Moser v. Fid. Nat'l Title Ins. Co.

CHRISTOPHER J. MOSER, Trustee, and KERNELL THAW, Appellants, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY, Appellee.

CIVIL ACTION NO. 4:17-CV-104

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TEXAS

March 21, 2018

MEMORANDUM AND ORDER

Pending before the court is Christopher Moser ("Moser" or "the Trustee") and Kernell Thaw's ("Kernell") (collectively, "Appellants") appeal from the judgment of the United States Bankruptcy Court, entered February 6, 2017, wherein the Honorable Brenda T. Rhoades found that an exclusion and the fortuity doctrine barred coverage under a title insurance policy issued by Fidelity National Title Insurance Company ("Fidelity"). Having reviewed the bankruptcy judge's opinion and order, the record, the submissions of the parties, and the applicable law, the court is of the opinion that the bankruptcy court's decision should be affirmed.

I. Background

Kernell and Stanley Thaw ("Stanley") (collectively, "the Thaws") were married in 2001. The following year, Stanley and Dr. Leslie Schachar ("Schachar") began operating a business together. When the business failed, Schachar paid business debts that were guaranteed by both Stanley and Schachar and, on May 6, 2008, sued to recover Stanley's share of the debt. While the action was pending in a state district court, the Thaws made arrangements to purchase a home located at 5197 Brandywine Lane in Frisco, Texas ("the Brandywine Property"). On August 6, 2009, the state district court granted a motion for partial summary judgment for Schachar in the amount of $349,535.82, plus $12,500.00 in attorney's fees, and postjudgment interest at the rate of five percent. On October 28, 2009, the Thaws executed a contract to purchase the Brandywine Property with Axxium Custom Homes Dallas, LLC ("Axxium"), for a principal amount of $1,750,000.00. On November 1, 2009, the Thaws revised the contract for deed, increasing the principal amount to $2,150,000.000.¹ The Thaws did not record the contract for deed in the real property records of Collin County, Texas. On November 5, 2009, the state district court issued a final judgment against Stanley ("the Schachar Judgment"), which Stanley appealed. On November 11, 2009, Schachar recorded an abstract of judgment in the real property records of Collin County, Texas, before the Thaws moved into the Brandywine Property in January 2010.

While Stanley's appeal was pending, the Thaws sought financing to pay off the Brandywine Property and, through their businesses, borrowed money to pay off the Brandywine Property at an accelerated rate.² The businesses, many of which were established during the pendency ofSchachar's lawsuit against Stanley, were purportedly owned by Kernell.³ Around June 27, 2011, the Thaws paid off the contract for deed, obtained a special warranty deed for the Brandywine Property from Axxium, and recorded the deed in the property records of Collin County, Texas. On June 28, 2011, Fidelity issued a title insurance policy ("the Policy"). On July 26, 2011, a Texas court of appeals affirmed the Schachar Judgment, and on November 4, 2011, the Supreme Court of Texas denied Stanley's petition for review. See Thaw v. Schachar, No. 07-10-0027-CV, 2011 WL 3112064 (Tex. App.—Amarillo July 26, 2011, pet. denied).

On December 2, 2011, Stanley filed a petition for relief under Chapter 7 of the Bankruptcy Code. Subsequently, Moser was appointed as Trustee of Stanley's bankruptcy estate, and Schachar filed a proof of claim, asserting he had a secured claim of $400,566.17 on the petition date. During the course of the bankruptcy proceedings, this court held, and was ultimately affirmed by the Fifth Circuit, that a judgment lien ("the Schachar Lien") attached to the Brandywine Property on November 11, 2009, when Schachar filed his abstract of judgment and before the Thaws made the Brandywine Property their homestead. Moser v. Schachar, 4:14-CV-185, 2015 WL 679689 (E.D. Tex. Feb. 17, 2015), aff'd sub nom. In re Thaw, 620 F. App'x 304 (5th Cir. 2015). Thus, when the Brandywine Property was sold in September 2013, the Schachar Lien attached to the net proceeds of the sale, approximately $500,000.00.

The Policy is "a contract of indemnity, meaning a promise to pay [the insured] or take other action if [the insured] ha[s] a loss resulting from a covered title risk." In the section entitled"Covered Title Risks," the Policy includes, "a lien on your title because of . . . a judgment." In the section entitled "Exclusions," the Policy states that it excludes title risks "that are created, allowed, or agreed to by you" ("Exclusion 3(a)"). "You" or "your" refer to the insured.

On January 28, 2014, the Trustee made a demand on Fidelity for benefits under the Policy, which Fidelity denied on March 19, 2014. Kernell similarly made a demand on February 21, 2014, which was denied on March 26, 2014. On January 20, 2016, the bankruptcy court approved a settlement in which Schachar received about $444,000.00 from the net proceeds of the sale in full satisfaction of his claim. Appellants subsequently sued Fidelity in an adversary proceeding, arguing that Fidelity breached the Policy by denying the claim. The bankruptcy court issued an order holding: (1) the Trustee had standing to assert a claim for benefits under the Policy; (2) the Trustee and Kernell did not lose benefits under the Policy when the Brandywine Property was sold; and (3) coverage under the Policy was barred because Exclusion 3(a) and the fortuity doctrine applied. It is from this order that the Trustee and Kernell appeal.

II. Analysis

A. Jurisdiction

District courts have jurisdiction to hear appeals from "final judgments, orders, and decrees" and, with leave of the court, "other interlocutory orders and decrees" of bankruptcy judges. 28 U.S.C. § 158(a). Appeal from the bankruptcy court to the district court "shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts." Id. § 158(c)(2). Therefore, "when reviewing a bankruptcy court's decision in a 'core proceeding,' a district court functions as a[n] appellate court." First Nat'l Bank v. Crescent Elec. Supply Co. (In re Renaissance Hosp. Grand Prairie Inc.), 713 F.3d285, 293 (5th Cir. 2013) (quoting Webb v. Reserve Life Ins. Co. (In re Webb), 954 F.2d 1102, 1103-04 (5th Cir. 1992)); accord Perry v. Dearing (In re Perry), 345 F.3d 303, 308-09 (5th Cir. 2003).

B. Standard of Review

In reviewing a decision of the bankruptcy court, the court must accept the bankruptcy court's findings of fact unless clearly erroneous and examine the bankruptcy court's conclusions of law de novo. See In re Renaissance Hosp. Grand Prairie Inc., 713 F.3d at 293-94; In re Halo Wireless, Inc., 684 F.3d 581, 586 (5th Cir. 2012); Drive Fin. Servs., L.P. v. Jordan, 521 F.3d 343, 346 (5th Cir. 2008). Mixed questions of law and fact are reviewed de novo. In re Renaissance Hosp. Grand Prairie Inc., 713 F.3d at 294; Tech. Lending Partners, LLC v. San Patricio Cty. Cmty. Action Agency (In re San Patricio Cty. Cmty. Action Agency), 575 F.3d 553, 557 (5th Cir. 2009). A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court is left with a firm and definite conviction that a mistake has been committed. See In re Renaissance Hosp. Grand Prairie Inc., 713 F.3d at 293-94 (citing Anderson v. City of Bessemer City, 470 U.S. 564, 573-74 (1985)); Bertucci Contracting Corp. v. M/V ANTWERPEN, 465 F.3d 254, 258-59 (5th Cir. 2006).

Under Texas law, the interpretation of insurance policies is governed by the same rules that apply to the interpretation of other contracts. Lawyers Title Ins. Corp. v. Doubletree Partners, L.P., 739 F.3d 848, 858 (5th Cir. 2014); Pendergest-Holt v. Certain Underwriters at Lloyd's, 600 F.3d 562, 569 (5th Cir. 2010); Great Am. Ins. Co. v. Primo, 512 S.W.3d 890, 892-93 (Tex. 2017); Nat'l Fire Ins. Co. v. Crocker, 246 S.W.3d 603, 606 (Tex. 2008). The determination of whether an insurance policy is ambiguous is a question of law for the court to decide. DoubletreePartners, L.P., 739 F.3d at 858; Carrizales v. State Farm Lloyds, 518 F.3d 343, 346 (5th Cir. 2008). Ambiguity does not result simply because the parties differ in their interpretations of the policy. United Nat'l Ins. Co. v. Mundell Terminal Servs., Inc., 740 F.3d 1022, 1027 (5th Cir. 2014); Doubletree Partners, L.P., 739 F.3d at 859; Tex. Indus., Inc. v. Factory Mut. Ins. Co., 486 F.3d 844, 846 (5th Cir. 2007); Primo, 512 S.W.3d at 893. Rather, "[a]n ambiguity exists only if the contract language is susceptible to two or more reasonable interpretations." Doubletree Partners, L.P., 739 F.3d at 858-59 (quoting Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157 (Tex. 2003)); accord Tex. Indus., Inc., 486 F.3d at 846; Primo, 512 S.W.3d at 893. If an insurance policy is ambiguous and is susceptible to more than one reasonable interpretation, under the "contra-insurer rule," it will be construed in favor of the insured. Doubletree Partners, L.P., 739 F.3d at 859 & n.28; Carrizales, 518 F.3d at 346; Tex. Indus., Inc., 486 F.3d at 846; Hulcher Servs., Inc. v. Great Am. Ins. Co., No. 4:14-CV-231, 2015 WL 3921903, at *4 (E.D. Tex. June 25, 2015); State Farm Fire & Cas. Co. v. Vaughan, 968 S.W.2d 931, 933 (Tex. 1998). This rule of construction does not apply, however, when the insurance contract is expressed in plain and unambiguous language and is susceptible to only one reasonable interpretation. See Am. States Ins. Co. v. Bailey, 133 F.3d 363, 369 (5th Cir. 1998); Canutillo Indep. Sch. Dist. v. Nat'l Union Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996); Armijo v. Tetra Techs., Inc., 936 F. Supp. 2d 675, 686 (E.D. La. 2013).

Under Texas law, the insured has the initial burden of establishing coverage under the terms of the policy. Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, 124 (Tex. 2010); Ulico Cas. Co. v. Allied Pilots Ass'n, ...