Lupu v. Loan City, LLC
| Decision Date | 10 September 2018 |
| Docket Number | Nos. 17-1944 & 17-2024,s. 17-1944 & 17-2024 |
| Citation | 903 F.3d 382 |
| Parties | Adrian LUPU v. LOAN CITY, LLC; Ocwen Loan Servicing, LLC, Ocwen Loan Servicing, LLC, Third-Party Plaintiff v. Stewart Title Guaranty Company, Third-Party Defendant Stewart Title Guaranty Company, Appellant (17-1944) Ocwen Loan Servicing, LLC, Appellant (17-2024) |
| Court | U.S. Court of Appeals — Third Circuit |
Michael P. Coughlin, Esquire (Argued), Kaplin Stewart Meloff Reiter & Stein, 910 Harvest Drive, P.O. Box 3037, Blue Bell, PA 19422, Counsel for Appellant, Stewart Title Guaranty Co.
Kassia Fialkoff, Esquire, Duane Morris LLP, 200 South Biscayne Boulevard, Suite 3400, Miami, FL 33312, Brett L. Messinger, Esquire (Argued), Brian J. Slipakoff, Esquire, Duane Morris, 30 South 17th Street, United Plaza, Philadelphia, PA 19103, Counsel for Appellee, Ocwen Loan Servicing LLC
Joshua L. Thomas, Esquire, 225 Wilmington-West Chester Pike, Suite 220, Chadds Ford, PA 19317, Counsel for Appellee, Adrian Lupu
Before: MCKEE, AMBRO, and RESTREPO, Circuit Judges
AMBRO, Circuit Judge What is the duty of a real estate title insurer in Pennsylvania to defend the insured party (here the successor to a lender) against claims of the borrower/mortgagor? Its courts, we predict, would not apply the "in for one, in for all" rule (known also as the complete defense rule)1 —whereby a single covered claim triggers an obligation for the title insurer to defend the entire action—to a case about that insurer’s duty to defend. To identify a covered claim, we apply Pennsylvania’s rule that potentially covered claims are identified by "comparing the four corners of the insurance contract to the four corners of the complaint." American & Foreign Ins. Co. v. Jerry's Sport Center, Inc. , 606 Pa. 584, 2 A.3d 526, 541 (2010).
Adrian Lupu, at the time a Pennsylvania homeowner, refinanced his home loan and mortgage with Loan City, LLC. It soon transferred both to IndyMac Bank, FSB, then they went to Fannie Mae, next to OneWest Bank, FSB, and finally to the current holder, Ocwen Loan Servicing, LLC. Stewart Title Guaranty Company provided title insurance. After defaulting, Lupu sued to void the instruments evidencing his debt, the District Court ultimately dismissed his action, and he did not file an appeal. Lupu is not a party to this dispute about who must pay the fees and costs of Ocwen incurred in defending his claims. Nonetheless we need to flesh out the facts underlying the issues before us.
Lupu’s action challenged, among other things, the use of the MERS System, a private mortgage registry that allows its members to avoid the need for cumbersome county-level public recordation when transferring mortgage interests. Members do so by designating Mortgage Electronic Registrations Services, Inc., an entity acting as an intermediary, as the holder of record for their mortgages. Although MERS is named as the mortgagee, it does so only as its members’ nominee and not as the actual owner; the members retain the beneficial interests in the mortgages. As a result, the members can transfer mortgage interests among themselves without the need to record the assignments. The MERS System tracks those transactions electronically. Because Loan City used the MERS System, the mortgage on Lupu’s home and real property identified MERS as the mortgagee of record. Despite Lupu’s challenge to the validity of the system, the use of this streamlined recording method is generally in accord with Pennsylvania law. Montgomery Cty., Pa. v. MERSCORP Inc. , 795 F.3d 372 (3d Cir. 2015).
If a MERS System member sells a mortgage to a non-member, the mortgage must quit the MERS System by a direct mortgage assignment to the buyer. The transfers from Loan City to IndyMac Bank, and by it to Fannie Mae, all members, were made on the system with MERS remaining the locally recorded mortgage holder. But OneWest Bank is not a member, so it received and recorded a mortgage assignment from MERS. OneWest, in turn, sold the mortgage to Ocwen Loan Servicing, also a non-member, by recorded assignment. The Office of the Recorder of Deeds of Chester County, Pennsylvania has the documents for these last transactions.
In connection with Lupu’s refinance transaction, Stewart Title insured to Loan City, along with its successors and assignees, the record title of the property (hereafter referred to as the "Title Policy"). It covered against "loss or damage" resulting from, among other things:
Schedule A, to which coverage provisions (1) and (9) refer, describes the property as vesting in "ADRIAN LUPU, AS SOLE OWNER[.]"
For covered claims, the Title Policy requires Stewart Title to "pay the costs, attorneys’ fees and expenses incurred in defense of the title or the lien of the Insured Mortgage, as insured, but only to the extent provided in the Conditions and Stipulations." Those Conditions and Stipulations state that Stewart Title will defend only "those stated causes of action ... insured against by this policy[ ]" and not "those causes of action which allege matters not insured against by this policy."
After defaulting on his loan obligations, Lupu filed a pro se Complaint to Quiet Title in the Court of Common Pleas of Chester County. He named Loan City, MERS, Fannie Mae, and some John Does as defendants, but he only served Loan City with the Complaint. When it did not respond, Lupu moved for and received a default judgment against the entity. However, Loan City had by then transferred the mortgage to OneWest Bank by a recorded assignment. After the transfer, Lupu filed a First Amended Complaint, dropping Fannie Mae and MERS as defendants and adding OneWest. It removed the case to federal court (the Eastern District of Pennsylvania) based on diversity of citizenship.
Once there, Lupu filed a Second Amended Complaint. Among other things, it alleged that: MERS had been used to "thwart" and "circumvent" Pennsylvania’s recording laws, making the loan contract "illegal" and "unenforceable;" the unrecorded mortgage loan assignments were improper, thus breaking "the chain of title," as MERS is merely "an electronic recording entity" and cannot execute an assignment; Loan City fraudulently induced him into the mortgage and loan transaction by failing to inform him that it would transfer the loan and assign the mortgage; and using MERS (instead of the local office of the Recorder of Deeds) to track the mortgage assignments in Pennsylvania was a violation of the Commonwealth’s compulsory recording laws and constituted a forgery and fraudulent practice.
OneWest Bank moved for summary judgment, and, in response, Lupu moved to file a Third Amended Complaint, which the Court granted in part to allow three claims. The first sought enforcement against OneWest, as Loan City’s successor, of the default judgment against Loan City on Lupu’s initial state-court complaint. The second claim renewed his objections about MERS being used to skirt the recording laws and the unrecorded transfers breaking the chain of title; in effect, MERS was not the mortgagee and thus did not have the legal "capacity to assign the [m]ortgage" to OneWest. The third claim reasserted Lupu’s contention that the use of MERS violates Pennsylvania law. OneWest again moved for summary judgment.
Meanwhile, outside of the Complaint, a new allegation began taking shape. Lupu, now with counsel, responded to interrogatories by asserting that "[t]he original Mortgage ... signed in front of the Pennsylvania Notary contained signatures of Adrian Lupu and [his wife]2 and was never recorded." Lupu claimed Loan City created mortgage documents using a different notary that had only his signature. He filed his own motion for summary judgment, and, to meet his burden of proof, submitted a certification stating that "the ‘recorded mortgage’ to MERS/OneWest is not the ‘original mortgage’ ... Mr. Lupu and his wife signed at closing."
Considering the Third Amended Complaint, the District Court denied OneWest Bank/Ocwen Loan Servicing’s summary judgment motion (the servicer had by then taken the bank’s interest in the mortgage). The Court explained, however, that the "only claim remaining in the case" involved Lupu’s challenge to "the legitimacy of the recorded mortgage[.]" The lawsuit survived because Lupu’s statement in the affidavit raised a factual issue by creating the possibility that Lupu was seeking a "constructive" amendment to the Complaint even though its "language ... did not specifically allege that the mortgage was forged[.]"
It didn’t end here. Lupu brought a Fourth Amended Complaint that added Ocwen and Stewart Title as defendants and deleted OneWest. In the facts section he made the forgery allegation to which he had previously referred. He claimed that Loan City created, notarized, and recorded forged mortgage documents "using a different notary from Silver Spring[ ], [Maryland,] having only Mr. Lupu’s signature," and that the original mortgage, therefore, could not have been assigned by Loan City to MERS or ultimately to Ocwen. Among other things, Lupu re-asserted his claim that the unrecorded transfers (using...
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