The U.S. Court of Appeals for the Seventh Circuit recently reversed summary judgment in favor of an insurer and against a mortgagee in an action involving state tort claims arising from a deadly fire in the collateral property, holding that an issue of fact existed regarding who was in possession of the property when the fire occurred.
A copy of the opinion in Apex Mortgage Corp. v. Great Northern Insurance Co. is available at: Link to Opinion.
The owners of a commercial laundromat took out a loan secured by the property, but defaulted seven years later. The parties entered into a repayment agreement, but the borrower defaulted a year later and the laundry went out of business.
The owners offered the mortgagee a deed in lieu of foreclosure and the mortgagee accepted on condition the property was still marketable. It was not. The mortgagee made repairs to preserve the property and returned the deed to the owners.
A year and a half later, two firemen “lost their lives battling a blaze at the abandoned laundromat.” Their estates sued the mortgagee “in Illinois state court for negligence under a premises liability theory.”
The wrongful death case settled for $15 million but the mortgagee only had $1 million in general liability coverage, so the mortgagee filed a claim with “its umbrella insurance provider, for coverage, but [the insurer] refused” on the basis that the policy excluded “any liability or loss, cost or expense arising out of property [the insured] acquire[d] by foreclosure, repossession, deed in lieu of foreclosure or as mortgagee in possession.”
The mortgagee sued the umbrella carrier, and the trial court granted the insurer’s motion for summary judgment because “the undisputed record demonstrated [the mortgage company] was a mortgagee in possession when the fire broke out.” The mortgagee appealed.
On appeal, the Seventh Circuit first addressed the mortgagee’s argument that it was not a “mortgagee in possession” at the time of the fire. Although the Court noted that it did “not read the caselaw in [the appellant’s] favor[,]” it felt constrained to “remand because a triable issue exists on who possessed the property at the time of the fire.”
The Court rejected the insured’s argument that the trial court misinterpreted Pennsylvania law — which governed under the policy’s choice-of-law provisions — when it held that “to qualify as a mortgagee in possession, a mortgagee need only obtain possession of the property from the mortgagor upon default with the mortgagor’s consent” because “a mortgagee qualifies as a mortgagee in possession if and only if it takes possession of and operates the property to recoup the defaulted loan.”
The Seventh Circuit reasoned that under Pennsylvania law, what matters is possession, not possession plus management and control of the property. “[O]nly if a mortgagee takes possession … do management and control come into play; the mortgagee’s operation of the property is not necessary otherwise.”
“The mortgagee’s right of actual possession lasts until the default is recovered. How the default is recovered does not drive possession. … Thus a mortgagee who exercises its right of actual possession upon default and moves to safeguard its security interest in the property still fits the definition of ‘mortgagee in possession.’”
The Court then turned to the fact question of whether the mortgagee had actual possession of the property when the fire occurred. “If not, then [the insurer] cannot invoke the policy’s exclusion for ‘mortgagees in possession.’”
The Seventh Circuit concluded that the trial court “jumped the gun” when it found that the mortgagee “indisputably possessed the property….” This is because “[u]nder Pennsylvania law, whether a party is a ‘possessor’ of land is treated as a question for the trier of fact.”
The Court reasoned that the trial court relied too heavily on the fact that the mortgagee had changed the locks, finding it significant that the mortgagee returned the deed in lieu to the mortgagors, never actually prevented them from accessing the property, and one of the mortgagors cut a deal with the City of Chicago to remedy the code violations after the mortgagee secured the property.
The Seventh Circuit concluded that “[t]ogether, these facts create a triable issue on who possessed, i.e., physically controlled, the laundromat — or at the very least, on whether [the mortgagee] possessed the property with the intent to exclude [the mortgagors] — at the time of the fire. Summary judgment, therefore, was premature.”
The Court, in closing, rejected the insurer’s final argument that the mortgagee cannot litigate the issue of coverage because it “conceded its premises liability under Illinois law by settling[,]” reasoning that “[s]ettlement does not create a judicial ruling. Nor does it vindicate a plaintiff’s theory of liability.”
“The notion that a party cannot litigate coverage after settling claims brought against it is not supported by the cases [the insurer] cites. Instead, those cases explain an insured can expect reimbursement of a settlement made ‘in reasonable anticipation of liability’ for covered damages, where the covered claim was the ‘primary focus’ of settlement. … Those items — anticipation of liability, coverage, and primary focus — are litigated regularly post-settlement.”
The trial court’s summary judgment was vacated and the case was remanded to resolve the factual disputes.
