Opinion
J-A16032-15 No. 3472 EDA 2014
08-04-2015
LEM 2Q, LLC, LEM 2P, LLC, LEM REAL ESTATE MEZZANINE FUND, II, LP, LEM REAL ESTATE MEZZANINE PARALLEL FUND II, LP, LEM 2Q NEVADA, LLC, LEM PARTNERS, II, LP, LEM 2P NEVADA LLC, LEM PARTNERS II, LP Appellants v. GUARANTY NATIONAL TITLE COMPANY, FIDELITY NATIONAL TITLE INSURANCE COMPANY, ROBERT J. VOEGEL, ROBERT ROTHSTEIN AND JOSEPH P. CACCIATORE Appellees
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
Appeal from the Order Entered November 6, 2014
In the Court of Common Pleas of Philadelphia County
Civil Division at No(s): 001398 July Term, 2010
BEFORE: LAZARUS, J., OLSON, J., and PLATT, J. MEMORANDUM BY LAZARUS, J.:
Retired Senior Judge assigned to the Superior Court.
LEM2Q, LLC, LEM 2P, LLC, LEM Real Estate Mezzanine Fund, II, LP, LEM Real Estate Mezzanine Parallel Fund II, LP, LEM 2Q Nevada, LLC, LEM Partners, II LP, and LEM 2P Nevada LLC (collectively "LEM") appeal from the order granting summary judgment in favor of Guaranty National Title Company, Fidelity National Title Insurance Company, Robert J. Voegel, Robert Rothstein, and Joseph P. Cacciatore (collectively "Appellees"), entered in the Court of Common Pleas of Philadelphia County. After careful review, we affirm.
The trial court described the facts and procedural history of the matter as follows:
[LEM is the successor-in-interest] of an entity that invested $3 million in real property under a preferred equity scheme. [Appellee] Fidelity National Title Insurance Company ("Fidelity"), is an Illinois title insurance company registered to conduct business in Pennsylvania. [Appellee] Guaranty National Title Company ("Guaranty"), is an Illinois entity. At all times relevant to this action, Guaranty was title assurance agent on behalf of Fidelity, pursuant to an Issuing Agent Agreement (the "IAA") executed before the occurrence of any of the facts relevant to this action. Individual [Appellee] Robert J. Voegel ("Voegel"), a resident of Illinois, executed the IAA on behalf of Guaranty in his role as President and Counsel thereof. Individual [Appellee] Robert R. Rothstein, Esquire ("Rothstein"), was or is Senior Vice President of Guaranty. Individual [Appellee] Joseph P. Cacciatore ("Cacciatore"), is an Illinois resident. Voegel and Cacciatore are or were members of an entity known as C&V Investments, LLC ("C&V"), a non-party in the instant action.
. . .
On May 1, 1999, Fidelity and Guaranty entered into the IAA, whereby Fidelity appointed Guaranty as its agent for real estate title assurance. The IAA remained in effect at all times relevant to this action. Pursuant to the IAA, Fidelity specifically appointed Guaranty—
to countersign and issue title insurance commitments, guarantees, endorsements, title insurance policies of [Fidelity], or any other form whereby [Fidelity] assumes
liability (collectively, Title Assurances) in [Guaranty's] territory set forth in Schedule A.
Trial Court Opinion, 11/6/14, 1-4 (internal footnotes omitted).
In the Spring of 2007, individual [Appellees] Voegel and Cacciatore, through C&V, loaned funds to real estate investor, Russell M. Meusy, II ("Meusy"), and his company (collectively, the "Meusy Interests"), to facilitate Meusy's purchase of a 234 multi-family property (the "Property"), located in Reno, Nevada. The loan transactions occurred in Illinois; none of the loans was recorded with any public agency. Subsequently, closing on the Property occurred on May 11, 2007, with [Appellee] Guaranty performing the duties of settlement agent. The closing papers prepared by Guaranty did not disclose that C&V had loaned funds to the Meusy Interests.
After closing on the Property, the Meusy Interests approached [LEM] to obtain additional funding. [LEM] reviewed the settlement papers prepared by Guaranty at the Property closing of May 11, 2007, and decided to provide funding to the Meusy Interests. Thus, on June 29, 2007, [LEM] invested $3 million in a company known as Manzanita Gate Apartment[s] Holdings, LLC ("Manzanita Holdings"), an entity formed by Meusy to act as the direct or indirect owner of the Property. [LEM's] $3 million investment in Manzanita Holdings was made through a financial device known in the real estate investment business as a "mezzanine loan." The purpose of the mezzanine loan was to provide the Meusy Interests with capital, and to allow [LEM] to acquire a preferred equity stake in Manzanita Holdings. [Appellee] Guaranty performed the duties of escrow agent and closing officer to the $3 million mezzanine loan. During this closing, Guaranty did not disclose the existence of C&V's prior unrecorded loans to the Meusy Interests. Shortly thereafter, the
Meusy Interests defaulted on all their obligations, including the C&V loans and the mezzanine loan provided by [LEM].
[LEM] commenced the instant action in July 2007. After a long and convoluted procedural history, which included the filing of an amended complaint in January of 2011, [LEM] filed a motion for summary judgment against Guaranty, Voegel, Rothstein and Cacciatore. This motion essentially asserts that Guaranty, as the escrow agent to the mezzanine loan, had a duty to disclose to [LEM] the existence of C&V's "usurious" loans. According to this motion, if [LEM] had been informed of the existence of such usurious loans, [LEM] would have concluded that any investment in Manzanita Holdings would have been risky; consequently, [LEM] would have refrained from funding Manzanita Holdings, and would not have lost [its] $3 million investment.
[LEM] also filed a motion for summary judgment against Fidelity, as principal of Guaranty. According to this motion, Fidelity is liable for the losses suffered by [LEM], under a theory of respondeat superior, pursuant to the terms of the IAA which Fidelity and Guaranty executed in 1999. On July 21, 2014, [Appellees] Guaranty, Voegel and Rothstein filed a cross-motion for summary judgment against [LEM]. On the same day, [Appellees] Fidelity and Cacciatore filed their respective cross-motions for summary judgment.
Notably, this territory does not include Reno, Nevada, the location of the property that is at the center of the instant dispute.
Guaranty was also tasked with providing a date-down endorsement to extend the coverage date of the title insurance policy issued by Ticor Title Insurance Company to Manzanita Gate Apartments Holdings, LLC until June 29, 2007. Among other things, the date-down endorsement involved disclosing recorded encumbrances on the property.
After the amended complaint was filed, Appellees filed preliminary objections on forum non conveniens grounds. The trial court granted the preliminary objections without prejudice so that the claims could be brought in either Illinois or Nevada. On appeal, this Court vacated and remanded the matter, indicating that the appropriate procedure to transfer the matter to another jurisdiction would be to file a petition pursuant to Pa.R.Civ.P. 1006(d). See LEM 2Q , LLC v. Guar. Nat. Titile [sic] Co., 60 A.3d 856 (Pa. Super. 2012) (unpublished memorandum). Thereafter, Appellees filed petitions seeking dismissal of the amended complaint, again on forum non conveniens grounds. However, the trial court found that sufficient contacts existed with Philadelphia and denied the petitions. See Trial Court Order, 6/28/13; see also Trial Court Order, 8/9/13.
The trial court denied LEM's summary judgment motion and granted each of Appellees' summary judgment motions in an order and memorandum dated November 6, 2014. LEM filed a timely notice of appeal. LEM now raises the following issues on appeal:
The trial court did not order LEM to file a concise statement of matters complained of on appeal pursuant to Pa.R.A.P. 1925(b), and LEM did not file one.
1. Where a title company also acting as an escrow agent:
• was charged with issuing a title report to an investor purchasing an ownership interest in a company for $3 million and providing title protection disclosing all encumbrances impacting the title and equity with respect to the seller company; and
• where the title company had an undisclosed conflict of interest from making secret, unrecorded mortgage loans to the seller company, which mortgages burdened the seller with extremely unfavorable repayment terms evidencing the poor financial state of the selling company and reducing the value of the equity of the selling company;
Brief of Appellants, at 2-4.
can the [Appellees] use their title company as a front to create and carry out this fraudulent scheme, concealing the existence of the conflict of interest and the unrecorded mortgages, with no duty to disclose their conflict of interest or existence of their unrecorded mortgages?
2. Did the trial court abuse its discretion by making the clearly erroneous finding of fact that the duties of [Appellee] Guaranty National Title Company in the subject transaction were "purely administrative[?]"
3. Did the trial court commit an error of law and an abuse of discretion by ruling that [Appellee] Guaranty National Title Company, as title agent for the transaction, had no duty under the Closing Escrow Agreement to disclose to [LEM]
unrecorded mortgages known to it but unknown to [LEM], in favor of the principal owner and president of Guaranty and his partner?
4. Did the trial court commit an error of law and an abuse of discretion by ruling that [Appellee] Guaranty National Title Company had no duty to disclose unrecorded mortgages to its president known to it but unknown to [LEM], because such a duty exists under, inter alia, Section 551 of the Restatement (Second of Torts)[?]
5. Did the trial court commit an error of law and an abuse of discretion by ruling that [Appellee] Guaranty National Title Company had no duty to disclose an actual conflict of interest in performing title searches by not disclosing the existence of their own mortgages on the subject property that would prevent the funding by their client LEM in a transaction in which Guaranty was involved?
We begin by noting our standard and scope of review of an order granting summary judgment:
Our scope of review is plenary, and our standard of review is the same as that applied by the trial court. Our Supreme Court has stated the applicable standard of review as follows: An appellate court may reverse the entry of a summary judgment only where it finds that the lower court erred in concluding that the matter presented no genuine issue as to any material fact and that it is clear that the moving party was entitled to a judgment as a matter of law. In making this assessment, we view the record in the light most favorable to the non-moving party, and all doubts as to the existence of a genuine issue of material fact must be resolved against the moving party. As our inquiry involves solely questions of law, our review is de novo.Reinoso v. Heritage Warminster SPE LLC , 108 A.3d 80, 84 (Pa. Super. 2015) (brackets omitted).
Thus, our responsibility as an appellate court is to determine whether the record either establishes that the material facts are undisputed or contains insufficient evidence of facts to make out a prima facie cause of action, such that there is no issue to be decided by the fact-finder. If there is evidence that would allow a fact-finder to render a verdict in favor of the non-moving party, then summary judgment should be denied.
Initially, we note that while LEM lists multiple issues on appeal, each issue essentially asserts that the Appellees, Guaranty in particular, owed a duty to LEM to disclose the unrecorded secured loans C&V provided to the Meusy Interests for the Manzanita Gate closing on May 11, 2007. LEM asserts that had such disclosure been made, LEM would not have made its preferred equity investment on June 29, 2007, and, therefore, would not have suffered any loss. Indeed, whether Appellees owed a duty of disclosure to LEM is the crux of the entire matter on appeal.
Whether a duty exists is a question of law, and the determination of "whether there has been a neglect of such duty is generally for the jury." Emerich v. Philadelphia Ctr. for Human Dev., Inc., 720 A.2d 1032, 1044 (Pa. 1998). Where no affirmative duty of disclosure is owed, "mere silence does not constitute fraud." Sewak v. Lockhart , 699 A.2d 755, 759 (Pa. Super. 1997) (citing Wilson v. Donegal Mut. Ins. Co., 598 A.2d 1310, 1316 (Pa. Super. 1991)). Moreover, the default position for Pennsylvania courts is to refrain from imposing new affirmative duties. See Charlie v. Erie Ins. Exch., 100 A.3d 244, 252 (Pa. Super. 2014).
We note that the trial court completed a choice of law analysis, and finding that the outcome would not be affected regardless of which state's law was applied, determined that Pennsylvania law governs. See Trial Court Opinion, 11/6/14, at 5-9. This choice of law determination was not raised as an issue on appeal by any of the parties. Where "choice of law is not an issue properly presented for our consideration, we cannot discuss this issue sua sponte." Discount Drug Corp. v. Honeywell Protection Services , Div. of Honeywell , Inc., 450 A.2d 49, 50 (Pa. Super. 1982). Thus, Pennsylvania law is utilized in our analysis.
Instantly, the trial court determined that the parties' closing escrow agreement provides that Guaranty's duties under the agreement are purely administrative and no additional obligations are implied by the terms of the agreement. The trial court further determined that nothing within the agreement could be construed to affirmatively require Appellees to disclose unrecorded loans encumbering Manzanita Gate. The trial court concluded that under the circumstances presented, no duty to disclose the unrecorded secured loans was owed to LEM. We agree.
The material facts are not in dispute. The record reveals that Fidelity did not underwrite a title insurance policy regarding the Manzanita Gate property. Instead, the title insurance policy at the center of this dispute was underwritten by Ticor, a fact which LEM admits. Nevertheless, throughout this litigation, LEM has attempted to assign liability to Fidelity based upon a Closing Protection Letter ("CPL") that was apparently erroneously issued by an unknown individual at Guaranty. Regardless of the reason the CPL was issued, the language on the face of the CPL indicates that it does not extend coverage to LEM under the circumstances.
Much argument has been made regarding the IAA. However, it is clear from the record that Fidelity did not authorize Guaranty to act as title agent in Reno, Nevada, did not authorize Guaranty to provide escrow services on its behalf, and did not issue the title insurance policy in this matter. It appears that LEM's counsel made an assumption that Fidelity was involved, perhaps based upon prior deals involving the parties. Regardless, Fidelity had no involvement and did not authorize Guaranty to act with respect to any of the transactions relevant to the instant matter.
The CPL indicates that it applies "[w]hen the insurance of [Fidelity] is specified for [the party's] protection" where the party is "the lessor or purchaser of an interest in land or a lender secured by a mortgage [or other security interest.]" Motion for Summary Judgment as to [Guaranty Defendants], Exhibit B, Closing Protection Letter. Here, no insurance policy was underwritten by Fidelity, and LEM did not obtain a direct interest in the property. Additionally, we note that courts that have considered similar scenarios have determined that "the issuance of a title insurance policy is generally necessary for liability to ensue under a closing protection letter." National Mortgage Warehouse , LLC v. Bankers First Mortgage Co., 190 F. Supp. 2d 774, 783 (D. Md. 2002) (citing Fleet Mortgage Co. v. Lynts , 885 F. Supp. 1187 (E.D. Wis. 1995)).
Significantly, LEM has made the assumption throughout this litigation that the policy provides LEM with coverage. However, the Ticor policy is an owner's policy which provides coverage for the owner of real estate. Here, Manzanita Gate Investments, LLC, was the owner of the property during the relevant time period and was the entity to which the Ticor policy was issued. No evidence has been presented to demonstrate that either Manzanita Gate Apartment Holdings, the entity into which LEM invested, or LEM itself, had been named as an insured under the Ticor policy. Indeed, LEM has presented no evidence whatsoever to demonstrate its status either as a named insured or third-party beneficiary under the Ticor policy. It was simply assumed that LEM would be insured under the owner's policy. However, LEM admits that it was not specifically insured as a preferred equity investor. See Response of [Guaranty] to the Summary Judgment Motion of [LEM], Exhibit O, Transcript of Jay J. Eisner Deposition, at 52-54. For these reasons, we find that LEM was not insured pursuant to the Ticor policy.
Endorsements for mezzanine lenders and private equity investors exist and were available at the time of the transactions in this matter, but none was obtained by LEM. Such endorsements are added to an owner's policy, such as the policy Manzanita Gate Investments obtained in this matter. The endorsements are intended to prevent imputation of the policy-holding member's knowledge to the lender or investor, since encumbrances that the policy-holder has either agreed to or has knowledge of are exempted from coverage under the typical title insurance policy. See John C. Murray, Title Insurance for Mezzanine Financing Transactions (American Law Institute Continuing Legal Education 2005). Imputation presents a risk to the investor because, at least under Pennsylvania law, an LLC's member's knowledge is imputed to other members. See Moskowitz v. A.B. Kirschbaum Co., 89 Pa. Super. 274, 276 (1926); 15 Pa.C.S. § 8324; 15 Pa.C.S. § 8904.
LEM's lack of status as an insured under the Ticor policy lends credence to the trial court's determination that Guaranty was merely responsible for performing administrative duties in the transaction in which LEM invested in Manzanita Gate Holdings. Indeed, "[the escrow agent] under an escrow agreement is generally considered to be an agent (or trustee) for both parties - a special agency whose authority must be strictly construed, and who is bound by the terms of the escrow agreement." Janson v. Cozen & O'Connor , 676 A.2d 242, 247 (Pa. Super. 1996) (citation omitted).
It appears that Guaranty served as a title agent regarding the policy issued to Manzanita Gate Investments, LLC. However, the record has not been developed in this regard. Nevertheless, as title agent, the duties Guaranty would have been responsible for would have been owed to the named insured rather than LEM, as discussed.
Here, the closing escrow agreement states that Guaranty's duties as escrow agent "are only as herein specifically provided, and are purely ministerial in nature. . . . This agreement sets forth all the obligations of [Guaranty] with respect to any and all matters pertinent to the escrow contemplated hereunder and no additional obligations of [Guaranty] shall be implied." Response of [Guaranty] to the Summary Judgment Motion of [LEM], Exhibit C, at 5-6. Moreover, the date-down endorsement which Guaranty was obligated to provide under the escrow agreement indicates that only items of record need be disclosed. Thus, Guaranty complied with respect to the plain meaning of the date-down endorsement. Pursuant to the closing escrow agreement, Guaranty did not and could not owe any other duties to LEM.
For the foregoing reasons, we find that no material issues of fact existed to preclude the trial court from determining whether Appellees had a duty to disclose the unrecorded secured loans. Ultimately, LEM has failed to demonstrate that it was owed any such duty, particularly where LEM is not a named insured or beneficiary under the Ticor title insurance policy. Significantly, because LEM did not have coverage under the Ticor policy, LEM cannot demonstrate that Guaranty owed LEM any duties as a title agent. Thus, Guaranty merely owed LEM ministerial duties as escrow agent pursuant to the closing escrow agreement. There is no dispute that Guaranty performed these duties satisfactorily. Because Appellees had no duty to disclose the unrecorded secured loans made by C&V, Appellees' silence does not constitute fraud. Sewak , supra.
Moreover, as mentioned in note 8, supra , an insurance endorsement for this particular situation was available. As we need not specifically rule on the issue to reach our decision, we decline to discuss whether knowledge of the unrecorded secured loans was imputed to LEM, but we note that the lack of this endorsement provides further support for our determination that LEM was not covered by the Ticor policy. --------
Order affirmed.
PLATT, J., Joins the majority.
OLSON, J., Concurs in the result. Judgment Entered. /s/_________
Joseph D. Seletyn, Esq.
Prothonotary
Date: 8/4/2015