SUSIE MORGAN, District Judge.
The above-captioned matters, which were consolidated for purposes of discovery and trial,
1. During 2004, plaintiff First American Bank (the "Bank")
2. At the time it approached the Bank with its proposal, Titan had very little experience in management of a casino gambling business and virtually no experience in the operation of an ocean going vessel.
3. The Bank employed Carter Klein ("Mr. Klein") of Jenner & Block, LLP in Chicago as its legal counsel in connection with the loan.
4. In connection with its application for the loan, Titan presented the Bank with a March 31, 2004 survey of the Ocean Jewel prepared by Noble Denton Marine, Inc. ("Noble Denton") that appraised the vessel's value at the time at $25 million and projected the vessel's value would increase to $44.8 million when all repairs were complete.
5. On August 16, 2004, the Bank approved a loan of up to $18 million to Titan for its planned offshore gaming venture. The loan closed on October 14, 2004.
6. As collateral for the loan, the Bank was to receive preferred ship mortgages on all three vessels.
7. In researching the risks to which the Bank's ship mortgages might be subject, Mr. Klein came across plaintiff First American Transportation Title Insurance Company's ("FATTIC")
8. After reviewing FATTIC's website and other marketing materials, Mr. Klein contacted a FATTIC representative regarding the possibility of the Bank purchasing a vessel title insurance policy in connection with the loan to Titan. Mr. Klein was then referred to Victor Koock, FATTIC's general counsel, and Hughes Grahan, a New Orleans attorney retained by FATTIC. In arranging for the issuance of the title policies, Mr. Klein dealt primarily with Mr. Grahan.
9. As they worked to finalize their negotiations, Mr. Klein and Mr. Grahan negotiated three specific endorsements to the typical FATTIC policy.
10. On October 12, 2004, FATTIC issued to the Bank a commitment to insure the Ocean Jewel,
11. Also on October 12, 2004, FATTIC issued to the Bank a commitment to insure the Shuttles,
12. The three endorsements described above were added to both Policy No. 773 and Policy No. 778.
13. Subsequent to the issuance of Policy No. 773 and Policy No. 778, the Bank loaned an additional principal amount of $10 million, for a total principal amount loaned of $28 million.
14. Titan began its offshore gaming operation in December 2004, and, almost immediately, it became clear to all involved that Titan's business model would not work for a variety of reasons, some of which were the fault of Titan and some of which were not, but all of which meant the business was likely to fail from the start.
15. On August 1, 2005, Titan filed for reorganization under Chapter 11 of the United States Bankruptcy code.
16. As Titan careened toward bankruptcy, the Bank retained the services of Ronald Peterson and John Keller to represent it in connection with the bankruptcy proceeding and retained the services of Fred Caruso, a workout specialist, to advise the Bank on how to minimize the loss it would suffer on the loan as a result of Titan's failed business.
17. After consultations with Mr. Caruso, the Bank decided to provide debtor-in-possession ("DIP") financing to Titan to allow it to continue operation during the pendency of the bankruptcy.
18. Between August 1, 2005 and October 14, 2005, the Bank advanced a total of $1,420,382 to Titan as DIP financing.
19. Meanwhile, shortly after Titan filed for bankruptcy but before Titan ceased business operations, the Bank had all three vessels appraised by Norman Dufour, a qualified marine surveyor and appraiser. Mr. Dufour concluded that, as of August 1, 2005, the Ocean Jewel had a fair market value of $10.8 million, an orderly liquidation value of $6 million, and a forced liquidation value of $2 million.
20. On December 22, 2005, the Titan bankruptcy estate moved to sell most of its assets, save the Emerald Express,
21. Before the sale could be consummated, however, the Sapphire Express sank at her moorings on January 24, 2006 while docked at Tampa Bay Shipbuilding & Repair Company ("Tampa Bay Shipbuilding") in Tampa, Florida.
22. Yamashiro, Titan's estate, the Bank, and FATTIC re-negotiated the sale price for the Titan assets and determined that a $500,000 reduction in the total price would appropriately account for the fact that the Sapphire Express was no longer a part of the sale.
23. On May 3, 2006, the Titan estate moved to abandon the sunken Sapphire Express, which neither FATTIC nor the Bank opposed.
24. On January 19, 2006, Titan's estate moved to abandon the Emerald Express.
25. At the time of the abandonment, the Emerald Express' engines had already been removed from the vessel and sent to Carey Diesel in Delaware to be rebuilt.
26. Approximately eighteen months after it was abandoned in the bankruptcy proceeding, Eastern Shipbuilding had the hull of the Emerald Express arrested and purchased it, free and clear, at an admiralty Marshal's sale held on August 13, 2007 for a credit bid of $10,000.
27. The Bank realized nothing from the Marshal's sale of either shuttle.
28. On or about September 2, 2005, the Bank (through counsel John Keller) gave formal written notice to FATTIC that it was asserting a claim under the Policies with respect the Ocean Jewel and both the Shuttles.
29. On or about September 28, 2005, the Bank (again through Mr. Keller) submitted additional documentation and information as requested by FATTIC in connection with the Bank's claims under the Policies.
30. Upon receiving the Bank's claim, FATTIC retained the services of David Reeves, of the Florida law firm of Moseley, Prichard, Knight & Jones,
31. Pursuant to the policies, FATTIC was required to provide the Bank with counsel, chosen by FATTIC and at FATTIC's cost, to defend against claims by third parties adverse to the Bank's insured preferred mortgage.
32. After he was retained by FATTIC for the Bank, Mr. Reeves promptly began investigating and reviewing all liens asserted against the Ocean Jewel and the Shuttles in the bankruptcy proceeding, including PDS' lien against the Ocean Jewel and the liens asserted by Eastern Shipbuilding and Gear Services against the Emerald Express. Mr. Reeves prepared spreadsheets summarizing the liens asserted against each of the three vessels.
33. On August 25, 2006, the Bank submitted a preliminary statement of claim to FATTIC.
34. On September 21, 2006, Mr. Hull responded to the Bank's preliminary statement of claim as follows:
35. Mr. Hull also noted Mr. Reeves was still in the process of defending the claims for insured necessaries liens against the Ocean Jewel.
36. On May 8, 2007, FATTIC tendered a payment of $1,162,287 to the Bank, contending that amount constituted the entirety of the Bank's insured loss under the terms of Policy No. 773.
37. On October 12, 2006, Mr. Hull responded to the Bank's claims with regard to the Shuttles.
38. On July 23, 2007, the Bank submitted a revised proof of claim to FATTIC.
39. On December 15, 2006, the Bank filed suit against FATTIC with respect to the Shuttles after FATTIC refused to pay anything above the amounts paid to Tampa Bay Shipbuilding and Eastern Shipbuilding, respectively, in the foreclosure sales.
40. In its complaint, the Bank provided a brief recap of the complicated factual and procedural history of this case and asserted a claim against FATTIC for breach of contract in connection with Policy No. 778, stating that, under the Policy, FATTIC was obligated to pay for "all losses suffered by the Bank as a result of the existence of the Necessaries liens" asserted against the Shuttles.
41. After several months of litigation in connection with the Bank's Shuttles claims, FATTIC filed a motion for partial summary judgment, seeking a judgment as a matter of law "that the measure of indemnity recoverable by the Bank under the title insurance policy is the amount, if any, that the Bank's recovery on its mortgages has been or will be reduced by payments to the holders of priming necessaries liens, but nothing more."
42. On September 20, 2007, Judge Africk
43. While Judge Africk's order regarding FATTIC's motion for partial summary judgment in the Shuttles litigation was pending before the Fifth Circuit, the Bank filed another lawsuit against FATTIC, this time in regards to FATTIC's handling of the Bank's claim under the Ocean Jewel Policy.
44. On October 14, 2009, the Fifth Circuit affirmed in part and reversed in part Judge Africk's ruling with respect to the Shuttles and remanded the case back to the trial court for further proceedings. See First Am. Bank v. First Am. Transp. Title Ins. Co., 585 F.3d 833, 839 (5th Cir. 2009). The Fifth Circuit affirmed Judge Africk's holding that, as a matter of law, the Bank's recovery under Policy No. 778 is limited only to "actual loss or damage," thus precluding the Bank from recovering any consequential damages. Id. at 837-38. The Fifth Circuit reversed Judge Africk's decision with regard to the measure of the Bank's loss with respect to the Shuttles, however, stating that while it agreed that "FATTIC's liability under the [Shuttles] Policy is limited to the difference between the value of [the Bank's ship mortgages when unencumbered and the value of [the Bank's] mortgages subject to the necessaries liens . . . the district court erroneously confined the loss in value suffered by [the Bank] solely to the amounts bid at foreclosure sale of [the Shuttles]," when it should have considered "all other relevant information when valuing loss under a title insurance policy." Id. Accordingly, the Fifth Circuit held that, because the "determination of the value of [the Bank's] unencumbered ship mortgages and the value of the mortgages subject to the necessaries liens raises genuine issues of material fact based upon any appraisals, the foreclosure proceeds, and other market data," Judge Africk's decision to grant summary judgment in FATTIC's favor was incorrect. Id. The Fifth Circuit remanded the case for resolution of those fact issues and for "the determination of the proper date of valuation" of the Bank's insured loss, if any. Id.
45. Once the Shuttles litigation returned to Judge Africk's trial docket, the stays in the Shuttles litigation and the Ocean Jewel litigation were lifted, the two cases were consolidated, and both cases were set for trial.
46. As a part of this discovery process, the Bank noticed the deposition of Scott Colemere, an Eastern Shipbuilding employee, regarding the fate of the Emerald Express after Eastern Shipbuilding purchased the vessel at the Marshal's Sale on September 5, 2007.
47. Having been informed that the Emerald Express had been re-sold in 2009 for substantially more than it was sold at the 2007 Marshal's Sale, FATTIC determined that Eastern Shipbuilding's net proceeds from the January 2009 sale of the Emerald Express represented the fair market value that should be used to determine the difference in the Bank's mortgage on the vessel when unencumbered and the value of the mortgage subject to necessaries liens. FATTIC took the position that, since the fair market value exceeded the amount of the necessaries liens, the difference constituted the Bank's insured loss in connection with the Emerald Express.
48. On June 1, 2010, FATTIC tendered an unconditional payment to the Bank for $450,139.50 under the Shuttles Policy for the Emerald Express.
49. The parties also took further discovery regarding the Sapphire Express. At the time, the last the parties knew of the vessel's fate was that Tampa Bay Shipbuilding had submitted a winning credit bid in October 2006, and Mr. Hull had made the decision that the entire amount of Tampa Bay Shipbuilding's credit bid was comprised of uninsured superpriority claims. After further discovery, FATTIC learned that on February 8, 2007, Tampa Bay Shipbuilding sold the vessel to Moon Lake Holdings (Panama), Inc. ("Moon Lake") for $350,000, and that Moon Lake resold the vessel that same day to Fjellstrand AS (the shipyard that had originally built the vessel) for $500,000.
50. Mr. Hull also learned that, of the $99,227.38 winning credit bid price submitted by Tampa Bay Shipbuilding, only $88,712 was for superpriority claims and the remaining $10,515.38 was for pre-bankruptcy petition necessaries charges.
51. On June 11, 2010, FATTIC made an unconditional payment to the Bank of $10,515.38 under the Shuttles Policy for the Sapphire Express.
52. On May 25, 2010, FATTIC filed another motion for summary judgment, this time in connection with the Bank's claim against FATTIC regarding the Ocean Jewel.
53. After FATTIC's second motion for summary judgment was denied and these consolidated cases were transferred to Section E of this Court, the cases were tried before the Court, sitting without a jury, from October 22, 2012 to October 24, 2012. In its case-in-chief, the Bank called Robert Hull; John Keller; Victor Koock; Fred Caruso, an expert in the fields of financial analysis, corporate restructuring, and the winding down of companies; Norman Dufour, an expert in the field of marine vessel surveying and appraisal; and George Panzeca, an expert in the fields of accounting and forensic accounting. In its case-in-chief, FATTIC called David Reeves; and Charles "Chuck" Hansen, an expert in the fields of real property transactions, secured lending, and title insurance. In addition, the following depositions were jointly introduced into evidence in lieu of live testimony: Carter Klein,
1. The Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 1332, as the parties are completely diverse and the amount in controversy, exclusive of interest and costs, exceeds $75,000. Pursuant to the terms of the two policies, venue is proper in this Court.
2. The Ocean Jewel Policy
3. Both policies explicitly provide that Louisiana law applies to disputes arising thereunder.
4. In its opinion reviewing Judge Africk's grant of summary judgment in FATTIC's favor in connection with the Shuttles litigation, the Fifth Circuit summarized the basic tenets of Louisiana insurance law as follows:
5. Because vessel title insurance is rare, cases from Louisiana and elsewhere applying land title insurance law are relevant to the Court's analysis.
6. The parties agree Section 7(a)(iii) of the policies provides the appropriate method for measuring FATTIC's liability to the Bank, if any, under the two policies. The parties do not agree, however, on the practical application of Section 7(a)(iii) to the facts of this case. The parties disagree on the relevant dates for determination of the difference in value of the Bank's title as insured and the value of the title subject to insured necessaries liens. The date the difference in the values is determined is important because the difference between the two values is the amount FATTIC owes on the policies. The Court will address the parties' arguments with respect to the determination of the date of valuation insofar as it affects the difference in values first, followed by the arguments with respect to the difference in values in this case and the measure of FATTIC's liability.
7. The Bank argues the policies are ambiguous as to the date of valuation of its loss under Section 7(a)(iii). The Bank argues the appropriate date of valuation of its title, as insured, is August 2005, which is the date Titan filed for bankruptcy and the date the necessaries liens asserted against the vessels were "discovered." In support of this argument, the Bank relies on two treatises, D. DARLOW BURKE, THE LAW OF TITLE INSURANCE (Aspen Law & Business, 3d Ed. 2000) ("Burke") and JOYCE D. PALOMAR, TITLE INSURANCE LAW (Thomson Reuters 2011-2012 Ed.) ("Palomar"), both of which state that, in the context of land title insurance, the date of valuation should be determined in a way that places the risk of loss on the insurer once the insurer takes control of the handling of the insured defects because the insurer's handling of the insured title defects could adversely affect the measure of the insured's loss. See Palomar at § 10:16 (explaining that while the 1992 ALTA land title policy form, from which the FATTIC policies are derived, does not provide a date of valuation, ALTA recognized this problem and ALTA's 2006 loan policy form now gives the insured lender the option of using "either the property's value on the date the insured makes a claim or the property's value on the date that claim is settled and paid"); Burke at § 7.04 (explaining that when the insurer takes control of the handling, defense, and resolution of lien claims, the insured should not be required to bear the risk associated with the insurer's control of the claim starting the moment the title defect is discovered).
8. Essentially, the Bank argues it should not be punished for FATTIC's exercise of its right to spend time and money defending liens asserted against the vessel before the vessels could be sold. The Bank argues its loss should be measured as of the moment the title defect became apparent in August 2005.
9. FATTIC agrees the date of valuation of the vessels is relevant for some purposes.
10. With respect to the Ocean Jewel and the Sapphire Express, FATTIC avers the appropriate date for determining its liability is the dates the vessels were sold — February 2006 for the Ocean Jewel and October 2006 for the Sapphire Express — because those vessels were sold for fair market value and thus the amounts paid at judicial sale should be used to determine the impairment of the Bank's mortgages on those vessels due to insured-against necessaries liens.
11. With respect to the Emerald Express, FATTIC contends the January 2009 $445,137.50 net resale price of the vessel, rather than the $10,000 paid at the September 2007 judicial sale, should be used to determine the amount by which the Bank's mortgage was impaired due to insured-against necessaries liens.
12. The Bank contends that Section 7(a)(iii) applies in the same manner to both the Ocean Jewel claim and the Shuttles claim, and that for all three vessels, the "insured loss for each mortgage is measured by the difference between the unencumbered fair market value of the vessel and the value of the vessel as encumbered."
13. The Bank contends Mr. Dufour's appraisals of the three vessels, in which he offered his expert opinion on the fair market values of the vessels as of early August 2005, provide the starting point for the Court's calculation of the Bank's loss.
14. For the Ocean Jewel, the Bank argues its loss is measured by subtracting the $4,172,215 the Bank received as a result of the bankruptcy sale of the vessel from the $10.8 million appraised fair market value of the vessel as of August 2005. Thus, the Bank argues FATTIC's tender of $1,162,287 was $5,465,498 short.
15. For the Emerald Express, the Bank argues its insured loss is the $500,000 Eastern Shipyard received as a result of the sale of the hull to Petroa, and thus FATTIC's tender of $450,139.50 was $49,860.50 short.
16. For the Sapphire Express, the Bank argues that, because it received nothing as a result of any of the sales of the vessel, its loss equals the $2 million August 2005 appraised fair market value of the vessel, and thus FATTIC's tender of $10,515.38 was $1,989,484.70 short.
17. In total, the Bank calculates its insured loss on the mortgages as $7,884,893.20.
18. With respect to the measure of the Bank's insured loss, FATTIC contends the "application of Section 7(a)(iii) varies depending upon whether the [judicial] sale price of the collateral exceeds the total amount of the liens priming the insured mortgage, such that the insured lender receives some return on the collateral."
19. FATTIC contends its liability to the Bank in connection with the Ocean Jewel, the sale of which resulted in the Bank receiving some return on its collateral and for which the Bank's return was reduced by payments to holders of insured priming necessaries liens, is measured under Section 7(a)(iii) by determining the extent to which the lender's security is impaired by the covered defect. As explained above, on the date the vessel was sold, the amount of necessaries liens asserted against the Ocean Jewel was $1,162,827.02. As a result, with respect to the Ocean Jewel, FATTIC maintains under Section 7(a)(iii) that its liability to the Bank is $1,162,287.02 — the final amount in necessaries liens paid to holders of necessaries liens and thus carved out of the Bank's recovery from the sale of the vessel — because its only duty as title insurer is to place the insured in the same position as if the Bank's priority had not been defeated by the necessaries liens.
20. Because it has already tendered $1,162,287.02 to the Bank in connection with the claim on the Ocean Jewel, FATTIC argues it has fulfilled its obligation under the Ocean Jewel Policy.
21. With respect to the Sapphire Express, the Marshal's sale did not result in the Bank receiving any return on its collateral. The amount of Tampa Bay Shipbuilding's necessaries liens claim was $10,515.38. The amount of Tampa Bay Shipbuilding's superpriority claims was $88,712. The total amount of necessaries liens asserted against the vessel was $824,311.51. FATTIC contends it correctly counted only the insured necessaries liens portion of Tampa Bay Shipbuilding's claim against the vessel as an insured loss under Section 7(a)(iii), as that amount represents an amount the Bank would have recovered in a sale for fair market value but for the insured-against necessaries liens. FATTIC contends Tampa Bay Shipbuilding's superpriority claims were not insured.
22. With respect to the Emerald Express, the Marshal's sale did not result in the Bank receiving any return on its collateral. The amount of Eastern Shipbuilding's necessaries lien claim was $597,352.72 and the total amount of necessaries liens asserted against the vessel was $813,061.11. FATTIC contends it correctly counted the $445,137.50 in net proceeds from the January 2009 resale of the hull as an insured loss under Section 7(a)(iii), as that amount represents an amount the Bank would have recovered in a sale for fair market value but for the insured-against necessaries liens.
23. Because it has already tendered $10,515.38 to the Bank in connection with the claim on the Sapphire Express and $450,139.50 to the Bank in connection with the Emerald Express, FATTIC argues it has fulfilled its obligations to the Bank under the terms of the Shuttles Policy.
24. The Fifth Circuit remanded this case "for the determination of the proper date of valuation" as this date is relevant to the Court's loss valuation. First Am. Bank, 585 F.3d at 838.
25. The Court finds the policies are not ambiguous, as there is only one reasonable interpretation of the Section 7(a)(iii) with respect to the date of valuation and FATTIC's liability. See, e.g., First Am. Bank, 585 F.3d at 837; see also In re Liljeberg Enterprises, Inc., 304 F.3d 410, 439-440 (5th Cir. 2002) ("[u]nder Louisiana law, a contract is ambiguous when it is uncertain as to the parties' intentions and susceptible to more than one reasonable meaning under the circumstances and after applying established rules of construction. . . . when the words of the contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent") (citations, quotation marks, and footnotes omitted).
26. The Court finds the policies clearly provide the difference in value of the vessels encumbered and unencumbered must be measured as of the dates the vessels were sold at judicial sale.
27. The difference must be measured on the date of judicial sale because this is the date on which the Court can determine with certainty the amount of the Bank's insured loss as a result of insured-against necessaries liens.
28. The Court's holding that the Bank's loss must be measured as of the date of judicial sale is supported by the majority of cases addressing the issue. See, e.g., First Internet Bank of Ind. v. Lawyers Title Ins. Co., No. 07-869, 2009 WL 2092782, at *6 (S.D. Ind. 2009) (when interpreting a title insurance policy insuring against loss of priority, which policy measures the insured's loss as "the difference between the value of the insured estate or interest as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy," and noting that courts have reached "mixed results" on the issue of the proper date of valuation, "[t]he better reasoned cases have. . . determined loss in a lender's title insurance policy at the date of foreclosure."); see also Associated Bank, N.A. v. Stewart Title Guar. Co., 2012 WL 3067895, at *5 (D. Minn. 2012) ("[T]he majority of courts considering the [date of valuation] issue have held that such loss cannot be measured until the note has been repaid and the security for the mortgage is shown to be inadequate . . . The majority view comports with the nature of a title insurance policy."); Marble Bank v. Commonwealth Land Title Ins. Co., 914 F.Supp. 1252 (E.D.N.C. 1996) ("Since a lender suffers loss only if the note is not repaid, the discovery of an insured-against lien does not trigger recognition of that loss. Further, even though the lender's note is in default, an anticipated loss cannot be measured until completion of foreclosure because only then is there certainty the lender will not be paid in full. Consequently, it is clear that in the typical case the earliest a loss can be claimed on a lender's policy is at the time of completion of foreclosure."); Karl v. Commonwealth Land Title Ins. Co., 24 Cal.Rptr.2d 912, 919-20 (Cal. App. 1993) ("in the typical case the earliest a loss can be claimed on a lender's policy is at the time of completion of foreclosure"); Hodas v. First American Title Ins. Co., 696 A.2d 1095, 1097 (Me. 1997) ("The presence of a title defect immediately results in a loss to the holder of a fee interest since resale value will always reflect the cost of removing the defect. In contrast, the holder of a loan policy incurs a loss only if the security for the loan proves inadequate to pay off the underlying insured debt due to the presence of undisclosed defects."); Blackhawk Prod. Credit Ass'n v. Chi. Title Ins. Co., 423 N.W.2d 521, 525 (Wis. 1988) (a mortgagee's insured loss is sustained only if the "mortgagee's debt is not repaid and the security for the mortgage proves inadequate," so the loss must be measured as of that date).
29. Indeed, as the court in First Internet Bank recognized when faced with essentially the same issue as is presented in this case — the date of valuation of a mortgagee's loss under a title insurance policy when the priority of the mortgage is overtaken by another lien, a scenario for which the policy provides insurance — the date of loss for a lender is measured differently than it would be for an owner of the property, because there is no way of knowing the extent, if any, of the lender's loss until the date the property is actually sold.
30. The Court agrees with the First Internet Bank court that, for a mortgagee such as the Bank, using the date the defect is discovered instead of the date the property against which the insured against liens are asserted is sold would "necessarily require speculation and estimation about the value of the property before it is even certain whether the lender will suffer a loss," and because using the date of foreclosure as the date of valuation "provides a value and loss amount based on a real transaction," the dates of the bankruptcy/foreclosure sales are the most appropriate dates for valuing the Bank's losses as a result of the liens asserted against the vessels. 2009 WL 2092782, at *6. Despite the Bank's protestations to the contrary, using the date of sale as the date of valuation "does not systematically favor the insurer or the lender," because, in the end, "[m]arket conditions determine which party benefits from the date-of-foreclosure rule." Id.
31. The Court also notes that defense expert Chuck Hansen explained this is the "general industry approach" to determine the appropriate date for valuation of an insured lender's loss.
32. The Court specifically rejects the Bank's date of valuation theory calling for the Bank's losses, which were not suffered in any determinable way until the vessels were sold, to be measured using out-of-date appraised fair market values that were obsolete at the time of the judicial sales. All relevant information must be considered in determining the unencumbered value of the vessel on the date of sale, but using an out-of-context, outdated appraisal done years earlier would yield the kind of absurd result Louisiana law explicitly disallows.
33. Having determined the appropriate dates of valuation of the Bank's losses on its mortgages due to insured-against necessaries liens, the Court now turns to the calculation of those losses, if any, taking into consideration all relevant information as to the value of the Bank's mortgages as insured at the relevant times.
34. The measure of the Bank's insured loss under Section 7(a)(iii) is clear and unambiguous. FATTIC's liability under Section 7(a)(iii) is "limited to the difference between the value of [the Bank's] ship mortgages when unencumbered and the value of [the Bank's] ship mortgages subject to the necessaries liens."
35. Stated another way, Section 7(a)(iii) provides that FATTIC is liable to the Bank to the extent the value of the Bank's mortgages was impaired by the existence of insured-against necessaries liens because those liens were given priority over the Bank's mortgages. Whatever other losses the Bank suffered as a result of Titan's business failures — including the fact that the vessels were sold for substantially reduced prices — is the Bank's issue, not FATTIC's, and FATTIC is not responsible for putting the Bank back in the same position it would have been in had Titan's business not failed.
36. As explained in the Fifth Circuit's opinion in this case, under Louisiana law, when valuing an insured loss in the context of a title insurance policy, the Court is required to take into account not only the price for which the property subject to the mortgage was sold at foreclosure or bankruptcy sale, but also any other available relevant information relative to the collateral's true value as of the date of the sale. See First Am. Bank, 585 F.3d at 838 (citing Volunteer State Life Insurance Co. v. Union Title Guarantee Co., 143 So. 43, 44 (La. 1932)). The Fifth Circuit specifically mentions appraisals and "other market data" as indicative of the kinds of "other information" the Court should consider in connection with the Shuttles. Id. (directing the Court to consider "all . . . relevant information when valuing loss under a title insurance policy," including "appraisals, the foreclosure proceeds, and other market data"). The Fifth Circuit's opinion is binding on this Court's determination of the measure of the Bank's insured loss in connection with both mortgages.
37. With respect to the Ocean Jewel, the Court finds, after considering all available information relative to the difference in the value of the Bank's mortgage as unencumbered and its value as encumbered on February 17, 2006,
38. The evidence at trial clearly demonstrates the Ocean Jewel was sold at a bankruptcy sale for a price substantially lower than Mr. Dufour estimated the vessel would sell for under ideal market conditions. That reduction in the vessel's value was brought on by Titan's abysmal business performance and by the passage of time, not by the fact that FATTIC decided to defend against liens asserted against the vessel as it was entitled to do. By its express terms, the Ocean Jewel Policy gave FATTIC the right to defend against liens that could affect the Bank's mortgage. The same policy also states that while any such litigation is pending, FATTIC has "no liability for loss or damage." FATTIC cannot be punished for exercising its right, and the Court finds that FATTIC exercised this right diligently and as efficiently as possible under the circumstances.
39. For the record, the Court notes that it considered all relevant evidence of difference in the value of the Bank's Ocean Jewel mortgage as unencumbered and the value of the mortgage as encumbered on the date of the foreclosure sale. See First Am. Bank, 585 F.3d at 838; Volunteer State Life, 143 So. at 44.
40. The Court does not consider the March 2004 appraisal done by Noble Denton or the August 2005 appraisal done by Mr. Dufour to be relevant in its analysis of the Bank's insured loss in February 2006. The price for which the Ocean Jewel was sold in February 2006 was a true indication of the vessel's value, and the value of the Bank's mortgage on the vessel, as of that date. There is nothing in the record supporting the Bank's assertion that, on the relevant date, the vessel was worth the amounts quoted in either appraisal, both of which were done well in advance of the vessel's sale.
41. With respect to the Emerald Express, the Court finds, after considering all available information relative to the difference in the value of the Bank's mortgage as insured and its value as encumbered on August 13, 2007,
42. Even though the vessel was sold in 2007 for $10,000, the Court considered the fact that the vessel's hull was eventually re-sold for a net recovery of $445,137.50 which indicates the Bank's mortgage's true value as of August 2007 was $445,137.50, and not $10,000. The Court finds the January 2009 net recovery price more probative of the value of the Bank's mortgage on the Emerald Express than the August 2007 foreclosure sale price. Because the Bank did not receive any funds as a result of the sale or resale of the Emerald Express' hull, the entire $445,137.50 represents the amount of the impairment of the Bank's title as a result of insured-against necessaries liens and thus the total amount of the Bank's insured loss.
43. For the record, the Court notes that it considered all available relevant evidence as to the value of the Bank's Shuttles mortgage in reaching this conclusion. See First Am. Bank, 585 F.3d at 838; Volunteer State Life, 143 So. at 44.
44. The Court did not consider Mr. Dufour's appraisal of the Emerald Express' hull for the same reason it did not consider Mr. Dufour's appraisal of the Ocean Jewel; those appraisals simply are not relevant because they were done too far in advance of either sale and under significantly different circumstances.
45. Moreover, the Court rejects the Bank's contention that it suffered an insured loss on its Shuttles mortgage in connection with those components of the Emerald Express that were removed from the vessel well in advance of the August 2007 foreclosure sale and which no party expressed any intention of re-installing on the vessel.
46. The district court in Stewart & Stevenson Services, Inc. v. M/V CHRIS WAY MACMILLAN, 890 F.Supp. 552 (N.D. Miss. 1995), stated governing principles relevant to this case: (1) "components of a vessel, even though readily removable, which are essential either for her general navigation or for the specific voyage upon which she is embarked become a part of the vessel itself and thus constitute appurtenances or apparel of the vessel"; (2) "an item of equipment need not be aboard the vessel in order to be an appurtenance of the vessel"; and (3) the determination of whether equipment that has been removed from a vessel remains an appurtenance depends upon the intention of the parties. Id. at 561-64.
47. The evidence in this case clearly demonstrates the Emerald Express' gearboxes, engines, and jet drives had been removed from the vessel well before the vessel was sold in 2007; indeed, the evidence shows the component parts were removed even before Titan filed for bankruptcy in 2005. Furthermore, while the Court recognizes that equipment need not be physically onboard a vessel to be considered an appurtenance, there was no evidence whatsoever presented at trial that either party had any intention of re-installing those parts on the vessel at any time, even when the hull was resold in August 2009.
48. Accordingly, the Court agrees with FATTIC that by the time the vessel was sold in 2007, the parts were no longer considered appurtenances of the Emerald Express, and thus those parts were not subject to the Bank's mortgage. FATTIC owes no obligation to the Bank for losses suffered by the Bank unrelated to the insured mortgage.
49. Because it paid in full the amounts owed to the Bank to reimburse the Bank's insured losses in connection with the Emerald Express mortgage,
50. With respect to the Sapphire Express, the Court finds the Sapphire Express' February 2007 resale price is more probative of the vessel's true value at the time of judicial sale than the price for which it was sold to Tampa Bay Shipbuilding by credit bid in October 2006.
51. As a result, the Court finds the true value of the vessel on October 11, 2006 was $500,000.
52. The Court notes for the record that it considered all available relevant evidence as to the value of the Bank's Shuttles mortgage on the date the Sapphire Express was sold by judicial sale in reaching this conclusion. See First Am. Bank, 585 F.3d at 838; Volunteer State Life, 143 So. at 44. The Court does not consider Mr. Conroy's or Dufour's appraisals to be relevant because they were done too far in advance of the sale and under different circumstances.
53. The Court also finds, after considering all available information relative to the difference in the value of the Bank's mortgage as insured and as encumbered on October 11, 2006, the value of the Bank's mortgage as insured was $411,288. Because the Bank did not receive any funds as a result of the sale or resale of the Sapphire Express, this amount represents the impairment of the Bank's title as a result of insured-against necessaries liens and thus the total amount of the Bank's insured loss.
54. As explained earlier, $88,712 of Tampa Bay Shipbuilding's $99,227.38 credit bid was designated as superpriority claims by the bankruptcy court.
55. Section 2(d) of the Shuttles Policy expressly excludes from coverage "[d]efects, liens, [and] encumbrances . . . attaching or created subsequent" to the Shuttles Policy's effective date.
56. Because the superpriority claims were created by the court, not by statute, and because they arose after the effective date of the Shuttles Policy, they are excluded from coverage. Mr. Hull correctly determined FATTIC did not owe the Bank anything in connection with the $88,712 worth of superpriority claims asserted by Tampa Bay Shipbuilding against the Sapphire Express.
57. After subtracting out the $88,712 in superpriority claims asserted by Tampa Bay Shipbuilding from the $500,000 price for which the Sapphire Express resold in February 2007, $411,288 is the amount by which the Bank's mortgage was impaired as a result of necessaries liens asserted against the vessel. To date, FATTIC has paid only $10,515.38 of this amount.
58. Because it paid less than the full amount owed to the Bank to reimburse the Bank's insured losses in connection with the Sapphire Express mortgage, FATTIC did not do everything it was required to do, and did not pay everything it was required to pay, under the terms of the Shuttles Policy with respect to the Sapphire Express. Pursuant to the Shuttles Policy, FATTIC still owes the Bank $400,772.62 in connection with the Sapphire Express.
59. In addition to its claim that FATTIC has yet to reimburse the Bank $7,884,893.20 in insured losses in connection with the Ocean Jewel and Shuttles mortgages, the Bank also seeks $3,482,383 in "vessel preservation" costs and $786,710 in costs expended by the Bank "to preserve the lien of its mortgage under the title policies."
60. FATTIC argues Section 8(d) is not actually an insuring clause, but instead a provision limiting the amount for which FATTIC can be held responsible under the policies under the applicable Section 7 differential calculation. FATTIC reads Section 8(d) as increasing FATTIC's limit of liability under certain circumstances, but that such an increase does not come into play unless the Bank is able to show that it suffered an actual loss or damage as a result of a covered risk. According to FATTIC, Section 8(d) does not add any more covered risks to the Policy and, because neither the Bank's preservation expenses nor its professional fees were incurred as a result of an enumerated covered risk, the Bank is not entitled to reimbursement for those costs and expenses.
61. As the Fifth Circuit noted in its opinion in this case, well-settled Louisiana law requires the provisions in the FATTIC policies "be interpreted in light of the other provisions so that each is given the meaning suggested by the contract[s] as a whole." First Am. Bank, 585 F.3d at 837. In addition, the Fifth Circuit stated, as with any insurance policy, the FATTIC policies "should not be interpreted in an unreasonable or strained manner so as to enlarge or to restrict [their] provisions beyond what is reasonably contemplated by [their] terms or so as to achieve an absurd conclusion." Id.
62. The Court agrees with FATTIC on this issue. Section 8(d) does not obligate FATTIC to reimburse the Bank for the more than $4 million in preservation costs and attorney's fees the Bank incurred between the date Titan filed for bankruptcy and the dates the vessels were sold.
63. These expenses were not incurred as a result of the necessaries liens. The expenses incurred by the Bank as a part of its efforts to keep the Titan gambling operation afloat, and to maximize the value of its collateral, are not losses or damage due to insured defects in the Bank's title.
64. Instead, those expenses were incurred by the Bank due to Titan's abysmal business performance, which led to a rapid decline in the value of the vessels and their eventual sale at substantially reduced prices.
65. The mere existence of necessaries liens asserted against the vessels was not the cause of Titan's downfall, nor were those liens the reason the Bank decided to incur the costs and expenses for which it now seeks reimbursement. Section 8(d) does not expand FATTIC's liability to the Bank to include all preservation and holding expenses. It serves only to set a limitation on FATTIC's aggregate liability to the Bank in the event such expenses are incurred as a result of a covered risk. Because the evidence at trial clearly shows FATTIC's expenses were not incurred as a result of insured necessaries liens, Section 8(d) does not apply.
66. As a result, the Bank is not entitled to recover anything from FATTIC pursuant to Section 8(d) in connection with the professional fees and preservation expenses it incurred relative to the Ocean Jewel, the Emerald Express, and the Sapphire Express.
67. Finally, the Court turns to the Bank's claims that FATTIC acted in bad faith and breached its duties as an insurer, thus rendering FATTIC liable to the Bank for various penalties pursuant to Louisiana Revised Statute 22:1892
68. In Levy Gardens, the Fifth Circuit explained the elements of a bad faith claim asserted under these two statutes as follows:
Levy Gardens, 706 F.3d at 634-35. "Whether or not a refusal to pay is arbitrary, capricious, or without probable cause depends on the facts known to the insurer at the time of its action. . . . Because the question is essentially a factual issue, the trial court's finding should not be disturbed on appeal absent manifest error." Id. at 635 (quoting Reed v. State Farm Mut. Auto. Ins. Co., 03-107; (La. 10/21/03); 857 So.2d 1012, 1021). Because penalty statutes such as these are penal in nature, they are strictly construed. See, e.g., Guillory v. Lee, 09-75 (La. 6/26/09); 16 So.3d 1104, 1130.
69. Because the Court has found FATTIC fulfilled most of its obligations under the policies to the Bank, and that it did so in as timely a fashion as could be expected in a case as complex as this, the Court finds there is no factual basis for the Bank's claims for penalties under either of the Louisiana insurance penalty statutes.
70. FATTIC timely adjusted the Bank's Ocean Jewel claim and, once the final amount due to the Bank became clear, FATTIC paid that amount in a timely fashion.
71. With respect to the Shuttles, FATTIC's initial assertion that it owed nothing to the Bank in connection with either vessel, while ultimately incorrect, was not unreasonable, arbitrary, or capricious. Levy Gardens, 706 F.3d at 635; see also Rainbow USA, Inc. v. Nutmeg Ins. Co., 612 F.Supp.2d 716, 732 (E.D. La. 2009) (under Louisiana law, "[a]n insurer that has a reasonable basis for denying coverage or reasonable doubts as to whether coverage applies does not act in bad faith; indeed, such an insurer `has the right to litigate . . . questionable claims without being subjected to damages and penalties.'") (quoting Clark v. McNabb, 04-5 (La. App. 3 Cir. 5/19/04); 878 So.2d 677, 684).
72. Indeed, once it became clear that the Bank did, in fact, suffer an insured loss in connection with Emerald Express, FATTIC timely tendered a check to the Bank covering that insured loss in its entirety.
73. While FATTIC's conduct with respect to the Bank's Sapphire Express claim presents a bit of a closer call, the Court nevertheless finds FATTIC's conduct did not rise to the level of being arbitrary and capricious. FATTIC had a reasonable basis to defend against the Bank's claim, and it acted in good faith reliance on that defense when it decided to deny the claim and litigate this case. Rainbow, 612 F. Supp. 2d at 732.
74. As in Levy Gardens, "[n]either party acted perfectly," but the Court finds FATTIC undertook its obligations as title insurer in good faith, and thus it should not be penalized for taking the time to make sure any losses suffered by the Bank were actually covered by the Ocean Jewel or Shuttles Policies before tendering any payments to the Bank. Levy Gardens, 706 F.3d at 636.
75. FATTIC is not liable to the Bank for penalties, attorney's fees, costs, or any other statutory damages or penalty authorized under Louisiana law for bad faith handling of an insurance claim.
In light of the forgoing findings of fact and conclusions of law,
LA. REV. STAT. ANN. § 22:1892(A)(1), (B)(1).
LA. REV. STAT. ANN. § 22:1973(A)-(C).
