Posting for

Monday, December 20, 1999

by: Bert Rush

LOAN POLICY DAMAGES/CLAIMS/MEASURE OF DAMAGES/DUTY TO MITIGATE

The Ohio Supreme Court has issued a very interesting decision, exploring issues frequently encountered by title companies with claims under loan policies.

Mainly, the Court holds that after discovery of a "missed" mortgage the lender's damages, compensable under its title policy, are measured by the amount which the lender would have recovered through foreclosure in the absence of the missed mortgage--even where the successful bid is surprisingly low--and the lender, at least in this case, did not have a duty to attempt to mitigate its damages by acquiring the property and further marketing it.

The case is Chicago Title Insurance Company v. Huntington National Bank, 719 N.E.2d 955, 87 Ohio St.3d 270 (1999).

This case arises from a loan of $194,000 made by Huntington National Bank to one Diane Hibbitt in March 1995. This loan was secured by a mortgage against two parcels owned by Ms. Hibbitt in Delaware, Ohio--one on Aspen Court and another on Sulu Road. The mortgage was insured by Chicago Title as a first mortgage on both properties.

It turned out Ms. Hibbitt's ex-husband, Kenneth, had a prior mortgage on the Sulu Road property--which was apparently missed by Chicago Title.

In October 1995, Kenneth Hibbitt filed suit for judicial foreclosure of his mortgage. A sale was ordered, and from the proceeds Kenneth first received $40,841, and Huntington National Bank got the remainder of $53,155.

The Bank made a claim under its loan policy, seeking reimbursement of the $40,841 paid to Kenneth. But Chicago Title denied the claim as premature, saying the Bank could not show a loss compensable under the policy until the Aspen Court property was sold. In a letter to the Bank, a Chicago Title representative explained that if the Bank was not made whole after foreclosure of the Aspen Court property, then Chicago Title would "pay the amount required to make HNB whole or the amount received by Kenneth W. Hibbitt...whichever is less."

Apparently, the Bank allowed Ms. Hibbitt time to market the Aspen Court property. Beginning in February 1996, she listed it for sale with an asking price of $181,900. There were no offers. In February 1997, the price was reduced to $174,900. Still, there were no offers.

Finally, in August 1997, Huntington National Bank took the property to foreclosure. The foreclosure sale was attended by representatives of the Bank and Chicago Title --but neither of them participated in the bidding. The successful bid was $115,000. This bid was surprisingly low, since the property had been valued at $172,500 by an appraiser.

After the foreclosure, the Bank figured it was still owed more than $60,000 and it renewed its claim with Chicago Title. Now the Bank wanted the $40,841, plus interest at 10.25 percent per annum (apparently from the time Kenneth Hibbitt was paid, to date).

Chicago Title denied the Bank's claim, saying the correct measure of damages should be calculated based on the fair market value of the Aspen Court property, as determined by the appraiser, rather than the amount realized through foreclosure.

Chicago Title filed suit seeking a declaratory judgment that it had no liability to Huntington National Bank, and the Bank cross-complained alleging breach of contract and negligence on the part of Chicago Title.

The trial court ruled in favor of Chicago Title, accepting the appraisal as evidence of the Aspen Court property's value and finding that the Bank had a duty to mitigate its damages, if necessary, by bidding the amount it was owed to acquire the property through foreclosure and thereafter marketing it for its fair value. The trial court also ruled against the Bank on its negligence claim.

The Bank appealed, and the court of appeals affirmed in part and reversed in part, remanding the case for further hearings on the question of fair market value and holding that the Bank did not have a duty to attempt to mitigate its damages.

This time both sides appealed, and the Supreme Court agreed to decide the case.

The first issue was the correct measure of damages. The Court cited loan policy language to establish that Chicago Title insured the Bank against "loss or damage" incurred by reason of "(t)he priority of any lien or encumbrance over the lien of the insured mortgage." Although the policy does not further define "loss or damage," the Court noted it uses the term "actual loss" in describing the insurer's extent of liability. Turning to Webster's Dictionary, the Court said "actual" means "something that exists in reality," and concluded:

"Therefore, based on the language used in

the policy, the parties intended for an insured's

loss, caused by matters insured against by the

policy, to be a real loss, one based on fact, not

speculation or possibility. ...

The appropriate measure of damages is

based upon what the buyer actually paid at the

foreclosure sale and what the lender actually

received, not a hypothetical valuation based

on speculation had the property been sold on

open market."

In further explaining this holding, the Court pointed out its consistency with what Chicago Title said it would do in its earlier letter directing the Bank to proceed with foreclosure against the Aspen Court property (i.e., "pay the amount required" to make the Bank "whole"). The Court also cited cases from four other states, which it said supported its reliance "upon the actual foreclosure price instead of fair market value to determine loss contemplated by a title insurance policy."

With respect to the second issue, the insured's alleged duty to mitigate damages, the Court again began its analysis by looking to policy language for guidance. Finding nothing on point, the Court said:

"(T)he title insurance policy at issue did not

require the insured to bid or otherwise assume

the burdens and obligations of ownership for

the sole purpose of minimizing damages caused

by the insurer's breach. If an insurer wants its

insured to be obligated to mitigate damages by

purchasing the secured property in a foreclosure

situation in order to recover under a title insurance

policy, this should be made a condition precedent

to recovery...expressly written into the policy."

Otherwise, the Court explained that the "general rule" favoring mitigation of damages by an injured party does not "require the party to incur extraordinary expense and risk."

Here, the Court noted Dianne Hibbitt previously tried to market the property for eighteen months, without a single offer--even after she reduced the asking price to $174,900. If the Bank had acquired the property, said the Court, it too "may have encountered difficulties in reselling" it.

And, the Court said, the Bank "cannot be held responsible for failure to bid...when Chicago Title had an equal opportunity to do so. When both parties have the same opportunity to reduce damages, a defendant cannot later contend that the plaintiff failed to mitigate." (Citations omitted.)

Finally, the Court made short work of the Bank's negligence claims--saying the insured must be limited to its contractual remedies due to the merger clause found in Section 14(b) of the Conditions and Stipulations.

So...Chicago Title was ordered to indemnify the Bank in the amount of $40,841, plus interest. Although not further explained in the Court's decision, the award of interest will presumably be based on Ohio's customary prejudgment interest rate rather than the 10.25 percent requested by the Bank.

Comment: Accepting (as we must) the Court's recital of the facts, I don't have a problem with the outcome. Still, one wonders why the claims handler(s) fought this one.

I expect title claims handlers will be quoted language from this case for years to come--by lenders or their counsel demanding a quick buy-out for a problem loan. The thing to remember is that this case doesn't support such demands. The Bank in this case cooperated with the title insurer--waiting and overseeing efforts to market the property for more than eighteen months before the disappointing foreclosure sale. And, the Bank was in no way responsible for the title defect nor any condition of the property which may have rendered it undesirable.

At least, these are the facts we are given as supporting the decision.

I don't think this case should be read to say that the results of an appraisal can never be considered as evidence of value when there's been a foreclosure sale. Nor does it say that an insured lender may never be obliged to cooperate with an insurer's reasonable request for help in attempting to minimize damages.

Instead, I think the Court's decision takes a common sense approach--based as consistently as possible on title policy language--ultimately finding in favor of a lender that simply waited long enough for indemnification.

**********

Following Monday's posting, Rich Angelo (Valley Forge/Philadelphia) writes:

One has to wonder if the result would have been different if the Bank had participated in the bidding process, and was able to acquire the premises for less than the appraised value. In most foreclosures in this end of the country, there is little active bidding at mortgage foreclosure sales. The lenders usually make the minimum bid and acquire the premises.

Jim Dondero (Grand Rapids, MI) writes:

The Ohio Supreme Court seems to grasp fairly well what is often difficult for insured lenders to understand, i.e., the INDEMNITY nature of a Loan Policy. Most courts have now recognized that an insured realizes "actual loss" only when, and to the extent that its "security" (i.e., the lien of a mortgage or deed of trust) may be impaired by the title defect, lien or encumbrance forming the basis of a claim. Even see the case of BLACKHAWK PROD. CREDIT vs. CHICAGO TITLE INS. CO., 400 N.W.2d 287 (Wis. App. 1986), holding that the insured lender could not recover where the value of the "unimpaired security" exceeded the amount of the policy (but NOT the amount of the loan BALANCE). I think the Ohio Court is merely saying that the Bank HAD exhausted its collateral, and that its duty to mitigate loss did not require it to bid at its foreclosure sale.

**********

Following up on Monday's posting, Alan Rubin (Uniondale, NY) writes:

For an excellent statement of the difference between an indemnifiable loss of an insured lender and that of an insured owner, and what constitutes "actual loss" under a loan policy, we often cite the CA case of Cale v. Transamerica Title Insurance Co., 225 Cal. App. 3d 422, 275 Cal Reptr. 107 (1990). I find that the court in Cale explains the concept of a lender's loss in clear and understandable terms.

Dennis Gonski (outside counsel/NJ), referring to Jim Dondero's reply, writes:

The posting cites to an Ohio case, Blackhawk Production Credit Association v. Chicago Title Insurance Company, 400 N.W.2d. 287 (Wis. App. 1986) for the proposition that an "insured lender could not recover where the value of the 'unimpaired security' exceeded the amount of the policy (but NOT the amount of the loan balance)"

I believe that to be wrong!

In a later opinion in that same case -- Blackhawk Production Credit v. Chicago Title Insurance, 423 N.W.2d 521 (1988) Justice Day, for the court wrote:

"This is a review of a published decision

of the court of appeals, Blackhawk Production

Credit Ass'n v. Chicago Title Ins. Co., 135

Wis.2d 324, 400 N.W.2d 287 (Ct.App.1986),

which reversed a judgment of the circuit court

for Waushara country, Circuit Judge Frederic

W. Fleishauer of Portage county presiding,

against Chicago Title Insurance Company

(Chicago Title) for failure to disclose or except

a superior lien in a mortgagee's policy of title

insurance. We conclude that the computation

of damages made by the court of appeals,

as well as that made by the circuit court, was

erroneous. We therefore reverse the court of

appeals decision and remand for findings to

determine the extent of actual loss Blackhawk

Production Credit Association (Blackhawk)

sustained due to the defect in tile of the real

property security interest it insured with Chicago

Title."

Later in his opinion, Justice Day held that Chicago Title was indeed liable for damages in the amount of $53,375.00, computed as follows:

"Actual loss to Blackhawk is calculated

by determining the difference between the

value of Blackhawk's security interest had

title been as described in its insurance policy

($53,375) and the value of the mortgage

subject to the defect ($53,375 - $106,750 =

<$53,375>). Though a negative balance

would result, Blackhawk may not recover an

amount greater than the value of its security

interest, or, in this case, $53,375.

Moreover, under the terms of the Chicago

title policy, Blackhawk is entitled to recover

whichever amount is less, either the actual

loss to Blackhawk as a result of defect or

the face value of the title policy. Since the

loss in land value of $53,375 was less than

the $85,000 limits of the policy, the lower

figure of $53,375 would be recoverable by

Blackhawk. Computations were not made

at trial, however, to determine Blackhawk's

recoverable costs and attorney fees

associated with the settlement of the

Rochelle Bank superior lien. We, therefore,

remand this action with directions to the

circuit court to determine Blackhawk's costs,

attorney fees and expenses required to

remove Rochelle Bank's superior interest,

to add that amount to the $53,375 in

damages sustained by Blackhawk, and

enter judgment accordingly."

Being a litigation counsel and also being sensitive to case law concerning policy damage computations, I would lose sleep tonight if I did not post this "connection"

Best wishes for the holidays!

**********

Following up on last Monday's posting, and Dennis Gonski's reply, Jim Dondero (Grand Rapids, MI) writes:

You are absolutely correct, Dennis, and I apologize for missing the Wisconsin Supreme Court's reversal in the BLACKHAWK case. I am troubled by it, though, in that it strains to find a basis of recovery for a lender that had quite obviously and intentionally UNDERINSURED its mortgage, a fact which appears to be unique to this case out of all the reported decisions on the subject. Now I may be the one losing sleep tonight.

A Safe, Healthy and Happy New Year to all LandSakes folk!