Facts

The lawsuit arose out of a $37 million construction loan made by Central Pacific Bank (and participating lender Preferred Bank) (collectively, the "Bank") to finance the construction of a residential development on Tract No. 29843 in Hemet, California. Fidelity National Title Company (FNT) acted as the underwritten title company for the bank with respect to the original $35 million construction loan pursuant to written lenders closing instructions in 2006, as well as a loan modification in 2007. Fidelity National Title Insurance Co. (FNTIC) was the title insurer of the bank's deed of trust. The title insurance covered lots 1-120 on Tract No. 29843, excluding lots 121-125. Lots 121-125 were owned by someone other than PCG-Peppertree LP, the borrower.

In 2008, borrower PCG-Peppertree failed to repay the construction loan and abandoned the development with millions of dollars of mechanic's liens and stop notices arising from unpaid work performed by project contractors. Following PCG-Peppertree's abandonment, numerous lawsuits were filed against the Bank by sub-contractors and suppliers seeking to foreclose mechanic's liens and assert related causes of action. Following its default, PCG also informed the Bank that its deed of trust did not cover Lots 121-125. The Bank tendered the underlying mechanics lien actions to FNTIC in April 2008. The Bank also tendered a separate claim to FNTIC in July 2008 for coverage of Lots 121-125. FNTIC accepted the defense of the mechanics lien claims under a reservation of rights. In December 2008, FNTIC denied coverage as to Lots 121-125. FNTIC retained counsel to defend the Bank against mechanic's lien claimants, paying more than $1 million in attorneys' fees to defend the Bank in those cases. The insurer also paid approximately $700,000 under a reservation of rights to the mechanics to help settle the claims.

Plaintiff sought approximately $55 million from both defendants (Fidelity National Title Company and Fidelity National Title Ins. Company). Plaintiff sued for intentional fraud, fraudulent concealment, breach of fiduciary duties, bad faith, constructive fraud, reformation, negligent misrepresentation and two separate breach of contract causes of action.

PLAINTIFF'S CONTENTIONS:
In its complaint against Fidelity, in which the Bank sought recovery of the full amount of the loan, plus interest, attorneys' fees, receiver fees and punitive damages, in an amount exceeding $50 million, the Bank alleged that FNT breached the lenders closing instructions and its fiduciary duties, and fraudulently concealed information about Lots 121-125 from the Bank. "Had FNT complied with the escrow instructions and its fiduciary duties, it could not have closed the construction loan or the subsequent loan modification and could not have distributed the construction loan or the modification and disbursed the construction loan funds in the first instance," the Bank alleged. "FNT obtained a title insurance policy from its sister company, FNTIC. However, the policy did not satisfy the requirements of the escrow instructions. Moreover, FNTIC subsequently wrongfully denied insurance coverage under the policy that FNT did obtain, causing Central Pacific Bank further damages and forcing Central Pacific Bank to file this action to establish the existence of the title insurance that FNT was required to obtain." Among other things, the Bank alleged that FNT failed to attach an accurate legal description to the recordable documents or verify the accuracy of the legal description.

The Bank made claims for breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief, reformation of the scope of the title insurance policy, reformation of endorsements to the policy, breach of closing instructions, breach of fiduciary duty, negligence, fraud and negligent misrepresentation.

DEFENDANTS' CONTENTIONS:
In its trial brief, both Fidelity entities maintained that they did nothing wrong and the Bank's loss was due to its own actions. "Before making the loan the bank calculated that over the two-year course of the loan, PCG-Peppertree would construct and sell over 400 housing units, enabling it to repay the loan," Fidelity stated in its brief. "When the two years had passed, only 29 units had been built, only 13 sales of units had closed and at the end of the day, only seven units were inhabited. The property is strewn with construction defects, and the cost of fixing those defects, taken together with the drop in value of the property thanks to the real estate collapse, renders the entire Peppertree property literally worthless. Fidelity, of course, had nothing to do with any of these decisions or occurrences. The cause of the Bank's loss has nothing to do at all with Fidelity. Undaunted, however, the Bank -- with $37 million gone and a worthless property as security -- has fashioned its creative lawsuit to seek a bailout from Fidelity for its disastrous underwriting practices. The Bank tries to turn Fidelity into the super guarantor of all things related to property. The Bank's theories, its case and all of its causes of action fail." Fidelity noted that the Bank had retained outside lender's counsel to handle the loan and that FNT followed the Bank's counsel's lenders closing instructions, by attaching the proper legal description to the Bank's deed of trust. Fidelity also maintained that the legal description in the Preliminary Report in question clearly informed the Bank that only Lots 1-120 were going to be covered (this notwithstanding the bank's contention that the address line on the Preliminary Report, and APNs appearing on the report, allegedly provided otherwise). "After the borrower defaulted, the Bank asserted that it discovered for the first time that the legal description was missing lots 121-125," Fidelity stated. "And conveniently, only after this lawsuit was filed did the Bank inform Fidelity for the first time that it did not retain [its attorney] to make sure that the Bank had fully and properly secured its $35 million loan. If the Bank in fact limited [the attorney's] representation in this regard, it violated longstanding lending industry custom and practice. If it did not, then the Bank should have sued the law firm for malpractice. Yet the Bank claims it has no tolling agreement with the firm. A title officer follows instructions and he did just that. An attorney, as well as the Bank's in-house loan officers, are, pursuant to industry custom and practice, the ones who make sure the Bank has all of its collateral. The Bank and its counsel both failed miserably. All of the claims against FNT (breach of the closing instructions, negligence, breach of fiduciary duty and fraud) simply lack merit." Fidelity's trial brief further added, "In short, and at the end of the day, this is a case brought by a grossly negligent Bank and a team of clever attorneys, who will put forth any argument they think can possibly fly to cause Fidelity to bail out the Bank."

Damages

The Bank sought $55 million in damages.

Result

Fidelity received a complete defense verdict.

Deliberation

7 hours

Length

25 days