BB Syndication Services, Inc. v. First American Title Ins. Co.

Summarized by Kurt Carlson , Carlson Dash LLC
10 years 11 months ago

Citation:

BB Syndication Services Inc. v. First American Title Insurance Company, Court of Appeals, 7th Circuit 2015 (unpublished)

Tag(s):

Ruling:

The Seventh Circuit held that when a lender cuts off loan funding by reason of a construction project’s overspending, the lender is, in fact, “creating” or “suffering” a mechanic’s lien because there is inevitably some completed work that remains to be done that will go unpaid. In that event, the exclusion to the standard form title insurance policy applies, known as “Exclusion 3(a)”.

Procedural context:

BB Syndication Services, Inc. (the “Lender”) sued First American Title Insurance Company (the “Insurer”) in Wisconsin state court for breach of title policy and bad-faith denial of coverage and the Insurer removed the case to federal court. The district court ruled that the Insurer violated its duty to defend the Lender, but Exclusion 3(a) precluded a duty to indemnify. Because of the exclusion, the bad-faith claim was dismissed and the Lender was awarded only its litigation costs as damages on the duty-to-defend claim. The Lender appealed the court’s decision on Exclusion 3(a) and the bad-faith claim but the Court of Appeals affirmed the ruling.

Facts:

Trilogy Development Company (“Developer”) contracted for construction of a commercial development with an initial estimated cost of $118 million, including a $32 million investment by the Developer and a construction loan for $86 million from the Lender. The construction loan was secured by the construction project and the Lender bought title insurance from the Insurer who was also designated as the disbursement agent for the loan funds. The project soon became out of balance and the Lender’s call for repayment was answered by the Developer with a bankruptcy petition and adversary proceeding to determine the amount of liens and priority of creditors. The Lender looked to First American for indemnification and was denied, with First American invoking Exclusion 3(a). Bankruptcy court awarded $17 million in mechanics’ liens and gave them all priority over the Lender, which left the Lender with nothing after a judicial auction only salvaged $10 million from the unfinished project. After settlement, the Lender received just $150,000 of its $61 million claim. On appeal, the Lender challenged the court’s ruling that Exclusion 3(a) applied in this case. The exclusion is a standard provision in title policies, but doesn’t apply any time the lender could have prevented a mechanic’s lien from arising. In this case, the liens arose directly from the Lender’s cutting off of funds, putting this situation squarely in the realm of 3(a). The Lender continued to fund the project long after it was clear the costs would overrun the balance of the loan. The Lender claims that this demonstrates good faith and a willingness to see the project to completion, but the court interpreted it as poor judgment that precipitated the liens. The Court of Appeals explicitly declined to place decisive weight on the existence of a disbursement agreement.

Judge(s):

Wood, Flaum, Sykes

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