Opinion
Civil No. CCB-04-1400
June 7, 2004
MEMORANDUM
Now pending before the court is a motion to dismiss filed by the defendant, First American Title Insurance Company. The issues in this motion have been fully briefed and no hearing is necessary. See Local Rule 105.6. For the reasons stated below, the motion to dismiss will be granted.
BACKGROUND
This lawsuit concerns a title insurance policy purchased by the plaintiff, ASK Realty II Corporation ("ASK"), from the defendant, First American Title Insurance Company ("FATICO"), in September 2001 for a residential property located at 3146 Keswick Road, Baltimore, Maryland ("the Property"). In February 2003, ASK contacted FATICO to make a claim under this title insurance policy and to request legal representation in a lawsuit filed by the individuals who had purchased the Property from ASK, Daniela Amzel and Adrian Batchelor ("Amzel and Batchelor"), based on an alleged defect in their title to the Property. FATICO denied coverage to ASK, and this lawsuit followed. ASK originally filed a complaint against FATICO in the Circuit Court for Baltimore City, Maryland on March 19, 2004. On May 3, FATICO removed the suit to federal court, invoking diversity jurisdiction.
Amzel and Batchelor purchased a leasehold interest in the Property from ASK on April 15, 2002. Their lawsuit against ASK was based on a title defect related to a prior owner of the leasehold interest in the Property, Rosemary Cash ("Cash"). Cash purchased the leasehold interest in the Property on May 12, 1997, with a loan from Atlantic Regional Mortgage Corporation. In August 2000 the owner of the reversionary ground rent interest in the Property, Gary Waiker ("Waiker"), filed an ejectment action against Cash in the Circuit Court for Baltimore City, alleging non-payment of ground rent for the Property. The Circuit Court entered a default judgment against Cash and in favor of Waiker in October 2000, which became final on December 26, 2000, and was recorded on January 16, 2001.
Cash also had refinanced her leasehold interest in the Property with a loan from Nova Mortgage Corporation ("Nova") in August 1998. Cash eventually defaulted on this loan, and trustees for Nova brought foreclosure proceedings in the Circuit Court for Baltimore City in March 2001. Bank One purchased the leasehold interest in the Property in June 2001 through the foreclosure sale. In July 2001, Waiker sent a letter to Bank One informing it of the amounts due for ground rent on the Property, and stating that he would seek a writ of possession if the outstanding ground rent was not paid within 30 days. Bank One sold the leasehold interest in the Property to ASK on August 8, 2001. This deed was recorded on September 14, 2001.
In October 2001 Waiker transferred his reversionary interest in the Property to an LLC, and then filed a request for a writ of possession for the Property to enforce the prior default judgment. The Circuit Court for Baltimore City issued a writ of possession in favor of Waiker's LLC in December 2001. ASK was not notified of nor a party to this action, and was not served with the writ of possession.
ASK made substantial repairs and improvements to the Property, and then sold it to Amzel and Batchelor on April 15, 2002. The FATICO title agent who prepared the title abstract on the Property for ASK failed to find the existing default judgment against Cash and in favor of Waiker for possession. In the deed to Amzel and Batchelor, ASK covenanted:
[T]hat she has not done or suffered to be done any act, matter or thing whatsoever, to encumber the property hereby conveyed; that she will warrant specially the property hereby granted; and that she will execute such further assurances of the same as may be requisite.
(Compl. at Ex. C at pg. 1.) In September 2002, counsel for Waiker's LLC contacted Amzel and Batchelor to inform them of the outstanding writ of possession on the Property. Waiker demanded $80,000 to transfer title for the Property to Amzel and Batchelor. Amzel and Batchelor responded by filing a complaint in the Circuit Court for Baltimore City in January 2003 against Waiker's LLC and ASK. Amzel and Batchelor stated that if Waiker in fact held title to the Property in fee simple, then ASK had "breached the special warranty contained in the April 15, 2002 deed." (Id. at Ex. B, Compl., at ¶ 33-36.) In an amended complaint filed in March 2003, Amzel and Batchelor added a second count stating that if Waiker in fact held title to the Property in fee simple, then ASK had "breached the covenant against encumbrances contained in the April 15, 2002 deed." (Id. at Am. Compl., at ¶ 38-40.)
ASK had obtained a title insurance policy for the Property from FATICO, effective September 20, 2001. The policy protects the holder, ASK, against specified "covered risks," including: (1) "someone else owns an interest in Your Title;" (2) "someone else has rights affecting Your Title arising out of leases, contracts, or options;" or (3) "Your Title is defective." (Id. at Ex. A at "Covered Risks" ¶ 1-2, 6.) The policy insures against "actual loss, including any costs, attorneys' fees and expenses provided under this Policy" resulting from the covered risks. (Id. at "Owner's Coverage Statement") FATICO has a duty to defend the policyholder in any part of a legal action "which is based on a Covered Risk and which is not excepted or excluded from coverage in this Policy." (Id. at "Our Duty to Defend Against Legal Actions.") In the exclusions section, the policy states that the holder is not insured against "risks that are created, allowed, or agreed to by You." (Id. at "Exclusions" ¶ 4a.)
Although the policy generally excludes coverage if the event creating a covered risk arises after the policy's effective date, the three covered risks listed above are covered regardless of when they arise. (Compl. at Ex. A at "Covered Risks" ¶ 7, "Exclusions" ¶ 4d.) In its correspondence with ASK, FATICO suggested that Amzel and Batchelor's claims against ASK were not covered by the title insurance policy because the claims arose after the policy became effective. (Id. at Exs. E and J.) FATICO has not argued this basis for exclusion before this court.
As stated, ASK contacted FATICO in February 2003 to make a claim under its title insurance policy and to request legal representation in the pending lawsuit filed by Amzel and Batchelor. Based on its review of the initial complaint (which alleged breach of the special warranty of title only), FATICO responded that any acts by ASK giving rise to such a breach would have occurred after the policy's effective date, and thus would be excluded from coverage. (Id. at Ex. E.) When ASK forwarded a copy of the amended complaint, FATICO responded that the same analysis applied to a claim for breach of the covenant against encumbrances, because any acts by ASK giving rise to such a breach would have occurred after the policy's effective date, and thus would be excluded from coverage. (Id. at Ex. J.) ASK hired outside counsel and ultimately prevailed on a motion to dismiss both counts against ASK.
Judge Carol Smith of the Circuit Court for Baltimore City found that the deed between ASK and Amzel and Batchelor created a special covenant against encumbrances, see Md. Code Ann., Real Prop. § 2-110, and a special warranty of title, see Id. § 2-106. (Compl. at Ex. L.) The count for breach of the special covenant against encumbrances failed as a matter of law, because the plaintiffs did not allege that ASK "through its own acts, executed or knowingly encumbered the property at issue," as would be required to establish a breach. (Id.) The count for breach of the special warranty likewise failed as a matter of law, because the plaintiffs did not allege that ASK had any knowledge or notice of Waiker's claim. (Id.)
ASK then filed this suit against FATICO. Count I of the complaint alleges that FATICO breached its contractual duty to defend the insured on the title claims raised by Amzel and Batchelor. Count II alleges that FATICO breached the implied covenant of good faith and fair dealing under the insurance policy. Count III is styled as a claim for "bad faith bordering on and/or amounting to fraud by way of accepting title insurance premiums under false pretenses without the intent to insure and/or defend." (Compl. at ¶ 22-26.) This count alleges that FATICO "never intended to insure or interpose a defense in the event of a title claim and therefore obtained title insurance premiums by way of fraud and under false pretenses and/or in bad faith." (Id. at ¶ 26.) ASK seeks punitive damages under Count IV. Under the other counts ASK seeks $50,000 in damages for legal fees and lost time, $246.00 in reimbursement for fees already paid to FATICO under the policy, and $500,000 in bad faith damages.
ANALYSIS
"The purpose of a Rule 12(b)(6) motion is to test the sufficiency of a complaint; importantly, a Rule 12(b)(6) motion does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999) (internal quotation marks and alterations omitted). When ruling on such a motion, the court must "accept the well-pled allegations of the complaint as true," and "construe the facts and reasonable inferences derived therefrom in the light most favorable to the plaintiff." Ibarra v. United States. 120 F.3d 472, 474 (4th Cir. 1997). Consequently, a motion to dismiss under Rule 12(b)(6) may be granted only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also Edwards, 178 F.3d at 244. In addition, because the court is testing the legal sufficiency of the claims, the court is not bound by the plaintiff's legal conclusions. See, e.g., Young v. City of Mount Ranier, 238 F.3d 567, 577 (4th Cir. 2001) (noting that the "presence . . . of a few conclusory legal terms does not insulate a complaint from dismissal under Rule 12(b)(6)" when the facts alleged do not support the legal conclusions); Labram v. Havel, 43 F.3d 918, 921 (4th Cir. 1995) (affirming Rule 12(b)(6) dismissal with prejudice because the plaintiff's alleged facts failed to support her conclusion that the defendant owed her a fiduciary duty at common law).
I.
All of the claims in ASK's complaint rely on FATICO's refusal to defend ASK against the lawsuit filed by Amzel and Batchelor, based on FATICO's conclusion that the lawsuit did not state any claim covered by the title insurance policy between the parties. Under Maryland law, a liability insurer's mistaken refusal to provide any defense based on its assertion that there is no coverage under the policy only gives rises to an action for breach of contract. See Mesmer v. Md. Auto. Ins. Fund. 725 A.2d 1053, 1058, 1061 (Md. 1999). These facts, without more, cannot give rise to a tort claim. See Id. It is not entirely clear what theory of liability ASK is invoking under Count III, which alleges allege bad faith bordering on and/or amounting to fraud. To the extent that this count asserts a breach of FATICO's contractual duty to defend under the title insurance policy, it is subsumed within Counts I and II of the complaint. To the extent that Count III asserts a claim sounding in tort, it is barred under the facts alleged, which limit ASK to an action for breach of contract. Moreover, the punitive damages that ASK seeks under Count IV are not available in a pure action for breach of contract. See Munday v. Waste Mgmt. of N. Am., Inc., 997 F. Supp. 681, 685 (D. Md. 1998); Baltimore County v. RTKL Assocs. Inc., 846 A.2d 433, 437 (Md. 2004). Counts III and IV of ASK's complaint thus must be dismissed for failure to state a claim upon which relief can be granted.
Maryland law distinguishes between the case of an insurer that refuses to provide any defense and an insurer that provides a defense, and thus assumes a duty to provide that defense with reasonable care.See Mesmer, 725 A.2d at 1061-64. In the latter case the insurer may be subject to tort liability, for example if the insurer wrongfully fails to settle a third-party claim. See Id.
II.
In an action under Maryland law alleging breach of a contractual duty to defend pursuant to an insurance policy, the court must engage in a two-part inquiry to determine: (1) the coverage and defenses under the applicable policy, and (2) whether the allegations against the insured potentially bring the claim within the coverage of the policy. See Montgomery County Bd. of Educ. v. Horace Mann Ins. Co., 840 A.2d 220, 225 (Md.App. 2003); see also Provident Bank of Md. v. Travelers Prop. Cas. Corp., 236 F.3d 138, 142 (4th Cir. 2000);Hartford Cas. Ins. Co. v. Chase Title, Inc., 247 F. Supp.2d 779, 780 (D. Md. 2003). The duty to defend does not arise unless the allegations in the underlying action state a legal claim that is within the coverage of the policy. See Reames v. State Farm Fire Cas. Ins., 683 A.2d 179, 186 (Md.App. 1996).
The first part of the inquiry requires the court to interpret the terms of the insurance policy. Insurance polices, like all contracts, "are construed as a whole to determine the parties' intentions." Bushey v. N. Assurance Co. of Am., 766 A.2d 598, 600 (Md. 2001) (internal quotation omitted). Maryland has not adopted the rule followed in many jurisdictions that an insurance policy is "construed most strongly against the insurer." Id. at 601 (internal quotation omitted). Unless there is some indication that the parties intended a technical meaning, the terms of the policy "are given their customary, ordinary, and accepted meaning," which is the "meaning a reasonably prudent layperson would attach to the term." Id. at 600-01 (internal quotation omitted). If a term "suggests more than one meaning to a reasonably prudent layperson," then it is ambiguous; if the ambiguity remains after consideration of any extrinsic or parol evidence that may be introduced then the ambiguity will be construed against the insurer.Id. at 601 (internal quotation omitted).
The claim by Waiker that he is entitled to possession of the Property based on an existing default judgment for ejectment against a prior owner is among the risks generally covered by the title insurance policy between FATICO and ASK. FATICO has a duty to defend ASK in any legal action based on such a claim, unless the risk is "excepted or excluded from coverage" under the policy. FATICO relies on the exclusion of "risks that are created, allowed or agreed to" by the insured. A similar provision found in many title insurance policies, excluding coverage for title defects or encumbrances "created suffered, assumed, or agreed to" by the insured, generally is construed to exclude knowing and intentional conduct by the insured that results in a title defect or encumbrance.See, e.g., Am. Sav. Loan Ass'n v. Lawyers Title Ins. Corp., 793 F.2d 780, 784 (6th Cir. 1986); Ticor Title Ins. Co. of Cal. v. FFCA/IIP 1988 Prop. Co., 898 F. Supp. 633, 640 (N.D. Ind. 1995); Stevens v. United Gen. Title Ins. Co., 801 A.2d 61, 69 (D.C. 2002); First Assembly Church of West Plains v. Ticor Title Ins. Co., 872 S.W.2d 577, 582-83 (Mo.Ct.App. 1994); see also Mark Twain Kansas City Bank v. Lawyers Title Ins. Corp., 807 F. Supp. 85, 87 (E.D. Mo. 1992) (stating that such an exclusion applies where the insured knew or should have known that its conduct could result in a title defect). In the only related Maryland case, Malkin v. Realty Title Ins. Co., 223 A.2d 155, 156-58 (Md. 1966), the Court of Appeals affirmed that an exclusion in a title insurance policy of defects and encumbrances "created, suffered, assumed or agreed to by the insured" barred an insured's claim against the insurer related to the location of a public roadway across the property, because the insured had inspected the property and completed the purchase with knowledge of the roadway.
Most applicable to the dispute between FATICO and ASK is the exclusion of risks "allowed" by ASK. The ordinary meaning of allowed is permitted or consented to, similar to the term "suffered" used in other title insurance policies, which "has been deemed synonymous with `permit,' which implies the power to prohibit or prevent the claim from arising."Am. Sav. Loan Ass'n, 793 F.2d at 784. If ASK permitted one of the covered risks to arise through its own knowing and intentional inaction, though it had the power to prevent the claim from arising, this risk would be excluded from coverage. In sum, based on these authorities and the ordinary meaning of the phrase "created, allowed or agreed to," the FATICO policy does not cover any defect in the title resulting from knowing and intentional action or inaction by ASK. FATICO's duty under the title insurance policy to defend ASK does not extend to any legal claims against ASK for such a defect.
Under the second part of the inquiry, the court must determine whether the claims alleged by Amzel and Batchelor potentially fall within the scope of the policy. If the potentiality for coverage is uncertain, any doubt must be resolved in favor of the insured. See Aetna Cas. Sur. Co. v. Cochran, 651 A.2d 859, 863-64 (Md. 1995): see also Hartford Cas. Ins. Co., 247 F. Supp.2d at 780. Amzel and Batchelor alleged two causes of action against ASK in their amended complaint: breach of the special warranty of title, and breach of the covenant against encumbrances.
ASK created a special warranty of title in the deed to Amzel and Batchelor, by covenanting to "warrant specially the property hereby granted." (Compl. at Ex. C at pg. 1.) Under Maryland law:
A covenant by a grantor in a deed "that he will warrant specially the property hereby granted" has the same effect as if the grantor had covenanted that he will warrant forever and defend the property to the grantee against any lawful claim and demand of the grantor and every person claiming or to claim by, through, or under him.
Md. Code Ann., Real Prop. § 2-106. A special warranty of title is breached only if the grantor's own conduct during its period of ownership creates a claim against the title. See Gebhardt Family Inv., LLC v. Nations Title Ins, of N.Y., Inc., 752 A.2d 1222, 1226 (Md.App. 2000); see also Chicago Title Ins. Co. v. 100 Inv. Ltd. P'ship, 355 F.3d 759, 761 n. 1 (4th Cir. 2004); Dillow v. Magraw, 649 A.2d 1157, 1168 (Md.App. 1994). In addition, the claim against the title must be asserted by the grantor itself, or "through or under" the grantor such as a claim by the grantor's heirs or assigns.See Pillow. 649 A.2d at 1169.
A special covenant against encumbrances operates in a similar fashion. Under Maryland law: A covenant by the grantor in a deed "that he has done no act to encumber the land" has the same effect as if he had covenanted that he had not done, executed, or knowingly suffered any act or deed whereby the land granted, or intended to be, or any part of it, is or will be charged, affected, or encumbered in title, estate, or otherwise.
The special warranty of title is distinguished from a general warranty of title, which is created by language that the grantor "will warrant generally the property hereby granted." Md. Code Ann., Real Prop. § 2-105. A general warranty of title warrants the property forever "against every lawful claim and demand of any person." Id.
Md. Code Ann., Real Prop. § 2-110. ASK created such a special covenant against encumbrances in the deed to Amzel and Batchelor, by covenanting that "she has not done or suffered to be done any act, matter or thing whatsoever, to encumber the property hereby conveyed." (Compl. at Ex. C at pg. 1.) Like a special warranty against title, a special covenant against encumbrances is breached only if the grantor's own conduct creates an encumbrance on the title. See Magraw v. Dillow, 671 A.2d 485, 490 (Md. 1996); Dillow, 649 A.2d at 1172. Just as a special warranty of title does not protect against claims under a superior or paramount title, see Pillow. 649 A.2d at 1168, a special covenant against encumbrances does not protect against acts by a predecessor in the chain of title who encumbered the property.See Magraw, 671 A.2d at 490.
The special covenant against encumbrances is distinguished from a general covenant against encumbrances, which is created by language "that the land is free and clear of all encumbrances." Md. Code Ann., Real Prop. § 2-111. A general covenant against encumbrances warrants that the property is free of any encumbrances, whether created by the grantor or by any predecessors in the chain of title. Id.
In sum, to succeed on their claim of breach of the special warranty of title, Amzel and Batchelor would have had to establish that ASK's conduct during its ownership of the Property created a claim by ASK or a related party against the title. Similarly, Amzel and Batchelor could not succeed on their claim for breach of the special covenant against encumbrances without establishing that ASK itself created or knowingly allowed an encumbrance on the Property. By the very nature of these claims, Amzel and Batchelor's lawsuit only concerned knowing and intentional conduct by ASK. This is precisely the kind of conduct by the insured that is excluded by the FATICO title insurance policy as "created, allowed or agreed to" by ASK. Even if the lawsuit succeeded, there was no possibility that the claim would be covered by the policy, and thus FATICO had no duty to defend ASK under the policy. Cf. Chicago Title Ins., 355 F.3d at 765 (applying a coverage limitation in a title insurance policy to hold that the insurer was not required to reimburse the insured for expenses stemming from an uncovered claim); Cheverly Terrace P'ship v. Ticor Title Ins. Co., 642 A.2d 285, 289-90 (Md.App. 1994) (affirming summary judgment for the insurer, agreeing that the insurer had no duty to defend insured against claims that fell within exemptions in its title insurance policy).
This conclusion is consistent with the positions taken by Amzel and Batchelor and by the Circuit Court for Baltimore City in the prior state court proceedings. In their opposition to ASK's motion to dismiss, the plaintiffs essentially conceded that they could not establish either of their claims without demonstrating that during its ownership of the Property ASK knowingly acquiesced in and failed to oppose Waiker's claim for possession. (Compl. at Ex. K.) The Circuit Court for Baltimore City dismissed Amzel and Batchelor's counts against ASK on precisely these grounds, because it was undisputed that ASK did not encumber the Property through its own acts and did not have any knowledge or notice of the alleged title defect. (Id. at Ex. L.) These state court proceedings further clarify the theory of Amzel and Batchelor's case-ASK allegedly had allowed the title defect to arise through its own knowing and intentional inaction, though it had the power to prevent the defect. Such a claim, if proven, would be excluded under the FATICO policy as a risk "allowed" by the insured. Cf. Am. Sav. Loan Ass'n, 793 F.2d at 784 (noting that a similar exclusion for risks "suffered" by the insurer would bar a claim that the insured had permitted to arise though it had the power to prohibit or prevent it).
As the allegations in the lawsuit filed against ASK did not potentially bring the underlying claim within the coverage of the title insurance policy, FATICO did not breach its contractual duties by refusing to defend ASK. Count I of ASK's complaint for breach of contract must be dismissed for failure to state a claim upon which relief can be granted.
Count II for breach of the implied covenant of good faith and fair dealing also fails to state a claim upon which relief can be granted. The implied covenant of good faith and fair dealing "simply prohibits one party to a contract from acting in such a manner as to prevent the other party from performing his obligations under the contract." Parker v. Columbia Bank. 604 A.2d 521, 531 (Md.App. 1992). ASK does not allege that FATICO prevented it from performing any of its contractual obligations, but instead faults FATICO for not doing things that FATICO had no contractual obligation to do. These allegations do not state a breach of the implied covenant of good faith and fair dealing. Cf. Id.
A separate order follows.
ORDER
For the reasons stated in the accompanying Memorandum, it is hereby Ordered that:
1. the defendant's motion to dismiss (docket no. 7) is GRANTED;
2. copies of this Order and the accompanying Memorandum shall be sent to counsel of record; and
3. the clerk of the court shall CLOSE this case.