BB Syndication Services, Incor v. First American Title Insuranc
780 F.3d 825
7th Cir.2015Background
- BB Syndication made an $86M construction loan to Trilogy for the West Edge project; First American issued a lender’s title policy and acted as disbursing agent.
- Early cost overruns emerged; BB Syndication disbursed >$61M but then stopped funding when the project became underfunded; many contractors filed mechanic’s liens for unpaid work.
- Bankruptcy/adversary proceedings elevated about $17M of mechanics’ liens that had priority over BB Syndication’s mortgage; auction recovery was minimal and lender suffered large loss.
- BB Syndication tendered defense/indemnity to First American under the title policy; First American denied coverage invoking Exclusion 3(a) (liens “created, suffered, assumed or agreed to” by the insured).
- District court held insurer breached duty to defend but Exclusion 3(a) barred indemnity; BB Syndication appealed the indemnity ruling.
Issues
| Issue | BB Syndication’s Argument | First American’s Argument | Held |
|---|---|---|---|
| Whether Exclusion 3(a) bars coverage for mechanics’ liens that arose after lender cut off funds | Lender had contractual right to stop funding; therefore it did not "create" or "suffer" liens and policy should cover the liens (or case is like decisions where full commitment was advanced) | Lender’s discretionary decision to stop funding caused the liens; Exclusion 3(a) applies to liens arising from insufficient funds and insurer owes no indemnity | Exclusion 3(a) applies; liens resulting from insufficient funds are excluded and insurer has no indemnity duty |
| Whether First American’s agreement not to invoke Exclusion 6 altered coverage for these liens | BB argued insurer waived Exclusion 6 so insurer cannot rely on other exclusions to deny coverage for these liens | Exclusion 6 concerns different circumstances (liens from work not financed by loan proceeds); waiver of Exclusion 6 is irrelevant to liens caused by cutoffs of loan funding | Agreement not to invoke Exclusion 6 does not create coverage for liens resulting from insufficient loan funds |
| Choice of law for interpreting the policy | BB favored application of Missouri law (relying on Eighth Circuit precedents) | First American relied on Wisconsin law; parties pointed to no meaningful difference for contract interpretation | Court applied Wisconsin law (no material difference for resolution) |
| Whether duty-to-defend findings revive indemnity/bad-faith | BB contended duty-to-defend breach should require indemnity or support bad-faith claims | First American noted duty-to-defend and indemnity are distinct; exclusion defeats indemnity and thus bad-faith claim fails if no coverage | Court affirmed no indemnity; duty-to-defend ruling stood but indemnity denial disposes of bad-faith claim |
Key Cases Cited
- Bankers Trust Co. v. Transamerica Title Insur. Co., 594 F.2d 231 (10th Cir. 1979) (lender that cut off funds “created” liens; title insurer not liable for unpaid work arising from insufficient funding)
- Brown v. St. Paul Title Ins. Corp., 634 F.2d 1103 (8th Cir. 1980) (same: insurer not required to guarantee payment for work for which loan funds were never advanced)
- American Sav. & Loan Ass’n v. Lawyers Title Ins. Co., 793 F.2d 780 (6th Cir. 1986) (distinguishing Brown where lender had advanced full commitment; insurer may cover liens once full commitment is disbursed)
- Chicago Title Ins. Co. v. Resolution Trust Corp., 53 F.3d 899 (8th Cir. 1995) (follows American Savings: coverage may exist where lender advanced full commitment)
- Home Fed. Sav. Bank v. Ticor Title Ins. Co., 695 F.3d 725 (7th Cir. 2012) (duty-to-defend broader than indemnity; presence or absence of disbursement agreement affects analysis)