Mass. Appeals Court hold that title insurer is not subrogee of mortgagee absent express subrogation clause in insurance contract

I'm always excited when I see a title insurance case, because they are so few and far between.  When such a dispute does arise it is not unusual to cite case law from a century ago.

In 2003, Shane Kelly took out a first mortgage with Chevy Chase Bank for a property he owned in Boston. 

In 2007, Kelly took out a second mortgage on the property with JPMorgan. JPMorgan retained Attorney Roseann Conti to conduct the closing.  Conti had also conducted the closing on the first mortgage.  Although Conti had knowledge of the first mortgage, which was recorded at the Registry of Deeds, she did not notify JPMorgan of it. 

JPMorgan obtained title insurance from Stewart Title Guaranty Company.  Conti acted as Stewart Title's agent.

JPMorgan eventually learned of the first mortgage.  It made a written demand on Kelly that he discharge it, based on a provision of the second mortgage that allowed it to require Kelly to discharge a priority lien on the property.  Kelly did not discharge the first mortgage.  He also stopped making payments on the second mortgage. 

In response to a claim by JPMorgan on the title insurance policy, Stewart Title paid $268,084.83 to discharge the first mortgage.  It did not inform Kelly that it had taken this action. It asserted an attorney malpractice action against Conti, which it settled for less than the amount paid to discharge the first mortgage.

Stewart Title then sued Kelly, seeking the difference between the payment it made to discharge the first mortgage and the sum recovered from Conti. In Stewart Title Guaranty Co. v. Kelly, 97 Mass. App. Ct. 325 (2020), the Massachusetts Appeals Court affirmed summary judgment for Kelly, who was acting pro se.

The court first addressed Stewart Title's allegation that Kelly breached the mortgage contract when he failed to discharge the first mortgage upon demand.  Stewart Title was not a party to the mortgage. It alleged that it was the subrogee of JPMorgan.

Subrogation is a doctrine that in the context of insurance allows an insurer who has paid a loss to a policyholder to bring suit against the person who caused the loss, standing in the shoes of the policyholder.  Insurance policies typically have a clause allowing the insurer to do so.  In this case, however, the title insurance policy did not have a subrogation clause.

 (In the trial court Stewart Title had submitted a motion for reconsideration of the granting of summary judgment to Kelly to which it attached a jacket to the policy that contained an express subrogation provision.  The Appeals Curt held that the trial court judge acted within her discretion to deny the motion to reconsider.) 

Stewart Title argued that the trial court judge's reliance on its failure to produce an express subrogation clause was error because it was not aware that its status as subrogee was disputed.  However, Kelly had denied Stewart Title's allegation that it was a subrogee to JPMorgan throughout the litigation, beginning with the answer to the complaint.  (Even if that were not the case, it's hard to see how Stewart Title could succeed on such an argument where it has the burden of proof on breach of contract.)

Stewart Title then argued that it is entitled to pursue the claim under the doctrine of implied subrogation.  It argued that JPMorgan would otherwise receive a windfall because it would have benefited from the removal of the first mortgage.

The Appeals Court noted that allowing Stewart Title to pursue a claim against Kelly would not avoid a windfall to JPMorgan.  In addition, Kelly was not primarily responsible for JPMorgan's loss.  He did not represent that the property was clear of encumbrances.  Rather, Stewart Title, through its agent, Conti, knew that the first mortgage encumbered the property and failed to disclose that fact to JPMorgan.  The court held that the doctrine of implied subrogation did not apply to such a situation.

The court also held that Stewart Title could not recover against Kelly on a theory of unjust enrichment, because there was no evidence that Kelly had accepted the actions of Stewart Title with knowledge that Stewart Title would expect reimbursement from him.