the land and therefore seeks a declaratory judgment that Fidelity Title is liable under its policy to protect the Bank against the superior liens. After holding a hearing on the parties' cross-motions for summary judgment, the district court entered judgment for defendant Fidelity Title on January 10, 1977. Because it appears to us that disputed issues of fact exist that bear on liability, we reverse and remand the case for trial on the merits.
Winchester Heights is a 348-lot subdivision located in the northwest part of Omaha, Nebraska. In 1973, Dial Investment, Inc. possessed purchase options for the property, which the Klinker family then owned. The parties had agreed upon a purchase price of $226,000.
On September 5, 1973, after several months of negotiations, Jack Karnes, president of Dial Realty, Inc. (a sister company of Dial Investment, Inc.), obtained a commitment for permanent financing of the Winchester Heights development from the Ford Motor Credit Company. Karnes was assisted in the negotiations by the Heitman Mortgage Company, a mortgage brokerage firm.
The commitment for permanent financing was contingent upon the completion of certain improvements at Winchester Heights, consisting primarily of site grading, installation of sewer and water lines, and construction of streets. To finance the improvements an interim loan was necessary, and Heitman contacted First National. In a letter dated September 27, 1973, First National agreed to make the necessary interim loan, contingent on agreement between the parties on the form and substance of necessary loan documents.
In October 1973, representatives of First National, Heitman, Dial Realty, and Dial Investment met to discuss the details of the interim construction loan. At this meeting, Jack Karnes, representing both Dial Investment and Dial Realty, proposed that the interim construction loan "wrap-around" 1 a purchase money mortgage on real estate. Apparently the Klinkers, owners of Winchester Heights, had consented to finance Dial Investment's purchase of the property by accepting three purchase money mortgages for the full sale price of the real estate ($226,000). These purchase money mortgages had an interest rate of 7%, considerably lower than the rate demanded by First National (31/2% Over prime, or about 15%). Accordingly, Karnes hoped to save money for his two companies, Dial Investment and Dial Realty, by persuading First National to "wrap" its loan "around" the first and superior mortgages to be held by the Klinkers rather than proceeding in the "normal" fashion of using interim loan proceeds to pay off immediately the superior obligations. With this goal in mind, Karnes proposed that First National secure its loan by a second mortgage on the property and development (in a "wrap-around" position) but retain.$390,000 of the $1,300,000 interim loan to pay off the prior mortgages and accumulated interest in the event of default. Thus, while the proposed scheme would save Dial Investment interest costs, it would also put First National in the position of an inferior lienholder.
From this point the evidence is contradictory. After concluding that the wrap-around arrangement was legally feasible, First National agreed to study the proposal further. The parties also discussed obtaining title insurance for the proposed transaction. First National suggested obtaining a clean title insurance policy that excluded references to the Klinker mortgages and gave it a first lien on the Winchester Development. The purpose of this clean title insurance policy is disputed by the parties, however. First National contends that it was purely for its own benefit and protection. The proposed wrap-around scheme left First National in a position of a second lienholder, and it viewed its prerogative to withhold.$390,000 of the loan proceeds to pay off the prior liens as inadequate protection. Other evidence supports a contrary purpose. In particular, some testimony indicates that both First National and the long-term lender, Ford Motor Credit Company, required a clean title in order to comply with internal policies designed to avoid auditing difficulties. This testimony suggests that the clean title was intended to be a subterfuge, disguising the true agreement and economic posture of the parties. It is clear that First National was willing to become the interim lender and that it was relying to a great extent on the financial integrity of Karnes and Donald Day, owners of Dial Investment and both wealthy men, to protect its interest. 2 Neither Karnes nor Day ultimately executed the loan documents as individuals, however. 3
The confusion continued after the meeting. Some testimony indicated that both First National and Dial Investment agreed to abandon the wrap-around scheme. Karnes, however, testified that Richard Peterson of First National consented to the wrap-around proposal and that its implementation continued.
Sometime after the meeting, Karnes contacted Kathryn Plourde, vice-president and counsel for Fidelity Title, to determine whether Fidelity Title would issue First National a clean title insurance policy in spite of the prior encumbrances, the Klinker mortgages. Fidelity Title agreed to issue the policy but made its acceptance contingent on First National's acceptance of the wrap-around scheme. When Karnes later called and stated that First National had accepted the deal, Fidelity took his word for it, even though Karnes was not an agent of First National.
Fidelity Title also requested a copy of the building loan agreement from Karnes to verify that sufficient funds would be reserved in order to discharge the encumbrances (the three Klinker mortgages) omitted from the policy. For unknown reasons, Fidelity Title was never furnished with a copy of the building loan agreement and did not follow through on its request to examine it.
On April 4, 1974, First National and Dial Investment signed the building loan agreement. The agreement provided, in part:
It is hereby understood and agreed that BORROWER has incurred an indebtedness in the sum of $226,000.00 to Anna C. Klinker and John Klinker ("Klinker"), said indebtedness being secured by a Real Estate Mortgage by and between Dial Construction Company, Inc. and Klinker covering that certain property described in Exhibit "C" attached hereto and made a part hereof. BORROWER hereby represents that it has caused the Title Insurance Company to delete reference to the said Real Estate Mortgage from its Policy of Title Insurance in favor of LENDER, and has caused the Title Insurance Company to guarantee to LENDER that LENDER's lien is a first mortgage against said property. BORROWER hereby authorizes LENDER to reserve the sum of THREE HUNDRED NINETY THOUSAND AND NO/100 ($390,000.00) DOLLARS to enable LENDER, at any time hereafter, to pay off the said Klinker Mortgage; and BORROWER hereby appoints LENDER its attorney-in-fact for the purposes of paying off such indebtedness to Klinker. Nothing herein contained shall impose upon LENDER any such obligation to pay off the said Klinker Mortgage. BORROWER hereby agrees that any default under the terms of the said Klinker Mortgage which would enable the Klinkers to foreclose said Mortgage, shall also constitute a default hereunder. (Emphasis added) 4
Significantly, the agreement authorizes the lender to reserve.$390,000 to discharge the Klinker mortgages, as contemplated by the proposed wrap-around financing scheme, but does not obligate the lender to use the money for that purpose. On the same day, Dial Investment executed and delivered to First National a promissory note and mortgage for the interim loan. These documents were subsequently recorded by First National.
The next day, April 5, 1974, Peter Hess, on behalf of Heitman Mortgage Company (the mortgage broker), sent the following letter to Kathryn Plourde of Fidelity Title:
In connection with that certain Mortgage Loan in the principal amount of $1,300,000.00, being made by First Minneapolis to Dial Investment Company, please be advised that the undersigned will cause to be deposited with you the sum of approximately $500,000.00 sometime next week.
You should have, on this date, recorded the Mortgage from Dial Investment Company to First Minneapolis. On the date that you disburse the funds which I will cause to be deposited with you as aforesaid, you are to be in a position to issue to First Minneapolis (but to be sent to the undersigned) your standard ALTA Loan Policy-1970 with ALTA Endorsement Form 1 coverage (amended 10-17-70) with Endorsements attached insuring over the questions of Usury and Truth-In-Lending and insuring First Minneapolis in the amount which you disburse as holder of record of a first and superior lien upon the mortgaged premises as of the date of your said disbursement * * *. (Emphasis added)
On March 22, 1974, Dial Investment purchased...
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