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Measure of Damages Under a Loan Policy: Healthcare Employees FCU v. GMAC Mortgage Corp

In April of 2003, GMAC enabled Armando Massimo to refinance the existing mortgage encumbering his property located in Bethlehem Township. It advanced $606,000, of which approximately $502,000 was applied to satisfy the existing mortgage in favor of SIB Ivy. The transaction was insured by Stewart Title Guaranty Company [“STG”] through its agent, Real Estate Escrow Company [REEC], which also acted as settlement agent. A closing service letter [“CSL”] was issued to GMAC covering certain closing-related conduct of REEC. Shortly after the closing, GMAC assigned its mortgage to Healthcare Employees Federal Credit Union [“HEFCU”].

Massimo defaulted in or about March 2005. A title search obtained for foreclosure purposes revealed that the GMAC mortgage (now held by HEFCU) was recorded on May 9, 2003. Unfortunately, it also disclosed that Massimo had made a mortgage in the face amount of $1,250,000 to Advantage Bank [“AB”] in November 2002, which was not recorded until April 2, 2003, or just over one month before the GMAC mortgage. A claim was tendered under the STG policy, and in response STG was successful in having AB’s mortgage equitably subordinated to the GMAC / HEFCU mortgage, but only up to $502,000, the sum which was applied to satisfy the SIB Ivy mortgage. Thus, the priority of the GMAC / HEFCU mortgage was split into two parts: the first $502,000 was in a first lien position, but the remaining $104,000 was in third position, with AB’s mortgage lien intervening. So, the GMAC / HEFUC mortgage lien was effectively reduced from $606,000 to $502,000. (For more information about the doctrine of equitable sub- ordination, see “Equitable Subordination Revisited: Sovereign Bank v. Gillis”, Title Talk No. 88 (Spring 2014).)

Massimo died in 2006. In Sept. 2008, HEFCU suit against GMAC, STG, REEC and Massimo’s estate. GMAC acquired title to the mortgaged property at a sheriff’s sale in Dec. 2008, and subsequently re-sold it for $384,000. In Oct. 2011, GMAC and STG filed cross-motions for summary judgment with respect to the calculation of damages allegedly owing to GMAC. The Law Division, in an unreported decision, awarded GMAC approximately $103,000, representing the portion of the mortgage that occupied third lien position. In addition, GMAC was awarded negligence-based damages of approximately $511,000.00.

On appeal, the Appellate Division affirmed the decision below in part, reversed in part, and remanded to the Law Division for re-calculation of damages. Healthcare Employees FCU v. GMAC Mortgage Corp, --- N.J Super. -- , 2014 WL 8264067 (App. Div. 2015). While acknowledging that GMAC had a valid claim arising under the policy against STG, the panel noted that (in general), there is no basis for an award of negligence damages against a title insurer, citing Walker Rogge v. Chelsea Title and Guaranty Co., 116 N.J. 517, 535 (1989). Rather, the insured must demonstrate that it has suffered a loss compensable under the policy. The court stated that damages under a title policy are determined by “the difference between the value of the property insured as it was with the defect insured against, and its value as it would have been if there had been no such defects”, quoting Appelman on Insurance, §5216 (1981). The Appellate Division also noted that the policy does not “guarantee either that the mortgaged premises are worth the amount of the mortgage note at the time the mortgage is [made], at the time of default, or at the time of foreclosure... .In addition, it does not cover consequential damages...”.

Had REEC timely filed a notice of settlement pursuant to N.J.S.A. 46:16A-1 et seq., it is possible that GMAC’s entire mortgage would have been in first position. However, its closing instructions did not require the agent to file same, or to perform a title continuation search, which could possibly have disclosed the existence of the AB mortgage. It merely required that its mortgage be insured as a first lien, and in fact it was so insured. Thus, GMAC could not recover damages under the CSL. Finally, the court adopted the rule of Morris v. Chelsea Title & Guar. Co., 12 N.J. Misc. 428 (Sup. Ct. 1934), which states that damages are calculated as of the date fixed or determined. In this case, that date was May 26, 2006, when the Chancery Division established the relative priorities of the GMAC and AB mortgage liens. On remand, damages were to be recalculated as of that date.

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