First American Title Ins. Co. v. First Trust N.A., ___ F.3d ___, 2004 WL 848277 (5th Cir.(Miss.)).
From the May, 2004 issue of The Title Insurance Law Newsletter
A title insurance policy does not insure title to a riverboat casino while it is in drydock being built, and therefore does not protect the insured lender against watercraft liens filed against it. The case drew amicus briefs from American Land Title Association and the Dixie Land Title Association.
Facts
Biloxi Casino Belle, Inc. ("BCBI") planned to build two riverboat casinos and moor them along the Mississippi River at Tunica and Biloxi, Mississippi. The Tunica casino boat was to be constructed on site. The Biloxi boat, named the "Biloxi Belle II," was to be built in Gulfport and floated to Biloxi. Various structures were to be built on the waterfront parcels also.
BCBI's parent, Biloxi Casino, Inc. ("BCI"), financed the project with $75 million in mortgage notes securitized and underwritten by Bear Stearns & Co. An indenture was executed between BCI as issuer and First Trust N.A. as indenture trustee for the note holders. BCI loaned the proceeds to BCBI, and BCBI gave BCI a promissory note. BCBI gave BCI a Leasehold Deed of Trust, Security Agreement and Fixture Filing with Assignment of Rents ("Leasehold Deed of Trust") on the Biloxi project, which gave BCI security interests in most of the realty (including fixtures) and personalty associated with the casino project, including "ships" and "boats." BCI assigned its interests in these instruments to First Trust, the indenture trustee. First Trust appointed First National Bank to act as disburser for the construction project.
First American issued title insurance policies to First Trust insuring the Leasehold Deed of Trust. Bear Stearns negotiated the terms of the title insurance policy. It was represented by Gibson, Dunn & Crutcher. First American's agent was David Wheeler, a Biloxi based attorney. About a month after closing, Wheeler sent Gibson Dunn a copy of the policies, which were 1990 ALTA forms. Item 4 on Schedule A, which identified "the instruments creating the estate or the interest in real estate which is hereby insured," cross referenced a rider that listed the Leasehold Deed of Trust and also various financing statements (Mississippi form UCC 1). The UCCs, like the Leasehold Deed of Trust, listed broad categories of BCBI personalty and fixtures, including "ships" and "boats," in addition to legal descriptions.
For several months afterward, Gibson Dunn and Wheeler corresponded about numerous changes to the policy language. In April, 1994, Wheeler sent the revised pages of the policy to Gibson Dunn. In addition to making the changes requested by Gibson Dunn, Wheeler noted that the revised copy eliminated the reference to the UCC 1 financing statements, leaving the Leasehold Deed of Trust as the only document listed in Schedule A, Item 4.
Meanwhile, boat construction costs ran over budget. However, First National Bank continued to make payments to the contractor, Charles N. White Construction Company. First Trust eventually stopped payments and sued First National Bank for negligence. See First Trust National Ass'n v. First National Bank of Commerce, 220 F.3d 331 (5th Cir.2000).
White filed a Mississippi statutory watercraft lien on the still uncompleted Biloxi Belle II in June 1994, and filed suit to enforce the lien in July. BCI and BCBI filed Chapter 11 bankruptcy petitions in August. Several lawsuits followed. White's watercraft lien complaint listed First Trust as having a potentially competing interest in the Biloxi Belle II. First Trust gave notice to First American of the lawsuit. First American responded, saying that its understanding was that First Trust was not requesting a defense. Two years later, in December 1996, First Trust requested a defense in the White Construction litigation, which had by now been removed to federal court and referred to the bankruptcy court. First American Title agreed to provide a defense, but under a reservation of rights. First Trust rejected First American's choice of counsel, asserting that the reservation of rights created a conflict of interest. It wanted First American to pay for counsel of First Trust's choice.
First American filed an adversary complaint in the BCI bankruptcy, seeking a declaratory judgment that it had no duty to indemnify or defend White Construction's claims.
White dropped its lien claim against First Trust in exchange for an assignment of First Trust's claim as an unsecured creditor in bankruptcy. Under the liquidation plan eventually adopted, White received $1.7 million. The bankruptcy court ruled on summary judgment that First American had no duty to pay attorney fees incurred before the December 1996 tender, but was responsible for post-tender fees and the loss of collateral caused by the payment to White from the bankruptcy plan. It entered judgment against First American for more than $1.4 million. The district court affirmed. First American appealed to the Fifth Circuit Court of Appeals.
UCCs "Insured" in Schedule A?
The pivotal coverage issue was whether or not the policy assured title to the boat being built in Gulfport, and against the watercraft lien filed by White against the boat. First Trust argued that the original Schedule A including the UCC-1s was in effect, and the reference to "ships" and "boats" was evidence that the policy insured the title to the boat. The court said that "the parties take sharply differing views" about the revision to Schedule removing the UCC-1s:
According to First American Title, the commitment documents negotiated by the parties concerned only land, and the inclusion of the financing statements in the initial version of the policy documents was simply a drafting mistake that Wheeler corrected with Gibson Dunn's approval. According to First Trust, in contrast, the inclusion of the UCC 1s was not a mistake at all, since the title insurance policies were always intended to cover more than just the real estate associated with the Biloxi project. Or, says First Trust, if their inclusion was initially a mistake, Wheeler could not amend the policy without First Trust's consent, which the Gibson Dunn attorneys did not give him and were not authorized to give him. In any event, it seems that First Trust only saw the later version of the policy and did not learn of the initial version until years later when, in connection with this case, First American Title submitted it as an attachment to its complaint.
First Trust also argued that the boat was included even without the UCCs, because the deed of trust made the same reference to ships and boats.
Construction Lien Coverage Invoked?
The court noted, however, that the coverage that First Trust claimed was invoked is the construction lien coverage, which protects against the "[l]ack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material ... arising from an improvement or work related to the land." Thus, it said, First Trust had to prove that the boat was "related to the land":
According to the policy, the "land" means "the land described or referred to in Schedule A, and improvements affixed thereto which by law constitute real property" but does not include property beyond the bounds of the area described in Schedule A.
First American Title, emphasizing that the unfinished boat never left Gulfport and allegedly was not intended to be a fixture, argues that it is not "related to the land."
The court agreed, and held that any lien First Trust had on the boat was not covered by the "insured mortgage."
We hold that the title insurance policy does not cover First Trust's security interest in the casino boat being constructed in Gulfport. Even if Wheeler did not successfully change the rider to remove the references to the UCC financing statements, First Trust's security interest in the boat and all of the other personalty described in the financing statements cannot be the "insured mortgage" that the title insurance policy protects. Tellingly, Item 4 on Schedule A specifies the insured mortgage by referring to "[t]he instruments creating the estate or the interest in real estate which is hereby insured."
... The Biloxi Belle II, under construction on a barge in Gulfport, was not real estate. It is conceivable, we suppose, that the qualifier "in real estate" could be read to apply only to "interest" but not "estate," so that Item 4 would insure instruments creating an "interest in real estate" but an "estate" in any type of property. But by far the more natural reading is that "in real estate" modifies both "estate" and "interest." The language thus embraces fee estates, leasehold estates, security interests, and so on, as long as those property interests are in real estate. This reading is powerfully confirmed, moreover, when one considers other portions of the policy, which give no indication of an intent to cover interests in personalty and every indication of insuring interests in land.
From the insuring clauses to the exclusions to Schedule A, the policy is replete with references to "land" and "real property." But those same provisions contain no references to "chattels," "goods," "movables," "personalty," or "personal property." The only impression an objective reader of the policy can come away with is that the document is firmly tied to terra firma.
The second problem that confronts First Trust's theory is that Item 4 refers to "[t]he instruments creating the estate or the interest in real estate." A UCC 1 financing statement is not a document that creates a security interest in any type of property. On the contrary, it is a method of giving notice of the existence of a security interest created by a security agreement.
Insuring clause 7, which insures "the priority of the lien of the insured mortgage," does not insure the lien of a financing statement, for such a document, unlike a mortgage or other security agreement, effects no lien.
Given the above considerations, we find unavailing First Trust's reminder that the policy's general definition of "mortgage" tells us that the term can mean "mortgage, deed of trust, trust deed, or other security instrument."
Under the canon of ejusdem generis, [FN8] one could perhaps argue that "other security instrument" should be restricted similarly. Nonetheless, even assuming that the policy's definition of the term "mortgage" could include documents creating security interests in personalty, what is controlling here is that the policy provides protection not for "mortgages" in general but only for the particular policy's "insured mortgage."
The court also found that the policy definition of "mortgage," which includes "or other security interest," does not create insurance for liens on personal property.
Would Boat Ever Be a Fixture?
The court also noted that there was some question about whether or not the boat would ever have been considered a fixture. The law enabling gambling applies only to a "cruise vessel" or "vessel" located in the waters along the Mississippi River. Gambling is not legal on dry land, but there are distinctions between "cruise vessel" and "vessel," with the latter being less moveable. A title agent had testified that First American insured two other river boats, and that they were found to be insurable because they were built directly on the land and were "pretty much fixture[s]." The agent also said that the boats had to be specifically identified as covered "because it's kind of excluded by the terms of the policies." The court said that the Biloxi Belle II was more boat-like than the other two vessels, and therefore the testimony actually hurt First Trust's argument.
UCC Policy Distinguished
Finally, in an interesting footnote, the court ruled that the offering of UCC policies by title underwriters does not mean that a traditional title insurance policy also covers such liens:
[W]e are mindful of the limitations of the ready bromide that title insurance covers only interests in real estate. Cf. La.Rev.Stat. Ann. § 22:2092.2(18) (defining "title insurance policy" as potentially encompassing either "movable or immovable property") (West Supp.2004). First Trust explains that Chicago Title Insurance Company must not have been aware of this platitude, for the company sold in Mississippi in the recent past a "UCC 9" policy that protected security interests in personalty arising under Article 9 of the UCC. The policy at issue in this case, however, is not an innovative UCC 9 policy but is instead a traditional, mundane lender's title insurance policy. Some policies offered by traditional title insurers might cover interests in personalty, but this one does not.
The Fifth Circuit opinion is a straightforward analysis of the policy terms. It may be the first reported decision involving a title insurance policy issued in relation to a casino vessel, and will bear close scrutiny by counsel involved in similar future projects.
