First Am. Title Ins. Co. v. Johnson Bank

• Citation: 372 P.3d 292,239 Ariz. 348
• Decision Date: 13 June 2016
• Docket Number: No. CV–15–0244–PR,CV–15–0244–PR
• Parties: First American Title Insurance Company, a California Corporation, Plaintiff/Appellee, v. Johnson Bank, a Wisconsin Bank Registered in Arizona, Defendant/Appellant.
• Court: Supreme Court of Arizona

239 Ariz. 348

372 P.3d 292

First American Title Insurance Company, a California Corporation, Plaintiff/Appellee

v.Johnson Bank, a Wisconsin Bank Registered in Arizona, Defendant/Appellant.

No. CV–15–0244–PR

Supreme Court of Arizona.

Filed June 13, 2016

Amended By Order Filed August 19, 2016

Mark A. Nadeau, Courtney G. Saleski, (argued), DLA Piper LLP (US), Phoenix, Attorneys for First American Title Insurance Company.

William G. Ridenour, Timothy Berg (argued), Janice Procter–Murphy, Fennemore Craig, P.C., Phoenix, Attorneys for Johnson Bank.

Dennis I. Wilenchik, Tyler Q. Swensen, Wilenchik & Bartness, P.C., Phoenix, Attorneys for Amici Curiae Equity Income Partners LP and Galileo Capital Partners, Ltd.

Ari Ramras, Ramras Legal, PLC, Phoenix, Attorney for Amicus Curiae Land Title Association of Arizona.

VICE CHIEF JUSTICE PELANDER authored the opinion of the Court, in which JUSTICES BRUTINEL and BOLICK, and JUDGE ECKERSTROM^* joined, and CHIEF JUSTICE BALES dissented.

VICE CHIEF JUSTICE PELANDER, opinion of the Court:

¶ 1 This case presents the question of how to calculate damages under a lender's title insurance policy that failed to disclose encumbrances substantially affecting the value of the property and thwarting its intended use. Because the policy itself does not specify a valuation date, we are asked to determine the appropriate date from which to measure the insured lender's loss. We hold that when an undisclosed title defect prevents the known, intended use of the property and causes the borrower to default on the loan, the lender's diminution-in-value loss should be calculated as of the date the title policy was issued rather than as of the date of foreclosure. Because the record does not establish that the title defect caused the borrowers' default and the ensuing foreclosure, we remand for further proceedings on that issue.

I.

¶ 2 In 2005 and 2006, First American Title Insurance Company issued two title insurance policies to Johnson Bank for two properties that secured the bank's loans in the total amount of $2,050,000. The policies failed to list certain covenants, conditions, and restrictions (“CC&R's”) that allegedly prohibited commercial development on either parcel. The property owners defaulted on their loan obligations to Johnson Bank, allegedly because they had intended to develop the properties and were prevented from doing so by the CC&R's. Based on the undisclosed CC&R's, the owners successfully sued First American to recover damages under their owners' title insurance policies.

¶ 3 In 2010, the properties were sold at a trustee's sale. Johnson Bank purchased the two parcels with a credit bid of $102,000. In 2011, Johnson Bank notified First American of claims under its lender's title insurance policies, asserting that the CC&R's prevented both properties from being developed for commercial purposes, and that the CC&R's were not listed exceptions to coverage under the policies.

¶ 4 The parties agreed to arbitrate the damage claims but could not agree on the date for calculating the alleged diminution in value of the subject parcels. Johnson Bank argued that the date of the loans should be used to calculate damages. First American argued that damages should be based on the value of the properties at the time of foreclosure, after the real estate market had precipitously declined.

¶ 5 Both parties sought declaratory relief in superior court. On the parties' cross-motions for summary judgment, the court granted judgment in favor of First American, ruling that the parcels should be valued as of the foreclosure date.

¶ 6 The court of appeals reversed, holding that “in the absence of a specified date of comparative valuation identified in the policies, ... the date to measure any diminution in property value is the date of the loan.” First Am. Title Ins. Co. v. Johnson Bank , 237 Ariz. 490, 494 ¶ 18, 353 P.3d 370, 374 (App. 2015)

. The court reasoned that because First American failed to discover and timely disclose the CC&R's, the policy was breached when the loans were made. Id. at ¶ 17. Accordingly, the court remanded the case for entry of judgment in favor of Johnson Bank on the valuation-date issue. Id. at ¶ 18.

¶ 7 We granted review because the case presents an issue of first impression in Arizona and of statewide importance. We have jurisdiction under article 6, section 5(3) of the Arizona Constitution

and A.R.S. § 12–120.24.

II.

¶ 8 We review a summary judgment de novo, viewing the facts in the light most favorable to the party against whom judgment was entered. See Ariz. R. Civ. P. 56(a)

; BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC , 236 Ariz. 363, 365 ¶ 7, 340 P.3d 1071, 1073 (2015). “We review de novo the interpretation of insurance contracts,” First Am. Title Ins. Co. v. Action Acquisitions, LLC , 218 Ariz. 394, 397 ¶ 8, 187 P.3d 1107, 1110 (2008), and construe provisions in such contracts according to their plain and ordinary meaning. Sparks v. Republic Nat. Life Ins. Co. , 132 Ariz. 529, 534, 647 P.2d 1127, 1132 (1982). We also interpret contracts so as to fulfill the parties' intent. Taylor v. State Farm Mut. Auto. Ins. Co. , 175 Ariz. 148, 152, 854 P.2d 1134, 1138 (1993).

A.

¶ 9 The title insurance policies at issue here are standard form American Land Title Association (“ALTA”) loan policies. The amounts insured corresponded to the total amount of Johnson Bank's loans ($2,050,000). Subject to various exclusions, exceptions, and conditions, the policies insure “against loss or damage ... sustained or incurred by the Insured by reason of ... [a]ny defect in or lien or encumbrance on the title.” The policies do not define the term “loss or damage,” but require the insured claimant to timely notify the insurer and provide proof of any claimed loss or damage, including the basis of the claim and the “basis of calculating the amount of the loss or damage.”

¶ 10 The policies do not specify the date to be used in calculating loss or damage. In pertinent part, the policies provide:

7. DETERMINATION AND EXTENT OF LIABILITY

This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the insured claimant who has suffered loss or damage by reason of matters insured against by this policy and only to the extent herein described.

(a) The liability of the Company under this policy shall not exceed the least of:

...

(iii) the difference between the value of the insured estate or interest as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against this policy.

¶ 11 Both parties argue that this policy language is unambiguous and supports their respective view. Johnson Bank asserts that the phrase “as insured” in § 7(a)(iii) refers to “when the property is to be valued” and means that, for damage-calculation purposes, “the property should be valued as of the date that the insurance policy issued.”

¶ 12 First American counters that the phrase “as insured,” used throughout the policy, refers only to how the property interest is insured, i.e., the policy's conditions and exceptions. The policy is not ambiguous, First American argues, merely because it does not specify a date for calculating the loss. See First Tenn. Bank, Nat. Ass'n v. Lawyers Title Ins. Corp. , 282 F.R.D. 423, 427 (N.D. Ill. 2012)

(stating that the absence of explicit text establishing a valuation date “does not necessarily mean that the provision is ambiguous”). According to First American, the policy implicitly establishes the date of foreclosure as the applicable valuation date because the policy indemnifies a loss from an undisclosed title defect only after the lender forecloses on the property, and thus the insured lender incurs no loss until then.

¶ 13 The court of appeals found the policy language in § 7(a)(iii) ambiguous because it does not identify “the date the loss is to be calculated.” First Am. Title , 237 Ariz. at 493 ¶ 12, 353 P.3d at 373

. Under the facts of this particular case, we agree. Because the relevant provision is reasonably susceptible to differing interpretations, and because no other evidence establishes any particular meaning mutually intended by the contracting parties, the policy's language alone does not resolve the valuation-date issue before us today. See

State Farm Mut. Auto. Ins. Co. v. Wilson , 162 Ariz. 251, 258, 782 P.2d 727, 734 (1989) (stating that ambiguity exists when a policy “presents conflicting reasonable interpretations”); cf.

Taylor , 175 Ariz. at 153–54, 854 P.2d at 1139–40 (discussing ambiguity determinations, parol evidence rule, and court's “primary objective—to enforce the contract as intended by the parties”).

¶ 14 First American nonetheless argues that because the lender must foreclose on the property to incur and claim a loss, the date of foreclosure is the only reasonable valuation date. See, e.g. , Marble Bank v. Commonwealth Land Title Ins. Co. , 914 F.Supp. 1252, 1254 (E.D.N.C. 1996)

(“In the court's view, [the insured lender] did not suffer a loss until it foreclosed on the project. Since a lender suffers loss only if the note is not repaid, the discovery of an insured-against lien does not trigger recognition of that loss.”). First American's argument, however, conflates two concepts. Although the insured lender's exact loss might not be calculable until foreclosure occurs, that calculation can be made using the property's value, with and without the defect, as of the policy date to determine the actual loss on the date of foreclosure.

¶ 15 In addition, the policy contains several contractual prerequisites that do not directly bear on damage valuation. For instance, the lender must submit a written claim and proof of loss to the title company after discovering a title defect, and the title insurance company must decide whether it will exercise its rights under the policy to remove or cure the title defect instead of paying money damages. Such policy prerequisites, however, do not dictate...