Papers Read on these Motions: Memorandum of Law in Support x Affirmation in Support with Exhibits x Affirmation in Opp. and in Support of Cross-Motion with Exhibits x Memorandum of Law in Opp. and in Support of Cross-Motion x Affirmation in Opp. to Cross Motion and in Reply x Memorandum of Law in Opp. to Cross-Motion and in Reply x Reply Memorandum of Law x Pl. Supplemental Affidavit and Affm. with Exhibits x Pl. Supplemental Memorandum of Law x Def. Supplemental Memorandum of Law x Def. Supplemental Affm. with Exhibits x Def. Statement of Material Facts x In its Order dated July 6, 2023 (“July 2023 Order”), the Court granted the branch of plaintiff Ash Development, LLC’s (“Plaintiff” or “Ash”) cross-motion requesting conversion of defendant Fidelity National Title Insurance Company’s (“Defendant” or “Fidelity Title”) motion to dismiss to a motion for summary judgment. Presently pending before the Court are 1) Defendant’s motion to dismiss pursuant to CPLR §3211(a)(7), which has been converted to a motion for summary judgment, and 2) Plaintiff’s cross-motion for partial summary judgment a) as to liability against Fidelity Title in an amount to be established at trial, and b) granting a declaratory judgment declaring that i) Fidelity Title is required under its Title Policy to defend and indemnify Plaintiff from and against all legal fees, expenses, losses, and damages incurred or to be incurred in the Merling Actions, ii) Plaintiff is entitled to select and designate legal counsel of its own choosing in the Merling Actions by reason of Defendant’s breach of the Policy and irreconcilable conflicts of interest, and iii) declaring the rights and relations of the parties, respectively the Fidelity Policy and the Merling Actions. For the following reasons, Defendant’s motion is granted and Plaintiff’s motion is denied. BACKGROUND A. The Parties’ History The Complaint alleges as follows: Ash owns real property known as 117-03 Curzon Road, Richmond Hill, New York (the “Ash Parcel”) upon which it is developing a twenty-one unit apartment building. Ash brings this action under Fidelity National Title Insurance Policy No. 2153-1-ECA47108-2017.2730632-211247151 (“Policy”). At all relevant times, Fidelity Title has maintained its own in-house Legal Department known as Fidelity National Law Group (“Fidelity Law”). Fidelity Law is otherwise controlled and/or has acted and continues to act as a fiduciary and for the benefit of Fidelity Title. Ash sues to require Fidelity Title to provide and pay for the legal fees, costs, and expenses Ash has incurred and will incur in defending and prosecuting two related real property actions pending in Queens County (“Merling Actions”): 1) Esther Merling v. Ash Development LLC, Queens County Index No. 719085/2018 (“Adverse Possession Action”), and 2) Ash Development LLC v. Esther Merling, Queens County Index No. 717088/2020 (“Easement Action”). Esther Merling (“Merling”) is another Fidelity Title insured and the owner of two residential properties adjacent to the Ash Parcel (“Merling Parcels”). In the Adverse Possession Action, Merling asserts a claim of adverse possession over the area of a small basement window well extending approximately one foot into the Ash Parcel (the “Window Well”). In the Easement Action, Ash sues to enforce an access easement over the Merling Parcels (“Easement”). Ash seeks indemnification and reimbursement for all monetary losses sustained due to the Merling Actions pursuant to the Fidelity Policy. The Policy dated June 17, 2006 insures Ash’s fee simple title in the entire Ash Parcel. The Policy specifically excludes encroachment claims only to the extent shown on its attached survey made by A & B Engineering and Land Surveying, P.C. dated April 23, 2017, as revised May 5, 2017 (“A & B Survey”). The A & B Survey does not show, refer to, or otherwise indicate the presence of the small basement Window Well upon which Merling bases her adverse possession claim. The specific exclusions in the Policy do not apply to “encroachments” not shown in the A & B Survey — such as the one-foot encroachment of the basement Window Well area — and Merling’s claims against Ash in the Adverse Possession Action are accordingly subject to the defense, indemnity, reimbursement, and other covered insured provisions of the Policy. In addition to insuring Ash’s, fee simple title in the Ash Parcel, the Policy specifically insures and describes the appurtenant Easement. Fidelity Title’s bad faith legal filings in the Easement Action, effectuated through Fidelity Law on behalf of its other insured, Merling, have directly created the pretextual easement dispute. The Fidelity Law filings in the Easement Action breach Fidelity Title’s contractual, legal, and ethical responsibilities to Ash under the Policy. By affirmatively representing an adverse Fidelity Title insured via its wholly controlled Legal Department/Division, Fidelity Law knowingly engaged in a clear conflict between Fidelity Title’s two insureds and spearheaded Fidelity Title’s breach and repudiation of the expressly covered and insured Easement. Fidelity Title only accepted a partial tender of coverage in the Easement Action by letter dated May 23, 2022 (“Disclaimer Letter”). Ash’s claims under the Policy are timely, and Ash has the right to select its own counsel. Plaintiff asserts the following causes of action: 1) breach of the Fidelity Policy based on Fidelity Title improperly and unlawfully seeking to extinguish Plaintiff’s express written and duly recorded Easement, 2) breach of fiduciary duty, 3) breach of the Fidelity Policy based on the Disclaimer Letter, and 4) declaratory judgment that a) Fidelity Title is required under the Policy to defend and indemnify Ash from and against all legal fees, expenses, losses, and damages incurred or to be incurred in the Merling Actions, b) Ash is entitled to select and designate legal counsel of its own choosing in the Merling Actions by reason of Fidelity Title’s and Fidelity Law’s manifest and irreconcilable conflicts of interest, and c) otherwise declaring the rights and relations of the parties. B. The Parties’ Positions Defendant argues that the documentary evidence establishes that Fidelity was only actually noticed through a letter dated May 12, 2020, even though the litigations were commenced in 2018 and 2020. Despite no communication with the proper branch of Fidelity until on or about May 25, 2020, Ash asserts an alleged duty of outside counsel for Merling — conveniently bearing the name “Fidelity” — to undertake some investigation prior to that date. Ash did not notify Fidelity “shortly” — or, as required by the Ash Policy, “promptly.” Ash is not entitled to the reimbursement of legal fees it chose to expend. Defendant submits that Fidelity provided the required coverage and expeditiously retained counsel. In this action, however, Ash seeks a declaration that any counsel selected by Fidelity maintains a conflict and Ash’s current counsel should be retained through the Policy. Ash does not allege that “selected” counsel of McLoughlin & Stern disagree with Ash’s counsel on how to defend the claim. Accordingly, no conflict exists that would entitle Ash to choose its own counsel. Even if disagreements were alleged between the firms, they would be baseless. Pursuant to May 2022 Fidelity correspondences, coverage on the Easement Action has been provided. Defendant contends that the Complaint fails to state a cause of action. Ash notified Fidelity four and a half years after litigation was commenced and is not entitled to any reimbursement for expended fees. Additionally, Ash’s alleged conflict does not exist and it is not entitled to counsel of its choice. Finally, both the Adverse Possession Action and Easement Action are nowhere near or approaching a final non-appealable Order and thus no potential loss to Ash has manifested that would require the Court’s involvement in calculating any damages. Plaintiff argues that the Fidelity Law filings in the Easement Action violate the Policy. Fidelity Law affirmatively represented Merling, an adverse Fidelity Title insured, in attempting to dismiss Ash’s Easement Action. Additionally, Fidelity must defend and indemnify Ash for all losses sustained due to Merling’s claims in the Adverse Possession Action. In pre-litigation correspondence, Fidelity claimed that the Policy exclusions bar coverage or limit the amount of Ash’s damages so as not to include damages resulting from delay in development of Ash’s Parcel. The Disclaimer Letter, however, cites to an inapplicable Washington, D.C. appellate court decision. This non-precedential out-of-state holding is directly contradicted by controlling New York authority that an insurer’s defense obligation arises not only where the allegations of the complaint give rise to a covered claim, but where the insurer has actual knowledge of facts establishing a reasonable possibility of coverage. Moreover, Fidelity did not merely defend one insured in a suit brought by the other, it used its in-house Legal Department to prosecute claims seeking to extinguish the very same easement that Fidelity insured on behalf of Ash. Accordingly, Fidelity created the very title dispute at issue. Moreover, Fidelity’s refusal to reimburse Ash for fees and expenses based on a failure to notify Fidelity promptly in writing is inapplicable where Fidelity’s Law Group has been defending the Easement Action and Fidelity thus at all times had actual and immediate knowledge of the claim. Plaintiff argues that the Disclaimer Letter is erroneous in asserting that Ash’s damages for delay in its development of the property constitute consequential damages beyond what the Policy covers. If Ash loses the adverse possession or the easement claim, it will have suffered a loss of property interests directly covered by the Policy, which are direct damages, not consequential damages. Further, the extent of Ash’s damages cannot be calculated before the Adverse Possession Action and Easement Action are concluded. Fidelity also wrongfully contends that its obligation to defend and indemnify Ash in the Adverse Possession Action is barred by the exclusion in the Policy for “[r]ights of tenants or persons in possession, if any.” That exclusion concerns tenants and persons who possess the insured property, not encroachments from neighboring properties that the Policy expressly covers. Plaintiff avers that it has the right to select its own counsel. Fidelity takes the untenable position that its funding of both the plaintiff and the defendant in the same action — with each taking opposite positions regarding the same Easement — does not constitute a conflict of interest. Fidelity has an inherent conflict of interest and its attempt to distinguish directly controlling law is meritless. To that end, Ash is entitled to appoint and designate its own attorney because a conflict of interest in the insurer’s selection of counsel is manifest. Plaintiff argues that Fidelity’s dismissal motion based on lack of prompt notice should be rejected. Fidelity cannot prove that it was prejudiced by the date it received notice of the Adverse Possession Action or the Easement Action. Even if Fidelity was prejudiced by a delay, its liability is only limited to the “extent” of that prejudice. Fidelity’s claim that it was prejudiced by not being able to select counsel earlier is not cognizable because it had no such right by virtue of its conflict of interest. Even if Fidelity had the right to select counsel, its inability to do so would only limit the hourly reimbursable rate of past attorneys’ fees. Under the express terms of the Policy, the consequence of less than prompt notice is strictly limited to potentially reducing Fidelity Title’s liability, but only to the extent that the delay results in actual prejudice to the insurer. This “Notice-Prejudice Rule” applicable in New York renders the twenty-one month delay period between the December 2018 filing of Merling’s Adverse Possession Action and October 2020, when Fidelity’s National Claims Counsel acknowledged receipt of the action, immaterial in the absence of actual prejudice to Fidelity Title. Plaintiff contends that Defendant fails to demonstrate actual prejudice and glosses over the Complaint’s allegations that Fidelity Law, Defendant’s in-house law firm, is not merely a carrier-designated attorney for Merling, but a wholly controlled department, division, and agent of Fidelity Title. Additionally, there can be no claim of prejudice from the alleged late notice of the Adverse Possession Action. The Window Well was allegedly in place for decades, and a preliminary injunction against Ash was imposed by the court in the Adverse Possession Action and remains in place. Fidelity’s in-house National Claims Counsel was aware of the Easement Action from the outset and acknowledged receipt of its filings in writing. Defendant avers that the language of the Policy prohibiting reimbursement of unapproved or uncovered legal fees is clear and unambiguous. With respect to the alleged entitlement to consequential and other damages, Plaintiff cites inapplicable case law. Additionally, Fidelity’s actions do not constitute a conflict of interest. Not only has Ash failed to assert any allegations regarding the ability of the designated firm of McLaughlin & Stern, LLP to competently litigate and defend its interest, there is no evidence that McLaughlin & Stern, LLP has taken any action, as the two actions are currently awaiting summary judgment decisions. Plaintiff argues that Defendant also ignores the controlling Notice-Prejudice Rule. Defendant cannot purport to claim prejudice when it was directly involved in the Easement Action from the outset, and any delayed notice of the Adverse Possession Action was non-prejudicial. Additionally, Defendant’s conflict of interest analysis ignores the plethora of controlling New York authority treating insurer conflicts in selection of counsel for the insured essentially the same as conflict of interest rules applicable to all attorneys. Defendant plainly has a conflict of interest in selecting counsel because it will be better off if Ash loses in either action or, at the very least, if the litigation between the two insureds resolves in a manner where neither party is liable to the other. Ash has designated the firm of Rosenberg Calica & Birney (“RCB”) as its counsel. Having wrongly refused to recognize RCB as counsel for Ash, Defendant is obligated to reimburse Ash for its fees in the Merling Actions. Defendant’s other bases for denial of coverage are meritless. Ash’s damages are overwhelmingly actual damages, and, in any event, consequential damages are covered under the Policy. 1. Supplemental Submissions In its July 2023 Order, the Court directed the parties to submit whatever evidentiary materials are required for the Court to render a proper summary judgment determination. Plaintiff submits a Decision and Order dated June 12, 2023 in the Easement Action (“Merling Decision”), and Merling’s Answer with Counterclaim dated July 20, 2023. Plaintiff notes that the Merling Decision denied Merling’s motion to dismiss the complaint in the Easement Action, and Merling’s Answer with Counterclaim contains a counterclaim to quiet title pursuant to RPAPL Article 15. Defendant did not submit any documents that were not previously before the Court. Both parties submitted supplemental memoranda of law, which largely echo their prior arguments and will not be summarized here. RULING OF THE COURT On a motion for summary judgment, the moving party must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact. Nomura Asset Capital Corp. v. Cadwalader, Wickersham & Taft LLP, 26 N.Y.3d 40, 49 (2015), quoting Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 (1986). If the moving party produces the requisite evidence, the burden then shifts to the nonmoving party to establish the existence of material issues of fact that require a trial of the action. Nomura Asset Capital Corp., 26 N.Y.3d at 49, quoting Alvarez, 68 N.Y.2d at 324. Viewing the evidence in the light most favorable to the non-moving party, if the non-moving party, nonetheless, fails to establish a material triable issue of fact, summary judgment for the movant is appropriate. Nomura Asset Capital Corp., 26 N.Y.3d at 49, quoting Ortiz v. Varsity Holdings, LLC, 18 N.Y.3d 335, 339 (2011). Defendant’s motion for summary judgment on Plaintiff’s first and second causes of action is granted. The first claim alleges a breach of Policy insofar as Defendant, through Fidelity Law, seeks to extinguish Plaintiff’s Easement. The second claim similarly alleges that Defendant’s irreconcilable conflict of interest constitutes a breach of fiduciary duty. Plaintiff’s failure to allege a conflict of interest, however, is fatal to both of these claims. Plaintiff contends that a conflict of interest exists because Fidelity Title is funding McLaughlin & Stern LLP’s representation of Plaintiff at the same time that Fidelity Law is representing the Merlings. Plaintiff, however, has not cited any controlling authority to support its position that an insurer may not designate separate counsel for two different insureds with adverse interests. The Court is not persuaded that Fidelity’s remuneration of panel counsel and Fidelity Law in the same action, without more, creates a conflict of interest. The Court is also not persuaded that the Merlings’ counterclaim to extinguish the Easement in the Easement Action creates a conflict of interest. Any arguments respecting the merits of that counterclaim are more properly directed to the trial court in that matter. Defendant’s motion for summary judgment on the third claim is granted. Plaintiff’s third cause of action alleges that the Disclaimer Letter constitutes a breach of the Policy. In the Disclaimer Letter, Defendant accepts the tender of defense in the Easement Action with respect to the Merlings’ challenge to the validity of the Easement, but 1) declines to reimburse Plaintiff for legal fees incurred in the Easement Action and 2) disclaims liability for damages for delay of the development of the Ash Parcel. See Compl. at Exh. E. With respect to reimbursement of counsel fees, the Policy provides: The Company shall have the right to select counsel of its choice (subject to the right of the Insured to object for reasonable cause) to represent the Insured as to those stated causes of action. It shall not be liable for and will not pay the fees of any other counsel. See Compl. at Exh. A §5(a). Accordingly, in the absence of a conflict of interest, Defendant’s refusal to reimburse Plaintiff for legal fees and expenses incurred by Defendant’s privately retained counsel is not a breach of the Policy. Plaintiff’s claim concerning Defendant’s refusal to reimburse Plaintiff for damages incurred due to delays in developing the Ash Parcel is premature pending a final judicial determination in the underlying action. See Compl. at Exh. A §9(b) (“In the event of any litigation, including litigation by the Company or with the Company’s consent, the Company shall have no liability for loss or damage until there has been a final determination by a court of competent jurisdiction, and disposition of all appeals, adverse to the Title, as insured”). Defendant’s motion for summary judgment on the fourth claim for declaratory judgment is granted. The fourth cause of action seeks a declaration that 1) Fidelity is required under the Policy to defend and indemnify Ash from and against all legal fees, expenses, losses, and damages incurred or to be incurred in the Merling Actions, and 2) Ash is entitled to select and designate legal counsel of its own choosing in the Merling Actions by reason of Fidelity Title’s and Fidelity Law’s manifest and irreconcilable conflicts of interest. To the extent this claim is based on Defendant’s conflict of interest, refusal to reimburse legal fees, and/or disclaimer of damages for delay in development, it fails for the reasons set forth above with respect to the first, second, and/or third causes of action. Plaintiff also contends that Fidelity Title is required to defend and indemnify it in the Adverse Possession action. The Court disagrees. Defendant declined to defend and indemnify Plaintiff in the Adverse Possession action based on the Policy exception for “rights of tenants or persons in possession.” See Weber Affm. at Exh. H; see also Compl. at Exh. A, Schedule B (“[t]he following are expressly excluded from coverage of Policy, and the Company will not pay loss or damage costs, attorneys’ fees, or expenses which arise by reason of…Rights of tenants or persons in possession, if any”). This very exception was at issue in Melamed v. First American Title Insurance Company, 190 A.D.3d 724 (2d Dept. 2021). In Melamed, the title insurer refused the plaintiffs’ demand for defense and indemnification in an adverse possession action filed by their neighbors. The Second Department affirmed the trial court’s determination that the insurer was not required to defend and indemnify the plaintiffs, holding that the neighbors’ claim “fell squarely” within the exception from coverage for “claims arising from the rights of persons in possession.” Melamed, 190 A.D.3d at 725. This Court adopts the reasoning of the Melamed court and concludes that Merlings’ adverse possession claim respecting the Window Well falls within the Policy exception for rights of tenants or persons in possession. Cf. Herbil Holding Co. v. Commonwealth Land Title Ins. Co., 183 A.D.2d 219, 228 (2d Dept. 1999) (discussing the rights of persons in possession exception and noting that “the title company does not want to be held responsible for some unknown person who might be able to make a claim founded on either the possession alone (i.e., adverse possession) or an instrument which would not cross the examiner’s path if the public records were examined — for example, an unrecorded deed”). Plaintiff’s contention that the A & B Survey did not show any encroachment or the existence of the Window Well does not alter the Court’s conclusion. See Herbil, 183 A.D.2d at 228 (“any risk attendant to not examining the physical property itself is passed to the insured by way of the exception”). Further, Plaintiff’s reliance on Schneider v. Commonwealth Land Title Ins. Co., 844 N.Y.S.2d 657, 661 (Sup. Ct. Kings Cty. 2007) is misplaced. While the insurer in Schneider defended an adverse possession claim notwithstanding the rights of tenants or persons in possession exception in the policy, that case primarily concerned the question of whether the insurer had a duty to represent the insured on an appeal of a partially adverse determination. Indeed, the court noted that “[w]hether the initial adverse possession claim was covered under the terms of the policy is a moot issue as Defendant failed to disclaim coverage[.]” See Schneider, 844 N.Y.S.2d at 660. CONCLUSION Defendant’s motion for summary judgment is granted. Plaintiff’s cross-motion for partial summary judgment is denied. Settle judgment on ten (10) days’ notice. All matters not decided herein are hereby denied. This constitutes the decision and order of the Court. Dated: October 19, 2023
