FIRST NAT. BANK OF MINNEAPOLIS v. FID. NAT. TITLE INS. CO.

• Decision Date: 10 January 1977
• Docket Number: Civ. No. 76-0-193.
• Citation: 425 F. Supp. 105
• Parties: FIRST NATIONAL BANK OF MINNEAPOLIS, a National Banking Association, Plaintiff, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY, a Nebraska Corporation, Defendant.
• Court: U.S. District Court — District of Nebraska

425 F. Supp. 105

FIRST NATIONAL BANK OF MINNEAPOLIS, a National Banking Association, Plaintiff, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY, a Nebraska Corporation, Defendant.

Civ. No. 76-0-193.

United States District Court, D. Nebraska.

January 10, 1977.

Frank F. Pospishil, Omaha, Neb., for plaintiff.

Robert J. Becker, Omaha, Neb., for defendant.

DENNEY, District Judge.

This matter comes before the Court upon cross-motions of the parties for summary judgment Filings # 19, 21 subsequent to a hearing before the Court on December 7, 1976.

Plaintiff, First National Bank of Minneapolis hereinafter referred to as the Bank, instituted this action for a declaratory judgment to determine the liability of defendant, Fidelity National Title Insurance Company hereinafter referred to as Fidelity Insurance under the provisions of defendant's mortgagee policy of title insurance issued to plaintiff. Jurisdiction is based on diversity of citizenship, 28 U.S.C. § 1332, the Bank being a citizen and resident of Minnesota and Fidelity Insurance being a citizen and resident of Nebraska. The parties have conducted extensive discovery which reveals the following undisputed facts.

Dial Investment Company, Inc., not a party to this litigation, owned an option to purchase certain real estate known as Winchester Heights, located in Omaha, Nebraska, from Anna C. Klinker, John Klinker and Marvely J. Klinker, for approximately $390,000.00. On April 4, 1974, the Bank and Dial entered into a Building Loan Agreement providing for interim construction financing up to $1,300,000.00 for the development of Winchester Heights and thereafter the Building Loan Agreement was secured by a promissory note from Dial in the amount of $1,300,000.00 and a mortgage. On April 22, 1974, Dial purchased the land from the Klinkers and gave them two purchase money mortgages which were recorded on May 13, 1974.

On April 29, 1974, Fidelity Title issued to the Bank a Mortgagee Policy of Title Insurance, insuring that title to Winchester Heights was, as of 8:00 A.M., on April 29, 1974, vested in Dial Investment Company and insuring the Bank against loss or damage, not exceeding $1,300,000.00, sustained by reason of any lien or encumbrance other than those set forth in Schedule B of the policy, affecting title to Winchester Heights.

In February, 1975, Dial defaulted on the loan from the Bank, owing $752,690.28. The Bank commenced mortgage foreclosure proceedings in the District Court of Douglas County, Nebraska, against interested defendants. The Klinkers, defendants therein, counterclaimed against the Bank, asserting that the Bank's mortgage lien was subject to their prior purchase money mortgages. Fidelity National, after refusing to defend the Bank against the counterclaims pursuant to the title insurance, consented to be bound by the final determination of the various mortgage priorities by the state court. The state court found the Klinker mortgages to be prior to the Bank's. Although the title insurance policy issued by Fidelity National did not list the Klinker mortgages as excluded liens in Schedule B, Fidelity National refuses to acknowledge any liability.

Pursuant to the decree in the foreclosure action instituted in the District Court of Douglas County, Nebraska, the real estate involved in this controversy shall be sold on or about March 1, 1977. Plaintiff instituted this action, seeking a declaratory judgment construing the title insurance policy to protect the Bank from any and all damages which the Bank may sustain, not to exceed $1,300,000.00, by virtue of the Klinker mortgages.¹

Defendant's primary contention is that the policy excludes coverage of plaintiff's claim. The title insurance provides in relevant part as follows:

Subject to the exclusions from coverage, the exceptions contained in Schedule B and the provisions of the conditions and stipulations hereof, Fidelity National Title Insurance Company, a Nebraska corporation, herein called the Company, insures as of Date of Policy shown in Schedule A against loss or damage, not exceeding the amount of insurance stated in Schedule A and Costs, attorneys' fees and expenses which the Company may become obligated to pay hereunder, sustained or incurred by the insured by reason of —

1. Title to the estate or interest described in Schedule A being vested otherwise then as stated therein;

2. Any defect in or lien or encumbrance on such title;

. . . . .

6. The priority of any lien or encumbrance over the lien of the insured mortgage.

Emphasis supplied.

Defendant relies upon paragraph 3 of the "Exclusions From Coverage", which provides in relevant part:

Defects, liens, encumbrances, adverse claims, or other matters (a) created, suffered, assumed or agreed to by the insured claimant; . . ..

Fidelity National contends that the uncontroverted facts show that the Bank "agreed to" the liens of the Klinkers. The Bank asserts that this defense is unavailable to defendant.

The uncontroverted facts relied upon by defendant, while somewhat complicated with the details of "high finance" arranged by intelligent businessmen, have been fully developed in depositions, as evidenced by the parties' cross-motions for summary judgments. The Building Loan Agreement entered into between the Bank and Dial on April 22, 1974, for the interim construction financing of Winchester Heights, provides in relevant part as follows:

It is hereby understood and agreed that BORROWER has incurred an indebtedness in the sum of $226,000.00 to Anna C. Klinker and John Klinker ("Klinker"), said indebtedness being secured by a Real Estate Mortgage by and between Dial Construction Company, Inc. and Klinker covering that certain property described in Exhibit "C" attached hereto and made a part hereof. BORROWER hereby represents that it has caused the Title Insurance Company to delete reference to the said Real Estate Mortgage from its Policy of Title Insurance in favor of LENDER, and has caused the Title Insurance Company to guarantee to LENDER THAT LENDER'S lien is a first mortgage against said property. BORROWER hereby authorizes LENDER to reserve the sum of THREE HUNDRED NINETY THOUSAND AND NO/100 ($390,000.00) DOLLARS to enable LENDER, at any time hereafter, to pay off the said Klinker Mortgage; and BORROWER hereby appoints LENDER its attorney-in-fact for the purposes of paying off such indebtedness to Klinker. Nothing herein contained shall impose upon LENDER any such obligation to pay off the said Klinker Mortgage which would enable the Klinkers to foreclose said Mortgage, shall also constitute a default hereunder.

Paragraph 29.

The above paragraph culminated from meetings between Dial and the Bank which took place in October or November, 1973. Richard L. Peterson, Assistant Vice President of the Bank, testified in his deposition as follows:

Q. All right. Can you recall what the conversations were at this meeting, and if you can, would you relate to me, please, what the conversations were and who said what?

A. Well, the center of the conversation was a topic which had not been discussed with the bank previous to the meeting, and that was Mr. Karnes a principal of Dial inquired of us if we would be willing to provide a wraparound loan rather than a normal loan, which what I mean by "normal loan" is that we would not subordinate our position or wrap around any additional financing.

The reason for his requests as explained to us was that whatever arrangements he had with the owners of the Winchester Heights land at that point in time were willing to accept an interest rate substantially less than what was the proposed interest rate on our interim construction loan.

I think the majority of the time at that meeting was spent discussing the potential of doing the loan in that manner, and it was even — I spent a fair amount of time on the phone talking to both some senior officers of our bank and our legal counsel, the Dorsey law firm, to determine if we could legally do a wrap-around loan because it was my impression that we had never done one in the past.

Q. Now would you explain for me, please, what the term "wrap-around loan" meant, as explained in your meeting with Mr. Karnes and Mr. Hess and Mr. Crowley:

A. To me, and I guess basically it applies to this situation, a wrap-around loan was one where a lender put out money on a subordinate basis to another debt issue with the responsibility and ability to cure defaults and make payments on that superior debt.

Q. All right. Did Mr. Karnes — well, obviously he indicated it was his desire to have this wrap-around done. What did Mr. Karnes tell you about any mortgages which may already be on the property?

A. I don't believe I was specifically told what form of financing was involved or related to that piece of land. We were made aware of the fact that some sort of obligation in relation to that land had been incurred between Dial Investment Company, Inc., and the party that presently owned that land. I was not aware of the fact, whether it was in the form of a mortgage or an option to purchase or some other form of obligation.

Q. But you were aware that, that the superior obligation was there, and I guess the question was whether or not you would wrap around it.

A. The question was whether we were willing to wrap around it.

Q. Right.

A. Some form of debt that was either there or would be there.

Q. All right. Did Mr. Karnes indicate what the total amount of debt was which he asked that you wrap around?

A. The only thing I remember in that relationship was that the amount of debt plus the funds needed to carry that debt over the term of our loan totalled approximately $390,000.00.

. . . . .

Q. Well, prior to that time, were you aware that part of the loan proceeds were going to be used to buy the land?

A. Yes, some of the loan proceeds were to be used to buy the land.

Q. All right.

A. At this point in time, again, let me say that we still had not received a specific cost

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