Mercantile-Safe Deposit & Trust Company v. Chicago Title Insurance Company (Maryland U.S.D.C.) (Not approved for publication)

Signed March 20, 2007. Memorandum and Order by Judge Catherine C. Blake (not approved for publication)

On consideration of cross motions for summary judgment, the motion of the plaintiff ("Mercantile") is GRANTED, the motion of the defendant ("Chicago Title") is DENIED, and JUDGMENT ENTERED in favor of Mercantile.

This case arose out of the refusal by Chicago Title to pay claims made by the insured, Mercantile, under two lenders title insurance policies it had issued to cover two indemnity deed of trust ("IDOTs") granted to secure guarantees of two loans made by Mercantile to two family businesses. The guarantor and grantor of the IDOTs was the trustee named in two unrecorded qualified personal residence trusts ("QPRTs") established by the original owners of the property. The deed which transferred title to the trustee had recited in part that no party dealing with the trustee with regard to the property need inquire as to the trustee's authority or to the satisfaction of the terms of the trust documents. Neither Mercantile nor Chicago Title asked for or reviewed the trust documents.

When the loans went bad, certain of the beneficiaries under the QPRTs filed suit to dispute the validity of the IDOTs, claiming the trustee had engaged in improper self-dealing in violation of his responsibilities to the beneficiaries. Pursuant to a notice of claim from Mercantile, Chicago Title undertook to defend in the suit, without reservation of right to disclaim coverage. The trial court declared that the trustee had been without power to grant the IDOTs, since the loans were unconnected to the trusts and granting the IDOTs was inconsistent with the beneficiaries' interests. Mercantile lost on appeal, and was thus unable to foreclose on the IDOTs.

Upon Mercantile's filing of a proof of claim under the title policies with Chicago Title, counsel for Chicago Title requested access to Mercantile's records as part of its "investigation" of Mercantile's claim. Mercantile subsequently filed this suit, alleging breach of contract and asking declaratory relief.

After reviewing the standards for summary judgment, the judge noted that in Maryland, insurance policy language is not construed most strongly against the insurance company as drafter, but rather using customary, ordinary and accepted meanings of terms used. Chicago Title claimed that the claimed amounts were not covered, since the IDOTs were given to secure payments due under the guaranties, and that the guaranties were invalid for the same reason the IDOTs had been declared invalid. Even though the judge conceded that the IDOTs were clear that they secured the guaranties, she found they also "indirectly secured the underlying loan obligations," citing the common Maryland practice of using IDOTs to avoid imposition of recordation tax on the loan amount. The judge opined that "[i]nterpreting the language of the IDOT as though it secured only the unconditional guaranty agreements and not the underlying promissory notes would be to rely on a technical differentiation that ignores Maryland practice and, more importantly, contradicts the plain purpose of the IDOTs as well as the parties’ understanding of the title insurance contracts," and found that the policies secured the underlying loan obligations and that Mercantile had suffered losses covered under those policies.

In addition, the judge found that, by unconditionally accepting and continuing representation of Mercantile in the underlying and preceding litigation, Chicago Title was now estopped from disclaiming its liability, since it precluded Mercantile from obtaining independent counsel and possibly accepting offers of settlement that had been rejected by counsel provided by Chicago Title.

Chicago Title also raised several bases for exclusion of the claim, as set forth in the language of the policy. The judge had little difficulty finding that the defect here was not "created, suffered, assumed or agreed to" by Mercantile, since it had the same information available to it that was available to Chicago Title, nor had Mercantile concealed material facts about the transaction, nor had it breached the policy by refusing to produce records associated with the claim, since Chicago Title had effectively waived the requirement when it had proceeded to treat Mercantile's claim as covered throughout the litigation below without reservation of right.

Consequently, the judge entered judgment in favor of Mercantile for the policy amounts, plus prejudgment interest, but declined to award attorney fees to Mercantile.

The Memorandum and Order are available in PDF format.