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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND : MERCANTILE-SAFE DEPOSIT AND : TRUST COMPANY : : v. : Civil No. CCB-05-2217 : CHICAGO TITLE INSURANCE : COMPANY : : MEMORANDUM Now pending before the court are cross motions for summary judgment.1 The parties have fully briefed the motions and no hearing is necessary. See Local Rule 105.6. For the reasons stated below, summary judgment will be granted for the plaintiff. BACKGROUND This suit concerns the alleged breach of two insurance policies (the "Policies") issued by defendant Chicago Title Insurance Company ("Chicago Title") to plaintiff Mercantile-Safe Deposit and Trust Company ("Mercantile"). The Policies at issue insured the title on real property located at 1 Edward Kila Court (the "Property") under two indemnity deeds of trust ("IDOTs") executed by Edward Kila as trustee. Edward Kila's parents, John and Johanna Kila, the original owners of the Property, transferred the Property to him as trustee under two unrecorded qualified personal residence trusts ("QPRTs") established in their name. Thereafter, Edward Kila provided the IDOTs and unconditional guaranty agreements as collateral for

Both parties also have submitted motions to compel discovery, which will be denied, as the information sought is not relevant, is privileged, or is not needed to resolve the motions for summary judgment.

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commercial loans extended by Mercantile to two Kila family businesses, Commart, LLC ("Commart") and McShane, Inc. ("McShane"). More specifically, Mercantile approved a loan to Commart for $1.5 million in March 1999. As an inducement for this loan, John and Johanna Kila signed an unconditional guaranty agreement secured by an IDOT on the Kila Property. (Def.'s Summ. J. Mot., Ex. 21, 22.) John and Johanna Kila were originally named as the grantors on the Commart IDOT because they had previously listed the Kila Property as a personal asset on financial statements submitted to Mercantile, with whom the family had been doing business since 1993. (See id., Ex. 5.) On May 15, 1998, however, John and Johanna Kila had transferred ownership of the Property via a deed of gift to their son, Edward Kila, as trustee under newly established qualified personal residence trusts ("QPRTs"), which were never recorded. (Id., Ex. 6, 7, 9.) The QPRT beneficiaries included (1) John and Johanna Kila, who were entitled to reside at the Kila property for five years;2 (2) Edward Kila; and (3) John and Johanna's grandchildren (the "residual beneficiaries"). Upon receiving the signed loan documents, Mercantile's lawyer, J. Michael Brennan ("Brennan"), requested title insurance on the Kila Property from Chicago Title.3 In response, Catherine Jenkins ("Jenkins"), Chicago Title's underwriter, sent Brennan a title commitment

Although the trust documents immediately vested ownership in Edward Kila, as sole trustee of the QPRTs, John and Johanna Kila apparently were under the impression that they would retain ownership of the Property while they continued to live there, which partly accounts for the confusion surrounding the Commart IDOT. Because John Kila had an existing owner's title policy on the Property with Chicago Title, (see Pl.'s Summ. J. Mot., Ex. K), Brennan ordered Mercantile's title policy from Chicago Title to take advantage of a re-issue rate discount. 2
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("Commart Title Commitment"), accompanied by the recorded deed of gift, which reflected that title to the Property was now vested in Edward Kila, as trustee under the QPRTs.4 Prior to receiving the Commart Title Commitment, Mercantile had no knowledge that John and Johanna Kila no longer owned the Property. According to its terms, the deed of gift gave Edward Kila, as trustee, extraordinarily broad powers, including the power "to convey the Property by deed or other conveyance to any grantee, with or without consideration; to mortgage, execute a deed of trust on, pledge or otherwise encumber the Property or any part thereof . . ." (Def.'s Summ. J. Mot., Ex. 9.) In addition, the deed states: No party dealing with the Trustees in relation to the Property in any manner whatsoever, and . . . no party whom the Property or any part thereof or any interest therein shall be conveyed, contracted to be sold, leased or mortgaged by the Trustees, shall be obliged; . . . (b) to see that the terms of the trust have been complied with; (c) to inquire into the authority, necessity or expediency of any act of Trustees; or (d) be privileged to inquire into any of the terms of the Trust Agreement creating said Trust. Every deed, mortgage, lease or other instrument executed by the Trustees in favor of every person claiming any right, title or interest thereunder shall be deemed to represent that: (a) that at the time of the delivery thereof the said trust was in full force and effect; (b) that such instrument was executed in accordance with the trust, terms and conditions thereof and of the said Trust Agreement and in [sic] binding upon all beneficiaries thereunder; (c) that the Trustees were duly authorized and empowered to execute and deliver every such instrument . . . . (Id.) The Commart Title Commitment required that a deed of trust from Edward Kila, as sole trustee under the QPRTs, be "executed, delivered and duly filed for record." (Id., Ex. 33.) In

On March 30, 1999, prior to requesting title insurance on the Property, Mercantile closed on the Commart loan, advancing $500,000 to Commart based on the IDOT and guaranties executed by John and Johanna Kila. (Def.'s Summ. J. Mot., Ex. 27, 29.) 3

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addition, Chicago Title conditioned the Commart Policy on receipt of the trust instruments for

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review. (Id.) Upon receiving the Commart Title Commitment and deed of gift, Mercantile instructed Brennan to revise the Commart Guaranty and IDOT to reflect the correct title holder. Relying on the broad language of the deed of gift, Brennan prepared an unconditional guaranty and IDOT for Edward Kila to sign on behalf of the QPRTs as trustee. Mercantile then forwarded the revised documents to Chicago Title.5 Also relying on the deed of gift, Chicago Title proceeded to issue the title policy and record the IDOT in the land records of Queen Anne's County, waiving (as more fully discussed below) any requirement that the trust instruments be reviewed by Chicago Title.6 (Pl.'s Summ. J. Mot., Jenkins Dep., Ex. O at 95, 100-03.) It is undisputed that neither Mercantile nor Chicago Title had reviewed the unrecorded trust documents at the time title insurance was issued by Chicago Title. Shortly thereafter, Mercantile essentially duplicated the above process with respect to a revolving line of credit increase for McShane and a $1.75 million dollar lien on the Kila Property. Brennan similarly secured title insurance from Chicago Title for the McShane IDOT, which was granted by Edward Kila, as sole trustee of the QPRTs. By October 2001, the business fortunes of Commart and McShane had deteriorated significantly. (Def.'s Summ. J. Mot., Barclay Dep., Ex. 1 at 162-63.) As a result, in November

Brennan never forwarded the unconditional guaranties and IDOT signed by John and Johanna Kila, explaining that once Mercantile realized Edward Kila owned the Property, there was no need to send these original documents to the title company. (Def.'s Summ. J. Mot., Brennan Dep., Ex. 15 at 177-78.) Due to delays in the forwarding of funds to cover the costs of title insurance from Mercantile to Chicago Title, the Commart IDOT was not recorded and Chicago Title did not issue title insurance until July 22, 1999, almost two months after Chicago Title had first sent Mercantile the Commart Title Commitment. By this time, Mercantile had advanced nearly all the funds under Commart's $500,000 term loan and $1 million revolving line of credit increase. (Def.'s Summ. J. Mot., Ex. 23, 27.) 5
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2001, the Kilas entered into a formal agreement with Mercantile requiring, among other things, liquidation of the Kila Property. Over a year later, an attorney representing John and Johanna Kila's grandchildren, the QPRT residual beneficiaries, notified Mercantile that his clients were disputing the company's right to foreclose on the Property under the IDOTs. The grandchildren filed suit in Circuit Court for Baltimore County on April 22, 2002, claiming that Edward Kila engaged in improper self-dealing when he encumbered the trust property. Pursuant to a notice of claim from Mercantile, Chicago Title retained attorney Thomas McDonough ("McDonough") to defend Mercantile in the above action. Because Chicago Title waived its right to review the trust documents without writing an exclusion into the title insurance contract, Sharon Burke ("Burke"), Chicago Title's claims counsel assigned to investigate Mercantile's claim, concluded that Chicago Title was obligated to indemnify Mercantile in the event the residual beneficiaries succeeded in invalidating the IDOTs. (Pl.'s Summ. J. Mot., Burke Dep., Ex. U at 75-76.) Thus, Chicago Title assumed Mercantile's defense without disclaiming liability or making any reservations of right, aside from one unrelated to the title insurance at issue in this case. (Def.'s Summ. J. Mot., Ex. 63.) Ultimately, the Circuit Court of Queen Anne's County ordered the IDOTs null and void pursuant to the Maryland Court of Special Appeals decision in Mercantile Safe Deposit & Trust Co. v. Finn, in which the court held that Edward Kila had no power to encumber the Property in order to secure "a loan completely unconnected with the trust," as doing so "was `inconsistent with the beneficiaries' right to the beneficial enjoyment' of the corpus of the trust property." (Pl.'s Summ. J. Mot., Ex. X at 12; Def.'s Summ. J. Mot., Ex. 67.) McDonough appealed the Finn decision to the Maryland Court of Appeals, which denied certiorari. Mercantile v. Finn,

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869 A.2d 865 (Md. 2005). Consequently, Mercantile was unable to foreclose on the IDOTs. Once the Finn litigation was fully and finally resolved, Brennan sent Chicago Title, at its request, a "proof of claim" letter dated May 9, 2005. The letter outlined the amount of the outstanding balances owed under the Commart and McShane loans, which well exceeded the $3.25 million insurance coverage provided for under the Policies. (Def.'s Summ. J. Mot., Ex. 68.) Thereafter, Chicago Title's newly obtained outside counsel, James Bruce Davis ("Davis"), informed Brennan that Chicago Title would need to investigate the claim prior to making a decision on payment and requested access to Mercantile's files to determine whether a covered loss had occurred. (Id., Ex. 70.) Mercantile's new lawyer, Kevin Pascale ("Pascale"), advised Chicago Title on June 9, 2005 that Mercantile would "cooperate fully" with its request, but needed "a clearer understanding" of what Chicago Title was looking for. (Id., Ex. 71.) Mercantile then filed suit on July 14, 2005. Three years after assuming Mercantile's defense in the underlying Finn litigation, Chicago Title now asserts that several provisions of its Policies bar Mercantile's coverage claims. Hence, Chicago Title has refused to reimburse Mercantile for its losses. Mercantile, in turn, brought this action against Chicago Title for breach of contract and declaratory relief. ANALYSIS I. Summary Judgment Standard Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." The

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Supreme Court has clarified this does not mean that any factual dispute will defeat the motion: "By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis in original). "The party opposing a properly supported motion for summary judgment `may not rest upon the mere allegations or denials of [his] pleadings,' but rather must `set forth specific facts showing that there is a genuine issue for trial.'" Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514, 525 (4th Cir. 2003) (alteration in original) (quoting FED. R. CIV. P. 56(e)). The court must "view the evidence in the light most favorable to . . . the nonmovant, and draw all reasonable inferences in her favor without weighing the evidence or assessing the witness' credibility," Dennis v. Columbia Colleton Med. Ctr., Inc., 290 F.3d 639, 644-45 (4th Cir. 2002), but the court also must abide by the "affirmative obligation of the trial judge to prevent factually unsupported claims and defenses from proceeding to trial." Bouchat, 346 F.3d at 526 (internal quotation marks omitted) (quoting Drewitt v. Pratt, 999 F.2d 774, 778-79 (4th Cir.1993), and citing Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986)). II. Policy Coverage In this diversity action, Maryland law applies. Riesett v. W.B. Doner & Co., 293 F.3d 164, 173 n.5 (4th Cir. 2002). In Maryland, insurance policies, like all contracts, are construed as a whole according to the parties' intentions. Standard Fire Ins. Co. v. Proctor, 286 F. Supp. 2d 567, 574 (D. Md. 2003). Words are given their "customary, ordinary and accepted meaning" unless there is some indication that the parties intended otherwise. Bushey v. N. Assurance Co.

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of Am., 766 A.2d 598, 600-01 (Md. 2001) (internal quotation omitted). Maryland has not adopted the rule followed in many jurisdictions that an insurance policy is "construed most strongly against the insurer." Id. at 601. Only if a term is ambiguous in light of all the evidence will the ambiguity be construed against the insurer as the drafter of the contract. Proctor, 286 F. Supp. 2d at 574. Title insurance, as an indemnity agreement, reimburses "the insured for loss or damage sustained as a result of title problems, as long as coverage for the damages incurred is not excluded from the policy." Stewart Title Guar. Co. v. West, 676 A.2d 953, 960 (Md. Ct. Spec. App. 1996). The insured bears the initial burden of proving that the claim is covered by the policy. See In re The Wallace & Gale Co., 275 B.R. 223, 230 (D. Md. 2002); see also 17A Couch on Ins. 3d

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