CHICAGO TITLE INS. v. CITIZENS AND SOUTHERN NAT.

• Decision Date: 31 March 1993
• Docket Number: Civ. A. No. 1:91-CV-0170-JOF.
• Citation: 821 F. Supp. 1492
• Parties: CHICAGO TITLE INSURANCE COMPANY, Plaintiff, v. CITIZENS AND SOUTHERN NATIONAL BANK, Defendant.
• Court: U.S. District Court — Northern District of Georgia

821 F. Supp. 1492

CHICAGO TITLE INSURANCE COMPANY, Plaintiff, v. CITIZENS AND SOUTHERN NATIONAL BANK, Defendant.

Civ. A. No. 1:91-CV-0170-JOF.

United States District Court, N.D. Georgia, Atlanta Division.

March 31, 1993.

Joseph R. Manning, Gerald L. Pouncey, Jr., Laura M. Tate, Morris, Manning & Martin, Atlanta, GA, for plaintiff.

Charles Scott Greene, John Treutlen Marshall, Jonathan B. Wilson, Powell, Goldstein, Frazer & Murphy, Carol Eller Kirby, American Telephone & Telegraph Co., Atlanta, GA, for defendant.

ORDER

FORRESTER, District Judge.

This matter is a declaratory judgment action brought by Plaintiff Chicago Title Insurance Company against Defendant Citizens and Southern National Bank, seeking a declaration as to the coverage obligations under three mortgagee title insurance policies issued to Citizens and Southern National Bank (C & S). This matter is currently before the court on Plaintiff Chicago Title's motion for summary judgment. Defendant C & S has moved for a hearing and for leave to file two supplemental briefs against Plaintiff's summary judgment motion and to reopen discovery.

I. UNDISPUTED FACTS

In March of 1988, C & S entered into a revolving credit loan agreement with Hooker Holdings USA (Hooker), a wholly-owned subsidiary of Hooker, Ltd., of Australia. Under the terms of the loan, C & S agreed to advance Hooker up to $25,000,000. Although this loan was unsecured, Hooker did execute a negative pledge/guaranty agreement under which it agreed to refrain from pledging certain assets for other loans and guaranteed repayment of the loan. In May, 1989, C & S learned that retailers owned by Hooker were past due in payments to certain trade creditors. The bank decided that these late payments constituted a default under the revolving loan agreement. C & S orally notified Hooker of this default and breach and stated that no more advances would be permitted until further information regarding Hooker's financial situation was provided to the bank. The outstanding debt at the time of this notification was $10,160,000. During the tenure of the loan, the outstanding balance fluctuated between $25,000,000 and zero.¹

After discussions involving the possible acceleration or pay-off of this loan, a questioning of whether default was actually appropriate, and the possible provision of security for any additional credit extended above the outstanding balance on the revolving loan, the parties instead entered into a new loan agreement on June 19, 1989. Under this second loan C & S agreed to loan Hooker $10,000,000 secured by three mortgages on real property held by Hooker. The loan was used to pay off the outstanding balance on the first loan. C & S also required Hooker to execute solvency certificates on itself and its subsidiaries.

The loan agreement also provided that title insurance had to be obtained. It stated:

(h) Mortgagee title insurance with respect to the Pledged Real Estate, together with copies of each exception specified therein, assuring the bank that each mortgage is a valid and enforceable first priority security lien and security interest on the property conveyed thereby, free and clear of all defects and encumbrances except for title exceptions permitted by the Bank and such defects and encumbrances as the Bank may reasonably approve, which mortgagee title insurance shall include an endorsement for mechanics liens and any other matter that the Bank may request, and shall provide for affirmative insurance and such co-insurance and re-insurance as the Bank may request.

Counsel retained by Hooker contacted Chicago Title which provided the policies in dispute to C & S. The policies insured the mortgages on the three properties held in fee simple by a subsidiary of Hooker USA, Hooker (7) Atlanta. The properties were located in Volusia County, Florida, Duvall County, Florida, and Richland County, South Carolina. The amount of insurance for each mortgage was $3,206,000, $3,359,000, and $10,000,000, respectively. All policies, however, contained the same coverage language. The relevant language reads:

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B AND THE CONDITIONS AND STIPULATIONS, CHICAGO TITLE INSURANCE COMPANY ... insures, as of Date of Policy shown in Schedule A, against loss or damage, ..., sustained or incurred by the insured by reason of:

....

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

The exclusions from coverage provision at issue reads:

The following matters are expressly excluded from coverage of this policy and the Company will not pay loss or damage, costs, attorney's fees or expenses which arise by reason of:

....

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

(d) Attaching or created subsequent to Date of Policy (except to the extent that this policy insures the priority of the lien of the insured mortgage over any statutory lien for services, labor or material;

....

This new loan, however, did not save the day. On August 9, 1989, less than two months after the second loan was executed, Hooker filed for Chapter 11 relief. Shortly thereafter, C & S was informed that Hooker, as debtor-in-possession, would challenge the second loan agreement as a preferential transfer. Hooker also stated it would seek to recover the approximate $15,000,000 supposedly paid down on the first loan within the months prior to the filing of the petition. See fn. 1, supra. On February 13, 1990, Hooker filed the adversarial proceeding in bankruptcy court seeking the forfeiture of these mortgages and the return of the alleged $15,000,000 pay-down.

Thereafter, C & S told Chicago Title that it considered the challenge to these mortgages an insured event. Chicago Title agreed to provide a defense pursuant to the policy, but it reserved its rights to deny coverage and indicated that it would file a declaratory judgment action seeking a declaration that no coverage existed and rescission of the mortgage insurance policies.

In January, 1991, Chicago Title was told that C & S and Hooker had reached a tentative agreement in the bankruptcy proceeding. This agreement contained mutual covenants not to sue between C & S and Hooker for claims arising out of the facts underlying the transactions between Hooker and C & S. C & S agreed to release its secured interest in the three mortgages on the Hooker properties. Hooker, in turn, covenanted not to sue to recover the alleged $15,000,000 pay-down on the first loan.

Chicago Title refused to consent to this tentative agreement. Hooker and C & S, however, finally agreed to these settlement terms, and a settlement agreement containing these terms was approved by the bankruptcy court on July 24, 1991.

II. LEGAL DISCUSSION

Although the parties are correct in noting that no court has squarely addressed the question presently before this court, in essence, this matter is simply a construction of a title insurance contract. As this contract was made in Georgia to insure a Georgia-based national bank, Georgia law applies. American Family Life Assur. Co. v. U.S. Fire Co., 885 F.2d 826, 830-31 (11th Cir. 1989); Federal Insurance Co. v. National Distributing Co., 203 Ga.App. 763, 765, 417 S.E.2d 671 (1992).

The Georgia courts consider a title insurance contract to be:

an agreement whereby the insurer, for a valuable consideration, agrees to indemnify the insured in a specified amount against loss through defects of title to real estate, wherein the latter has an interest, either as a purchaser or otherwise; a contract to indemnify against loss through defects in the title to real estate or liens or encumbrances thereon.

Beaullieu v. Atlanta Title and Trust Co., 60 Ga.App. 400, 404, 4 S.E.2d 78 (1939). Typically, title insurance protects a purchaser or mortgagee against defects in or encumbrances on title which are in existence at the time the insured takes his title. Glass v. Stewart Title Guaranty Co., 181 Ga.App. 804, 805, 354 S.E.2d 187 (1987).

As title insurance contracts are contracts of indemnity, they are subject to the same rules of construction as other insurance policies. Black v. Pioneer National Title Insurance Company, 138 Ga.App. 138, 139-40, 225 S.E.2d 689 (1976); Beaullieu, 60 Ga.App. at 404, 4 S.E.2d 78. Insurance policies in Georgia are governed by the ordinary rules of construction. Progressive Preferred Ins. Co. v. Brown, 261 Ga. 837, 838, 413 S.E.2d 430 (1992); Rothell v. Continental Casualty Co., 198 Ga.App. 545, 545-46, 402 S.E.2d 283 (1991); O.C.G.A. § 13-2-3. Under ordinary rules of construction, this court must ascertain the intention of the parties by looking to the entire insurance contract. Ryan v. State Farm Mutual Auto Ins. Co., 261 Ga. 869, 872, 413 S.E.2d 705 (1992); James v. Pennsylvania General Ins. Co., 167 Ga.App. 427, 431, 306 S.E.2d 422 (1983). A court must first consider "the ordinary and legal meaning of the words employed in the contract." Id. If this language is plain and unambiguous and does not violate the law, the contract must be enforced as written. Ryan, 261 Ga. at 872, 413 S.E.2d 705; Fidelity & Deposit Co. of Maryland v....