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Geo Finance, LLC v. University Square 2751, LLC

United States District Court, E.D. Michigan, Southern Division

December 29, 2014

GEO FINANCE, LLC, Plaintiff,
v.
UNIVERSITY SQUARE 2751, LLC, Defendant, and UNIVERSITY SQUARE 2751, LLC, Third-party Plaintiff,
v.
FIRST AMERICAN TITLE INSURANCE AGENCY, Third-party Defendant.

OPINION AND ORDER GRANTING THIRD-PARTY DEFENDANT'S MOTION TO DISMISS, DISMISSING THIRD-PARTY COMPLAINT, AND DENYING MOTION TO STRIKE THIRD-PARTY PLAINTIFF'S COUNSEL'S AFFIDAVIT

DAVID M. LAWSON, District Judge.

The main dispute in this case is whether defendant University Square 2751, LLC is liable to the plaintiff for a geothermal water supply system, which had been installed on premises that University Square subsequently acquired following foreclosure proceedings. University Square contests its obligation to pay for the equipment or for the water service; but it maintains that if it is liable, all damages must be paid by its title insurer, third-party defendant First American Title Insurance Agency. Presently before the Court is First American's motion to dismiss the third-party complaint, in which it argues that as a matter of law, it cannot be liable under its title policy. It reasons that if the equipment is deemed to be a fixture for which the plaintiff failed to record its interest, the plaintiff cannot assert a claim against a good faith purchaser without notice. If University Square had no notice, the reasoning goes, it has no liability and there is no obligation for First American to indemnify. And if University Square had notice of the plaintiff's installation, there is no coverage under the plain terms of a policy exception. Finally, if the plaintiff's equipment is deemed to be personal property, First American's title policy is not implicated in any way. University Square responded to the motion by raising issues that extend beyond the pleadings. The Court allowed supplemental briefs to see if the dismissal motion should be converted to a summary judgment motion. After reviewing the submissions, the Court finds merit to First American's arguments, which compel the conclusion that the third-party complaint fails to state a viable claim against First American. Therefore, First American's motion to dismiss will be granted.

I.

The claims in this case are based on a contract between certain parties, none of whom are part of the present lawsuit. According to the original complaint, on October 29, 2001, Hardin Geotechnologies, Inc. executed two "Geoexchange Water Supply Agreements" with U-Square Associates, L.P., under which Hardin agreed "to design, construct and maintain geothermal wells, pipes, pumps, metering equipment, and related infrastructure ("Geothermal Equipment") necessary to operate a geoexchange water supply system that provided sufficient water to heat and cool two office buildings located at 2751 and 2761 E. Jefferson Ave. Detroit, Michigan 48207." Compl. ¶¶ 5-6. The agreement required U-Square to pay a monthly fee to Hardin based on metered water usage, and stated that all of the installed equipment would remain the property of Hardin. U-Square evidently had an option under the agreement to purchase the equipment, but it never exercised that option.

On September 30, 2010, Hardin defaulted on loans that it owed to its lender Old National Bank. Subsequently, plaintiff GEO Finance, LLC put together a funding package under which it paid off the defaulted Old National Bank loans in exchange for acquiring all of Hardin's assets, including all of its rights and obligations relating to the geothermal equipment. According to GEO Finance, "[f]rom June 1, 2011 through October 2012, GEO Finance was paid for the monthly usage of the Geothermal Equipment by the owner of the property, just as U-Square had paid Hardin since 2001." Compl. ¶ 12.

In October 2012, the property was foreclosed and sold at a sheriff's sale. Subsequently, the purchaser at the sheriff's sale sold the property to defendant University Square. GEO Finance contends that it had no notice of the foreclosure or sheriff's sale, that since University Square acquired the property it has received no payments under the geothermal equipment agreement, and that University Square has refused even to allow meter readers on the property to record metered water usage, despite the fact that the equipment continues to be used to heat and cool the office buildings. GEO Finance alleges that University Square owes it more than $50, 000 for use of the equipment, and that this sum continues to increase at an estimated rate of $5, 000 per month. GEO Finance also asserts that the fair market value of its equipment exceeds $200, 000, and that University Square has illegally converted all of the equipment to its own use by refusing either to make required payments or to surrender it.

On June 12, 2012, third-party defendant First American issued to University Square a title insurance policy covering the property at 2751-2761 East Jefferson Avenue, Detroit, Michigan. As noted above, on October 29, 2012, University Square completed its purchase of the East Jefferson property, after it had been foreclosed and sold at the sheriff's sale. The title policy's "Covered Risks" section states that it insures against "[a]ny defect in or lien or encumbrance on the Title, " including any "defect in the Title caused by... (vi) a document not properly filed, recorded, or indexed in the Public Records including failure to perform these acts by electronic means authorized by law...." Third Party Compl., Ex. A, Policy at 1.

University Square alleges in its third-party complaint that "[t]he title work showed no interest in the Property (either real or personal) that was filed by Plaintiff GEO Finance, or its predecessor in interest." Third Party Compl. ¶ 12, Ex. A. University Square also alleges in the third-party complaint - as it contends in its defense to the original complaint - that the geothermal equipment "is completely integrated into the Property (wall, ground, and ceiling), and is actually a fixture.'" Third Party Compl. ¶ 16. University Square asserts that it had no notice of any lien or leasehold interest relating to the equipment before it bought the property.

When the original complaint was filed, University Square submitted a claim for coverage under the policy to First American and requested that the insurer defend University Square according to its obligations under the policy. First American denied the claim, explaining:

The Complaint that was filed by GEO Finance, LLC, contains counts for conversion, unjust enrichment, and breach of contract. None of these counts are covered under the insuring provisions of the policy, and [they] are outside the scope of the policy.

Although there is no coverage for this matter it is important to understand that even if an argument could be made that the matter is within an insuring provision, the insuring provisions are subject to the remaining terms of the policy. Schedule B of the policy provides that:

This policy does not insure against loss or damage, and the Company will not pay costs, attorneys' fees, or expenses that arise by reason of:
1. Any facts, rights, interests, or claims that are not shown by the Public Records but that could be ascertained by an inspection of the Land or that may be asserted by persons in possession of the Land.
The presence of the equipment owned by GEO Finance, LLC was not shown by the public records but could have been ascertained by an inspection of the land. As such, this ...

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