Fawn Second Ave. LLC v. First Am. Title Ins. Co.

Citation610 F.Supp.3d 621
Decision Date11 July 2022
Docket Number21 Civ. 3715 (KPF)
Parties FAWN SECOND AVENUE LLC, 1881 Second Avenue LLC, and SFP 1881 Holdings LLC, Plaintiffs, v. FIRST AMERICAN TITLE INSURANCE COMPANY, Defendant.
CourtU.S. District Court — Southern District of New York

Daniel Robert Goldenberg, Farida Ali, Goldberg Weprin Finkel Goldstein LLP, New York, NY, for Plaintiffs.

Katherine Marguerite Lieb, Sills Cummis & Gross, P.C., New York, NY, Jaimee Lynn Katz Sussner, Sills Cummis & Gross, P.C., Newark, NJ, for Defendant.

OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:

Plaintiffs Fawn Second Avenue LLC, 1881 Second Avenue LLC, and SFP 1881 Holdings LLC (collectively, "Plaintiffs") are the holders of a title insurance policy (the "Policy") that was issued by Defendant First American Title Insurance Company in connection with Plaintiffs’ purchase of real property located at 82 Second Avenue in New York, New York (the "Property"). Following their acquisition of the Property, Plaintiffs were surprised to learn that years earlier the New York City Landmarks Preservation Commission (the "LPC") had designated the Property as a landmark, which impeded Plaintiffs’ plans to use and improve the Property. Plaintiffs sent Defendant a notice of claim under the Policy, demanding indemnification for the ostensible diminution in the Property's value stemming from this unexpected landmark designation. Defendant rejected the insurance claim, which prompted Plaintiffs to initiate this action alleging Defendant's breach of its coverage obligations under the Policy and its negligence in not disclosing the Property's landmark designation.

Defendant now moves to dismiss the Amended Complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), on the grounds that it owed Plaintiffs no duty to disclose the Property's landmark designation and that Plaintiffs seek indemnification for losses that are not covered by the Policy. For the reasons outlined below, the Court grants Defendant's motion to dismiss.

BACKGROUND1
A. Factual Background
1. The Property and Plaintiffs’ Insurance Claim

Plaintiffs purchased the Property, located at 82 Second Avenue, New York, New York, by deed on November 17, 2015. (Am. Compl. ¶ 9; see also Sussner Decl., Ex. A). Incident to the purchase of the Property, Defendant issued to Plaintiffs a title insurance policy. (Am. Compl. ¶ 11; Sussner Decl., Ex. E ("Policy")). Approximately two years later, Plaintiffs endeavored to make improvements to the Property, including installing a roof railing, replacing windows, painting the storefront, and adding signage. (Am. Compl. ¶ 15). Unbeknownst to Plaintiffs, several years earlier, on October 9, 2012, the Property had been designated by the LPC as part of the East Village/Lower East Side Historic District. (Id. at ¶¶ 13-14). On or about October 3, 2017, Plaintiffs received three separate warning letters from the LPC demanding that their work to improve the Property "stop immediately" because the Property is located "on a landmarked site or within a landmarked historic district." (Id. ).2

On October 12, 2017, Plaintiffs sent a letter to Defendant with a notice of claim under the Policy seeking insurance coverage for the diminished value of the Property incident to its landmark status. (Am. Compl. ¶ 16). By letters dated December 5, 2017, and February 21, 2018, Defendant denied Plaintiffs’ claim for coverage. (Id. at ¶ 17).

2. The Title Report and the Title Insurance Policy

In connection with Plaintiffs’ acquisition of the Property, on or about November 16, 2015, Defendant issued a final title report covering the Property. (Am. Compl. ¶ 10; Sussner Decl., Ex. C ("Title Report")). The first page of the Title Report is a Certificate of Title, which certified that "an examination of title to the [Property] has been made in accordance with [Defendant's] usual procedure" and that Defendant "agrees to issue its standard form of title insurance policy ... after the closing of the transaction[.]" (Title Report 1). The Certificate of Title further provided that "[t]his Agreement to insure shall terminate ... upon the issuance of title insurance in accordance herewith." (Id. ). Similarly, the Certificate of Title included the following warning, presented in bold text and all capital letters: "This report is not a title insurance policy! Please read it carefully. The report may set forth exclusions under the title insurance policy and may not list all liens, defects, and encumbrances affecting title to the property. You should consider this information carefully." (Id. ). The remainder of the Title Report comprised the results of Defendant's title search, which did not reveal that the Property was located on a landmarked site or within a landmarked historic district. (See generally id. at 3-17).

On November 17, 2015, Defendant issued the Policy, titled Owner's Policy of Title Insurance, bearing the policy number 3019-749066NY6. (Am. Compl. ¶ 11; see also Policy). The Policy is structured to insure against loss or damage sustained or incurred by reason of an enumerated list of "covered risks," which are expressly "subject to the exclusions from coverage, the exceptions from coverage contained in Schedule B and the Conditions[.]" (Policy 1).

Plaintiffs invoke two covered risks as establishing a basis for coverage here. The first is Covered Risk § 2(a), titled "Any defect in or lien or encumbrance on the Title." (Policy, Covered Risk § 2(a)). This Covered Risk "includes but is not limited to insurance against loss from":

(a) A defect in the Title caused by ...
(iii) a document affecting Title not properly created, executed, witness, sealed, acknowledged, notarized, or delivered; [or]
(vi) a document not properly filed, recorded, or indexed in the Public Records including failure to perform those acts by electronic means authorized by law[.]

(Id. ). The second is Covered Risk § 5, which provides coverage for:

The violation or enforcement of any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to
(a) the occupancy, use, or enjoyment of the Land;
(b) the character, dimensions, or location of any improvement erected on the Land;
(c) the subdivision of land; or
(d) environmental protection
if a notice, describing any part of the Land, is recorded in the Public Records setting forth the violation or intention to enforce, but only to the extent of the violation or enforcement referred to in that notice.

(Id. , Covered Risk § 5). The Policy defines "Public Records," in relevant part, as:

Records established under state statutes at Date of Policy for the purpose of imparting constructive notice of matters relating to real property to purchasers for value and without Knowledge.

(Id. , Conditions § 1(i)).

The Policy also contains a list of exclusions, or matters that "are expressly excluded from the coverage of this policy[.]" (Policy, Exclusions). Defendant cites two Policy exclusions that purportedly preclude coverage for Plaintiffs’ losses, irrespective of whether they involve a covered risk. The first is Exclusion 1, which provides that Defendant "will not pay loss or damage, costs, attorneys’ fees, or expenses that arise by reason of":

(a) Any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to
(i) the occupancy, use, or enjoyment of the Land;
(ii) the character, dimensions, or location of any improvement erected on the Land;
(iii) the subdivision of land; or
(iv) environmental protection;
or the effect of any violation of these laws, ordinances, or governmental regulations. This Exclusion 1(a) does not modify or limit the coverage provided under Covered Risk 5.
(b) Any governmental police power. This Exclusion 1(b) does not modify or limit the coverage provided under Covered Risk 6.

(Id. , Exclusions § 1(a)-(b)). The second is Exclusion 3, which provides that Defendant will not provide insurance coverage for "[d]efects, liens, encumbrances, adverse claims or other matters ... created, suffered, assumed, or agreed to by the Insured Claimant[.]" (Id. , Exclusions § 3(a)).

B. Procedural Background

Prior to initiating the instant action, on May 31, 2019, Plaintiffs filed a complaint in New York State Supreme Court, New York County, arising out of the same insurance claim that forms the basis of this suit. See Fawn Second Ave. LLC v. First Am. Title Ins. Co. , Index No. 655735/2018 (N.Y. Sup. Ct., summons with notice filed Nov. 16, 2018). (Sussner Decl., Ex. I). By Decision and Order on Motion dated November 14, 2019, New York State Supreme Court Justice Arthur F. Engoron credited Plaintiffs’ interpretation of the Policy and denied Defendant's motion to dismiss Plaintiffsstate court complaint. (Id. , Ex. K). On March 11, 2021, the Appellate Division, First Judicial Department, reversed the trial court's decision and dismissed Plaintiffs’ claims without prejudice because Plaintiffs had failed to timely serve the complaint or supply an affidavit of merit after filing the summons with notice. See Fawn Second Ave. LLC v. First Am. Title Ins. Co. , 192 A.D.3d 478, 140 N.Y.S.3d 399, 399-400 (1st Dep't 2021). (Sussner Decl., Ex. J). Due to this procedural defect, the Appellate Division declined to reach the merits of Plaintiffs’ claims. Id.

On April 9, 2021, Plaintiffs reinstituted their action against Defendant, with the filing of the underlying complaint in this action in New York State Supreme Court. (Dkt. #1-1). Defendant timely removed this action to federal court on April 27, 2021. (Dkt. #1). On May 12, 2021, Defendant submitted a letter indicating its intent to move to dismiss the underlying complaint (Dkt. #10), to which Plaintiffs responded five days later (Dkt. #14). The Court held a hearing on June 8, 2021, at which the parties discussed Defendant's contemplated motion to dismiss and the status of the parties...

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