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Fidelity National Title Ins. Co. v. Centerpoint Mech. Lien Claims, LLC

Court of Appeals of Arizona, First Division

August 27, 2015

FIDELITY NATIONAL TITLE INSURANCE COMPANY, in its corporate capacity and as successor by merger to Lawyers Title Insurance Corporation and Commonwealth Land Title Insurance Company, Plaintiff/Appellant,
v.
CENTERPOINT MECHANIC LIEN CLAIMS, LLC, an Arizona limited liability company, Defendant/Appellee. ML MANAGER, LLC; as manager of CENTERPOINT I LOAN, LLC; and CENTERPOINT II LOAN, LLC; and as authorized agent for ROBERT L. BARNES, a single man; HAROLD CHRIST, LTD, an Arizona corporation; CHARLES GOLDSTEIN, M.D., Trustee of Charles Goldstein Emergency Services, PC Section 401(k) Profit Sharing Plan and Trust Agreement effective December 10, 2007; PENNY HARDAWAY INVESTMENTS, LLC, an Arizona limited liability company; MORRIS A. KAPLAN, Trustee of the Goldman and Kaplan Ltd., Defined Benefit Plan under agreement dated December 31, 2001; G. GRANT LYON, Trustee for Radical Bunny, LLC, an Arizona limited liability company; SARAH A. LISA-PETRAUSCHKE and BRIAN M. PETRAUSCHKE, husband and wife; LORINDA S. MCMULLEN and LAURA MARTINI, as joint tenants with right of survivorship; and FREDERICK A. TAUNTON and DALE C. TAUNTON, Trustees of the Taunton Family Trust dated January 18, 2007, Defendants/Appellees/Cross-Appellants, and CENTERPOINT MECHANIC'S LIEN CLAIMS LLC, Intervenor/Appellee/Cross-Appellant. and UNIVERSAL-SCP 1 LP; and VRCP FUNDING, LP, Defendants/Appellees.
v.
FIDELITY NATIONAL TITLE INSURANCE COMPANY, Intervenor/Appellant/Cross-Appellee

Appeal from the Superior Court in Maricopa County. Nos. CV2011-015738, CV2008-024849, CV2008-032460, CV2009-036739, CV2009-036821, CV2009-036828 and CV2009-036861. The Honorable Randall H. Warner, Judge. The Honorable Edward O. Burke, Judge Retired.

Page 171

For Fidelity National Title Insurance Company and Commonwealth Land Title Insurance Company: Lori L. Voepel, Robert R. Berk, Jennifer B. Anderson, Jones Skelton & Hochuli, PLC, Phoenix.

For Centerpoint Mechanic Lien Claims, LLC: Richard M. Lorenzen, Philip R. Higdon, Rusty D. Crandell, Perkins Coie, LLP, Phoenix.

For ML Manager, LLC, et al: Keith L. Hendricks, Joshua T. Greer, Moyes Sellers & Hendricks, Phoenix.

For Universal-SCP 1 LP and VRCP Funding, LP: J. Lawrence McCormley, Tiffany & Bosco, PA, Phoenix.

For Amicus Curiae American Land Title Association: Stanley G. Feldman, Haralson Miller Pitt Feldman & McAnally, PLC, Tucson; Noel Fidel, Noel Fidel Attorney at Law, Phoenix.

Kent E. Cattani, Presiding Judge delivered the opinion of the Court, in which Judge Margaret H. Downie and Judge Michael J. Brown joined.

OPINION

Page 172

Kent E. Cattani, Presiding Judge.

[¶1] In this case, we address whether a title insurance company is liable under United Services Automobile Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987), for damages agreed to by its insureds in a settlement agreement resolving third-party mechanics' lien claims against the insureds' interest in a real estate development. Under Morris, when an insurer agrees to defend its insured against a third-party liability claim, but reserves the right to challenge coverage under the insured's policy, the insured may independently settle with the third-party claimant without violating the insured's duty of cooperation under the insurance contract; this settlement may assign to the claimant the insured's rights against the insurer, subject to the insurer's retained right to contest coverage.

[¶2] Here, the settlement agreement was not between the insureds and the third-party mechanics' lien claimants, but was rather an agreement between the insureds and an entity they controlled that had purchased the mechanics' lien claims. Moreover, the settlement agreement was for an amount significantly greater than the amount paid to purchase the mechanics' lien claims. Accordingly, and for reasons discussed below, we conclude that the settlement agreement between the insureds and the entity that purchased the mechanics' lien claims was not a compliant Morris agreement, and we accordingly reverse the superior court's ruling that the amount of the insurer's liability (if it loses the yet to be litigated coverage dispute) is the negotiated settlement amount.

FACTS AND PROCEDURAL BACKGROUND

I. Parties and Title Insurance Policies.

[¶3] In March 2007 and early April 2008, Mortgages, Ltd., a private lender, agreed to loan a developer additional funds to build Centerpoint, a high-rise residential condominium development in Tempe. Construction on the project had begun in December 2005, and a portion of the loan was used to pay off an earlier loan from Freemont Investment and Loan (" Freemont" ) secured by a deed of trust, with the balance used to fund construction. The loan was secured by a deed of trust against Centerpoint. A predecessor to Fidelity National Title Insurance Company (" Fidelity" ) issued a title insurance policy insuring priority of Mortgages, Ltd.'s deed of trust for a face amount of $165,200,000 (the " ML Policy" ).

Page 173

[¶4] Two months after issuing the loan, Mortgages, Ltd. went into bankruptcy. As part of its bankruptcy reorganization plan, Mortgages, Ltd.'s Centerpoint deed of trust interests were transferred to two investors--Centerpoint I Loan, LLC (" CPI" ) and Centerpoint II Loan, LLC (" CPII" )--and eight individual fractional interest holders. ML Manager, LLC acted as manager of CPI and CPII, as well as agent and attorney-in-fact for the fractional interest holders. We refer to ML Manger, CPI, CPII, and the fractional interest holders collectively as " ML Investors."

[¶5] In April 2010, ML Investors purchased Centerpoint at a trustee's sale for a credit bid of $8 million. Soon thereafter, CPI and CPII purchased a parking lot adjacent to Centerpoint. Fidelity issued a title insurance policy to CPI and CPII for the parking lot (the " Parking Lot Policy" ) for the amount of the purchase price, $875,000.

[¶6] Universal-SCP 1, LP (" Universal" ) contemporaneously provided CPI and CPII a bankruptcy exit loan of $20 million, secured in part by CPI and CPII's Centerpoint assets. Commonwealth Land Title Insurance Company (" Commonwealth" ) issued Universal a $5 million exit lender title policy insuring priority of its security interest in Centerpoint (the " Universal Policy" ).

[¶7] CPI and CPII also obtained a $5 million loan from VRCP Funding, LP (" VRCP" ), used in part to purchase the parking lot. The VRCP loan was secured by a deed of trust on Centerpoint and the parking lot, and Commonwealth issued VRCP a $5 million lender title policy insuring priority of its deed of trust (the " VRCP Policy" ).

II. Mechanics' Lien Litigation.

[¶8] Funding for the Centerpoint project became erratic during construction, which eventually stalled. Starting in April 2008, subcontractors and suppliers began to record mechanics' liens and notices of lis pendens against Centerpoint. The first of eventually dozens of mechanics' lien foreclosure claims was filed in October 2008, asserting that the mechanics' liens had ...


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