STEWART TITLE INSURANCE COMPANY, a Texas corporation, Plaintiff,
CREDIT SUISSE, Cayman Islands Branch, Defendant.
MEMORANDUM DECISION & ORDER
B. LYNN WINMILL, Chief District Judge.
The Court has before it a motion for partial summary judgment and a motion to amend to add a claim for punitive damages, both filed by defendant Credit Suisse. The Court heard oral argument on June 26, 2013, and the motions are now at issue. For the reasons described below, the Court will grant the motion to amend to add a claim for punitive damages, and grant in part the motion for partial summary judgment.
Defendant Credit Suisse loaned $250 million to Tamarack Resort, LLC to build a ski resort. Credit Suisse secured its loan with two mortgages on the resort property, and obtained title insurance from Stewart Title. With the resort only partially completed, Tamarack defaulted on the loan, leaving most of the contractors unpaid. The contractors filed liens on the resort property, and those liens were later determined to be superior to Credit Suisse's two mortgages. Stewart Title filed this action seeking a declaratory judgment that it is not required by the title insurance policy to indemnify Credit Suisse for any loss due to these superior liens.
In the pending motions, Credit Suisse challenges Stewart Title's reliance on the policy's exclusions to avoid coverage, and seeks to add a claim for punitive damages. The Court will take up the pending motions after first reviewing the factual background of this litigation.
On May 19, 2006, Tamarack and Credit Suisse signed a Credit Agreement setting forth the Loan of $250 million from Credit Suisse to Tamarack to build a ski resort. The Loan was secured by two mortgages on most of the 3, 608 acres on which the resort was to be built. On the same day the Loan was issued, Stewart Title, through its subsidiary, AmeriTitle, issued Credit Suisse a lender's title insurance policy ("the Policy") on the mortgaged land. The Policy was worth $227, 000, 000.00 and did not contain the standard exceptions for mechanics' liens and creditors' rights.
Before the Credit Agreement was signed, Credit Suisse and Stewart Title negotiated over the terms of the Policy. On April 20, 2006, Stewart issued a "Commitment to Provide Title Insurance, " which functioned as a draft of the Policy. Between issuing the Commitment and issuing the Policy, Stewart and Credit Suisse negotiated Schedule B, the list of specific exclusions to the Policy. Stewart also requested an appraisal of Tamarack from Credit Suisse and the list of accounts payable from the Loan documents. Credit Suisse gave Stewart an appraisal that another firm - Cushman & Wakefield - had prepared for financing purposes. Credit Suisse also directed Stewart to communicate with Tamarack to obtain the Schedules from the Loan documents.
Tamarack had contracted with multiple builders and architects to begin construction on portions of the resort prior to May 19, 2006. Notably, Banner/Sabey II, LLC, a general contractor, had begun construction of the Village Plaza in early April of 2006.
This becomes important because under Idaho law a contractor who has not been paid can file a mechanic's lien that attaches to the real property and takes priority over liens or mortgages that attached after the date the contractor began the work at issue. Thus, a company providing title insurance has a vested interest in knowing the date contractors began work on a project and whether that date is prior in time to any mortgages covered by the title insurance.
Stewart obtained lien waivers from some, but not all, of the contractors prior to issuing the Policy. Banner/Sabey II and MHTN, the architect of the Village Plaza project, did not sign waivers until several months after the Policy was issued. Banner/Sabey II had signed a contract with Tamarack in March of 2006, but had made the contract contingent on financing, which came in the form of Credit's Suisse's Loan. The Loan documents reflected this fact: at the time the Loan and Policy were issued Banner/Sabey II and MHTN were listed under Schedule 2.9, the accounts payable schedule, but were not listed under Schedule 1.1(e), the list of contractors, or Schedule 4.33, the list of material contracts.
The Loan was set to mature on May 19, 2011. Long before that date, however, Tamarack defaulted on the Loan. Credit Suisse filed a foreclosure action in Idaho state court and tendered to Stewart Title the defense against multiple competing liens.
Stewart Title accepted the tender and defended Credit Suisse in the state court foreclosure action. On May 1, 2009, the state court held that the lien waivers signed by Banner/Sabey II and other contractors only waived the right to a lien for work performed before the Loan documents were recorded, but not for later performed work.
On June 29, 2009, Stewart withdrew its defense of Credit Suisse against a vendee's lien held by BAG Property Holdings, LLC. On May 11, 2011, the state court entered findings concluding that certain mechanics' liens worth around $13 million were valid and had priority over Credit Suisse's mortgages. On May 17, 2011, Stewart withdrew its defense of Credit Suisse against these mechanics' liens and, on the next day filed this lawsuit. Stewart generally seeks a declaration that it does not need to indemnify Credit Suisse for any loss due to these superior mechanics' and vendees' liens.
In a motion now before the Court, Credit Suisse seeks summary judgment that: (1) The Policy affords coverage for mechanics' liens; (2) The Policy may not be rescinded or voided under I.C. § 41-1811 for Credit Suisse's alleged fraud; (3) The Policy affords coverage for the statutory BAG vendee's liens; (4) Exclusion 3(a) is inapplicable; (5) Exclusion 3(b) is inapplicable; (6) Stewart Title's common law fraud claim fails as a matter of law; (7) The Policy cannot be terminated for Credit Suisse's failure to provide a proof of loss; (8) The Policy cannot be terminated due to impairment of subrogation rights; (9) The Policy cannot be terminated due to Credit Suisse's failure to provide requested information; and (10) Stewart Title breached its duty to defend Credit Suisse against the mechanics' liens and BAG vendee's liens. The Court will address each of these claims.
Mechanic's Lien Coverage
The Policy provides that Stewart would protect Credit Suisse "against loss or damage... sustained or incurred by the insured by reason of... lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material." See Policy (Exhibit 79) at p.1. This coverage is made subject to any separate exclusion or exception that may be applicable. Id.
The mechanic's liens claimed by Banner/Sabey II and MHTN are statutorily created by § 45-501 of the Idaho Code. The clear language of the Policy, quoted above, covers mechanic's liens, like those held by Banner II and MHTN, subject to the separate provisions in the Policy on Exclusions and Exceptions. Credit Suisse is entitled to a partial summary judgment on this issue.
In its complaint, Stewart Title accuses Credit Suisse of fraud and seeks on that basis to rescind the Policy. Under Idaho law, a court may annul an insurance policy if it finds that the insured misrepresented, omitted, or concealed facts that were consequential to the risk insured against. See Idaho Code § 41-1811. Under this statute, a misrepresentation, omission, or concealment by an insured will not prevent recovery unless (a) it was made fraudulently; (b) it was "material to the acceptance of the risk;" or (c) the insurance company would not have issued the policy had it known of the misrepresentation, omission or concealment. Id.
The statute "describes the only circumstances in which a contract for insurance is voidable." Robinson v. State Farm, 45 P.3d 829, 837 (Id.Sup.Ct. 2002). Thus, to the extent that Stewart is relying on any common law claim of fraud apart from Idaho Code § 41-1811, those assertions must be stricken.
Stewart argues that Credit Suisse made two material misrepresentations that amount to insurance fraud under Idaho law. First, Stewart argues that Credit Suisse provided a misleading appraisal, intending to deceive Stewart into issuing the Policy. Second, Stewart argues that Credit Suisse knew, but failed to reveal, facts that gave priority to mechanic's liens filed by contractors Banner/Sabey II and MHTN over Credit Suisse's mortgages, and that this failure deceived Stewart into agreeing to cover those mechanics' liens in the Policy.
Fraud - Appraisal
Stewart argues that Credit Suisse provided a misleading appraisal of Tamarack Resort's value "with the intent to induce Stewart to issue a lender's title policy without standard exceptions for creditors' rights claims and mechanics liens." Complaint (Dkt. No. 1) at ¶¶ 18-21. Stewart argues that it would not have issued the Policy if it had known the "the true facts about the nature of the Appraisal." Id. at ¶ 57. Stewart also argues that Credit Suisse concealed another appraisal it had in its possession that accurately assessed the fair market value of Tamarack.
A title insurance company, like any other type of insurance company, is permitted to seek information from an insurance applicant in order to assess the risk it is assuming. When assessing risk, the insurer frames the questions it asks of an applicant, and is responsible for the clarity of those questions. See Wardle v. Int'l Health & Life Ins. Co., 551 P.2d 623, 626 (Id.Sup.Ct. 1976). Any ambiguity in the questions will be construed against the insurer. Id. The insurer is not limited to an initial set of inquiries; ambiguous responses by the applicant may, and should, prompt follow-up questions by the insurer to clarify the responses. Transamerica Premier Ins. Co. v. Miller, 41 F.3d 438, 442 (9th Cir. 1994) ("[A]n insurer's issuance of a policy in the face of what appears to be a lack of sufficient information to allow the insurer to determine its risks estops the insurer from, or waives the insurer's right to, cite that lack of information as a ground for avoiding coverage"). The applicant has a corresponding duty to answer the insurer's questions in good faith. Wardle, 551 P.2d at 626. When deciding whether an applicant has met this responsibility, a court must determine whether the applicant reasonably could have been expected to understand that it was required to disclose certain information in response to the direct question posed by the insurer. Id.
Here, there was no contractual requirement for Credit Suisse to provide an appraisal to Stewart Title in order to obtain title insurance. Credit Suisse provided the appraisal in response to a simple request by Stewart Title, through its agent AmeriTitle, in an email sent May 4, 2006. See E-mail (Dkt 88-2). The email asked, "Do you have a current appraisal?" In response, Credit Suisse sent AmeriTitle, via Federal Express on May 4, 2006, a copy of the appraisal prepared for them by Cushman and Wakefield in April of 2006. See Transmittal Letter (Dkt. No. 71-36). Credit Suisse's transmittal letter simply stated, "As you requested, enclosed is a copy of the appraisal of Tamarack." Id.
The Appraisal itself states "[t]he function of the report is for financing." It states that it can be relied upon by (1) "any qualified institutional buyer, " (2) "accredited investor, " (3) "Rating Agency, " or (4) "other lender in determining whether to purchase all or a participating interest in loans secured by the property." See Appraisal (Dkt. 71-37) at p. 2. The Appraisal does not represent that it can be relied upon by a title insurance company.
Moreover, the Appraisal is clear that its purpose is to estimate the "Total Net Value" of the Tamarack Resort. See Appraisal (Dkt. 71-37) at pp. 2, 4. It specifically warns that "[t]his is not the Market Value of the property." Id. The Appraisal defines Total Net Value "as the sum of the market value of the bulk lots of the entire planned community, as if all of the bulk lots were complete (in terms of backbone and infrastructure) and available for sale to merchant builders." Id. at 14.
Stewart now argues that the "Total Net Value" figure estimated by the Appraisal - $824 million - "is wildly inaccurate and had nothing to do with the market value of the [Tamarack Resort] Project at any time." See Stewart Brief (Dkt. No. 87) at p. 7. Stewart cites to the reports of its experts concluding that "the term Total Net Value' is misleading because it is an "unfamiliar term defined in a confusing manner without any reference or source." Id. at p. 8. Stewart accuses Credit Suisse of not providing a more accurate appraisal - that estimated the market value to be $284 million - despite having it in their possession. These circumstances, Stewart argues, create a genuine issue of material fact on the fraud claim that precludes summary judgment.
The Court disagrees. The Appraisal clearly states, as quoted above, that it is not estimating current market value and is to be used for financing purposes. Credit Suisse made no representation to Stewart about the Appraisal, and so Stewart cannot argue that it was misled by anything other than the language of the Appraisal. If that language was confusing - as Stewart's experts assert - the case law cited above put the burden on Stewart to ask clarifying questions. It failed to do so, and therefore waived its right to object now. See generally Wardle, 551 P.2d at 628 (holding that failure of insurer to ask clarifying questions about heart murmur precluded claim that nondisclosure of that condition was misleading under I.C. § 41-1811).
This conclusion is not altered by Credit Suisse's failure to provide Stewart with another appraisal that Credit Suisse had in its possession. That appraisal was prepared not for Credit Suisse but for SG Americas Securities LLC. See Draft Appraisal (Dkt. No. 88-12). Moreover, the appraisal states on the front page that it is only a "Draft" - there is no indication in the record that Credit Suisse had a final version in its possession at the time Stewart asked for an appraisal.
The Court will therefore grant Credit Suisse's motion for partial summary judgment to the extent it seeks to preclude Stewart from rescinding the Policy based on the Appraisal Credit Suisse did ...