On March 12, 2015, the United States Court of Appeals for the Seventh Circuit entered an opinion interpreting “the most litigated provision in the standard-form title-insurance policy purchased by real-estate lenders to protect their security interests in ongoing construction projects.” Exclusion 3(a) in the standard-form construction lender’s title policy provides that liens that are “created, suffered, assumed or agreed to” by the insured lender will not be covered under the title policy. In BB Syndication Services, Inc. v. First American Title Insurance Company, the Seventh Circuit held, in the context of a failed construction project, that this exclusion applies to mechanics’ liens arising as a result of a construction lender’s decision to declare a default and stop funding additional loans.

Background -

Like most large construction projects, the “West Edge” project in Kansas City, Missouri was funded by a combination of a cash contribution from the developer, Trilogy Development Company (the “Developer”), and a construction loan from the lender, BB Syndication Services (the “Lender”), secured by the development. The Lender’s loan documents contained the customary provisions whereby the loan proceeds were disbursed only as the project progressed and the Lender had the ability to stop funding if the loan became “out of balance” —i.e., if it became apparent that the cost of the project would exceed available funding. At closing, the Lender obtained a lender’s title insurance policy from First American Title Insurance Company (“First American”). As the project progressed, the Lender obtained an updated title policy each time it disbursed new loan proceeds.