Emi Equity Mortg., Inc. v. Stewart Title Guaranty Co.

EMI EQUITY MORTGAGE, INC., Appellant, v. STEWART TITLE GUARANTY COMPANY, Appellee.

Civil No. 17-1541 (ADC)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

March 30, 2018

OPINION & ORDER

Before the Court is EMI Equity Mortgage, Inc.'s ("EMI") appeal from a District of Puerto Rico Bankruptcy Court's Order and Partial Judgment dismissing its third party complaint against Stewart Title Guaranty Company ("Stewart"). ECF No. 1. For the reasons stated herein, the Court AFFIRMS IN PART AND REVERSES IN PART the Bankruptcy Court's Partial Judgment.

I. Factual and Procedural Background

On August 1, 2016, debtor Wilfredo Valdés Morales ("Valdés")—a bankruptcy petitioner under Chapter 13 of the Bankruptcy Code, Case No. 11-04694 (BKT)—filed a complaint against EMI, Adversary Proceeding Case No. 16-00166. ECF No. 8-2 at 10-15. Valdés alleged that EMI had filed an amended claim on his bankruptcy proceeding, listing its debt as secured by a mortgage, and had collected 53 post-petition payments totaling $38,108.06. However, Valdés's alleged that the debt was not secured because (1) the Property Registry had notified a defect in the mortgage that was never corrected and its entry had expired, and (2) EMI has collected an unsecured debt in violation of the bankruptcy stay. Accordingly, Valdés's complaint asked for compensatory damages, legal costs and fees, and punitive damages for EMI's continuous violation of the automatic bankruptcy stay, pursuant to 11 U.S.C. § 362.

On October 2, 2016, EMI answered the complaint and filed a third-party complaint against Stewart, who had issued a mortgage title insurance in favor of EMI for the mortgage loan issued to Valdés. ECF No. 8-2 at 16-19. After admitting most of Valdés's factual allegations, EMI's third-party complaint simply alleged the following:

4. Stewart Title Guaranty Company (Stewart) is an Insurance Company with mailing address at PO BOX 2039 Houston Texas 77252-2029 who has authorized the Commissioner of Insurance B5 Street Tabonuco, Suite 2016, PMB 356, Guaynabo, Puerto Rico 00968-3029 to be served in its behalf.

FACTS IN SUPPORT OF CLAIM

5. On August 1, 2016 Wilfredo Valdés Morales filed adversary 16-00166 against EMI.

6. If all of Debtor-Plaintiff allegations are true, Stewart has issued title insurance that covers losses surfaced by Valdés and EMI on account of the failure to record mortgage loan in the property registry.

WHEREFORE it is respectfully requested that if the complaint is granted, then this third party claim is proper and Steward must reimburse Valdés its claim, and EMI the value of the loan, with such further relief as is deemed proper under the circumstances.

ECF No. 8-2 at 18.

On November 3, 2016, Stewart moved to dismiss EMI's third party complaint under Federal Rule of Civil Procedure 12(b)(6). First, it argued that the complaint "consisted of vague and general allegations" that failed to establish a plausible claim for relief because it did not detail the terms of the alleged title insurance or allege that Stewart had breached any of its terms. ECF No. 5 at 4. Second, it argued that even if the complaint had alleged the terms of the policy and how Stewart had breached them, EMI's allegations and the policy terms show that EMI had never filed a claim and that, if it had filed one, Stewart would have denied it because EMI did not comply with its obligations under the insurance policy. Id.; see ECF No. 8-2 at 35-36.

On December 23, 2016, EMI requested leave to amend its third party complaint, tendered an amended complaint, ECF No. 8-3 at 1-2, and opposed Stewart's motion to dismiss, Id. at 8-10. The tendered amended complaint identified the insurance policy issued by Stewart in favor of EMI, provided more details regarding the property and mortgage at issue, and included the title insurance policy as an exhibit. The amended complaint alleged that the title insurance covers the losses suffered by Valdés and EMI, and that it constituted "a formal claim under the terms of [the] Title Insurance." Id. at 6.

In its opposition to the motion to dismiss, EMI argued that the tendered amended complaint addressed Stewart's argument that the first complaint was vague by including the insurance policy as an exhibit. ECF No. 8-3 at 8-10. EMI's opposition to the motion to dismiss further argued that:

[I]n [EMI's] view the Notice of October 4, 2016, provided with the Complaint of a claim filed August 2 or 63 days' [sic] later together with the Amended Complaint and the fact that the title Insurance at issue was provided to the Zapata Law Office on October 25, 2016 . . . should be sufficient notice under the insurance agreement.

Specially when Stewart has not established this delay has affected their ability to correct the problem.

ECF No. 8-3 at 9.

Stewart replied to EMI's opposition to the motion to dismiss and argued that granting EMI leave to amend the complaint would be an exercise in futility because the tendered amended complaint also failed to state a claim for which relief could be granted. ECF No. 8-5 at 4-14. Consequently, Stewart argued that it would be within the Bankruptcy Court's sound discretion to deny EMI leave to file the amended complaint.

First, Stewart argued that the insurance policy is a title insurance with clear terms that do not cover the damages that EMI might have caused to third parties if it violated the bankruptcy stay and collected unsecured-debt payments from Valdés. Id. at 10.¹ Second, Stewart argued that according to the clear terms of the policy insurance, EMI's third-party complaint does not constitute a formal notice of claim, and EMI has not given a formal notice of claim or a proof of loss in the manner explicitly required by the insurance policy. Id. at 10-13. Third, Stewart argued that EMI's delay in notifying the claim prejudiced Stewart because the delay "severely affected [Stewart's] opportunities of taking actions in order to correct the insured mortgage," which, according to the terms of the policy, relieved Stewart from any responsibility towards EMI. Id. at 11.

In support of a finding that it suffered prejudice, Stewart argued that EMI was notified on February 3, 2011, that the mortgage had a defect that prevented its entry into the Property Registry, but—instead of complying with the insurance policy and notifying Stewart of the mortgage title's defect—EMI withdrew the deed from the Property Registry on March 31, 2011. Stewart asked the Bankruptcy Court to take judicial notice of an online search of the public records of the Puerto Rico Property Registry, which it attached as Exhibit A to its pleading. Stewart argued that the record search shows that EMI withdrew the mortgage from the Property Registry in March, 2011, and that the debtor filed for bankruptcy on May 31, 2011.² Thus, Stewart argued that EMI's failure to notify the defect in the mortgage title and its decision to withdraw the document from the Property Registry prejudiced Stewart and releases Stewart from any liability under the terms of the title insurance. ECF No. 8-5 at 13.

On April 3, 2017, the Bankruptcy Court issued an Opinion and Order denying EMI leave to amend its third party claim and granting Stewart's motion to dismiss the third party complaint with prejudice, "for the reasons stated in Stewart's Reply to Response to Motion to Dismiss and Opposition to Motion Requesting Leave to Amend Complaint, whose findings of fact and conclusions of law the court adopt[ed] in their entirety." ECF No. 8-7 at 10-11. On April 7, 2017,the Clerk of the U.S. Bankruptcy Court entered partial judgment dismissing EMI's third party complaint, with prejudice. Id. at 12.

EMI now appeals the dismissal of its third party complaint against Stewart and argues that the Bankruptcy Court abused its discretion when it denied leave to amend its complaint "without any judtifying [sic] reason." ECF No. 3 at 11. Stewart filed a brief in response, ECF No. 5, to which EMI replied, ECF No. 7.

II. Standard of Review

On appeal from the bankruptcy court, the district court may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree, or remand with instructions for further proceedings. Fed. R. Bankr. P. 8013; 28 U.S.C § 158. District courts review a bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law under de novo review. Brandt v. Repco Printers (In re Healthco Int'l, Inc.), 132 F.3d 104, 107 (1st Cir. 1997). However, a bankruptcy court's decision to deny a party leave to amend a complaint is reviewed for abuse of discretion. In re Lombardo, 755 F.3d 1, 3 (1st Cir. 2014) (citing Noonan v. Rauh (In re Rauh), 119 F.3d 46, 52 n. 10 (1st Cir. 1997)). "Such an abuse may consist of, among other things, mistakes of law, or clearly erroneous findings of fact." In re Lombardo, 755 F.3d at 3 (citing Todisco v. Verizon Commc'ns, Inc., 497 F.3d 95, 98 (1st Cir. 2007); Young v. City of Providence ex rel. Napolitano, 404 F.3d 33, 38 (1st Cir. 2005)).

"Under the rules governing adversary proceedings, the bankruptcy court should freely give a party leave to amend his complaint when justice so requires." In re Lombardo, 755 F.3d at 3 (citing Fed. R. Bankr.P. 7015; Fed.R.Civ.P. 15(a)(2)). "While the rules thus reflect a liberal amendment policy," the district court defers "to the bankruptcy court's denial of leave to amend if supported by an apparent, adequate reason." In re Lombardo, 755 F.3d at 3 (citing Grant v. News Grp. Bos., Inc., 55 F.3d 1, 5 (1st Cir. 1995)). "Among the grounds that could justify a denial of leave to amend are undue delay, bad faith, dilatory motive, prejudice, and futility." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997) (citations omitted). "'Futility' means that the complaint, as amended, would fail to state a claim upon which relief could be granted." Id. (citing Glassman v. Computervision Corp., 90 F.3d 617, 623 (1st Cir. 1996)).

III. Discussion

EMI argues that the...