Knox TL Lot Acquisition, LLC v. First Am. Title Ins. Co.

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KNOX TL LOT ACQUISITION, LLC and MILLSTONE PARTNERS, LLC, Plaintiffs, v. FIRST AMERICAN TITLE INSURANCE COMPANY, Defendant.

No. 3:21-CV-00374-JRG-DCP

United States District Court, E.D. Tennessee, Knoxville

March 28, 2023

MEMORANDUM OPINION AND ORDER

J RONNIE GREER, UNITED STATES DISTRICT COURT JUDGE

This case is a derivative breach of contract action arising from a case in the Chancery Court for Knox County, Tennessee (the “Detrana Litigation”). [See Detrana v. Daniel (Docket No. 196470-2).] Plaintiffs Knox TL Lot Acquisition, LLC (“Knox TL”) and Millstone Partners, LLC (“Millstone” (and collectively with Knox TL the “Insureds”)) argue that their title insurer, First American Title Insurance Company (“First American”), breached their title insurance policies by failing to indemnify them for their settlement of the Detrana Litigation and failing to defend Knox TL.

Now this action is before the Court on First American's Motion for Summary Judgment [Doc. 39], the Insureds' Response in Opposition [Doc. 44], and First American's Reply [Doc. 46]. For the reasons stated below, First American's motion is GRANTED IN PART, as to the Insureds' failure to indemnify claims, and DENIED IN PART, as to Knox TL's failure to defend claim.

BACKGROUND

Knox TL Purchases Land and Obtains a Title Insurance Policy from First American.

Knox TL is a property development company owned by Scott Smith and Eric Moseley. [Smith Dep., Doc. 40-2 at PagelD 696-97 (8:17-9:2, 12:7-11).] Millstone is a home builder owned by Mr. Smith, Mr. Moseley, and Ben Testerman. [Id. at PageID 697 (10:16-11:4, 12:7-11).] Together, the Insureds develop residential properties and sell homes-Knox TL buys raw land and develops it into residential lots that it sells to Millstone, which builds houses on the lots and sells them to customers. [Id. at PageID 697 (12:7-11).]

In October 2017, Knox TL purchased 22.35 acres of land in Knoxville, Tennessee (“Tract 1”) from Charles Edward Daniel and Thomas J. Overton for the purpose of building Phase I of a three-phase residential subdivision called The Glen at West Valley (the “Glen”). [First American's Statement of Undisputed Facts, Doc. 40 ¶¶ 1-2.] Mr. Daniel and Mr. Overton also owned two adjoining properties (“Tract 2” and “Tract 3”) that Knox TL planned to buy later for Phase II of the Glen. [Id. ¶ 3.]

In connection with its purchase of Tract 1, Knox TL obtained an Owner's Policy of Title Insurance from First American (the “Knox TL Policy”). [Id. ¶ 4; Knox TL Policy, Doc. 1-1 at PageID 28-42.] The Knox TL Policy insured Knox TL against losses or damage incurred by reasons of defects, liens, and encumbrances on the title to Tract 1. [First American's Statement of Undisputed Facts, Doc. 40 ¶ 5.]

Under the Knox TL Policy, First American had a duty to defend Knox TL in actions involving the title to Tract 1 at its own cost and without unreasonable delay (Section 5(a)). [Knox TL Policy, Doc. 1-1 at PageID 34.] In accord with its duty to defend, First American retained the right to pursue litigation to final determination (Section 5(c)); limited its liability to final judgments (Section 9(b)); and conditioned the settlement of any claims or lawsuits on its prior written consent (Section 9(c)). [Id. at PagelD 35-36.] The relevant text of these provisions is as follows:

Section 5(a), Duty to Defend

Upon written request by the insured ... [First American], at its own cost and without unreasonable delay, shall provide for the defense of an Insured in litigation which any third party asserts a claim covered by this policy adverse to the Insured. This obligation is limited only to those causes of action alleging matters Insured against by this policy. [First American] shall have the right to select counsel of its choice (subject to the right of the Insured to object for reasonable cause) to represent the Insured as to these stated causes of action. It shall not be liable for and will not pay the fees of any other counsel. [First American] will not pay any fees, costs, or expenses incurred by the Insured in defense of those causes of action that allege matters not insured against by this policy.

Section 5(c), Right of Final Determination

Whenever [First American] brings an action or asserts a defense as required or permitted by this policy, [First American] may pursue the litigation to a final determination by a court of competent jurisdiction, and it expressly reserves the right, in its sole discretion, to appeal any adverse judgment or order.

Section 9(b), Liability Limited to Final Judgments

“[First American] shall have no liability for loss or damage until there has been a final determination by a court of competent jurisdiction, and disposition of all appeals adverse to the Title, as insured[.]”

Section 9(c), Consent Requirement

[First American] shall not be liable for loss or damage to the insured for liability voluntarily assumed by the Insured in settling any claim or suit without the prior written consent of [First American].

[Id. at PagelD 34-36.]

Additionally, Mr. Daniel and Mr. Overton had title insurance policies with Fidelity National Title Insurance (“Fidelity”) for Tracts 2 and 3. [Smith Dep., Doc. 402 at PageID 716 (87:11-88:22).] Mr. Daniel and Mr. Overton are not parties to this case and the Fidelity policies are not at issue. Nevertheless, the Insureds, in opposition to First American's motion for summary judgment, make arguments related to First American's contacts with Fidelity.

The Detrana Litigation Begins and Knox TL Tenders its Defense to First American.

On August 14, 2018, landowners whose property abutted Tracts 1, 2, and 3 (the “Detrana Plaintiffs”) sued Knox TL, S&E Properties, LLC (another entity owned by Mr. Smith and Mr. Moseley), Mr. Daniel, and Mr. Overton, (the “Detrana Defendants” (and collectively with the Detrana Plaintiffs the “Detrana Parties”)) in the Chancery Court for Knox County, Tennessee. [First American's Statement of Undisputed Facts, Doc. 40 ¶ 8.] The Detrana Plaintiffs brought the litigation to enforce deed restrictions in some of the Tracts' titles. If enforced, the deed restrictions would likely reduce the number of lots that Knox TL could develop for the Glen. [Id. ¶¶ 9-10.]

Knox TL was served with the Detrana Plaintiffs' complaint on August 22, 2018. [Id. ¶ 11.] Then, the Detrana Defendants jointly retained attorney Lewis Howard to defend them. [Id. ¶ 12.] Mr. Howard filed their answer on September 13, 2018, and, on September 14, 2018, he filed their motion for summary judgment. [Id. ¶¶ 12-13.]

While Mr. Howard was making the Detrana Defendants' initial filings, Knox TL, through its title agent East Tennessee Title Insurance Agency (“East Tennessee Title”), tendered its defense to First American. On August 31, 2018, East Tennessee Title submitted Knox TL's tender to First American. [Insureds' Counter-statement of Undisputed Facts, Doc. 45 ¶ 80.] On September 4, 2018, First American sent an acknowledgement letter to East Tennessee Title confirming receipt of the claim. [Id. ¶ 82.] On September 11, 2018, First American gave notice to East Tennessee Title that it was investigating the claim and, the next day, Jessica Ladwig, First American's Claims Counsel sent a letter to East Tennessee Title asking for a copy of its policy file. [Id. ¶¶ 83-85, 90.] On September 18, 2019, East Tennessee Title provided Ms. Ladwig with the additional information. [Id. ¶ 87.]

On October 11, 2018, Ms. Ladwig sent a letter to Mr. Smith informing him that First American had partially accepted Knox TL's claims under a reservation of rights and that it had retained Erika Barnes as counsel for those claims. [Id. ¶ 87; Letter Ladwig to Smith (Oct. 11, 2018), Doc. 45-1 at PageID 1044-49.] In her letter, Ms. Ladwig explained that, although Ms. Barnes had been retained to defend Knox TL, she was not retained to provide coverage advice regarding the Knox TL Policy. [Letter Ladwig to Smith (Oct. 11, 2018), Doc. 45-1 at PageID 1048.] Despite First American retaining Ms. Barnes, Mr. Howard continued to represent Knox TL and the other Detrana Defendants and acted as lead counsel in the Detrana Litigation.

The Detrana Parties Mediate and Settlement Negotiations Begin.

As a matter of background, in the summer of 2019 Knox TL was under no real pressure to settle the Detrana Litigation. Pursuant to their plans to develop the Glen, in early 2019, Knox TL began selling lots to Millstone-these lots were not encumbered by the deed restrictions at issue in the litigation. [Id. ¶ 23.] And, by late 2019, Millstone had fourteen houses worth approximately $5,000,000 under contract and closings scheduled to begin in early August. [Id. ¶ 38.]. Additionally, in connection with its purchase of the lots, Millstone obtained an Owner's Policy of Title Insurance from First American (the “Millstone Policy”). [Id. ¶ 24; Millstone Policy, Doc. 1-1 at PagelD 84-94.] The Millstone Policy contained the same conditions and exclusions as the Knox TL Policy-First American assumed the duty to defend Millstone in actions involving the properties' titles and it retained the right to pursue any litigation to final determination, limited its liability to final judgments, and conditioned the settlement of any claims or lawsuits on its prior written consent. [Id. ¶ 25; Insureds' Counter-statement of Undisputed Facts, Doc. 45 ¶ 25.] The Millstone Policy also included a provision excluding any losses or damages related to the Detrana Litigation. [Insureds' Counter-statement of Undisputed Facts, Doc. 45 ¶ 25.]

In June 2019, the Detrana Parties participated in mediation. [First American's Statement of Undisputed Facts, Doc. 40 ¶ 26.] The Detrana Defendants were represented by Mr. Howard and Ms. Barnes and, although she did...