MAINE
SUPREME JUDICIAL COURTReporter of Decisions
Decision: 1997 ME 137
Docket: Cum-96-455
Argued: March 4, 1997
Decided: June 25, 1997
Panel: WATHEN, C.J., and ROBERTS, GLASSMAN, CLIFFORD, RUDMAN, DANA, and LIPEZ,
JJ.
MARTIN HODAS,
Trustee of the Martin Hodas Defined Benefit Pension Plan
v.
FIRST AMERICAN TITLE INSURANCE CO.
ROBERTS, J.
[¶1] First American Title Insurance Company appeals from the judgment entered in
the Superior Court (Cumberland County, Bradford, J.) in favor of Martin Hodas on
his claim for a breach of a title insurance policy. First American argues the
court misconstrued the policy and erred in determining that Hodas suffered a
compensable loss. By cross-appeal, Hodas argues the court erred in failing to
find that First American engaged in unfair claims practices, pursuant to 24-A
M.R.S.A. § 2436-A (1990). We disagree with both contentions, and affirm the
judgment.
[¶2] In 1989 Hodas received a mortgage from Keith Studer to secure a $71,000
loan and any future advances to be made to Studer. The mortgage encumbered
property Studer owned in South Portland. Hodas contracted with First American to
insure his mortgage interest against defects in Studer's title. The insurance
contract was evidenced by a policy issued by First American to Hodas. The policy
stated there were no interests in the property other than those of Studer and
Hodas. Subsequently Hodas assigned the mortgage to a pension plan, of which he
is the trustee.
[¶3] In 1990 Studer defaulted on the loan and Hodas obtained a judgment of
foreclosure on the property. A foreclosure sale took place in April 1991, at
which Hodas bought the property for $80,000. The foreclosure sale report Hodas
filed stated that Studer's total outstanding debt secured by the mortgage,
including future advances, was $108,348.87.
[¶4] Hodas began to market the South Portland property immediately after
obtaining title. In September 1991 he contracted to sell the property to Leonard
Lawrence for $57,500. In preparation for the closing, Lawrence discovered a
title defect in the form of a previously undiscovered ownership interest
retained by Sara Studer, the former spouse of Keith Studer. On November 6, 1991,
Hodas filed a notice of claim with First American, which responded a week later
that it would exercise its right under the policy to pursue a quiet title action
to extinguish Sara Studer's interest. As a result of the title defect, Lawrence
rescinded the purchase and sale agreement.
[¶5] A short time later Hodas made another demand on First American for
indemnification pursuant to the policy. First American rejected the demand,
stating again that it intended to pursue a quiet title action against Sara
Studer, and, on December 12, 1991, retained counsel to do so. During this time
Hodas continued to market the property, and in March 1992 sold it to John Somers
for $40,000. On April 17, 1992, First American's attorney filed a quiet title
action in the name of Somers against Sara Studer. One year later, on April 21,
1993, a summary judgment on the quiet title action was entered in favor of
Somers.
[¶6] In this suit Hodas alleges First American breached its contract by failing
to indemnify him for the loss he sustained as a result of the title defect.
After a jury-waived trial a judgment was entered for Hodas for $18,000,
reflecting the difference between the sale price he would have received from
Lawrence and the price Hodas received from Somers plus real estate taxes Hodas
paid after the Lawrence sale fell through. This appeal followed.
I.Breach of Contract
[¶7] First American argues it did not breach its insurance contract with Hodas
because the quiet title action against Sara Studer was eventually successful.
First American directs our attention to section 7 of the policy, which provides:
7. LIMITATION OF LIABILITY
No claim shall arise or be maintainable under this policy (a) if the Company,
after having received notice of an alleged defect, ... by litigation or
otherwise, removes such defect ... within a reasonable time after receipt of
such notice; (b) in the event of litigation until there has been a final
determination by a court of competent jurisdiction, and disposition of all
appeals therefrom, adverse to the title or to the lien of the insured mortgage
... ; or (c) for liability voluntarily assumed by an insured in settling any
claim or suit without prior written consent of the Company.
Relying on clause (b), First American contends it fulfilled its obligations by
obtaining a final judgment extinguishing Sara Studer's interest in the property.
We disagree. Clause (a) gives First American the right to cure a title defect
and thus avoid a claim under the policy, but only if it does so "within a
reasonable time" after receiving a notice of the defect. The trial court found
that First American failed to satisfy that requirement, thus breaching its
insurance contract.
[¶8] What constitutes a reasonable time to cure a title defect, in the context
of a title insurance policy, is a question of fact. See Nebo v. Transamerica
Title Ins. Co., 98 Cal. Rptr. 237, 241 (1971) (construing language substantially
similar to section 7(a)). Findings of fact are reviewed for clear error and will
be upheld unless there is no competent evidence in the record to support them.
H.E. Sargent, Inc. v. Town of Wells, 676 A.2d 920, 923 (Me. 1996). The court's
finding that First American failed to cure the title defect within a reasonable
time is based on competent evidence and therefore is not clearly erroneous.{1}
II. Compensable Loss
[¶9] First American contends the court overlooked the distinction between loan
policies and owner policies of title insurance, which led the court to conclude
erroneously that Hodas suffered a compensable loss. A loan policy, such as Hodas
had in this case, protects the value of the mortgagee's security interest
against loss due to undisclosed title defects. An owner policy protects the
value of an owner's fee interest against similar risks. The presence of a title
defect immediately results in a loss to the holder of a fee interest since
resale value will always reflect the cost of removing the defect. In contrast,
the holder of a loan policy incurs a loss only if the security for the loan
proves inadequate to pay off the underlying insured debt due to the presence of
undisclosed defects. Blackhawk Production Credit Ass'n v. Chicago Title Ins.
Co., 423 N.W.2d 521, 525 (Wis. 1988). See also Focus Inv. Assocs. v. American
Title Ins. Co., 992 F.2d 1231, 1237 (1st Cir. 1993) (in the case of loan
policies "what is insured is the loss resulting from a defect in the security");
D. Barlow Burke, Jr., Law of Title Insurance § 2.1.1, at 2:7 (2d ed. 1993)
(there is no loss on a loan policy unless the amount of the undisclosed lien
reduces the value of the property to less than the underlying debt or, because
of the lien, the insured fails to recover the amount of its loan).
[¶10] First American contends Hodas suffered a loss covered by his loan policy
only if, on the date of foreclosure, the property's fair market value was less
than the value of his insured interest and the reduced fair market value was the
result of the undisclosed title defect. Thus, First American argues, because
Hodas was not aware of the defect at the time of foreclosure and did not present
evidence of the property's fair market value at that time, he failed to prove
that he suffered a compensable loss.
[¶11] First American's position is undermined by section 2(a) of the policy,
which provides for the continuation of coverage in the event the mortgaged
premises are purchased at foreclosure by the insured mortgagee:
2. (a)CONTINUATION OF INSURANCE AFTER ACQUISITION OF TITLE
This policy shall continue in force as of Date of Policy in favor of an insured
who acquires all or any part of the [mortgaged premises] by foreclosure ...;
provided that the amount of insurance hereunder after such acquisition ... shall
not exceed the least of:
(i) the amount of insurance stated in Schedule A;
(ii) the amount of the unpaid principal of the indebtedness ... plus interest
thereon, expenses of foreclosure and amounts advanced to protect the lien of the
insured mortgage and secured by said insured mortgage at the time of acquisition
...; or
(iii) the amount paid by any government agency ... in the acquisition of such
estate ....
The effect of this section is clear. After an insured mortgagee purchases the
mortgaged premises at foreclosure, coverage continues provided there remains
unpaid principal indebtedness. Coverage is limited, however, to the lesser of
the outstanding indebtedness or the stated policy limit. In the case at bar,
after Hodas purchased the Studer property at foreclosure for $80,000, there
remained a loan deficiency of $28,348.87. That amount, since it was less than
the stated policy limit of $71,000, comprised the maximum limit of Hodas's
recovery provided by the continued coverage.
[¶12] Although the court may have treated the damage award as if Hodas had
coverage as an owner rather than a lender, the result was correct. It serves no
useful purpose to characterize the continued coverage as falling within the
ambit of either a loan policy or an owner policy of title insurance. Neither of
those labels, as commonly understood, accurately describes the nature and effect
of the continued coverage. Regardless of its designation, however, the continued
coverage is clearly provided for in the language of section 2(a) of the policy.
In this case the continued coverage would indemnify Hodas for any loss caused by
undisclosed defects in the title of the formerly mortgaged premises, but only to
the extent of any unpaid indebtedness. Due to the presence of the title defect
discovered after Hodas entered into the purchase and sale agreement with
Lawrence, Hodas suffered a loss of $17,500, which was less than the unpaid
indebtedness of $28,348.87. In addition, he was forced to pay an additional $500
in real estate taxes prior to the ultimate sale to Somers. Thus the court
properly concluded that Hodas was entitled to recover $18,000 on the policy.
[¶13] Finally, we find no merit in Hodas's contention that the court should have
assessed penalties against First American, pursuant to 24-A M.R.S.A. § 2436-A,
for engaging in unfair claims practices.
The entry is: Judgment affirmed.
________________________________________
Attorney for plaintiff:
Jens-Peter Bergen, Esq. (orally)
Wonderbrook Center
57 Portland Road
Kennebunk, ME 04043
Attorneys for defendants:
John B. Emory, Esq.
Andrew W. Sparks, Esq. (orally)
Drummond & Drummond
One Monument Way
Portland, ME 04101
FOOTNOTES******************************** {1}. We express no opinion whether the
attorney who brought the quiet title action acted with reasonable care and
diligence. Our inquiry focuses only on First American's contention that it
properly invoked its right pursuant to the contract to quiet title rather than
pay Hodas's claim.