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Aztec Abstract & Title Insurance, Inc. v. Maxum Specialty Group

United States District Court, D. New Mexico

February 6, 2018

AZTEC ABSTRACT & TITLE INSURANCE, INC., a New Mexico Corporation, Plaintiff,


         This matter comes before the Court upon Maxum's Memorandum Motion for Summary Judgment (Motion for Summary Judgment), filed January 11, 2017. (Doc. 34). Plaintiff filed a response on February 3, 2017, and Defendant Maxum Indemnity Company (Maxum)[1] filed a reply on February 16, 2017. (Docs. 37 and 38). Having considered the Motion for Summary Judgment, the accompanying briefing, and the relevant evidence, the Court grants the Motion for Summary Judgment.

         A. Background

         1. Relevant Facts Viewed in the Light Most Favorable to Plaintiff [2]

         Plaintiff provides title and escrow services for real estate closings and is an agent for title insurance underwriter Commonwealth Land Title Insurance Company (Commonwealth). (Doc. 1-1) at 19-22; (Doc. 34-1) at 2-3, depo. at 9-10. Under the agency agreement with Commonwealth, if Plaintiff is grossly negligent in its provision of title services, Plaintiff may be liable to Commonwealth for any loss it suffers as a result of the gross negligence. (Doc. 1-1) at 20. This lawsuit involves Commonwealth's request for indemnification from Plaintiff for an error in its provision of title services.

         a. Chronology of Events

         In 2008, Sweetwater Farms (Sweetwater) obtained a mortgage from Zions First National Bank (Zions) to encumber a parcel of land next to a peanut processing plant. (Doc. 34) at 3, ¶ 5; (Doc. 34-1) at 4, depo. at 18-19. Plaintiff's closing officer, Jennifer Hardin, handled the closing of the transaction, and Plaintiff issued a title insurance policy underwritten by Commonwealth. (Doc. 34-1) at 2 and 4, depo. at 9, 18-19.

         In 2009, Sweetwater obtained a mortgage from Excel National Bank (Excel) to encumber the property upon which the peanut processing plant was situated. Id. at 4, depo. at 19. Hardin, likewise, handled the closing of that transaction for Plaintiff, and Plaintiff issued a title insurance policy underwritten by Commonwealth. Id.

         In December 2010, Excel sought to foreclose on its Sweetwater mortgage and discovered that Zions was asserting that its Sweetwater mortgage was senior to a portion of the property where the peanut processing plant was located, property subject to the Excel mortgage. (Doc. 34) at 3, ¶ 7; (Doc. 34-1) at 17. Consequently, in a letter dated December 22, 2010, Excel notified Commonwealth of Zions' claim to Excel's property and indicated that it had contacted Plaintiff about the problem, which Plaintiff was researching. (Doc. 34-1) at 17. This letter was copied to Hardin. Id. Under the terms of the title insurance policy, Commonwealth provided Excel with counsel to defend its interest in the disputed property. Id. at 33.

         In February 2011, Commonwealth advised Plaintiff, by letter, about the claim Excel presented to Commonwealth. Id. at 19. Commonwealth requested that Plaintiff provide a copy of its file on the Sweetwater transactions and any other information which would help Commonwealth's “investigation or resolution of this matter.” Id.

         In March 2011, Plaintiff's president, Bessie Engram, responded to Commonwealth explaining that a mistake in the legal descriptions in the two Sweetwater transactions occurred and that “[r]e-recording the Zions National Bank mortgage with corrected legal [description] or filing a modification with the corrected legal [description] of that mortgage should remedy the problem.” Id. at 18. Plaintiff also enclosed the requested Sweetwater files. Id.

         Engram admits that filing a mortgage with an incorrect legal description of the property is a negligent act. Id. at 8, depo. at 40-41. Moreover, Engram knew, in March 2011, that it was possible that the error in legal descriptions could result in a loss of collateral. Id. at 8, depo. at 40.

         In June 2012, Plaintiff, through Engram, applied for professional errors and omissions (E & O) liability insurance with Maxum. See Id. at 21. Question 38 of the application asks whether the applicant is “aware of any incident or circumstance which MAY RESULT in a CLAIM being made against the Applicant…?” Id. at 28. Plaintiff responded “no.” Id. Maxum subsequently issued the E & O insurance policy with an inception date of July 1, 2012. Id. at 36.

         In October 2012, Engram learned, from Hardin, about the foreclosure proceeding involving the Sweetwater property and that there was an issue with respect to Zions and Excel's mortgages, i.e., a possible overlap of the mortgages. (Doc. 37-1) at 1, depo. at 26, 28, and 29. In fact, Hardin testified at the October 2012 trial of the foreclosure proceeding. (Doc. 34-1) at 8, depo. at 41. In December 2012, the state court determined in the foreclosure proceeding that Zions had the first lien on the disputed property while Excel had a second lien on that property. Id. at 9, depo. at 46. Excel, thus, lost the value of the collateral with respect to the disputed property. Id.

         After Hardin testified at the foreclosure trial in October 2012, Engram had concerns about whether Plaintiff erred with respect to the Sweetwater mortgages. (Doc. 38-1) at 4, depo. at 44. Consequently, prior to the state court's determination in December 2012, Engram obtained a copy of the foreclosure trial transcript and asked Hardin if there was a claim against Plaintiff. Id. at 4, depo. at 42, 44. Hardin told Engram “no.” Id. at 4, depo. at 44. Following the 2012 foreclosure trial, Engram waited for Commonwealth to contact her. Id. at 4, depo. at 45. Engram explained at her deposition that, “If there was going to be a claim against me, they would have made it.” Id.

         As a result of the state court's decision, Commonwealth indemnified Excel for “the loss incurred as a result of a portion of [Excel's] Insured Property being subject to the superior Zions Mortgage.” (Doc. 34-1) at 33. Commonwealth resolved Excel's claim by paying Excel the title insurance policy limit of $275, 000.00. Id.

         In December 2014, Commonwealth wrote a letter to Plaintiff asserting that Plaintiff “knew or should have known that the legal descriptions were conflicting” and that the conflicting legal descriptions resulted in a loss to Excel and Commonwealth. Id. Hence, Commonwealth demanded that Plaintiff indemnify it for the losses and expenses it incurred due to the conflicting legal descriptions. Id. Commonwealth suggested that Plaintiff file a claim with its E & O insurer, Maxum, for indemnification. Id. Engram acknowledged she had received “some” correspondence from Commonwealth prior to the December 2014 letter. Id. at 11-12, depo. at 57-58.

         In January 2015, Plaintiff made a claim to Maxum for indemnification. Id. at 34. In addition to indemnification, Engram expected Maxum to defend Plaintiff from a possible lawsuit by Commonwealth. Id. at 13, depo. at 68. In anticipation of such a lawsuit, Plaintiff retained counsel. Id. at 13, depo. at 67. Commonwealth, however, has not filed any legal proceedings against Plaintiff in this matter. Id. at 11, depo. at 56. Indeed, Commonwealth has agreed not to sue Plaintiff for negligence with respect to the Excel mortgage. Id. at 12, depo. at 60.

         In October 2015, Maxum denied coverage explaining that the E & O insurance policy did not apply. Id. at 34. Maxum specifically cited the prior knowledge exclusion provision which states that the policy does not apply to “[a]ny ‘claim' arising out of or resulting from any ‘wrongful act'” which the insured “had knowledge of or information related to, prior to the first inception date of the continuous claims-made coverage with [Maxum], and which may result in a ‘claim.'” Id. at 37. According to Maxum, Plaintiff was aware of the legal descriptions error in 2010 and 2011. Id. at 38. Maxum, therefore, concluded that Plaintiff “was aware of wrongful acts which might result in a claim against it prior to July 1, 2012, ” the inception date of the E & O insurance policy. Id.

         b. Other Relevant Provisions of the E & O Insurance Policy

         The policy provision on the duty to defend states that Maxum has the “duty to defend any ‘insured' against any ‘suit' seeking … ‘damages.'” (Doc. 34-2) at 2. “Damages” are those sums an insured is “legally obligated to pay … because of a ‘wrongful act' in the rendering of or failure to render ‘professional services' by any ‘insured'….” Id. Maxum, however, has no duty to defend if “this insurance does not apply.” Id. Maxum, at its discretion, may “investigate any ‘wrongful act' and settle any ‘claim' or ‘suit' that may result.” Id.

         The policy further defines “damages” as “compensation only in the form of money for a ‘claim' to which this insurance applies.” Id. at 4. A “claim, ” in turn, is defined as “a written or verbal demand received by any ‘insured' for money….” Id. A “suit” is “a civil proceeding in which ‘damages' because of the rendering of or failure to render ‘professional services' to which this insurance applies are alleged.” Id. at 5. A “wrongful act” is “any actual or alleged negligent act, error or omission in the rendering or failure to render ‘professional services.'” Id.

         2. The Complaint Against Maxum

         In December 2015, Plaintiff filed suit against Maxum, Commonwealth, and a survey company in state court. (Doc. 1-1) at 7. Maxum removed the case to federal court in February 2016. (Doc. 1). Only Maxum remains as a Defendant. See Stipulated Order of Dismissal of Claims Against Defendants ...

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