Chicago Title Ins. Co. v. Resolution Trust Corp.

• Decision Date: 13 July 1995
• Docket Number: No. 94-2845,94-2845
• Citation: Chicago Title Ins. Co. v. Resolution Trust Corp., 53 F.3d 899 (8th Cir. 1995)
• Parties: CHICAGO TITLE INSURANCE COMPANY, a Missouri Corporation, Plaintiff-Appellee, v. RESOLUTION TRUST CORPORATION, as Receiver for Murray Federal Savings and Loan Association, a Federal Mutual Savings and Loan Association, Defendant-Appellant, v. McCOMBS, FRANK, ROOS ASSOCIATES, formerly known as McCombs, Knutson Associates, Inc., a Minnesota Corporation, Third Party Defendant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 899

53 F.3d 899

CHICAGO TITLE INSURANCE COMPANY, a Missouri Corporation, Plaintiff-Appellee, v. RESOLUTION TRUST CORPORATION, as Receiver for Murray Federal

Savings and Loan Association, a Federal Mutual

Savings and Loan Association, Defendant-Appellant, v. McCOMBS, FRANK, ROOS ASSOCIATES, formerly known as McCombs,

Knutson Associates, Inc., a Minnesota Corporation,

Third Party Defendant.

No. 94-2845.

United States Court of Appeals Eighth Circuit.

Submitted Feb. 16, 1995.

Decided April 25, 1995.

Rehearing and Suggestion for Rehearing

En Banc Denied July 13, 1995.

Jerome Alan Miranowski, Minneapolis, MN, argued (Mark P. Wine and Craig A. Cook, on brief), for appellant.

R. Dickey Hamilton, Chicago, IL, argued (Louis W. Brenner, Sr. and Michael J. Orme, on brief), for appellee.

Before BOWMAN, BEAM, and MURPHY, Circuit Judges.

DIANA E. MURPHY, Circuit Judge.

This case is about the right to recover under a title insurance policy insuring a mortgagor against loss of priority resulting from mechanic's liens. Chicago Title Insurance Company (CTI) brought this declaratory action against the Resolution Trust Corporation (RTC) in its capacity as receiver for Murray Federal Savings and Loan (Murray), an insolvent financial institution, to determine the parties' rights and liabilities under a title insurance policy and endorsement issued to Murray. ¹ The position of the RTC is that it is entitled to recover under the policy, but CTI believes that exclusions in the policy and limitations in the endorsement control. The RTC appeals from a judgment in the district court in favor of CTI. For the reasons discussed below, we reverse and remand.

I.

Murray became involved in the construction of the Tealwood Apartments complex in Bloomington, Minnesota when it agreed to lend the project developer, Tealwood Associates, $11,900,000. Murray and Tealwood Associates entered into a "Construction Loan Agreement" on July 23, 1987. The loan was secured by a mortgage on the property, and Tealwood Associates agreed to purchase for Murray a title insurance policy to protect the priority of the mortgage. The loan closing and filing of the mortgage occurred on August 12, 1987, and the policy was issued August 13, 1987. The policy insured Murray against "loss or damage" caused by any liens which arose prior to August 13.

The policy contained several exclusionary clauses, two of which have been raised here. Clause 3(a) excluded from coverage "[d]efects, liens, encumbrances, adverse claims, or other matters created, suffered, assumed or agreed to" by Murray. Clause 3(b) excluded "[d]efects, liens, encumbrances, adverse claims, or other matters ... not known to [CTI] and not shown by the public records" if Murray knew of them and failed to disclose them to CTI in writing.

Since the standard title insurance policy offered by CTI did not cover mechanic's liens arising after the date the policy was issued, Murray sought an endorsement providing coverage for loss or damage caused by loss of mortgage priority due to liens arising after the August 13 policy date. The endorsement was issued on November 5, 1987. It covered subsequent liens but not "loss or damage by reason of any failure by the insured to comply with or to enforce any of the provisions of the Construction Loan Escrow and Disbursing Agreement ... which relate to the disbursement of the proceeds of the loan secured by the insured mortgage."

The "Construction Loan Escrow and Disbursing Agreement" (the disbursement agreement) was entered into August 25, 1987. The parties to it were CTI, Tealwood, general contractor Woodsage Construction Company, and Murray. CTI wanted such an agreement before issuing the endorsement. It was to control monthly advances on the loan from Murray to the developer. CTI was to hold funds from the lender in escrow and to disburse them at Murray's direction. The developer warranted that as of the date of the agreement there were sufficient funds to complete the project. Disbursement Agreement Sec. 7.08. The agreement also stated that CTI was not obligated to act except as required under the agreement and that it assumed no liability that the project would "be completed as contemplated, or that sufficient funds [would] be available for completion." Disbursement agreement Secs. 6.02 & 6.03. Murray negotiated additional language which clarified that the disbursement agreement did not "limit the coverage provided by the title policy." Disbursement agreement Sec. 7.04. Exhibit III to the agreement required that CTI be provided with sufficient funds to cover disbursements approved by the lender and the developer. ²

CTI also took steps to protect itself before issuing the title insurance policy. Under Minnesota law, any mechanic's lien claims arising during construction will have priority over a mortgage if visible improvements were made to the property before the mortgage is recorded. Minn.Stat. Sec. 514.05. CTI required that Tealwood Associates and its general partner, Joseph Liebold, hire an independent engineer to inspect the property on August 12, 1987, the morning of the loan closing, and to verify that there were no visible improvements to the site. ³ CTI required the independent engineering report because concerns had arisen about the possibility that such improvements had been made. CTI attorney Marylu Dorwart, who lived near the Tealwood site, testified at trial that she had seen equipment on the property several years before construction of the apartment complex. In 1987 she noticed that road work was occurring. ⁴ During the summer of 1987, prior to the issuance of the policy, Dorwart and counsel for Murray discussed the possibility that improvements might have occurred.

The engineer who was hired to inspect the property, Dale Hamilton of third party defendant McCombs, Frank, Roos Associates, took photographs and submitted his conclusions in an affidavit, which CTI received and initialed before it issued the policy after the loan closing and the filing of the mortgage. The engineer's affidavit stated that no materials had been delivered to the site, and no excavation, grading or other site preparation had occurred. It also reported that there were no engineering or surveyor stakes, and that there had been "no visible beginning of any improvement thereon, except as follows: Boundary Monumentation." The monumentation was in the form of large mounds of dirt piled on or near the site. Testimony at trial indicated that the dirt had been placed at the site between April and June of 1987 by a road construction crew.

Construction on the apartment complex began in August 1987. Within several months the project began to experience cost overruns. ⁵ Murray reacted to address the overruns, including asking Tealwood Associates and Liebold to put up additional funds for the project. They did not do so, but they agreed to use funds budgeted for their fees to pay subcontractors. They also attempted unsuccessfully to find a buyer who could complete the project. Murray also gave up interest payments and rearranged the project budget. It distributed to the developer funds earmarked for future work in order to pay for already completed work. In rearranging the budget, Murray did not set aside loan proceeds to pay for retainage. The construction loan agreement which had been entered into by Murray and Tealwood Associates in July 1987, before the loan closing, provided that 10 percent retainage could be withheld pending satisfactory completion of work and that Murray would advance retainage to the developer for completed work as part of the regular loan disbursal process. Murray had a right under that agreement to halt construction if delays caused the project to enter default, but it did not exercise it. At the time Murray estimated that halting and restarting construction would add approximately $200,000 to the total project cost, and so it continued to advance loan money while the developer searched for additional funds. ⁶

In May 1989, Tealwood Associates abandoned the unfinished project, and Murray was declared insolvent. All but $435,000 of the loan funds had been used by this point. The Federal Savings and Loan Insurance Corporation, the RTC's predecessor, brought an action on Murray's behalf in state court for appointment of a receiver to complete construction. A real estate development company was appointed receiver, and the state court authorized Murray to advance the receiver funds to complete the project. Murray supplied the receiver approximately $670,000, which included the $435,000 of committed loan funds which had not yet been spent, as well as additional funds beyond those contemplated in the original construction loan.

Twenty one mechanic's lien claims totaling $954,000 were filed against the property after the developer abandoned the project. The lien claimants brought several state court actions in which Tealwood Associates, its general contractor, and the RTC were defendants. The cases were removed to federal court and consolidated. O & P Constr. Co. v. Tealwood Assocs. Ltd., et al, Civ.No. 4-89-578 (D.Minn.); Lyman Lumber Co. v. Woodsage Constr. Co., et al and 98 Normandale Ltd. Partnership v. Lyman Lumber Co., et al, Civ.No. 4-90-62 (D.Minn).

CTI decided to settle with one of the lien claimants, and in August 1991 it paid $77,000 to Lyman Lumber Company in settlement of Lyman's claim for $125,000. The RTC claims CTI was motivated to settle with Lyman because its lien claim could affect adjoining property on which CTI had issued a policy.

The remainder of the lien claims went to trial in October 1991. The claimants' theory at trial was that the mounds of dirt documented by the engineer the day of closing were visible improvements which gave all subsequently filed mechanic's liens priority over Murray's mortgage. The RTC and CTI jointly agreed to settle the claims after several days of testimony.

The record does not contain a written...