Insurer wall of denial falls.

Commercial construction projects are dangerous, especially in cities. General contractors routinely require that subcontractors purchase insurance policies covering the general contractor and owner as "additional insureds." And so, if a subcontractor does damage that triggers a lawsuit naming the general or owner, it is the subcontractor's insurance that should hire defense counsel, and later indemnify the claim.

In a perfect world.

In Capital City Real Estate, LLC v. Certain Underwriters at Lloyds of London, reported June 10, 2015, the United States Court of Appeals for the Fourth Circuit reversed Maryland federal judge Marvin Garbis' trial court decision to excuse the insurance company from the duty to defend the general contractor.

Capital City acted as its own general contractor in the renovation of a brick building in D. C., sharing a common wall with its neighbor.  Capital City subcontracted with another company for masonry work on and around the common wall. As a result of the subcontractor's work the common brick wall collapsed.

Welcome to the not-so-perfect world.

57 Bryant Steet in 2013

Capital City had required the masonry contractor to purchase the usual insurance policy, with the usual "additional insured" endorsement. However, when Capital City was sued by the neighboring landowner the insurance company denied the claim and refused to pay for a lawyer to defend Capital City. The insurance company denied the claim because, it argued, the neighbor's lawsuit alleged that only Capital City was negligent. The insurance company believed that the "additional insured" endorsement only reached conduct of the mason subcontractor for which Capital City was "vicariously liable."

Yes, it made me smile, too. (you are smiling, right?)

Vicarious liability is a limit on general liability.  It would mean that the subcontractor could have triggered certain damage on the project for which the general contractor would have no responsibility. Imagine for a moment that your employee accidentally trips a customer in your store, and the customer breaks a leg. You, as the employer, are vicariously responsible for the employee's actions.  Now imagine the same employee goes home and trips someone in  his own house, and that person breaks a leg. As the employer, you are not vicariously responsible for that person's broken leg. On the construction project, the insurance company argued that the general contractor was only covered for a narrow range of things performed by the subcontractor.

And the trial court accepted the argument and granted the insurance company summary judgment (a motion granted before a trial, based on the evidence then known and the applicable law). But the U.S. Court of Appeals rejected the argument.

Insurance contracts are not construed against an insurance company unless they are ambiguous. And where the endorsement in this case did not contain the extreme limitation of language relied upon by the insurer, the appellate court ruled that most any action on the job site by the subcontractor resulting in a lawsuit would trigger coverage for the general contractor. And that means that the insurance company must pay for the general contractor's trial lawyer.

That is why you purchase insurance, and that is why it is useful to have your project documents reviewed by counsel before an accident. You can always count on the insurer to construe the contract language as narrowly as possible in order to limit or deny your coverage.

Maryland's highest court makes foreclosure easier.

Your mortgage note is often passed around like an endorsed check. Welcome to the wild and wonderful world of "endorsements in blank."  On March 22, 2013, the Maryland Court of Appeals made it just a bit easier for mortgage lenders to foreclose in the case called (take a deep breath ) Deutsche Bank National Trust Company as Trustee for the Certificate Holders of ISAC 2006-5 MTG Pass-Through Certificates and Bank of America, N.A., as Successor by Merger toBAC Home Loans Servicing, LP v. Angela Brock. 

This case allowed the appellate court to settle a common dispute involving a lender or loan servicing company's right to enforce a note, or to foreclose the deed of trust securing that note. Mrs. Brock argued that the foreclosing loan servicer lacked authority to take her home because the mortgage note was endorsed "in blank," and did not specifically name the loan servicer.  And if you are not in the law biz, you may just be mumbling "what's 'in blank' mean?"  Glad you asked. Pour yourself some strong coffee and read on.

An endorsement is the act of signing over a negotiable instrument (imagine the check from your own checking account). You might write a check to your friend, "Jane."  Well, Jane usually will sign the back of the check and deposit that check in her account.  She has "endorsed" the check.  And the bank normally will require that she sign the check before it is accepted for negotiation.

But Jane can also choose to pass your check to someone else.  Imagine that she owes the exact same amount of money to her friend "Dick." She would sign her name to the back and add "pay to the order of Dick."  She'd hand him the check and Dick can now drop the check into his own bank account.

But Jane can also endorse your check "in blank."  That is, to anyone who possesses the check.  She would simply sign her name, or she might add "pay to bearer."  This converts our check to something that can be passed around from Jane to Dick, and from Dick to any number of others.  And each person in that chain of possession may deposit the check to their account.  It doesn't matter that their individual names do not appear on the back of your check because it has been endorsed "in blank."

So, back to our case.

Mrs. Buck argued that the loan servicing company should be required to prove that it had received her mortgage note from the last entity identified in the chain of endorsements. This is the standard of proof when a loan servicer has possession of a note that is missing endorsements.  And it would have made foreclosure of Mrs. Buck's home more difficult.  Her note was endorsed "in blank," and had been physically delivered to the foreclosing lender without any additional endorsement stamps.

Remember your check that was passed from Jane, and then to Dick and his friends? Well, the Court of Appeals made the same analysis.  It held that the servicing company does not have to make additional proof as long as it is in physical possession of the original note, where that note is endoresed "in blank."

What's this mean for you? Very simply, another avenue of attack on mortgage lenders and mortgage servicers has been closed to the homeowner. The court recognized the long standing practice of negotiating notes endorsed "in blank" as legitimate, and not falling into the category of cases where a note is missing endorsements, or a servicer has lost the original.

In a March 14, 2013 posting, the website Mortgage News Daily reported over 158,000 new foreclosure actions were docketed across the Country in February.  This is reported to be a slight increase from the prior month. (http://www.mortgagenewsdaily.com/03142013_realty_trac_foreclosures.asp, last checked 4/13/2013). In the following chart, Maryland is reportedly experiencing a 319% increase in new foreclosure activity.

 

As a practical matter, there are hundreds of cases clogging Maryland's courts where homeowners have sought to forestall foreclosure by arguing the lack of standing by a lender or servicer. These fights take years to resolve (Mrs. Buck's foreclosure started in 2009, four years before this final decision), and thousands of dollars in legal fees, and the delinquent homeowner often remains in the house without paying a dime in mortgage payments. 

Is that a good thing? For Mrs. Buck, perhaps, but what about you and others who struggle to make your monthly payments? But that's a different discussion, for another day.

Maryland's Court of Appeals decides Anderson v. Burson, and leaves the lender "standing."

On December 20, 2011, the Maryland Court of Appeals deftly greased the skids for continued enforcement of mortgage notes and deeds of trust in the case Anderson v. Burson. Judge Harrell has poured oil over the troubled waters created by repeated challanges to lender standing to enforce debt instruments, as described in my prior post on this case.

The anlysis is elegantly simple, dealing with the Uniform Commercial Code and the differences between a "holder" and a "transferee."  More importantly, the Court gives yearning litigation lawyers a standard analysis for establishing the "standing" of their lender clients. In practice, the standard will impose a large investigative burden on the lender.  But it is perfectly reasonable for any entity seeking relief from the court to do the work required to establish it's particular entitlement, n'est pas? Take a walk through the decision, after the jump.

Missing or incomplete endorsements? Then who can foreclose or sue for priority?

I have not posted for some time. It has not been for lack of interesting stuff happening in the industry. It is because that stuff has been so widely reported in the mainstream media. I have had little to add that would be of interest or which would make the widely distributed news more useful.

But the Maryland Court of Appeals has reported Anderson v Burson ( http://mdcourts.gov/opinions/cosa/2010/434s09.pdf ) on December 22, 2010. This is an opinion worth reading if you are involved in title insurance, foreclosure or bankruptcy work. It clarifies how a lender or servicer may demonstrate its standing to sue for lien priority where the chain of endorsements and assignments is unclear or incomplete.

The case presents a very common fact pattern: The "XYZ Trust" alleges standing to appoint a substitute trustee for purposes of foreclosing a deed of trust naming a prior lender and trustee. The title chain is missing a clear endorsement of the note over to the "XYZ Trust." The borrowers thus moved to enjoin the foreclosure.

The core of this opinion is the Specials' review of the commercial law defining "holders," and the transfer of instruments. In sum, where "XYZ Trust" is not linked into the chain of title by an express endorsement or allonge, it will have standing to sue or appoint substitute trustees if it meets the definition of "a non-holder in possession" as the term presents in the Commercial Code.

For outside counsel, this means some adjustment to our pleading of the issue. It also lessens our burden of proof, since absence of that exact endoresment is no longer fatal to the standing issue. Now, please excuse me as I must amend a few complaints!