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Hodas v. First American Title
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Decision:	1997 ME 137
Docket:	Cum-96-455
Argued:	March 4, 1997
Decided:	June 25, 1997


MARTIN HODAS, Trustee of the Martin Hodas Defined Benefit Pension Plan v. FIRST AMERICAN TITLE INSURANCE CO.


	[¶1]  First American Title Insurance Company appeals from the
judgment entered in the Superior Court (Cumberland County, Bradford, J.)
in favor of Martin Hodas on his claim for a breach of a title insurance policy. 
First American argues the court misconstrued the policy and erred in
determining that Hodas suffered a compensable loss.  By cross-appeal, Hodas
argues the court erred in failing to find that First American engaged in
unfair claims practices, pursuant to 24-A M.R.S.A. § 2436-A (1990).  We
disagree with both contentions, and affirm the judgment.  
	[¶2]  In 1989 Hodas received a mortgage from Keith Studer to secure a
$71,000 loan and any future advances to be made to Studer.  The mortgage
encumbered property Studer owned in South Portland.  Hodas contracted
with First American to insure his mortgage interest against defects in
Studer's title.  The insurance contract was evidenced by a policy issued by
First American to Hodas.  The policy stated there were no interests in the
property other than those of Studer and Hodas.  Subsequently Hodas
assigned the mortgage to a pension plan, of which he is the trustee.  
	[¶3]  In 1990 Studer defaulted on the loan and Hodas obtained a
judgment of foreclosure on the property.  A foreclosure sale took place in
April 1991, at which Hodas bought the property for $80,000.  The
foreclosure sale report Hodas filed stated that Studer's total outstanding
debt secured by the mortgage, including future advances, was $108,348.87.  
	[¶4]  Hodas began to market the South Portland property immediately
after obtaining title.  In September 1991 he contracted to sell the property
to Leonard Lawrence for $57,500.  In preparation for the closing, Lawrence
discovered a title defect in the form of a previously undiscovered ownership
interest retained by Sara Studer, the former spouse of Keith Studer.  On
November 6, 1991, Hodas filed a notice of claim with First American, which
responded a week later that it would exercise its right under the policy to
pursue a quiet title action to extinguish Sara Studer's interest.  As a result of
the title defect, Lawrence rescinded the purchase and sale agreement.  
	[¶5]  A short time later Hodas made another demand on First American
for indemnification pursuant to the policy.  First American rejected the
demand, stating again that it intended to pursue a quiet title action against
Sara Studer, and, on December 12, 1991, retained counsel to do so.  During
this time Hodas continued to market the property, and in March 1992 sold
it to John Somers for $40,000.  On April 17, 1992, First American's
attorney filed a quiet title action in the name of Somers against Sara Studer. 
One year later, on April 21, 1993, a summary judgment on the quiet title
action was entered in favor of Somers.  
	[¶6]  In this suit Hodas alleges First American breached its contract by
failing to indemnify him for the loss he sustained as a result of the title
defect.  After a jury-waived trial a judgment was entered for Hodas for
$18,000, reflecting the difference between the sale price he would have
received from Lawrence and the price Hodas received from Somers plus
real estate taxes Hodas paid after the Lawrence sale fell through.  This
appeal followed.  
I. Breach of Contract
	[¶7]  First American argues it did not breach its insurance contract
with Hodas because the quiet title action against Sara Studer was eventually
successful.  First American directs our attention to section 7 of the policy,
which provides: 

	No claim shall arise or be maintainable under this policy
(a) if the Company, after having received notice of an alleged
defect, ... by litigation or otherwise, removes such defect ...
within a reasonable time after receipt of such notice; (b) in the
event of litigation until there has been a final determination by a
court of competent jurisdiction, and disposition of all appeals
therefrom, adverse to the title or to the lien of the insured
mortgage ... ; or (c) for liability voluntarily assumed by an insured
in settling any claim or suit without prior written consent of the

Relying on clause (b), First American contends it fulfilled its obligations by
obtaining a final judgment extinguishing Sara Studer's interest in the
property.  We disagree.  Clause (a) gives First American the right to cure a
title defect and thus avoid a claim under the policy, but only if it does so
"within a reasonable time" after receiving a notice of the defect.  The trial
court found that First American failed to satisfy that requirement, thus
breaching its insurance contract.  
	[¶8]  What constitutes a reasonable time to cure a title defect, in the
context of a title insurance policy, is a question of fact.  See Nebo  v.
Transamerica Title Ins. Co., 98 Cal. Rptr. 237, 241 (1971) (construing
language substantially similar to section 7(a)).  Findings of fact are reviewed
for clear error and will be upheld unless there is no competent evidence in
the record to support them.  H.E. Sargent, Inc. v. Town of Wells, 676 A.2d
920, 923 (Me. 1996).  The court's finding that First American failed to cure
the title defect within a reasonable time is based on competent evidence
and therefore is not clearly erroneous.{1}  
II. Compensable Loss
	[¶9]  First American contends the court overlooked the distinction
between loan policies and owner policies of title insurance, which led the
court to conclude erroneously that Hodas suffered a compensable loss.  A
loan policy, such as Hodas had in this case, protects the value of the
mortgagee's security interest against loss due to undisclosed title defects. 
An owner policy protects the value of an owner's fee interest against similar
risks.  The presence of a title defect immediately results in a loss to the
holder of a fee interest since resale value will always reflect the cost of
removing the defect.  In contrast, the holder of a loan policy incurs a loss
only if the security for the loan proves inadequate to pay off the underlying
insured debt due to the presence of undisclosed defects.  Blackhawk
Production Credit Ass'n v. Chicago Title Ins. Co., 423 N.W.2d 521, 525 (Wis.
1988).  See also Focus Inv. Assocs. v. American Title Ins. Co., 992 F.2d 1231,
1237 (1st Cir. 1993) (in the case of loan policies "what is insured is the loss
resulting from a defect in the security"); D. Barlow Burke, Jr., Law of Title
Insurance § 2.1.1, at 2:7 (2d ed. 1993) (there is no loss on a loan policy
unless the amount of the undisclosed lien reduces the value of the property
to less than the underlying debt or, because of the lien, the insured fails to
recover the amount of its loan).  
	[¶10]  First American contends Hodas suffered a loss covered by his
loan policy only if, on the date of foreclosure, the property's fair market
value was less than the value of his insured interest and the reduced fair
market value was the result of the undisclosed title defect.  Thus, First
American argues, because Hodas was not aware of the defect at the time of
foreclosure and did not present evidence of the property's fair market value
at that time, he failed to prove that he suffered a compensable loss.  
	[¶11]  First American's position is undermined by section 2(a) of the
policy, which provides for the continuation of coverage in the event the
mortgaged premises are purchased at foreclosure by the insured mortgagee:


	This policy shall continue in force as of Date of Policy in
favor of an insured who acquires all or any part of the [mortgaged
premises] by foreclosure ...; provided that the amount of
insurance hereunder after such acquisition ... shall not exceed
the least of:  

		(i)	the amount of insurance stated in Schedule A;

		(ii)	the amount of the unpaid principal of the
indebtedness ... plus interest thereon, expenses of foreclosure
and amounts advanced to protect the lien of the insured
mortgage and secured by said insured mortgage at the time of
acquisition ...; or  

		(iii)	the amount paid by any government agency ... in
the acquisition of such estate ....  

The effect of this section is clear.  After an insured mortgagee purchases the
mortgaged premises at foreclosure, coverage continues provided there
remains unpaid principal indebtedness.  Coverage is limited, however, to the
lesser of the outstanding indebtedness or the stated policy limit.  In the case
at bar, after Hodas purchased the Studer property at foreclosure for
$80,000, there remained a loan deficiency of $28,348.87.  That amount,
since it was less than the stated policy limit of $71,000, comprised the
maximum limit of Hodas's recovery provided by the continued coverage.  
	[¶12]  Although the court may have treated the damage award as if
Hodas had coverage as an owner rather than a lender, the result was correct. 
It serves no useful purpose to characterize the continued coverage as falling
within the ambit of either a loan policy or an owner policy of title insurance. 
Neither of those labels, as commonly understood, accurately describes the
nature and effect of the continued coverage.  Regardless of its designation,
however, the continued coverage is clearly provided for in the language of
section 2(a) of the policy.  In this case the continued coverage would
indemnify Hodas for any loss caused by undisclosed defects in the title of the
formerly mortgaged premises, but only to the extent of any unpaid
indebtedness.  Due to the presence of the title defect discovered after Hodas
entered into the purchase and sale agreement with Lawrence, Hodas
suffered a loss of $17,500, which was less than the unpaid indebtedness of
$28,348.87.  In addition, he was forced to pay an additional $500 in real
estate taxes prior to the ultimate sale to Somers.  Thus the court properly
concluded that Hodas was entitled to recover $18,000 on the policy.  
	[¶13]  Finally, we find no merit in Hodas's contention that the court
should have assessed penalties against First American, pursuant to 24-A
M.R.S.A. § 2436-A, for engaging in unfair claims practices.
	The entry is:  
				Judgment affirmed. 
Attorney for plaintiff: Jens-Peter Bergen, Esq. (orally) Wonderbrook Center 57 Portland Road Kennebunk, ME 04043 Attorneys for defendants: John B. Emory, Esq. Andrew W. Sparks, Esq. (orally) Drummond & Drummond One Monument Way Portland, ME 04101
FOOTNOTES******************************** {1}. We express no opinion whether the attorney who brought the quiet title action acted with reasonable care and diligence. Our inquiry focuses only on First American's contention that it properly invoked its right pursuant to the contract to quiet title rather than pay Hodas's claim.