883 F.3d 1038
8th Cir.2018Background
- National City made a $21.28M construction loan to Majestic Pointe; Fidelity issued an ALTA 1992 lender’s title policy (mechanics’ lien coverage included) after construction had begun. Captiva later purchased National City’s loan interest and succeeded to the policy.
- Multiple mechanics’ liens (over $7M claimed) were filed after the policy date; Captiva claimed under the policy and Fidelity defended under a reservation of rights, reserving Exclusion 3(a) (liens “created, suffered, assumed or agreed to by the insured claimant”).
- Fidelity paid >$1.6M and spent >$400K defending lien claims, then filed declaratory relief which was dismissed by stipulation; Captiva proceeded with counterclaims and a jury found Fidelity breached the policy, awarding damages (including ~$6.28M for a failed sale to MLake).
- The district court excluded evidence on Exclusion 3(a) after concluding Fidelity must show National City engaged in intentional misconduct or inequitable dealings to invoke the exclusion; the court submitted unmarketability and breach issues to the jury but granted JMOL for Fidelity on Captiva’s tortious interference claim.
- On appeal, the Eighth Circuit held the district court used the wrong legal standard for Exclusion 3(a) (no strict misconduct requirement) and reversed the exclusion of evidence; it also held Captiva failed to prove title was unmarketable as of the policy date and affirmed the JMOL dismissal of the tortious-interference claim, vacating the judgment and remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of Exclusion 3(a) ("created, suffered, assumed or agreed to by the insured") | Exclusion 3(a) does not apply because National City did not act with intentional misconduct or inequitable dealings; lien arose from contractor claims, not lender’s conduct. | Exclusion applies because National City’s imprudent underwriting, failure to enforce loan conditions, and cessation of funding "created" or "suffered" the liens; no requirement to show intentional wrongdoing. | Eighth Circuit: District court erred requiring proof of intentional misconduct; Exclusion 3(a) may apply without proving intentional misconduct when lender’s conduct (e.g., failure to prevent or monitor insufficient funding) effectively created/suffered liens; evidence should have been admitted. |
| Whether unresolved mechanics’ liens rendered title unmarketable as of the policy Date of Policy (Oct. 25, 2007) | Captiva: inchoate liens (work begun before policy) made title unmarketable as of policy date; Duffy supports recognizing contingent/inchoate lien-related encumbrances. | Fidelity: mechanics’ liens do not encumber title until filed; unmarketability coverage protects past defects as of policy date, not liens filed later; first-spade rule governs lien priority only. | Court: Captiva failed to prove title was unmarketable on or before the policy date; even if inchoate liens could qualify, Captiva did not show unpaid obligations as of the policy date that later materialized into liens; declined to extend first-spade rule to make post-policy filed liens relate back for unmarketability coverage. |
| Application/Scope of the first-spade rule for title insurance coverage timing | Captiva: first-spade rule (relation back to commencement of work) means liens relate to date work began and thus predate policy, making title unmarketable. | Fidelity: first-spade rule affects lien priority, not whether an encumbrance existed for unmarketability coverage as of the policy date; a lien is an encumbrance when filed. | Court: first-spade rule governs priority disputes but does not determine the date a title insurance unmarketability loss arises; it refused to extend the rule to treat liens filed after the policy date as pre-existing encumbrances for coverage purposes. |
| Tortious interference with business expectancy (Captiva v. Fidelity re: defense control) | Captiva: Fidelity interfered with its attorney-client relationship and delayed/limited defense to advance coverage denial and impair sale to MLake; this was unjustified and caused damages. | Fidelity: policy gave it the right to control defense and litigation (subject to diligence); its litigation strategy and reservation of rights were justified and not independently wrongful. | Court: JMOL for Fidelity affirmed. Fidelity had contractual control of defense; Captiva failed to show absence of justification or independent wrongful means; communications and counsel activity did not constitute improper means under Missouri law. |
Key Cases Cited
- BB Syndication Servs., Inc. v. First Am. Title Ins. Co., 780 F.3d 825 (7th Cir.) (title insurance not designed to bear risk of liens from insufficient construction funding; lender can be said to have "created/suffered" such liens)
- Brown v. St. Paul Title Ins. Corp., 634 F.2d 1103 (8th Cir.) (lender’s cessation of funding after default can be treated as having "created or suffered" liens; insurer need not cover such liens)
- First Assembly Church of West Plains v. Ticor Title Ins. Co., 872 S.W.2d 577 (Mo. Ct. App.) (Exclusion 3(a) can apply where conduct was intentional and deliberate; courts resist reading the exclusion to require bad faith in every case)
- Chicago Title Ins. Co. v. Resolution Trust Corp., 53 F.3d 899 (8th Cir.) (analysis of created-or-suffered exclusion under different state law; cautioned against an overly broad application that would nullify coverage)
- Bob DeGeorge Assocs., Inc. v. Hawthorn Bank, 377 S.W.3d 592 (Mo.) (mechanics’ lien statutes: lien must be properly filed to be enforceable; first-spade rule gives relation-back priority to commencement of work)