634 F.2d 1103 (8th Cir. 1980), 79-1935, Brown v. St. Paul Title Ins. Corp.

Docket Nº:79-1935, 79-1967.
Citation:634 F.2d 1103
Party Name:William BROWN, Trustee, Appellee/Cross-Appellant, v. ST. PAUL TITLE INSURANCE CORPORATION, Appellant/Cross-Appellee.
Case Date:November 18, 1980
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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Page 1103

634 F.2d 1103 (8th Cir. 1980)

William BROWN, Trustee, Appellee/Cross-Appellant,

v.

ST. PAUL TITLE INSURANCE CORPORATION, Appellant/Cross-Appellee.

Nos. 79-1935, 79-1967.

United States Court of Appeals, Eighth Circuit

November 18, 1980

Submitted April 17, 1980.

As Amended Nov. 19, 1980.

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Robert C. Jones, Clayton, Mo., for appellant/cross appellee.

G. Carroll Stribling, Jr., Clayton, Mo., for appellee/cross appellant.

Before HEANEY and ARNOLD, Circuit Judges, and WRIGHT, [*] District Judge.

SCOTT O. WRIGHT, District Judge.

St. Paul Title Insurance Corporation, appellant/cross-appellee herein, appeals from the judgment of the district court 1 holding that St. Paul breached its policy of title insurance in refusing to defend or discharge certain mechanic's liens having priority over the insured's mortgage. William Brown, trustee in bankruptcy and plaintiff below, cross-appeals, contending that the trial court erred in refusing to award plaintiff statutory penalties and attorney's fees under Missouri's "vexatious refusal to pay" statute. 2 For reasons stated below, we find that St. Paul's refusal to defend or discharge the liens in question did not constitute a breach of its title insurance policy and, accordingly, we reverse the judgment of the district court. In so holding, plaintiff's claim for statutory penalties and attorney's fees becomes moot.

I.

This controversy arose as a result of the failure of a real estate venture in St. Charles County, Missouri, known as Lake St. Louis Estates. In March, 1974, Citizens Mortgage Investment Trust 3 (hereinafter CMIT) became the primary construction lender for the Lake St. Louis Estates project and, pursuant to a loan agreement with the project's developer, initially advanced over $10,000,000 to pay off prior construction lenders. CMIT also agreed to make further advances, up to a maximum of $17,000,000, subject to the conditions set forth in the loan agreement. The loan was primarily secured by a deed of trust and a first lien mortgage on the property comprising the Lake St. Louis development.

In order to protect its interest in the real estate securing the loan, CMIT purchased a

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title insurance policy from St. Paul Title Insurance Corporation insuring CMIT against any loss or damage suffered by reason of defects in the title to the property or by reason of liens or encumbrances on the property itself. The policy specifically provided, inter alia, that St. Paul insured CMIT against any loss incurred by reason of "any statutory lien for labor or material which now has gained or hereafter may gain priority over the lien of the insured mortgage...." The policy also contained a standard exclusion schedule setting forth those matters which were expressly excluded from the policy's coverage. Among the matters excluded were any defects, liens or encumbrances "created, suffered, assumed or agreed to by the insured claimant...."

St. Paul issued its policy on March 20, 1974, insuring, as of that date, the priority of CMIT's mortgage as the first lien on the Lake St. Louis property. Originally, the policy's coverage was equal to the amount of CMIT's initial advance. The total amount of coverage was periodically increased, however, as CMIT made subsequent advances pursuant to a disbursement agreement with St. Paul. The disbursement procedure agreed to by CMIT and St. Paul essentially worked as follows: As construction on the real estate project progressed, the developer would issue a "draw request" to CMIT certifying that certain work had been satisfactorily completed and requesting that specific contractors and suppliers be paid for services or materials furnished. After a draw request had been reviewed and approved by the proper parties, CMIT would transfer funds to a construction escrow account maintained by St. Paul, and St. Paul would make disbursements directly to the contractors and suppliers. Because each draw request had to be approved before payment could be made, the loan funds were not disbursed to the materialmen the same day the draw request was tendered, and several days would elapse between the request for payment and the date the funds were actually disbursed. Thus, by the time a draw request was finally paid, additional work would be completed between the draw request date and the disbursement date which would not be covered by the latest draw request. However, even though funds had not been advanced to pay for the improvements made in the interim period, the parties' disbursement agreement required St. Paul to issue an endorsement to its title insurance policy increasing the policy's maximum coverage to the total amount actually advanced by CMIT and moving the effective date of coverage up to the date the funds were disbursed rather than the date the draw request was made. The parties made a total of ten disbursements under this procedure and each time funds were disbursed St. Paul would issue an endorsement to its title insurance policy which would encompass a period of time (i. e., the period between the date of a draw request and actual payment) for which no funds had been made available to pay for construction costs.

On July 29, 1974, the date of CMIT's tenth and last disbursement, CMIT transferred nearly $186,000 to St. Paul's escrow account. That same day CMIT sent St. Paul a letter instructing it on how this money was to be disbursed. A portion of this sum, approximately.$19,000 was used to pay expenses incurred by Lake St. Louis Estates Company, the project's developer. The remainder was to be applied to a draw request submitted by the developer on July 16, 1974. CMIT instructed St. Paul to disburse these funds after it had obtained proper receipts or lien waivers from the appropriate subcontractors and suppliers and when it was in a position to:

1. insure our advance as being a first and best lien,

2. insure that there are no liens of record or you have insured over any such liens, and

3. issue your endorsement for $185,598.45 making the total liability at this time $11,061,628.79.

St. Paul disbursed the funds as instructed and subsequently issued an endorsement to its title insurance policy extending the effective date of the policy to July 30, 1974,

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and increasing the policy's coverage to $11,061,628.79, the total amount actually disbursed as of that date.

Soon after CMIT made its last disbursement, the developer failed to make an interest payment on its construction loan in violation of its loan agreement with CMIT. On August 2, 1974, CMIT sent...

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