Lawyers Title Ins. Co., Inc. v. Novastar Mortg., Inc.

• Decision Date: 26 November 2003
• Docket Number: No. 4D02-3039, No. 4D02-4684.
• Parties: LAWYERS TITLE INSURANCE COMPANY, INC., Appellant, v. NOVASTAR MORTGAGE, INC., d/b/a Novastar Mortgage, Austin W. Mills, III, Mary Mills, Aurora Loan Services, Inc., and Option One Mortgage Corporation, Appellees.
• Court: Florida District Court of Appeals

862 So.2d 793

LAWYERS TITLE INSURANCE COMPANY, INC., Appellant, v. NOVASTAR MORTGAGE, INC., d/b/a Novastar Mortgage, Austin W. Mills, III, Mary Mills, Aurora Loan Services, Inc., and Option One Mortgage Corporation, Appellees.

Nos. 4D02-3039, 4D02-4684.

District Court of Appeal of Florida, Fourth District.

November 26, 2003.

Rehearing Denied January 28, 2004.

Robert A. Cohen and Mario M. Ruiz of Cohen/Fox, P.A., Miami, for appellant.

Gregg W. McClosky and David J. Pascuzzi of McClosky, D'Anna, Ioannou & Dieterle, LLP, Boca Raton, for appellee Novastar Mortgage, Inc., d/b/a Novastar Mortgage.

ANDREWS, ROBERT LANCE, Associate Judge.

Lawyers Title Insurance Company appeals a final judgment allowing policy coverage for NovaStar Mortgage, Inc. ("Novastar").¹

Novastar is a nonconforming wholesale mortgage lender that buys and sells mortgage loans from challenged credit borrowers. Novastar had a mortgage warehousing arrangement with Netwide Funding Corp. ("Netwide"),² whereby Novastar extended a secured line of credit to Netwide to facilitate Netwide's origination of mortgage loans. On or about July 6, 1998, Rosalba Serrano ("Serrano") purchased a parcel of real property located in Palm Beach County, Florida. In connection with her purchase of the property, Serrano secured a mortgage loan from Netwide for $174,200, and executed a note and mortgage in favor of Netwide. The loan to Serrano had been pre-approved by Novastar. Pursuant to the mortgage warehousing agreement between them, Netwide endorsed the note to Novastar and executed an assignment of the mortgage to Novastar. The mortgage and the assignment of mortgage were both recorded on July 13, 1998. Appellant issued a title policy to Novastar on the same day.

After the closing of the Serrano loan, Netwide sent a closing package to Novastar that included the original mortgage and assignment. The parties are in dispute as to whether Novastar ever physically received the original note. Novastar then submitted the loan to its quality control department for an audit. The audit revealed that Serrano had made material misrepresentations concerning her employment, income, and social security number. Novastar became concerned the loan was too risky. It notified Netwide that there was a problem with the Serrano loan and consequently Novastar was not going to buy the loan. It instructed Netwide to resell the loan so that Novastar could recoup its money.

Netwide sold the loan to BNC on July 28, 1998, struck through its endorsement of the note to Novastar and marked it "canceled," and then endorsed the note to BNC and executed an assignment of the mortgage to BNC. After selling the note to BNC, Netwide failed to repay Novastar. BNC subsequently endorsed the note and assigned the mortgage to Aurora Loan Services, Inc. ("Aurora") on July 31, 1998.

On September 30, 1998, Serrano sold the property to Austin and Mary Mills and received a pay-off statement from Option One Mortgage Corporation. The pay-off statement indicated payment should be made to Aurora. Serrano made the payment, and the property was transferred to the Mills. First National Title Company served as settlement agent for the sale. First National paid Aurora even though a title search showed that Novastar had a senior lien on the property.

Around August 1998, Novastar requested the original note from Netwide. Novastar learned that the note had been sold by Netwide; however, Novastar did not inquire as to the identity of the purchaser, or take any other action on the note. Relying on Netwide's promises to pay, Novastar pursued Netwide for repayment. However, Netwide never paid Novastar and ultimately went out of business. Novastar then filed a claim under its title insurance policy with appellant for recovery of its loss. Appellant denied the claim stating that: 1) the loss was not covered under the policy; 2) Novastar did not suffer a loss due to the failure of title; and 3) Novastar did not own the note. Consequently, Novastar filed a three-count amended complaint against the parties involved. Count I was a mortgage foreclosure against the Mills' successors-in-title, James and Euphemia Strassberger. In Count II Novastar sought a declaratory judgment against appellant. Count III alleged civil liability for violation of the Mortgage Brokerage and Mortgage Lending Act against Netwide and its principals, Paul Aguirre and Craig Smith. The Strassbergers filed a third-party complaint against Aurora for indemnification, misrepresentation, and unjust enrichment. Aurora filed a fourth-party complaint against Netwide.

After a bench trial, the court entered two final judgments. The first was against Novastar on Count I and in favor of Novastar on Count III. Regarding Count III, a judgment of default was entered and Novastar was awarded $245,232.11 in damages. The second final judgment, at issue in this appeal, found in favor of Novastar on Count II, entering a declaratory judgment against appellant. As a result, Novastar was awarded $245,232.11, plus interest against appellant. Appellant moved for rehearing, relief from judgment, and remittitur. The trial court denied the motions and appellant appealed.

Soon after, the parties to this appeal and the Strassbergers mediated the issue of Novastar's attorneys' fees and costs. A settlement was reached and an agreed final judgment was entered by the trial court whereby Novastar would receive $135,200.00 in attorney's fees and costs from appellant. The trial court noted in its order that appellant could appeal the trial court's decision on Novastar's entitlement to attorneys' fees. Appellant did, in fact, appeal the trial court's order.

Appellant argues that the trial court erred in finding coverage under the title policy because Novastar's claim does not fall within the grant of coverage since the alleged defect came into existence subsequent to the date of policy, and that additionally, the loss is precluded by policy exclusions. Novastar, in turn, argues that the trial court properly found coverage because Novastar never received the original note from Netwide, and this wrongful retention of the original note caused the unenforceability of the mortgage.

The insurance policy was issued on July 13, 1998, the same date Novastar recorded the note and mortgage. The policy, which governs the rights and liabilities of the parties provided:

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B AND THE CONDITIONS AND STIPULATIONS, LAWYERS TITLE INSURANCE COMPANY, a Virginia corporation, hereinafter called the Company, insures as of Date of Policy shown in Schedule A, against all loss or damage, not exceeding the Amount of Insurance state in Schedule A, sustained or incurred by reason of:

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

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

3. Unmarketability of title;

4. Lack of a right of access to and from land;

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

The policy also contained exclusions from coverage including, but not limited to the following:

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

(a) created, suffered, assumed or agreed to by the insured claimant;

(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)

The trial court found that Novastar was entitled to coverage under the policy because its loss resulted from the "invalidity or unenforceability of the lien." The trial court held Novastar's mortgage lien was unenforceable due to the wrongful deprivation by Netwide of the original note. The trial court further found Novastar was unable to enforce its mortgage lien because it never properly obtained the original note; that the unenforceability of Novastar's mortgage lien did not arise by reason of defect, lien, encumbrance, adverse claim or matter created, suffered, assumed or agreed to by Novastar subsequent to the date of the policy; and Netwide's wrongful retention of the original note preceded or was coincident with the date of the policy.

It is well-settled that a trial court's ruling comes to this court clothed with a presumption of correctness and the burden is on appellant to demonstrate error. See Applegate v. Barnett Bank of Tallahassee, 377 So.2d 1150, 1152 (Fla.1979); see also Royal Oak Landing Homeowner's Ass'n v. Pelletier, 620 So.2d 786, 788 (Fla. 4th DCA 1993) (recognizing that a trial court's decision in a declaratory action is accorded a presumption of correctness). A trial court's findings of fact in a declaratory judgment action will be upheld if supported by competent substantial evidence. See Collier v. Parker, 794 So.2d 616, 618 (Fla. 1st DCA 2001). Conversely, any conclusions of law are reviewed de novo. See Panama City Beach Cmty. Redevelopment Agency v. State, 831 So.2d 662, 665 (Fla. 2002); First Union Nat'l Bank v. Turney, 824 So.2d 172, 185 (Fla. 1st DCA 2001).

Section 624.608, Florida Statutes (1997), defines title insurance as: "insurance of owners of real property or others having an interest in real property or contractual interest derived therefrom, or liens or encumbrances on real property, against loss by encumbrance, or defective titles, or invalidity, or adverse claim to title." While most insurance is protection against future occurrences such as fire or accident, title insurance is protection against future loss because of past events. See Livingston v. Am. Title & Ins. Co., 133 So.2d 483, 486 (Fla. 1st DCA 1961).

Generally, title insurance policy coverage for loss or damage from the invalidity or unenforceability of a lien or an insured mortgage insures against defects in the mortgage itself, but not against problems arising from, or related to, the...