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Banner Bank v. First American Title Insurance Co.

United States District Court, D. Utah

April 12, 2017

BANNER BANK, a Washington banking corporation, Plaintiff,
v.
FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation, Defendants.

          MEMORANDUM DECISION AND ORDER

          Bruce S. Jenkins United States District Judge.

         On November 30, 2016, Defendant First American Title Insurance Company filed a motion for summary judgment and memorandum in support thereof.[1] Plaintiff Banner Bank filed an opposition response on January 3, 2017.[2] First American Title Insurance Company filed a reply on January 17, 2017.[3]

         Plaintiff also filed its own motion for summary judgment and memorandum in support thereof on December 1, 2016.[4] Defendant First American Title Insurance Company filed an opposition response on December 29, 2016.[5] Banner Bank filed a reply on January 17, 2017.[6]

         Both motions for summary judgment came before the court for a hearing on January 31, 2017.[7] Steven W. Call and Jonathan A. Dibble appeared on behalf of Plaintiff Banner Bank.[8]Sara E. Bouley and Scott E. Gizer appeared on behalf of Defendant First American Title Insurance Company.[9] At the close of oral argument, the court reserved on the matter.[10]

         Having considered the parties' briefs, the arguments of counsel, and the relevant law, the court hereby GRANTS Plaintiffs summary judgment motion on the First, Second, and Third Claims for Relief and DENIES Defendant's summary judgment motion on those same three issues. As to the Fifth Claim for Relief, this issue is academic and need not be decided.

         BACKGROUND

         Wendell Jacobson ("Jacobson") obtained a line of credit from American West Bank, which at the time did business in Utah as Far West Bank[11] (the "Bank") in March 2007.[12] He originally executed a Promissory Note in favor of the Bank in the amount of $ 1, 000, 000.[13] In April 2007, Mr. Jacobson executed a Change in Terms Agreement which increased the principal loan obligation to $5, 000, 000.[14] In connection therewith, Mr. Jacobson and the Bank executed a Business Loan Agreement on June 15, 2009.[15] On the same day Mr. Jacobson, as part of the transaction, also executed a new loan document in the amount of $5, 000, 000 entitled Change in Terms Agreement.[16]

         In order to provide additional security for the five million dollar loan, Mr. Jacobson, purportedly acting for High Star Ranch, LLC and Management Masters, LLC, executed a Trust Deed for three parcels of land situated in Utah (the "High Star Trust Deed").[17] The Bank ordered a policy of title insurance (the "insurance policy") on the High Star Trust Deed which was issued by First American Title Insurance Company.[18]

         On January 16, 2013, the High Star Trust Deed was the subject of a lawsuit filed in this court: John A. Beckstead v. Far West Bank, case no. 2:13-cv-00038-BSJ (the "Receiver's Action"). The Receiver's Action was brought by John Beckstead, pursuant to his then existing appointment as Receiver in the related enforcement action Security and Exchange Commission v. Management Solutions, et al, case no. 2:11-cv-01165-BSJ (the "SEC Action"), wherein the SEC alleged that Jacobson and various entities controlled or managed by him, including Management Solutions, Inc. ("MSI"), were involved in a Ponzi scheme.

         On January 23, 2013, the Bank through its attorneys sent First American Title Insurance Company ("First American") a notice of claim letter requesting that it defend and indemnify the Bank with regard to the Receiver's Action.[19] First American denied coverage in a letter dated March 13, 2013. It explained that "the Receiver requests that the insured deed of trust be avoided pursuant to the Utah Uniform Fraudulent Transfer Act because the transfer was made to hinder, delay or defraud creditors, "[20] and that this claim was excluded from coverage under Exclusion 6 of the insurance policy.

         On April 19, 2013, the Bank sent a second letter requesting that First American review the matter. Among other things, the letter explained that the Receiver's Complaint alleged "neither [MSI] nor Wendell Jacobson was duly authorized to execute the [High Star Trust Deed] on behalf of High Star and Management Masters, "[21] and therefore the Receiver's Complaint implicated the insurance policy because it concerned the "failure of any person or Entity to have authorized a transfer or conveyance."[22]

         After reviewing the second letter over a period of about four months, on August 8, 2013, First American sent the second denial letter to Plaintiff. The letter reiterated that the Receiver's Complaint "seeks relief for 'the benefit of MSI's creditors and investors on whose behalf the Receiver acts' pursuant to the Utah Code Ann. §25-6-1, et seq. (known as the 'Uniform Fraudulent Transfer Act') by asking the Court to 'avoid the Transfer', " which is excluded by Exclusion 6 of the insurance policy.[23] That letter did not in any way deal with the allegations of lack of authority set forth in the second demand letter.

         After litigation in the Receiver's Action, the Bank and the Receiver entered a settlement agreement wherein the Bank paid the Receiver $675, 000 in exchange for a release of the claims concerning the High Star Trust Deed.[24]

         Thereafter, American West Bank merged with Banner Bank, [25] and the Bank commenced the current action against First American to recover under the High Star Trust Deed insurance policy (i) $675, 000 for the settlement payment, and (ii) $159, 288 for legal expenses involved.[26]

         In the current action, Banner Bank requests that the court: (i) find there was a duty to defend and indemnify; (ii) find that there was a breach of contract due to failure to defend and indemnify; (iii) find that there was a breach of the implied covenant of good faith and faith dealing; and (iv) grant the contingent claim that there was a breach of contract because the insurance policy was allegedly inconsistent with the commitment for title insurance.[27]

         DISCUSSION

         The issues in this case involve the insurance policy. Indeed, the commitment dated June 11, 2009, states "[First American's] obligations under this Commitment will end when the Policy is issued and then [First American's] obligation to [the Bank] will be under the Policy."[28] The insurance policy, which was a standard ALTA 2006 Extended Lender's policy for $5, 000, 000, was identified in the commitment.[29] The Plaintiffs cause of action related to an alleged contradicting commitment is dismissed with prejudice.

         The operative issue in this case is whether First American had a duty under the insurance policy to defend and/or indemnify American West Bank in the Receiver's Action against the Bank. Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."[30]

         The court finds that First American had a duty to defend American West Bank because the Receiver's Complaint alleged a risk that was covered by the insurance policy. The insurance policy states:

[First American] shall provide for the defense of an Insured in litigation in which any third party asserts a claim covered by this policy adverse to the Insured. This obligation is limited to only those stated causes of action alleging matters insured against by this policy.[31]

         Under Utah law, "[a]n insurer's duty to defend is determined by reference to the allegations in the underlying complaint. When those allegations, if proved, could result in liability under the policy, then the insurer has a duty to defend."[32] If there are covered and non-covered claims in a lawsuit, "the insurer is obligated to provide a defense to the entire suit, at least until it can limit the suit to those claims outside of the policy coverage."[33]

         One of the covered risks of the insurance policy is:

9. The invalidity or unenforceability of the lien of the Insured Mortgage upon the Title. This Covered Risk includes but is not limited to insurance against loss from any of the following impairing the lien of the insured Mortgage . . . (b) failure of any person or Entity to have authorized a transfer or conveyance. . . .[34]

         Among other things, the Receiver's Complaint alleged that the High Star Trust Deed was invalid and unenforceable because it was an unauthorized conveyance. Paragraph 9 of the Receiver's Complaint states "[t]he Receiver disputes the validity of the Deed of Trust securing the Line of Credit."[35] In his second claim letter of April 19, 2013, the last paragraph on page two, [36] counsel for the Bank provides his reading of the ambiguous Receiver's Complaint. That paragraph states as follows:

However, if neither [MSI] nor Wendell Jacobson was duly authorized to execute the trust deeds on behalf of High Star and Management Masters, the Receiver's claims to avoid those trust deeds would be insured under the lender policy based upon the afailure of any person or Entity to have authorized a transfer or conveyance."[37]

         "The implied covenant of good faith and fair dealing . .. inheres in all insurance contracts."[38] "'[T]he implied obligation of good faith performance contemplates, at the very least, [1] that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, [2] will fairly evaluate the claim, and [3] will ...


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