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WBK Industry News - Litigation Developments

10th Circuit: Title Insurer Did Not Have Duty to Defend or Indemnify Claim for Fraudulent Conveyance of Deed

The U.S. Court of Appeals for the Tenth Circuit ruled in favor of a national title insurance company and found that the title insurer did not have a duty to defend nor a duty to indemnify a bank that collateralized two deeds of trusts from an alleged fraudster operating a Ponzi scheme.

The case stems from an appeal of a district court decision granting summary judgement and attorney’s fees to the bank.  Initially, an alleged fraudster, who was using his businesses to operate a Ponzi scheme, conveyed two deeds of trust to the bank as collateral for loans made to his businesses.  The SEC filed an enforcement action against the fraudster and a receiver was appointed to represent his creditors.  The receiver filed an action against the bank challenging the conveyances and the bank requested that the title insurer defend it in the receiver’s action.  The title insurer refused because it believed the action fell outside the coverage of the policy.  After settling with the receiver, the bank brought an action against the title insurer alleging, among other things, breach of contract for failing to indemnify and breach of contract for failing to defend.  The district court granted summary judgement to the bank and the title insurer appealed.

The Tenth Circuit reviewed the summary judgment decision de novo and determined, among other things, that the title insurer did not breach the contract for duty to defend under Utah law, which is determined pursuant to the “eight corners” rule, where the court analyzes only what is contained within the four corners of the policy and the four corners of the complaint.  First, the court found that title policy covered unauthorized transfers, but had an exclusion that disallowed any claim, by reason of operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, where the transaction creating the lien is a fraudulent conveyance or fraudulent transfer.  Then, the court found that the receiver’s complaint’s sole claim for relief was pursuant to Utah’s Uniform Voidable Transactions Act, a creditors’ rights law, and the allegations in the complaint are that the alleged fraudster was operating a Ponzi scheme where the transfer of the deeds was in furtherance of the scheme and to defraud creditors.  The court determined that though the unauthorized transfer of the deeds of trust was a covered event under the policy, the event could still be excluded if the unauthorized transfer was part of a fraudulent conveyance.

Further, the Tenth Circuit concluded that the title company did not breach the contract for duty to indemnify.  Applying Utah law, the court held that, because the duty to indemnify is narrower than the duty to defend, if the receiver’s complaint was not enough to establish a duty to defend, then it would not be enough to establish a duty to indemnify.  Additionally, the court was hesitant to use the settlement agreement between the bank and receiver to allow the duty to defend to attach retroactively, especially when the parties had an incentive to negotiate a settlement agreement that would create liability for the title company, regardless of the nature of the action.