Blackhawk Production Credit Ass'n v. Chicago Title Ins. Co.

• Citation: 423 N.W.2d 521,144 Wis.2d 68
• Decision Date: 13 January 1988
• Docket Number: No. 85-0524,85-0524
• Parties: BLACKHAWK PRODUCTION CREDIT ASSOCIATION, a foreign corporation, Plaintiff- Respondent-Petitioner, v. CHICAGO TITLE INSURANCE COMPANY, a foreign corporation, Defendant-Appellant.
• Court: United States State Supreme Court of Wisconsin

Page 521

423 N.W.2d 521

144 Wis.2d 68

BLACKHAWK PRODUCTION CREDIT ASSOCIATION, a foreign corporation, Plaintiff- Respondent-Petitioner, v. CHICAGO TITLE INSURANCE COMPANY, a foreign corporation Defendant-Appellant.

No. 85-0524.

Supreme Court of Wisconsin.

Argued Nov. 3, 1987.

Decided Jan. 13, 1988.

Lewis Murach, argued, for plaintiff-respondent-petitioner; Lewis Murach, Rudolph, Kubasta, Rathjen & Murach, Wautoma, on brief.

C. Vernon Howard, argued, for defendant-appellant; Robert J. Schwab, C. Vernon Howard, Stroud, Stroud, Willink, Thompson & Howard, Madison, on brief.

DAY, Justice.

This is a review of a published decision of the court of appeals, Blackhawk Production Credit Ass'n v. Chicago Title Ins. Co., 135 Wis.2d 324, 400 N.W.2d 287 (Ct.App.1986), which reversed a judgment of the circuit court for Waushara county, Circuit Judge Frederic W. Fleishauer of Portage county presiding, against Chicago Title Insurance Company (Chicago Title) for failure to disclose or except a superior lien in a mortgagee's policy of title insurance. We conclude that the computation of damages made by the court court of appeals, as well as that made by the circuit court, was erroneous. We therefore reverse the court of appeals decision and remand for findings to determine the extent of actual loss Blackhawk Production Credit Association (Blackhawk) sustained due to the defect in title of the real property security interest it insured with Chicago Title.

The facts of this case are not in dispute. On January 22, 1979, Kim and Philip Rolfe obtained an interest as tenants in common in a land contract for 413.5 acres of agricultural real estate in Waushara county, Wisconsin. On March 27, 1980, Kim Rolfe assigned his undivided one-half interest in the land contract to Blackhawk to provide additional security for a $279,901.52 indebtedness on notes he executed in 1979. His debt was already partially secured by a separate purchase money security agreement in all livestock, farm products, crops, machinery, and irrigation equipment he owned. Blackhawk determined that the fair market value of Kim Rolfe's equity in the undivided one-half interest in the land was worth at least $85,000 (the amount by which Blackhawk felt it was undersecured on its notes).

On the date of Rolfe's assignment, Chicago Title issued a title insurance policy in the amount of $85,000 to Blackhawk. This policy indemnified Blackhawk against any "loss or damage," and "costs, attorneys' fees and expenses which [Chicago Title] may become obligated to pay," sustained by reason of "any defect in or lien or encumbrance on" the security interest Blackhawk held in Kim Rolfe's land, unless otherwise excluded from coverage. The policy further provided:

"Subject to the provisions of Schedule B, this policy covers and guarantees against any loss and damage which the assured may sustain, not exceeding the face amount of this policy, by reason of either (a) defects in the title of the vendees under the land contract described in Schedule A hereof, or (b) defects in the title of the vendors named in said land contract to the fee of the real estate covered thereby. This policy does not, however, guarantee anything with respect to the amount that has been paid upon said land contract at the date of the policy or the amount that may remain unpaid thereon at said date."

Schedule B listed as excepted prior encumbrances the superior interests held in fee simple and under land contract on this acreage, exclusions for delinquent and then-assessable taxes, and the right of Kim Rolfe to reacquire the interest in the property "upon payment of the obligation for which said assignment [to Blackhawk] is security." The policy stated that the "liability of Chicago Title under the policy shall not exceed the least of: (i) the actual loss of the insured claimant; or (ii) the amount of insurance stated in Schedule A [$85,000]." It further established that Chicago Title,

"... at its own cost and without undue delay, shall provide for the defense of an insured in all litigation consisting of actions or proceedings commenced against such insured, or a defense interposed against an insured in an action to enforce a contract for a sale of the estate or interest in said land, to the extent that such litigation is founded upon an alleged defect, lien, encumbrance, or other matter insured against by this policy."

Neither Blackhawk nor Chicago Title was aware that Kim and Philip Rolfe had previously executed a collateral assignment of their entire interest as vendees in the land contract to The First National Bank and Trust Company of Rochelle (Rochelle Bank) on January 25, 1980. Chicago Title did not list this assignment as an excepted prior lien in the title insurance policy issued to Blackhawk.

In February, 1981, the land contract vendors commenced a foreclosure action against Kim and Philip Rolfe for default in payments. Blackhawk was named as a party defendant and first learned that Rochelle Bank held a lien on the entire 413.5 acres superior to Blackhawk's lien on Kim Rolfe's undivided one-half interest. The Rochelle Bank lien secured two promissory notes executed by Philip Rolfe, for which Kim Rolfe was the guarantor. At the time of foreclosure, the principal amount of those notes exceeded $350,000. This encumbered all equity held by both Kim and Philip Rolfe in the property.

Pursuant to the terms of the title insurance policy, Blackhawk timely notified Chicago Title of the Rochelle Bank lien. Blackhawk further advised Chicago Title in advance that it intended to purchase the farmland, thereby attempting to mitigate its loss if possible. Except for requesting answers to interrogatories from Blackhawk, Chicago Title did not intervene or participate in negotiations to resolve the land contract foreclosure action.

After a series of transactions with the superior lienholders, Blackhawk settled the foreclosure action by purchasing unencumbered fee simple title to the entire Rolfe farm, including Kim Rolfe's undivided one-half interest which was insured by Chicago Title, the uninsured one-half interest held by Philip Rolfe, and an additional forty-one acres of adjoining land which was held by Rochelle Bank as Trustee for Philip Rolfe and was also not insured by Chicago Title. The superior liens paid by Blackhawk included a $216,255 balance due on the land contract, $9,147 in delinquent taxes, and $111,250 to Rochelle Bank, who in turn paid $4,500 of that amount to Sandra Rolfe for yet another lien on Philip's share of the property. Other miscellaneous payments and fees not pertinent to this action were made as well.

Of particular importance was Blackhawk's arm's length settlement of Rochelle Bank's $350,000 superior claim for the sum of $106,750 ($111,250--$4,500), establishing this substantially lower amount as the fair market value of Rochelle Bank's superior interest in the property. Blackhawk's first priority lien on the irrigation equipment installed on the land apparently persuaded Rochelle Bank to sell its security interest for a reduced amount, since the land value would have dropped substantially had this equipment been removed. The sum of $106,750 was the most Rochelle Bank believed it could have obtained for its interest in the land upon foreclosure without the irrigation equipment after subtracting the other superior liens of record. It was determined by the circuit judge at trial that no portion of the amount paid to Rochelle Bank was for the forty-one acre adjoining parcel and that the Bank would not have settled Kim Rolfe's indebtedness for any lesser amount. ¹

After clearing the adjoining forty-one acre parcel and converting it to irrigated farmland, Blackhawk sold all of the property, including the irrigation equipment and the forty-one acre parcel, for a total selling price of $583,500. After subtracting the amounts Blackhawk had paid to obtain clear title, Blackhawk gained $198,663 from the sale of the 454.5 (413.5 + 41) improved acres of land. Applying this to Kim Rolfe's indebtedness of $297,132 ($280,000 plus accrued interest), Blackhawk determined its net loss to be $98,469 ($198,663 - $297,132 = $98,469). It, therefore, sued Chicago Title to recover under its policy of title insurance.

At trial, the circuit court found that Blackhawk incurred a loss covered under the terms of the policy. The court concluded that Blackhawk would have had no land value available to it after subtracting the cost of the superior liens, including the unexcepted Rochelle Bank lien, from the sale price of the 413.5 acres of farmland with the irrigation equipment in place.

The circuit court then made a determination of Blackhawk's net loss after it had purchased the property at foreclosure sale and resold it:

2. The $530,815.00 figure used by the circuit court was based on a cost per acre of $1,285.00 for the total number of acres sold by Blackhawk ($583,500 - 454.5 = $1,285).

                Sale price of       $530,815.00  2
                  413.5 acres
                  of farmland
                  with
                  irrigation
                  equipment
                

                Note FN2. The $530,815.00 figure used by the circuit court was based on a cost per
                  Note acre of $1,285.00 for the total number of acres sold by Blackhawk ($583,500 -
                  Note 454.5 = $1,285)
                                    216,255.00           balance due on land contract
                                      9,147.00           delinquent taxes
                                    106,750.00           amount for which the Rochelle Bank
                                                             lien was settled (less $4,500 to
                                                             Sandra Rolfe)
                                    297,132.00           principal and interest due on the
                                                             Kim Rolfe notes to Blackhawk.
                                     98,469.00           net unsecured loss
                

Based on these computations, the court ruled that Chicago Title should pay policy limits of $85,000 plus interest. The court granted the recovery of pre-judgment interest but...