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Beneficial Mut. Sav. Bank v. Stewart Title Guar. Co.

United States District Court, E.D. Pennsylvania

August 12, 2014

BENEFICIAL MUTUAL SAVINGS BANK, Plaintiff,
v.
STEWART TITLE GUARANTY COMPANY, Defendant

Decided Date: August 11, 2014.

Page 538

For BENEFICIAL MUTUAL SAVINGS BANK, Plaintiff: PATRICK J. HUGHES, LEAD ATTORNEY, CONNELL FOLEY LLP, CHERRY HILL, NJ.

For STEWART TITLE GUARANTY COMPANY, Defendant: FREDERICK W. ALWORTH, GIBBONS PC, NEWARK, NJ; JOSHUA R. ELIAS, PRO HAC VICE, GIBBONS PC, NEWARK, NJ; SCOTT J. ETISH, GIBBONS P.C., PHILADELPHIA, PA.

MEMORANDUM

EDUARDO C. ROBRENO, United States District Judge.

Page 539

Table of Contents

I. INTRODUCTION

II. BACKGROUND

III. STANDARD OF REVIEW

IV. DISCUSSION

A. Applicable Law

B. Analysis

1. Parties' Burdens

2. Terms of Exclusion 3(a)

3. Application of the Exclusion

4. Lender's Objections to Applying the Exclusion

a. Lender's Knowledge

b. Lender's Negligence

c. Lack of a Specific Exclusion

5. Exclusion 3(a) Warrants Denying Coverage of the Defect

V. CONCLUSION

I. INTRODUCTION

The plaintiff in this action, Beneficial Mutual Savings Bank (" Lender" ), is a lender. The defendant, Stewart Title Guaranty Company (" Insurer" ), is a provider of title insurance. Lender loaned $480,000 (the " Loan" ) to 3010 Ocean Avenue Brigantine, LLC, (the " LLC" ), and it was guaranteed by William D. Bucci (defined collectively with the LLC as " Borrowers" ). The Loan secured by a mortgage (the " Mortgage" ) on real estate located at 3010 Ocean Avenue (the " Property" ).[1]

Insurer issued Lender a title insurance policy (the " Policy" ) insuring the Mortgage as a first mortgage on the Property. The Policy provides defense and indemnification for, inter alia, lack of priority of the Mortgage over any other liens on the property. At the time the Property was conveyed to the LLC, there was a previous mortgage for the amount of $1,200,000 (the " Prior Mortgage" ) on the property securing a loan made by Bancorp Bank (" Prior Lender" ) to the owners of the property prior to the transfer to the LLC. That the Mortgage is subordinate to the Prior

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Mortgage is the alleged defect (the " Defect" ) in this case.

The Policy included an exclusion which, inter alia, excluded coverage for any defects which Lender had " agreed" to. Thus, the question driving this litigation is whether Lender accepted the Mortgage subordinate to the Prior Mortgage, and thus agreed to the Defect. If Lender did agree to the Defect, coverage under the Policy is excluded. If Lender did not agree, it is entitled to defense and indemnification.

For the reasons set forth below, the Court will grant Insurer's Motion for Summary Judgment and deny Lender's Motion for Summary Judgment.

II. BACKGROUND

Lender is a chartered bank organized under the laws of Pennsylvania and with its principal place of business in Pennsylvania. Insurer is an insurance company organized under the laws of Texas and with its principal place of business in Texas.

On November 12, 2009, Lender loaned Borrower $480,000.00 in the form of a commercial mortgage loan. Pl.'s Mot. Summ. J., Pl.'s Statement Undisputed Facts ¶ 2. To secure the Loan, the LLC granted Lender a Mortgage which was duly recorded. Pl.'s Statement Undisputed Facts ¶ 3-4 (citing the Open-End Mortgage and Security Agreement (" Mortgage Agreement" )). Mr. Bucci guaranteed the Loan personally. At the time the Loan was made, and the Mortgage given, the Prior Mortgage for $1,200,000, held by Prior Lender, remained unsatisfied.[2]

According to the Loan Information Summary, the purpose of the Loan was " to refinance an existing second mortgage on Borrower[s]' investment property located at 3010 Ocean Avenue." Loan Information Summary 1. The Loan Information Summary lists the proposed collateral for the Loan as a title insured second mortgage and the assignment of rents, leases, and contracts from the Property. Loan Information Summary 2. The Property was appraised, at the time that the summary was prepared, at a value of $2,400,000, and thus, after accounting for the first and second mortgages, the equity remaining in the property was approximately $720,000. Loan Information Summary 5.

About a month prior to closing, Lender received a copy of a marked-up title commitment prepared by Insurer's title agent, Brendan Abstract (" Abstract Company" ). The title commitment lists several outstanding mortgages on the Property. Each outstanding lien contained in the commitment was accompanied by a hand written notation, some barely legible, which Lender claims indicates that each mortgage would be removed prior to closing.[3] One of these listed mortgages was " Mortgage made by [prior owners] to [Prior Lender] dated February 17, 2005 and recorded February 24, 2005." Commitment Schedule A.

The Mortgage Agreement executed at the closing of the Loan states that, inter alia, " [e]xcept for a certain first Mortgage disclosed by Mortgagor to Mortgagee, Mortgagor warrants that it presently possesses an unencumbered fee simple title to

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the Mortgaged Premises, . . . that this Mortgage is a valid and enforceable first lien on the Mortgaged Premises subject only to the aforesaid title objections." Mortgage Agreement 3. The Promissory Note, executed at the time of the Loan, states that " [p]ayment of this Note is secured by (a) a second Open-End Mortgage and Security Agreement . . . and (b) the Environmental Indemnity Agreement . . . from Obligor." Promissory Note. The Environmental Indemnity Agreement lists, among the collateral securing the Loan, " [a] second Open-end Mortgage and Security Agreement in favor of Bank." Environmental Indemnity Agreement 1.

Most notably, the Loan Agreement, executed simultaneously with the other documents, states that the Loan was secured by

[a] valid second lien on good and marketable fee simple title to the Property and improvements located thereon free and clear of all prior liens, restrictions easements and other encumbrances and title objections except such as may have been approved in writing by Bank, to be evidenced by the assignment of a second mortgage . . . covering the property. This mortgage is subordinate to a mortgage to [other bank][4] . . . in the original stated amount of $1,200,000.00.

Loan Agreement 1.

Insurer issued the Policy (title insurance), insuring the Loan and Mortgage. Pl.'s Statement Undisputed Facts ¶ 5; see also Loan Policy Title Ins. The Policy provided coverage for fourteen numbered risks which included, inter alia, number 10 providing for coverage for " [t]he lack of priority of the lien of the Insured Mortgage upon the Title over any other lien or encumbrance." Loan Policy Title Ins. 2.[5]

The Policy also includes seven enumerated exclusions from coverage under which the " matters are expressly excluded from the coverage of this policy, and [Insurer] will not pay loss or damage, costs, attorneys' fees, or expenses that arise." Loan Policy Title Ins. 2. Exclusion 3(a), in particular, provides an exclusion for " Defects, liens, encumbrances, adverse claims, or other matters: (a) created suffered, assumed, or agreed to by the Insured Claimant." Loan Policy Title Ins. 2. Notably, there is not a specific exception included in the Policy which would expressly cover the Defect.

In February 2011, Lender filed a notice of claim (" First Notice" ) in which it first

Page 542

set forth its theory of why it was entitled to coverage under the Policy. See Notice Claim, Feb. 7, 2011. In the First Notice, Lender explained that:

The Commitment indicates that, about a month before the Insured Mortgage was executed, the [Property was] subject to (among others) a $1,200,000.00 mortgage in favor of [First Lender]. The Commitment contained an exception for this prior mortgage, but the exception was marked as " removed" at Closing. Neither this exception, nor any-other for a prior mortgage, appears in the [] Policy.
[Lender]'s Loan Agreement recites that the Insured Mortgage was to be subordinate to a $1,200,000.00 first mortgage of unspecified date, in favor of First Cornerstone Bank which was allegedly recorded on May 1, 2008, in Mortgage Book 4744, Page 141, in the Office of the Clerk of Cape May County, New Jersey.
Because the [Property is] located in Atlantic County, the Insured Mortgage could never have been subordinate to the lien of a ...

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