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16th & K Hotel, Lp v. Commonwealth Land Title Insurance Company

August 3, 2011

16TH & K HOTEL, LP,
PLAINTIFF,
v.
COMMONWEALTH LAND TITLE INSURANCE COMPANY, ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Judge Beryl A. Howell

MEMORANDUM OPINION

The Plaintiff 16th & K Hotel, LP, is the owner of the St. Regis Hotel at 16th and K Streets, N.W. in Washington, D.C. The plaintiff's plans to expand the hotel to an adjacent lot literally hit an unexpected brick wall, which had not been disclosed on the surveys relied upon in obtaining financing for the construction. In this case, the plaintiff sues the surveyors and the title insurer for over $23,000,000 in damages due to the alleged nondisclosure on the surveys of a party wall with an adjoining property. Pending before the Court is the motion by the defendant title insurer, Commonwealth Land Title Insurance Company (hereinafter "Commonwealth"), to dismiss the action against it, pursuant to Federal Rule of Civil Procedure 12(b)(7), for failure to join the plaintiff's lenders as "necessary parties in this case." Commonwealth P. & A. Supp. Mot. Dismiss, ECF No. 8, at 2-3. For the reasons set forth below, this motion is DENIED.*fn1

I.BACKGROUND

The plaintiff, a Delaware limited partnership, purchased the St. Regis Hotel, located at 923 16th Street, N.W., in 2005 and thereafter explored the feasibility of expanding the hotel's facilities by purchasing an adjacent lot with a townhouse at street address 1528 K Street, N.W. (referred to as "Parcel Two" in this litigation). Compl. ¶¶ 9-10, 12-13.*fn2 From 2005 through 2007, the plaintiff contracted with the surveyors, defendant Bruce C. Landes, who is a resident of Virginia, and defendant Landmark-Fleet Surveyors, P.C., a Virginia professional corporation with its principal place of business in Virginia, to prepare a series of certified surveys of Parcel Two. Id. ¶¶ 14, 16, 51; Commonwealth Cross-Claim, ECF No. 15, ¶¶ 2-3. The defendant surveyors supplied surveys of Parcel Two in December 2005, November 2006, December 2006, April 2007, and July 2007. Compl. ¶¶ 16, 51; see also Commonwealth Cross-Claim, ECF No. 15, ¶¶ 8-13. These surveys consistently showed that the townhouse on Parcel Two was a "free-standing structure, without material easements or encroachments thereon." Compl. ¶¶ 17, 51. The plaintiff "reasonably concluded" that the townhouse could be fully demolished and redeveloped as part of the needed hotel facilities and, consequently, in April 2006, purchased Parcel Two. Id. ¶¶ 32-33. Thereafter, in 2006, the plaintiff commenced extensive renovations on the St. Regis, plans for which included demolition of the townhouse on Parcel Two and reconstruction of an addition to the hotel on that parcel. Id. ¶¶ 32, 35.

In connection with a modification of its construction financing, plaintiff purchased from Commonwealth, a Nebraska corporation with its principal place of business in Jacksonville, Florida, an Owner's Policy of Title Insurance, Policy No. 08-001112, issued on April 2, 2008, for an insurance amount of $172 million (hereinafter the "Owner's Policy"). Id. ¶ 38; Commonwealth Cross-Claim, ECF No. 15, ¶ 1; Compl., Ex. A, Owner's Policy of Title Insurance, at 4. The Owner's Policy insured plaintiff "against, inter alia, loss or damage sustained or incurred by the reason of defect in or lien or encumbrance on or unmarketability of title for [the St. Regis] and Parcel Two." Compl. ¶¶ 37-38; see also Commonwealth Answer, ECF No. 15, ¶ 38 ("Commonwealth admits that it sold Owner's Policy No. 08-001112 to the Plaintiff").*fn3 The Owner's Policy is a binding agreement between the plaintiff and defendant Commonwealth. Compl. ¶ 67; Commonwealth Answer, ECF No. 15, ¶ 67.

The Owner's Policy includes a so-called "ALTA 16 Mezzanine Endorsement," which provides that Barclays Capital Real Estate Finance, Inc. (hereinafter "plaintiff's Mezzanine Lender") has an interest in some or all of the proceeds of any claim under the Owner's Policy up to the amount of the outstanding indebtedness under the Mezzanine Loan between the plaintiff and the Mezzanine Lender. Compl. Ex. A, Owner's Policy of Title Insurance; Commonwealth Mot. Dismiss, ECF No. 8, Ex. A-1, Mezzanine Endorsement, at 1-2; Commonwealth Cross-Claim, ECF No. 15, ¶ 17.*fn4 The Mezzanine Endorsement states, in relevant part, that:

2.(a) [the Plaintiff] has assigned to the Mezzanine Lender the right to receive amounts otherwise payable to the insured under this policy, not to exceed the outstanding indebtedness under the Mezzanine Loan; .

6. (a) that the amount of insurance under this policy shall be reduced by any amount [Commonwealth] may pay under any policy insuring a mortgage to which exception is taken in Schedule B . . . and the amount so paid shall be deemed a payment under this policy; . . .

7. If the insured, the Mezzanine Lender or others have conflicting claims to all or part of the loss payable under the Policy, [Commonwealth] may interplead the amount of the loss into Court. The insured and the Mezzanine Lender shall be jointly and severally liable for [Commonwealth's] reasonable cost for the interpleader and subsequent proceedings, including attorney's fees. [Commonwealth] shall be entitled to payment of the sums for which the Insured and Mezzanine Lender are liable under the preceding sentence from the funds deposited into Court, and it may apply to the Court for their payment.

Commonwealth Mot. Dismiss, ECF No. 8, Ex. A-1, Mezzanine Endorsement, at 1-2.

In late April 2008, while construction on Parcel Two was underway, the plaintiff first discovered the existence of the party wall and immediately stopped construction. Compl. ¶ 52; Commnwealth Cross-Claim, ECF No. 15, ¶ 18. The party wall, which is 12 inches wide, serves as both the east wall of the townhouse on Parcel Two and the west wall of the office building on the adjoining property at 1522 K Street, N.W. Compl. ¶ 52; see also Commonwealth Cross-Claim, ECF No. 15, ¶ 8. The existence of the party wall, which was not disclosed on any of the surveys supplied by the defendant surveyors, rendered Parcel Two "substantially useless" to the plaintiff. Compl. ¶¶ 53, 59. The plaintiff claims that it has incurred damages in excess of $23,000,000 due to the costs of repairing the damage to the party wall, restoring the townhouse on Parcel Two and its inability to meet its deadlines and obligations under the original construction plans. Id. ¶¶ 58, 73.

Subsequent to the discovery of the party wall, in January 2009, Barclays Capital Real Estate, Inc., which was the plaintiff's Mortgage Lender, and Barclays Capital Real Estate Finance, Inc., which was the plaintiff's Mezzanine Lender (hereinafter collectively referred to as "plaintiff's Lenders"), notified Commonwealth of their claims for reimbursement of their losses against Commonwealth under both plaintiff's Owner's Policy and under the Loan Policy. See Commonwealth Mot. Dismiss, ECF No. 8, Ex. B, Notice of Claim Letter from plaintiff's Lenders to Commonwealth dated Jan. 16, 2009, at 1-2;*fn5 Commonwealth Cross-Claim, ECF No. 15, ¶¶ 19-20.*fn6 Both of the plaintiff's Lenders are Delaware corporations, with their principal place of business in New York. Commonwealth P. & A. Supp. Mot. Dismiss, ECF No. 8, at 2.

According to the plaintiff, a "Substitute Trustees' Deed" indicates that, in March 2011, the plaintiff's Mortgage Lender recorded a Notice of Foreclosure with the District of Columbia Recorder of Deeds and, a month later, sold "the subject real property"*fn7 at public auction for $25,000,000 to STR DC, LLC, a Delaware limited liability company, which thereafter assigned its right, title and interest to SRDC8 OWNER, LLC. See Pl.'s P. & A. Opp'n Mot. Dismiss, ECF No. 21 (hereinafter "Pl.'s Opp'n Mem."), at 3; Pl.'s Opp'n Mot. Dismiss, ECF No. 21, Ex. A, Substitute Trustees' Deed.

Plaintiff initiated this suit in Superior Court of the District of Columbia on March 31, 2011, and the Defendant Commonwealth removed it to this Court on April 20, 2011. Notice of Removal, ECF No. 1, ¶ 1. The Complaint contains four counts, asserting, in Count I, breach of the Owner's Policy against defendant Commonwealth and, in Counts II through IV, negligence against the defendant surveyors. Compl. ¶¶ 66-100. ...


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