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Chesapeake Land Development Co. LLC v. Chicago Title Insurance Co.

United States District Court, W.D. Oklahoma

November 30, 2017

CHESAPEAKE LAND DEVELOPMENT COMPANY LLC, Plaintiff,
v.
CHICAGO TITLE INSURANCE COMPANY, Defendant.

          ORDER

          JOE HEATON U.S. DISTRICT JUDGE.

         Plaintiff Chesapeake Land Development Company, L.L.C. (“Chesapeake”) filed this action in state court against Chicago Title Insurance Company (“Chicago Title”) and Capitol Abstract & Title Company (“Capitol Abstract”) asserting claims related to its 2007 purchase of certain r e a l property. Chicago Title removed the action on grounds of diversity jurisdiction after the state court dismissed Chesapeake's claims against Capitol Abstract, a nondiverse party. Chesapeake was granted leave to amend its complaint, see Doc. #41, [1] and Chicago Title filed a motion to dismiss pursuant to Fed.R.Civ.P.12(b)(6). Chesapeake then filed a motion for leave to file a second amended complaint, which the court has denied by separate order.

         Background

         In the amended complaint, Chesapeake alleges that in 2007, prior to its purchase of two adjoining lots in Nichols Hills, Oklahoma (the “Property), it “engaged with” Chicago Title and Capitol Abstract, its title agent. Plaintiff alleges that Capitol Abstract conducted a title investigation and discovered that both lots were burdened with specific use restrictions included in two 1954 deeds conveying the Property from G.A. Nichols Inc. and members of the Nichols Family to the Christian Science Society of Oklahoma City (“1954 use restrictions”). The deed for one lot limited its use to church purposes. The deed for the other provided that it could be used only as a park. Plaintiff alleges that when it learned of the use restrictions its agent, Joe Lewallen, informed Capitol Abstract that the restrictions would have to be removed from the Property before the sale closed. Capitol Abstract's representatives allegedly advised Mr. Lewallen that the restrictions could be removed at the time of sale by obtaining releases from the First Church of Christ, Scientist (the “Church”), the seller and then-current owner of the Property.[2]

         Chesapeake alleges that before it bought the Property Mr. Lewallen asked Capitol Abstract whether the City of Nichols Hills (the “City”) had an “interest or easement right associated with the City's park and jogging trail adjoining the Park Lot.” Doc. #44, p. 3, ¶8. It claims “Capital Abstract representatives affirmatively advised Mr. Lewallen and Chesapeake that the City did not have any current ownership interest in the Park and further stated that the releases that Capital Abstract would obtain from the Church would effectively eliminate such interests, if any.” Id. Chesapeake alleges it then purchased the property for $10, 000, 000, [3] obtained the releases from the seller and simultaneously purchased a title insurance policy in the amount of $10, 000, 000 on the Property from defendant Chicago Title.

         Chesapeake alleges it entered into sales negotiations for the Property in late 2014. During the sales process it allegedly discovered the Property was still burdened by the earlier 1954 use restrictions. When they prevented the sale from being completed, plaintiff submitted a claim of loss to Chicago Title, asking it to perform its duties under the title policy so the sale could be finalized. Plaintiff alleges that, although defendant accepted the claim under a reservation of rights on May 11, 2015, and took the position that the claim was covered under the policy, it failed to take steps to “alleviate the title issue to the Property for several months, ” and the third-party offer to buy the Property was rescinded. Doc. #44, p. 5, ¶11.

         Plaintiff alleges defendant, instead of “properly respond[ing] to the demands of its insured to cure the burdens/ownership issues on the Property and/or to pay Chesapeake under the Title Policy, ” modified its original acceptance of plaintiff's claim on October 12, 2015, by insisting on the right to attempt to cure the defects caused by the use restrictions. Id. at ¶12. Defendant hired attorney Mel McVey in late 2015, plaintiff alleges, “[m]ore than seven (7) months after Chesapeake submitted its initial claim and after the Property sale had failed, ” to investigate and cure the defective title issues on both lots. Id. at ¶13. In early 2016, McVey allegedly confirmed that the “Park lot” part of the Property was “likely burdened with an implied easement or right-of-way belonging to the City of Nichols Hills.” Id. at ¶14.

         Plaintiff alleges there is no indication that Capital Abstract took any reasonable steps to determine the validity of the City's possible easement rights in 2007, when plaintiff's counsel asked about it, or that defendant investigated the issue after plaintiff made its demand in March, 2015. Plaintiff asserts that even if the use restrictions are removed from the Property, the City's possible implied easement both restricts its ability to sell or develop the property and has diminished its value. Plaintiff alleges that defendant refused to pay it any amount owed under the title policy for over 18 months and offered less than 3% of the total policy coverage amount when it finally made a payment offer. Plaintiff asserts breach of contract and bad faith claims against defendant, which defendant asserts should be dismissed with prejudice for failure to state a pursuant to Fed.R.Civ.P. 12(b)(6).[4]

         Breach of contract

         Chesapeake claims Chicago Title breached the title policy by failing to provide coverage for the loss or damages it sustained due to the use restrictions and by not resolving the title issue involving the implied easement. Chicago Title contends Chesapeake fails to state a breach of contract claim based on the use restrictions because they do not encumber the title or make it unmarketable and because they were expunged by the Oklahoma Marketable Record Title Act. It contends Chesapeake fails to state a breach of contract claim based on the implied easement because Chesapeake sued before making a claim under the policy, so its claim is premature, because the path is open and notorious, so it is not considered to be a defect in the title or to render the title unmarketable, and because Chesapeake has not alleged it has been damaged as a result of the easement.

         The parties appear to agree that Oklahoma law applies to the issues involved in this diversity case and there is no apparent reason to question that.[5] “In Oklahoma, ‘[a]n insurance policy, like any other contract of adhesion, is liberally construed, consistent with the object sought to be accomplished, so as to give a reasonable effect to all of its provisions, if possible.'” Emcasco Ins. Co. v. CE Design, Ltd., 784 F.3d 1371, 1378 (10th Cir. 2015) (quoting Dodson v. St. Paul Ins. Co., 812 P.2d 372, 376 (Okla. 1991)). Its construction should be natural and reasonable, “‘to effectuate its purpose'” and it should be “‘viewed in the light of common sense so as not to bring about an absurd result.'” Id. (quoting Wiley v. Travelers Ins. Co., 534 P.2d 1293, 1295 (Okla.1974)). Policy terms are construed “in their plain and ordinary sense if they are unambiguous, clear and consistent.” Id. If the policy language is doubtful and susceptible to more than one construction, then the court will “interpret the policy language most favorably for the insured and against the insurer.” Id.

         The pertinent parts of the title policy issued by Chicago Title provide that, subject to identified exclusions, exceptions, conditions and stipulations, Chicago Title

insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the Amount of Insurance stated in Schedule A, sustained or incurred by the insured by reason of:
1. Title to the estate or interest described in Schedule A being vested other than ...

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