Washington Mutual Bank v. Commonwealth Land Title Insurance Company

NUMBER 13-08-00256-CV COURT OF APPEALS THIRTEENTH DISTRICT OF TEXAS CORPUS CHRISTI - EDINBURG WASHINGTON MUTUAL BANK, Appellant, v. COMMONWEALTH LAND TITLE INSURANCE COMPANY, Appellee. On appeal from the 95th District Court of Dallas County, Texas. MEMORANDUM OPINION Before Justices Rodriguez, Garza, and Vela Memorandum Opinion by Justice Rodriguez This appeal arises from a denial of insurance coverage. Appellee Commonwealth Land Title Insurance Company (Commonwealth) denied liability coverage to appellant Washington Mutual Bank (WAMU) after a bankruptcy trustee obtained an agreed judgment against WAMU in an adversary proceeding. WAMU sued Commonwealth for denying its claim under the title insurance policy issued by Commonwealth to WAMU, and WAMU complains on appeal of the trial court's entry of summary judgment in favor of Commonwealth. By one issue, WAMU argues that the trial court erred in granting summary judgment to Commonwealth because Commonwealth failed to prove it was prejudiced by WAMU's failure to notify Commonwealth of the adversary proceeding before entry of judgment against WAMU. We affirm. BACKGROUND On November 22, 2003, WAMU loaned $137,513 to Kenneth and Gay Roder (the Roders) to refinance a pre-existing mortgage on their home. Commonwealth issued WAMU a mortgagee title insurance policy in connection with the loan. The policy generally indemnified WAMU for loss and/or damage incurred by WAMU because of any defect in title. The policy also provided, in relevant part, as follows: 3. NOTICE OF CLAIM TO BE GIVEN BY INSURED CLAIMANT. The insured [WAMU] shall notify [Commonwealth] promptly in writing . . . . (ii) in case knowledge shall come to an insured hereunder of any claim of title or interest that is adverse to the title to the estate or interest or the lien of the insured mortgage, as insured, and that might cause loss or damage for which [Commonwealth] may be liable by virtue of this policy. If prompt notice shall not be given to [Commonwealth], then as to the insured all liability of [Commonwealth] shall terminate with regard to the matter or matters for which prompt notice is required; . . . Commonwealth's issuing agent recorded the deed of trust lien corresponding to the loan to the Roders on January 29, 2004. On March 26, 2004, only fifty-six days after recordation of the deed of trust, the Roders filed for bankruptcy. Because the deed of trust was recorded less than ninety days prior to the bankruptcy, the bankruptcy trustee instituted an adversary proceeding against WAMU on June 1, 2004, alleging that the recordation was a preferential transfer in contravention of the bankruptcy code. See 11 U.S.C. § 547(b) (2006). The trustee filed a motion for summary judgment in the adversary proceeding on July 7, 2004, which WAMU did not oppose. On August 23, 2004, WAMU and the trustee entered into an agreed judgment. The agreed judgment surrendered WAMU's rights in the property, transferred all rights and benefits under the deed of trust lien from WAMU back to the Roders' bankruptcy estate, and gave WAMU an unsecured claim against the estate. WAMU eventually received a disbursement from the estate in the amount of $25,910.86. On December 21, 2004, nearly four months after the entry of the agreed judgment, WAMU filed a claim on its title insurance policy with Commonwealth. On February 22, 2005, Commonwealth denied the claim on the grounds that WAMU failed to notify Commonwealth of the adversary proceeding in time for Commonwealth to defend the validity of the insured deed of trust lien. WAMU sued Commonwealth in February 2007 in the 95th District Court of Dallas County, alleging breach of contract in connection with Commonwealth's denial of WAMU's claim under the title insurance policy. (1) Commonwealth filed a motion for summary judgment on the grounds that it was not liable to WAMU as a matter of law because WAMU failed to satisfy several conditions precedent to recovery under the policy, including, among others, that WAMU provide timely notice to Commonwealth of the adversary proceeding. The trial court granted Commonwealth's motion and rendered summary judgment in its favor. This appeal ensued. STANDARD OF REVIEW In a traditional summary judgment, the issue on appeal is whether the movant met the summary judgment burden by establishing that no genuine issue of material fact exists and that the movant is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); Sw. Elec. Power Co. v. Grant, 73 S.W.3d 211, 215 (Tex. 2002). In reviewing a summary judgment, we consider the evidence in the light most favorable to the nonmovant, accepting as true all evidence favorable to the nonmovant, indulging every reasonable inference, and resolving any doubts in the nonmovant's favor. Harwell v. State Farm Mut. Auto. Ins. Co., 896 S.W.2d 170, 173 (Tex. 1995). We consider evidence favorable to the movant only if it is uncontroverted. Great Am. Reserve Ins. Co. v. San Antonio Plumbing Supply Co., 391 S.W.2d 41, 47 (Tex. 1965). A defendant is entitled to summary judgment if it conclusively negates at least one essential element of the plaintiff's cause of action or establishes all the elements of an affirmative defense. Am. Tobacco Co., Inc. v. Grinnell, 951 S.W.2d 420, 425 (Tex. 1997); see also Kim v. Farmers Ins. Exch., Inc., No. 01-05-01112-CV, 2007 WL 3105898, at *2 (Tex. App.-Houston [14th Dist.] Oct. 25, 2007, no pet.) (mem. op.). Because the trial court's order granting summary judgment does not specify the basis for the ruling, we will affirm the trial court's judgment if any of the theories advanced by Commonwealth are meritorious. See Harwell, 896 S.W.2d at 173. APPLICABLE LAW Compliance with a notice-of-suit provision in an insurance policy "is a 'condition precedent to the insurer's liability on the policy.'" Harwell, 896 S.W.2d at 173-74 (quoting Weaver v. Hartford Acc. & Indem. Co., 570 S.W.2d 367, 369 (Tex. 1978)); see also Blanton v. Vesta Lloyds Ins. Co., 185 S.W.3d 607, 611 (Tex. App.-Dallas 2006, no pet.). An insured's failure to notify its insurer does not absolve an insurer from liability unless the lack of notice prejudices the insurer. Harwell, 896 S.W.2d at 174; Jenkins v. State & County Mut. Fire Ins. Co., 287 S.W.3d 891, 898 (Tex. App.-Fort Worth 2009, pet. denied). However, an insurer is prejudiced as a matter of law if the insured fails to notify the insurer until after a default judgment against the insured becomes final and nonappealable. Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 166 (Tex. 1993); Harwell, 896 S.W.2d at 174. Importantly, for purposes of prejudice, there is no difference "between cases in which an injured third party obtains a default judgment [against the insured] and cases . . . in which the insured appears at trial but offers no evidence or defenses on [its] behalf." Harwell, 896 S.W.2d at 174; see also Kim, 2007 WL 3105898, at *4. DISCUSSION In its sole issue on appeal, WAMU complains that the trial court erred in granting summary judgment to Commonwealth because Commonwealth failed to prove it was actually prejudiced by WAMU's failure to notify Commonwealth of the adversary proceeding before the entry of the agreed judgment. (2) By its argument, WAMU asks this Court to distinguish this case from the controlling applicable law because a "settlement without consent" does not presumptively prejudice an insurer, see Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651, 690 (Tex. App.-Houston [14th Dist.] 2006, pet. denied), and the agreed judgment here was merely a settlement without Commonwealth's consent. The purpose of a notice-of-suit provision in an insurance policy is to enable an insurer to investigate the circumstances of the policy-invoking incident so that the insurer has adequate time to prepare to defend any claims. See Blanton, 185 S.W.3d at 611-12 (citing Employers Cas. Co. v. Glens Falls Ins. Co., 484 S.W.2d 570, 575 (Tex. 1972)). Thus, the crucial inquiry in determining whether an insurer was prejudiced as a matter of law is whether the insurer's ability to defend against the claim has been irreparably impaired by an insured's failure to comply with a notice-of-suit provision. See id. at 612 (citing 13 Couch on Insurance § 186:14 (3d ed. 2005)). And whether an insurer has suffered such an impairment depends largely on the extent to which the insured defended against the claim before judgment was entered and became final and nonappealable. See Harwell, 896 S.W.2d at 174; see also Kim, 2007 WL 3105898, at *4. WAMU does not dispute that it made no efforts to defend against the trustee's claims in the adversary proceeding. See Great Am. Reserve Ins. Co., 391 S.W.2d at 47. Specifically, WAMU did not respond to the trustee's motion for summary judgment, instead consenting to an agreed judgment that stripped WAMU of its rights under the deed of trust lien and left it with an unsecured claim in the bankruptcy. WAMU eventually received $25,910.86 for the unsecured claim, more than $130,000 less than the amount of the original loan to the Roders. It is undisputed that Commonwealth did not learn of the judgment--nor did it have any knowledge of the adversary proceeding--until nearly four months after the entry of the judgment when WAMU attempted to file a claim against the title insurance policy for the difference between the unsecured claim amount and the amount of the original loan. In its motion for summary judgment, Commonwealth argued that it was prejudiced as a matter of law by WAMU's failure to notify it of the adversary proceeding because it was denied the opportunity to defend against the claims of the bankruptcy trustee. See Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 693 n.3 (Tex. 1994) (reasoning that an insurer is prejudiced where it is denied the opportunity to answer for the insured, litigate the merits of the suit, or appeal any adverse judgment). Based on the foregoing facts, we agree. Because WAMU failed to comply with an express condition precedent of its insurance policy with Commonwealth, it was not entitled to coverage, and the trial court did not err in granting summary judgment to Commonwealth on the basis of this affirmative defense. See Grinnell, 951 S.W.2d at 425; Harwell, 896 S.W.2d at 173-74. WAMU's first issue is overruled. CONCLUSION The judgment of the trial court is affirmed. NELDA V. RODRIGUEZ Justice Delivered and filed the 14th day of January, 2010. 1. The case is before this Court on transfer from the Fifth Court of Appeals in Dallas pursuant to an order issued by the Supreme Court of Texas. See Tex Gov't Code Ann. § 73.001 (Vernon 2005). 2. WAMU argues that, even if Commonwealth had been given an opportunity to defend, there were no viable defenses to the bankruptcy trustee's claims, thus conclusively negating any prejudice suffered by Commonwealth as a result of WAMU's failure to notify. WAMU contends that it "cut its losses" by consenting to the agreed judgment. However, WAMU's focus on the potential failed defenses misses the mark--as is accurately argued by Commonwealth in its brief on appeal, the critical question is whether Commonwealth was "denied the opportunity to answer for the insured, to litigate the merits of the suit, to appeal any adverse judgment against the insured, and to otherwise minimize the insured's liability." See Harwell v. State Farm Mut. Auto. Ins. Co., 896 S.W.3d 170, 174 (Tex. 1995); Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 693 n.3 (Tex. 1994); see also Blanton v. Vesta Lloyds Ins. Co., 185 S.W.3d 607, 611-12 (Tex. App.-Dallas 2006, no pet.).