Associated Bank, N.A. v. Stewart Title Guar. Co., Civil No. 11–1124 ADM/JJG.

• Citation: 881 F.Supp.2d 1058
• Decision Date: 27 July 2012
• Docket Number: Civil No. 11–1124 ADM/JJG.
• Parties: ASSOCIATED BANK, N.A., Plaintiff, v. STEWART TITLE GUARANTY COMPANY, Defendant.
• Court: U.S. District Court — District of Minnesota

881 F.Supp.2d 1058

ASSOCIATED BANK, N.A., Plaintiff,

v.STEWART TITLE GUARANTY COMPANY, Defendant.

Civil No. 11–1124 ADM/JJG.

United States District Court, D. Minnesota.

July 27, 2012.

Jonathan D. Miller, Esq., Karl J. Yeager, Esq., Paula Weseman Theisen, Esq., Meagher & Geer, P.L.L.P., Minneapolis, MN, on behalf of Plaintiff.

James M. Lockhart, Esq., Jessica L. Meyer, Esq., Lindquist & Vennum P.L.L.P., Minneapolis, MN, on behalf of Defendant.

MEMORANDUM OPINION AND ORDER

ANN D. MONTGOMERY, District Judge.

I. INTRODUCTION

On June 14, 2012, the undersigned United States District Judge heard oral argument on Defendant Stewart Title Guaranty Company's (“Stewart Title”) Motion for Summary Judgment [Docket No. 13] and Plaintiff Associated Bank, N.A.'s (“Associated Bank”) Motion for Summary Judgment [Docket No. 17]. For the reasons set forth below, both Motions are granted in part and denied in part.

II. BACKGROUND¹

Associated Bank alleges Stewart Title breached its contractual duties to indemnify and defend Associated Bank as required by their title insurance policy.

A. Associated Bank's Loan to and Mortgage from Randy S. Arneson

In February 2007, Associated Bank loaned $450,250 to Randy S. Arneson (“Arneson”) based on his signed promissory note. Lockhart Aff. [Docket No. 16] Ex 3. The loan was made in connection with Arneson's purchase of vacant land in Hennepin County, Minnesota (the “Property”), and was secured by a mortgage on the Property (the “Mortgage”). Id. Exs. 2, 4.

Arneson's loan application was provided to Associated Bank's loan officer Justin Link (“Link”) by broker New Day Capital, LLC (“New Day Capital”). Id. Ex. 5 at AB002560. New Day Capital is not on Associated Bank's list of approved brokers. Id. Contrary to Associated Bank's policies and recommended practices, Link did not attend the loan closing to witness Arneson's signature on the Mortgage and other documents and to verify their accuracy. Id. Ex. 18 at 79:2–80:4, Ex. 20 at 25:1–25:15, Ex. 21 at 43:12–45:20.

B. The Policy

To insure the Mortgage, Associated Bank purchased a lender's title insurance policy (the “Policy”) from Stewart Title in the face amount of $450,250. Id. Ex. 1 (Policy).

1. Insuring Provision

The insuring provision of the Policy provides, in relevant part:

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B AND THE CONDITIONS AND STIPULATIONS, STEWART TITLE ... insures ... against loss or damage ... sustained or incurred by the insured by reason of:

...

5. The invalidity or unenforceability of the lien of the insured mortgage upon the title.

Policy at AB002693. The Policy also 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.” Id.

2. Duty to Defend Provision

The Policy Conditions and Stipulations include a duty-to-defend provision which states, in pertinent part:

Upon written request by the insured ... the Company, at its own cost and without unreasonable delay, shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy.... The Company will not pay any fees, costs or expenses incurred by the insured in the defense of those causes of action which allege matters not insured against by this policy.

Policy at AB002701 ¶ 4(a).

3. Exclusions

The Policy includes a section entitled “Exclusions from Coverage” that states, in relevant part:

The 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:

...

3. Defects, liens, encumbrances, adverse claims or other matters:

(a) created, suffered, assumed or agreed to by the insured claimant;

...

(c) resulting in no loss or damage to the insured claimant.

Policy at AB002693–94.

C. Arneson's Challenge to the Mortgage

On September 20, 2007, Arneson contacted Associated Bank claiming he had discovered a $450,000 loan of which he was previously unaware. Lockhart Aff. Ex. 6 at AB004368; Ex. 17 at AB004723. After initially claiming the signature on the Note and Mortgage was not his, id. Ex. 6, Arneson alleged the documents were blank when he signed them. Id. Ex. 9. Upon investigating, Associated Bank discovered the payments on the loan had been made by a Minnesota developer, 10Spring Homes, Inc. Lockhart Aff. Ex. 21 at 29:11–12.

D. Associated Bank's Foreclosure Action

Payments on the loan ceased, and on April 17, 2008, Associated Bank commenced a foreclosure action (the “Foreclosure Action”) against the Arnesons in Hennepin County District Court. Lockhart Aff. Ex. 7. Associated Bank alleged Arneson was in default under the Note and Mortgage, and sought to foreclose its Mortgage against the Property. In an Answer dated May 19, 2008, the Arnesons asserted affirmative defenses to the Foreclosure Action, including the defense that the Note and Mortgage were obtained by fraud. Miller Decl. [Docket No. 22] Ex. K (“Answer”). Specifically, the Arnesons alleged:

8. ...Plaintiff's Complaint fails as the instruments upon which Plaintiff bases its action were obtained from Defendant Randy S. Arneson by fraud and misrepresentation, as follows:

a) Defendant Randy S. Arneson did not enter into a Purchase Agreement with Fox Den Development, LLC, 10 Spring, LLC or with Scott Rosenlund for the purchase of the real property referenced in Plaintiff's Complaint;

b) On or about February 2, 2007, Randy S. Arneson executed a blank Note and a blank Mortgage at the offices of New Day Capital, LLC in Chanhassen, Minnesota;

c) There was not a notary public present at the time Defendant Randy S. Arneson executed the blank Note and Mortgage on or about February 2, 2007 at the offices of New Day Capital, LLC in Chanhassen, Minnesota;

d) Defendant Randy S. Arneson did not attend a real property closing/settlement on or about February 2, 2007 at the offices of Title Mark, New Day Capital, LLC, or Associated Bank, N.A.

Id. at 2.

In July, 2008, the Arnesons filed a Third Party Complaint in the Foreclosure Action. Id. Ex. L (“Third Party Complaint”). The Third Party Complaint asserted claims for fraud, conversion, and unjust enrichment against Shin–On Lindberg, Scott R. Rosenlund, Celeste Skaar, and their affiliated entities 10Spring Homes, Inc., 10Spring Enterprises LLC, Fox Den Dev LLC, and New Day Capital. Id. ¶¶ 1–8, 10–28, 33–37. The Third Party Complaint alleged Lindberg, Rosenlund, Skaar, and their affiliated entities fraudulently led Arneson to believe he was part of a real estate investment group that was obtaining financing for the purchase of vacant land and persuaded him to sign a blank property purchase agreement, blank promissory note, and blank mortgage as a part of their scheme. Id. ¶¶ 10–15, 20–26. According to the Third Party Complaint, Lindberg contacted Arneson the evening of February 2, 2007, and informed him it was necessary to meet immediately with Lindberg's associate to proceed with a real estate investment opportunity related to the Property. Id. ¶ 23. Arneson met with the associate at 9:30 p.m. that evening and executed a blank purchase agreement for the Property, a blank promissory note, and a blank mortgage. Id. ¶¶ 24–25. The Third Party Complaint further alleged Lindberg, Rosenlund, Skaar, and their affiliated entities converted the $450,000 in loan proceeds from Associated Bank for their own use, id. ¶ 28, and that Skaar, as an officer of New Day Capital, breached her fiduciary duties as the mortgage broker for Arneson and the purported real estate investment group by falsifying Arneson's assets on the loan application to Associated Bank Id. ¶¶ 29–32. Associated Bank was not named as a third party defendant in the Third Party Complaint. See generally id.

E. Associated Bank's Tender of Defense to Stewart Title

On May 11, 2009, Associated Bank sent a letter to notify Stewart Title of Arneson's assertion in the Foreclosure Action that the Mortgage was unenforceable. Miller Decl. ¶ 3, Ex. E. Associated Bank stated it was “tendering th[e] matter to Stewart Title for defense and indemnification of Associated under the policy.” Id. Associated Bank included copies of the Arnesons' Answer and Third Party Complaint. Id. A certified mail signature receipt shows the letter was received by Stewart Title on May 14, 2009. Id. Ex. E at 2. Stewart Title did not acknowledge or respond to the May 11, 2009 letter. Id. ¶ 3.

On December 2, 2009, Associated Bank sent a letter informing Stewart Title that a private mediation was scheduled for December 9, 2009, in the Foreclosure Action and inviting Stewart Title to participate. Id. ¶ 4, Ex. F at 1. A delivery service e-mail confirms the letter was delivered to Stewart Title on December 3, 2009. Id. Ex. F at 3. Stewart Title did not respond to the letter or attend the mediation.²Id. ¶ 4.

F. Settlement of Foreclosure Action and Loss under the Policy

In late June, 2010, Associated Bank and the Arnesons executed a settlement agreement (the “Settlement Agreement”) in the Foreclosure Action. Miller Decl. Ex. G (Settlement Agreement). At the time the Settlement Agreement was executed, the market value of the Property secured by the Mortgage was approximately $126,000. Lockhart Aff. Ex. 22 at 7.

Under the Settlement Agreement, Associated Bank and the Arnesons acknowledged the Mortgage and Note were invalid and unenforceable. Settlement Agreement ¶ 4. Additionally, the Arnesons agreed to pay Associated Bank $175,000. Id. As security for the new obligation, the Arnesons provided a new mortgage against the Property, as well as mortgages against their condominium and hunting land. Id.

Associated Bank and the Arnesons filed a Stipulation...