First Dakota National Bank v. Old Republic National Title Insurance Company

UNITED STATES DISTRICT COURT

DISTRICT OF SOUTH DAKOTA

SOUTHERN DIVISION

FIRST DAKOTA NATIONAL BANK, 4:21-CV-04190-VLD

Plaintiff,

vs. MEMORANDUM OPINION ON

CROSS-MOTIONS FOR SUMMARY

JUDGMENT

OLD REPUBLIC NATIONAL TITLE

INSURANCE COMPANY,

Defendant.

INTRODUCTION

This matter is before the court on First Dakota National Bank’s

complaint alleging Old Republic National Title Insurance Company’s bad faith

denial of insurance coverage and seeking a declaratory judgment confirming

coverage. Docket No. 1, ¶¶ 42–52. Pursuant to 28 U.S.C. § 1332, jurisdiction

is premised on the parties’ diversity of citizenship. Id. ¶¶ 1–2, 41; Docket No.

12, ¶¶ 2, 27. Pending are Old Republic’s motion for summary judgment,

Docket No. 36, and First Dakota’s motion for partial summary judgment,

Docket No. 41.

FACTS1

Arlo and Betty Clemensen owned and farmed approximately 1,440 acres

of Spink County, South Dakota farmland (the “Property”). Docket No. 40, ¶ 1.

Ron Clemensen is the son of Arlo and Betty. Id. ¶ 2. Arlo passed away in

2011, and Ron became the primary caregiver to Betty and began assisting with

her financial affairs. Id. ¶ 3. Betty created a revocable trust called the Betty

Clemensen Living Trust, dated July 29, 2014 (“Betty’s Trust”). Id. ¶ 4. Betty

was the initial trustee of Betty’s Trust. Id. ¶ 5. Betty transferred ownership of

the Property into Betty’s Trust. Id. ¶ 6.

In July 2016, Ron submitted two applications to First Dakota National

Bank, each for a loan in the principal amount of $750,000, for a total of

$1,500,000 (the “Loans”), which First Dakota ultimately approved. Id. ¶ 8.

The proceeds from the Loans were paid to Dacotah Bank to pay down loans it

previously made to Arlo, Betty, and Ron jointly as well as to Ron personally.

Docket No. 45, ¶ 14. The Loans were to be secured by two mortgages on the

Property, one mortgage for each of the two loans (the “Mortgages”). Docket No.

40, ¶ 9. Land owned by Ron’s Living Trust was also mortgaged. Docket No.

45, ¶ 2. First Dakota ordered and received title commitments from Spink

County Abstract & Title Insurance Inc. Docket No. 40, ¶ 10. Spink County

Title is an agent of Old Republic for the purpose of issuing title commitments

1 For readability, the court omits most quotation marks and citations to

exhibits, the parties’ statements of undisputed material facts, or responses to

those statements.

and title insurance policies underwritten by Old Republic, pursuant to the

terms of a written agency agreement. Id. ¶ 11.

Upon its review of the title commitments, First Dakota came to learn that

the Property was owned by Betty’s Trust. Id. ¶ 12. A training manual created

for First Dakota’s closing specialists instructed that if a trust was a borrower,

the “Full Trust Agreement (no exceptions)" needed to be obtained and reviewed

in its entirety “to determine there is proper evidence of who signs and what

powers are given.” Id. ¶ 13; Docket No. 37-3 at pp. 3–4; Docket No. 48-1, ¶ 13;

Docket No. 48-2, ¶ 5.

The manual also instructed: “Watch for any hidden options to purchase

or caveats that affect the use of the collateral to be granted,” and included

“[s]pecific trust authorization to borrow money and pledge trust property as

collateral” among the items “most important to pay attention to.” Docket No.

37-3 at p. 4; Docket No. 40, ¶ 14; Docket No. 48-1, ¶ 14. It further

emphasized, “Power of Attorney cannot sign for a trust or other entity.” Docket

No. 37-3 at p. 4 (bold red text omitted); Docket No. 40, ¶ 15.

Prior to closing, First Dakota requested, received, and reviewed a copy of

the trust agreement for Betty’s Trust. Docket No. 40, ¶ 16. It also requested,

received, and reviewed an unsigned certificate of trust for Betty’s Trust that

was to be signed by Betty at closing. Id. ¶ 17. The certificate of trust identified

Betty as the sole “present Trustee” of Betty’s Trust, expressly stated that the

Trustee (Betty) was authorized to encumber and otherwise deal with interests

in real property in Betty’s Trust’s name, and provided a signature line for only

Betty to sign as Trustor and Trustee. Id. ¶ 18.

In an email between Shane Pick, Dakota MAC Closing Specialist, and

Corey Maaland, Dakota MAC Loan Production Officer, Maaland was advised by

Mr. Pick that “Betty Clemensen [would] have to be at the closing to sign the

Mortgage and a Trust Certificate.” Docket No. 37-10 at pp. 2–3. First Dakota

had its closing specialist review the power of attorney and sent it to the

secondary market (Agri-Access) for review and approval. Docket No. 45, ¶ 17.

Betty was unable to attend the closing, so First Dakota gave Ron

permission to use a power of attorney to sign the Mortgages on behalf of Betty’s

Trust. Docket No. 40, ¶ 19; Docket No. 45, ¶ 3. A few months before, Ron

used the same power of attorney to sign three mortgages granted by Betty’s

Trust to Great Plains Bank as security for Ron’s loans. Docket No. 45, ¶ 18.

Ron represented to First Dakota that he had authority to execute the

Mortgages on behalf of Betty’s Trust. Id. ¶ 19. First Dakota did not have much

experience using a power of attorney in lending situations. Id. ¶ 16. First

Dakota requested a copy of the power attorney, and it received and reviewed a

document entitled “Property Power of Attorney of Betty Clemensen.” Docket

No. 40, ¶ 20. First Dakota did not send a copy of any power of attorney

documents to Spink County Title either before or after the closing. Id. ¶ 22.

First Dakota prepared the Mortgages and other loan documents to be signed at

closing. Id. ¶ 23.

First Dakota conducted the closing at Ron’s home in his kitchen on

September 29, 2016. Docket No. 40, ¶ 25. It is not unusual for lenders to

close their own transactions, nor do the Title Policies prohibit a lender from

closing its own transaction. Docket No. 45, ¶¶ 34–35. First Dakota never met

with Betty at any time. Docket No. 40, ¶ 27. Ron signed both mortgages

“Ronald Clemensen Poa” on a line designated “Ronald Clemensen, Power of

Attorney of the Betty Clemensen Living Trust dated July 29, 2014.” Id. ¶ 28;

Docket No. 37-7 at p. 13 (this signature block included a middle initial “P.”);

Docket No. 37-8 at p. 13. First Dakota employee Corey Maaland notarized

Ron’s signatures on the Mortgages and further certified in the

acknowledgement on the Mortgages that Ron was "known to me to be an

authorized trustee or agent of the trust that executed the Mortgage[s]." Docket

No. 40, ¶ 29. First Dakota did not have Ron sign the certificate of trust for

Betty’s Trust. Id. ¶ 30. Betty signed the certificate of trust the following day.

Id. ¶ 31. First Dakota hand-delivered the signed Mortgages to the Spink

County Register of Deeds for recording on the same day of the closing. Id.

¶ 32. First Dakota did not provide the Mortgages to Spink County Title prior to

closing or prior to recording. Id. ¶ 33. There was no requirement that it do so.

Docket No. 45, ¶ 25.

After the closing, at the request of First Dakota, Spink County Title, as

agent for Old Republic, issued a loan policy of title insurance for each of the

two Mortgages (the “Title Policies”). Docket No. 40, ¶ 34. The Title Policies

utilize the standard form ALTA Loan Policy of Title Insurance 6-17-06 and

contain identical Covered Risks, Exclusions from Coverage, Exceptions from

Coverage, and Conditions. Id. ¶ 35. The Title Policies were effective September

29, 2016, the same date as the Mortgages. Docket No. 45, ¶ 22. When a

customer closes its own transaction, Spink County Title reviews the closing

documents — including the mortgage — to ensure the documents are

satisfactory before issuing the final policy. Id. ¶ 36. Spink County Title — Old

Republic’s agent — reviewed the Mortgages prior to issuing the final Title

Policies. Id. ¶ 24. Agri-Access, a non-party lender, participated in the Loans at

100% participation. Docket No. 40, ¶ 36.

Brock Klapperich is Betty’s grandson and Ron’s nephew. Id. ¶ 37. Upon

becoming aware of the Loans and Mortgages, after Ron defaulted, Klapperich,

acting as Betty’s temporary conservator and the successor trustee of Betty’s

Trust, filed a lawsuit against First Dakota in December 2017 in the Spink

County Circuit Court (the “Klapperich Lawsuit”). Id. ¶ 38; Docket No. 45, ¶ 4.

The original complaint in the Klapperich Lawsuit asserted two counts against

First Dakota: (1) declaratory judgment that the Mortgages were void because

Ron did not have authority to bind Betty’s Trust when he executed the

Mortgages ostensibly on behalf of Betty’s Trust; and (2) declaratory judgment

that the Mortgages are void because Ron as attorney-in-fact did not have the

power to self-deal and the Mortgages did not benefit Betty. Docket No. 40,

¶ 39.

First Dakota tendered notice of the Klapperich Lawsuit to Old Republic,

“report[ing] a potential claim on the [Title Policies].” Id. ¶ 40; Docket No. 48-10.

Old Republic investigated the claims and issued a coverage determination letter

dated January 12, 2018, in which Old Republic agreed to provide a defense to

First Dakota against the declaratory judgment counts, subject to a reservation

of rights to deny liability and terminate coverage if Old Republic discovered

facts or other information that would indicate that there was no coverage for

the loss. Docket No. 40, ¶ 41. Old Republic reserved the right to reevaluate

coverage if First Dakota knew, participated, and/or contributed to Ron’s

alleged self-dealing and/or alleged lack of authority. Id. ¶ 42. It cited to

Klapperich’s allegation that First Dakota knew or should have known that Ron

did not have the authority to self-deal. Id. Old Republic’s reservation was

based on First Dakota’s knowledge, conduct, and effect flowing from the fact

that First Dakota “structured the loans to the security instruments,” conducted

its own closing, and disbursed the loan proceeds. Id. Old Republic also “[c]ited

to Exclusion 3 in the Title Policies, which provides that Old Republic will not

pay loss or damage, costs, attorneys’ fees, or responses2 that arise by reason of

defects, liens, encumbrances, adverse claims, or other matters created,

suffered, assumed, or agreed to by [First Dakota].” Id.

Old Republic retained attorney Reed Rasmussen of the Siegel, Barnett &

Schutz law firm to represent and defend First Dakota against the declaratory

judgment counts. Id. ¶ 43.

2 The exclusion states “expenses,” not “responses.” See Docket No. 37-15 at p.

4. First Dakota did not dispute the term “responses,” so it controls for

purposes of adjudicating Old Republic’s motion. Wallace v. FIMCO Inc., 4:23-

CV-04045-VLD, 2024 WL 3624770, at *1 n.3 (D.S.D. Aug. 1, 2024) (citing

D.S.D. L.R. 56.1(D)).

Shortly after the Klapperich Lawsuit was filed, Agri-Access requested

that First Dakota buy back the Loans. Id. ¶ 44. First Dakota bought back

50% of the Loans. Id. ¶ 48.

First Dakota submitted a claim with its errors and omissions insurer

after the Klapperich Lawsuit was filed, but the claim was rejected as untimely.

Id. ¶ 49.

On or about October 3, 2018, Klapperich filed an amended complaint in

the Klapperich Lawsuit which added new counts against First Dakota,

including conspiracy to exert undue influence, conspiracy to commit

conversion, civil conspiracy, unjust enrichment, and a RICO claim. Id. ¶ 50.

Old Republic reviewed the amended complaint and, in a letter to First Dakota

dated October 24, 2018, confirmed that it would continue to provide a defense

to First Dakota as to the declaratory judgment counts subject to the

reservations outlined in the January 12, 2018, letter. Id. ¶ 51. Old Republic

further informed First Dakota that it would not provide a defense as to

Klapperich’s newly added counts against First Dakota because they were tort

claims that, if proven true, would not result in a loss under any of the Covered

Risks listed in the Title Policies. Id. ¶ 52.

During settlement discussions in the Klapperich Lawsuit, Old Republic

offered an amount, disputed among the parties as either $200,000 or

$375,000. Id. ¶ 53; Docket No. 38, ¶ 5; Docket No. 48-1, ¶ 53; Docket No. 48-

2, ¶ 3. Old Republic was willing to contribute more, but the mediation ended

before it had the opportunity to increase its offered contribution. Docket No.

40, ¶ 53.

After several years of litigation, Klapperich filed a motion for partial

summary judgment as to the declaratory judgment counts against First

Dakota. Id. ¶ 54. That motion culminated in a memorandum decision in

Klapperich’s favor dated March 5, 2021, in which the court ruled the Mortgages

were void. Id. The court found that “[s]ince Betty appointed herself as trustee

of [Betty’s Trust], she alone, acting as trustee, had the power to encumber the

Trust estate with mortgages.” Docket No. 37-1 at p. 7. The court stated that a

section of Betty’s Trust “allows for an attorney-in-fact to act on Betty’s behalf

as trustor. It does not confer the powers of a trustee onto an attorney-in-fact,

nor could it.” Id. at p. 8. Turning its attention to the power of attorney, the

court held it did “not specifically allow Ron to mortgage [the Property] for his

own benefit.” Id. at p. 9.

Shortly after that memorandum decision, Old Republic sent a letter to

First Dakota dated March 22, 2021, that reaffirmed the reservation of rights in

light of the factual findings and conclusions made by the Spink County Circuit

Court, reaffirmed that Old Republic was not defending First Dakota against the

“tort claims,” and confirmed that Old Republic authorized Attorney Rasmussen

to pursue an appeal at Old Republic’s expense. Docket No. 40, ¶ 56.

Following the memorandum decision, Klapperich filed a third amended

complaint that asserted slander of title, breach of the implied covenant of good

faith and fair dealing, aiding and abetting breach of fiduciary duty, conversion,

exploitation of the elderly, and unjust enrichment. Id. ¶ 57. Old Republic

reviewed the third amended complaint and, in a letter to First Dakota dated

April 6, 2021, confirmed that it was not defending First Dakota against the tort

claims3 because the Title Policies do not provide coverage against such claims.

Id. ¶ 58. It also restated that it had authorized Attorney Rasmussen to pursue

an appeal of the court’s memorandum decision at Old Republic’s expense and

reiterated its reservation of rights to deny indemnification pursuant to the

terms of the Title Policies. Id.

First Dakota retained its own counsel to defend against the “tort claims.”

Id. ¶ 59. First Dakota elected to settle the tort claims with Mr. Klapperich. Id.

¶ 60. Old Republic decided not to pursue an appeal of the declaratory

judgment counts, but the parties dispute the reason for that decision. Id.;

Docket No. 48-1, ¶ 60.

First Dakota filed its complaint with this court on November 12, 2021.

Docket No. 1. It seeks a “judicial determination . . . that the actions alleged by

3 Slander of title, conversion, exploitation of the elderly, and breach of fiduciary

duty are torts. RESTATEMENT (SECOND) OF TORTS § 624 (AM. LAW INST. 1977);

Mach v. Connors, 979 N.W.2d 161, 172 (S.D. 2022); cf. In re Certification of a

Question of Law, 981 N.W.2d 325, 331–35 (S.D. 2022); In re Elizabeth A.

Briggs Tr., 898 N.W.2d 465, 471 (S.D. 2017). “South Dakota does not

recognize an independent tort for breach of the implied covenant of good faith

and fair dealing.” Nygaard v. Sioux Valley Hosps. & Health Sys., 731 N.W.2d

184, 193 (S.D. 2007) (quotation omitted) (cleaned up). That cause of action

sounds in contract. Id. at 193–94 (citations omitted). Unjust enrichment is

not a tort, it is an equitable doctrine. Mack v. Mack, 613 N.W.2d 64, 69 (S.D.

2000); see RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT § 1 (2011).

The letter from Old Republic listed all these claims in bullet point fashion and

stated: “If the allegations are taken as true as to the above-listed tort claims in

the Third Amended Complaint, there would be no loss falling under any of the

Covered Risks of the policy.” Docket No. 37-22 at p. 2 (emphasis added).

Klapperich in the [t]hird [a]mended [c]omplaint . . . are Covered Risks and not

Exclusions from Coverage as set forth in the [Title Policies].” Id. ¶ 43. It

further “seeks a judicial determination that Old Republic should provide

and/or pay it $1,500,000.00 and all other covered costs and expenses

associated with the Klapperich [Lawsuit],” as well as attorney’s fees. Id. ¶¶ 44-

45. First Dakota also brings a count of bad faith denial of insurance coverage.

Id. ¶¶ 46–52.

DISCUSSION

A. Summary Judgment Standard

Summary judgment is appropriate where “the movant shows that there is

no genuine dispute as to any material fact and the movant is entitled to

judgment as a matter of law.” FED. R. CIV. P. 56(a). It is, therefore, the moving

party’s burden “to establish both the absence of any genuine issue of material

fact and that the moving party is entitled to judgment as a matter of law.” S.

Black Hills Water Sys., Inc. v. Town of Hermosa, 5:21-CV-05070-VLD, 2023 WL

4824956, at *4 (D.S.D. July 27, 2023). “Once the movant has met its burden,

the nonmoving party may not simply rest on the allegations in the pleadings,

but must present facts, by affidavit or other evidence, showing that a genuine

issue of material fact exists.” Id. (citing Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 256 (1986); FED. R. CIV. P. 56(e)). That evidence must be sufficiently

probative to “permit a finding in [the non-moving party’s] favor on more than

mere speculation, conjecture, or fantasy.” Musolf v. J.C. Penney Co. Inc., 773

F.3d 916, 918 (8th Cir. 2014) (citation omitted). The court will “review the

evidence and the inferences which reasonably may be drawn from the evidence

in the light most favorable to the nonmoving party.” Id. (citation omitted).

“[C]ross-motions [for summary judgment] require the court to evaluate each

motion independently.” Black Hills, 2023 WL 4824956, at *5 (citations

omitted).

Pursuant to the choice of law provision in the Title Policies, South

Dakota law governs this matter. See Docket No. 1-6 at p. 11; Docket No. 1-7 at

p. 11.

B. Old Republic’s Motion for Summary Judgment

1. Declaratory Judgment as to Coverage

a. Whether Old Republic has a Duty to Indemnify the Loss

from the Klapperich Lawsuit’s Declaratory Judgment

Counts

First Dakota “seeks a judicial determination . . . pursuant to the [Title

Policies] that the actions alleged by Klapperich in the Third Amended

Complaint against [First Dakota] are Covered Risks and not Exclusions From

Coverage.” Docket No. 1, ¶ 43. Old Republic seeks summary judgment on this

claim.

The court first analyzes Klapperich’s declaratory judgment counts, which

ultimately led to a conclusion that the Mortgages were void.

Under the Covered Risks listed in the Title Policies are the following:

2 Any defect in or lien or encumbrance on the Title. This

Covered Risk includes but is not limited to insurance against loss

from

(a) A defect in the Title caused by . . .

(v) a document executed under a falsified, expired,

or otherwise invalid power of attorney[.]

9 The invalidity or unenforceability of the lien of the Insured

Mortgage upon the Title. This Covered Risk includes but is not

limited to insurance against loss from any of the following

impairing the lien of the Insured Mortgage . . .

(c) the Insured Mortgage not being properly created,

executed, witnessed, sealed, acknowledged, notarized, or

delivered . . .

(e) a document executed under a falsified, expired, or

otherwise invalid power of attorney[.]

Docket No. 42-6 at pp. 1–2; Docket No. 42-7 at pp. 1–2.

The Spink County Circuit Court held that only Betty Clemensen, as

trustee, had the power to encumber the Property with mortgages and that

Betty’s Trust did “not confer the powers of a trustee onto an attorney-in-fact,

nor could it.” Docket No. 37-1 at pp. 7–8. It further held that “the Power of

Attorney itself does not specifically allow Ron to mortgage [Betty’s Trust]’s

estate for his own benefit.” Id. at p. 9. The court held the Mortgages were void,

“invalid or unlawful from [their] inception.” Id. at p. 10 (quoting Hanna v.

Landsman, 945 N.W.2d 534, 545 (S.D. 2020)).

Old Republic denies the duty to indemnify First Dakota’s loss on two

theories: Exclusion 3(a) and Exclusion 3(b) of the Title Policies. Docket No. 39

at pp. 16–22.

i. Exclusion 3(a)

Exclusion 3(a) states:

The following matters are expressly excluded from the coverage of

this policy, and the Company will not pay loss or damage, costs,

attorneys’ fees, or expenses that arise by reason of

3 Defects, liens, encumbrances, adverse claims, or other

matters [hereinafter “defect”]

(a) created, suffered, assumed, or agreed to by the

Insured Claimant[.]

Docket No. 42-6 at p. 2; Docket No. 42-7 at p. 2.

Old Republic argues that First Dakota “created, suffered, assumed, and

agreed” to the defect in the Mortgages because it ignored language in its

training manual cautioning that a power of attorney cannot sign for a trust.

Docket No. 39 at pp. 17–19. Old Republic also cites to manual text advising a

review of the trust document “in its entirety” to determine what powers it

conveys “to borrow money and pledge trust property as collateral,” and to

whom. Id. at p. 17. Old Republic points out that Shane Pick, Dakota MAC

Closing Specialist told Corey Maaland, Dakota MAC Loan Production Officer in

an email that “Betty Clemensen will have to be at the closing to sign the

Mortgage and a Trust Certificate.” Id. at p. 18; see Docket No. 37-10 at p. 3.

First Dakota counters that its employees’ ignorance rises only to the level

of negligence, but that to “create, suffer, assume, or agree” to a defect requires

intent. Docket No. 48 at pp. 2–9.

Under South Dakota law, “[e]very insurance contract shall be construed

according to the entirety of its terms and conditions as set forth in the policy

and as amplified, extended, or modified by any rider, endorsement, or

application lawfully made a part of the policy.” SDCL § 58-11-39. “To

determine the scope of coverage in an insurance policy, [the court] confine[s]

[itself] to the plain and ordinary meaning of the language of the policy and may

not make a forced construction or a new contract for the parties.” Larimer v.

Am. Family Mut. Ins. Co., 926 N.W.2d 472, 475 (S.D. 2019) (quotation

omitted). “When an insurer seeks to invoke a policy exclusion as a means of

avoiding coverage, the insurer has the burden of proving that the exclusion

applies.” Id. (quotation omitted).

Whether insurance contract language is ambiguous is a question of law.

Ass Kickin Ranch, LLC v. N. Star Mut. Ins. Co., 822 N.W.2d 724, 726 (S.D.

2012) (citations omitted). If there is “genuine uncertainty as to which of two or

more meanings is correct, the policy is ambiguous.” Cornelius v. Nat’l Cas.

Co., 813 N.W.2d 167, 169 (S.D. 2012) (quotation omitted). “Where the contract

is ambiguous, ‘the interpretation most favorable to the insured should be

adopted.’ ” Larimer, 926 N.W.2d at 475–76 (quoting Ass Kickin Ranch, 822

N.W.2d at 727).

The South Dakota Supreme Court has yet to interpret Exclusion 3(a).

This court must predict how that court would interpret the provision. Hot Stuff

Foods, LLC v. Hous. Cas. Co., 771 F.3d 1071, 1075 (8th Cir. 2014). Old

Republic claims, “there is no serious debate over [the] meaning[ ]” of the words

“created,” “suffered,” “assumed,” and “agreed to.” Docket No. 39 at pp. 16–17.

The court disagrees.

Old Republic argues First Dakota “ ‘created’ the defect in the Mortgages

when it drafted the Mortgages for Ron’s signature, gave him permission to use

a power of attorney to sign, and then recorded the Mortgages.” Id. at p. 19. It

also states First Dakota “ ‘agreed’ to the defect . . . when it notarized Ron’s

signatures . . . and then recorded the Mortgages.” Id. The court could

construe these arguments as First Dakota created, or agreed to, the defect by

creating the Mortgages. See Docket No. 54 at p. 3 (“[T]here is no dispute that

[First Dakota] itself drafted the Mortgages, had Ron sign on behalf of Betty’s

Trust, conducted the closing, and recorded the Mortgages. These acts are the

very definition of bringing the defective Mortgages into being, causing the

defective Mortgages to exist, and producing the Defective Mortgages.”). But if

Old Republic’s insured bear the risk of a defect or adverse claim simply by

creating mortgages, then the coverage would be illusory. There must be some

plus factor to rise to the level of “created,” “suffered,” “assumed,” or “agreed to”

a defect.

The court could construe that plus factor in terms of constructive

knowledge, i.e., First Dakota created the defect because it should have known

Ron Clemensen was an improper signatory for Betty’s Trust. See Nelson v.

Nelson Cattle Co., 513 N.W.2d 900, 905 (S.D. 1994) (“A person has

constructive knowledge of a risk if it is plainly observable so that anyone of

competent faculties is charged with knowledge of it.”) (citation omitted). A

similar interpretation might sound in negligence. See, e.g., Docket No. 48 at

p. 5 (“First Dakota’s failure to follow its internal training policies concerning

review of documents and use of a power of attorney can establish, at best,

negligence.”). While the court agrees such interpretations are reasonable, the

exclusion contains verbs better understood as active undertakings, not passive

consequences. See Am. Sav. & Loan Ass’n v. Lawyers Title Ins. Corp., 793 F.2d

780, 784 & n.1 (6th Cir. 1986) (quoting, inter alia, Brown v. St. Paul Title Ins.

Co., 634 F.2d 1103, 1107–08 n.8 (8th Cir. 1980)). The Sixth Circuit explains:

The term “created” has generally been construed to require a

conscious, deliberate and sometimes affirmative act intended to

bring about the conflicting claim, in contrast to mere inadvertence

or negligence. Similarly, the term “suffered” has been interpreted

to mean consent with the intent that “what is done is to be done,”

and has been deemed synonymous with “permit,” which implies

the power to prohibit or prevent the claim from arising. Further,

an insured does not assume an assessment against property

“merely because he agreed to take the property ‘subject to’ any

assessments.” “Assume,” under this definition requires knowledge

of the specific title defect assumed. And “agreed to” carries

connotations of “contracted,” requiring full knowledge by the

insured of the extent and amount of the claim against the

insured’s title. As with the other terms, this definition implies

some degree of intent.

Id. (citations omitted).

Reasonable and most favorable to the insured would be to construe the

plus factor in terms of such fulfilled intent. The intentional conduct “need not

constitute misconduct.” See Transamerica Title Ins. Co. v. Alaska Fed. Sav &

Loan Ass’n, 833 F.2d 775, 776 (9th Cir. 1987). Reading a requirement of

misconduct into the provision would artificially narrow it. But the court

recognizes that in most instances, an intent to create a defect will be attended

by some degree of mischief.

This interpretation complements Exclusion 3(b), which excludes defects

actually known to the insured but not in the public record. See, e.g., Docket

No. 42-6 at p. 2. Implicit in that exclusion is the recognition that the issuance

of title insurance follows an abstraction—“allowing the insurer to reduce or

eliminate risk by conducting a careful title search to identify defects.” Cf.

Captiva Lake Invs., LLC v. Fid. Nat’l Title Ins. Co., 883 F.3d 1038, 1043 (8th

Cir. 2018) (quotation omitted). And so, the contract places the onus for failing

to uncover a public defect on the insurer—except (and this is where Exclusion

3(a) comes in)—when the insured is the architect of that defect. The

remaining, unknown risk gets priced into the premium. See Gregory v.

Clausen, 99 N.W.2d 883, 885 (S.D. 1959) (“Contracts of insurance . . .

indemnify against loss, damage, or liability arising from an unknown or

contingent event.”) (quotation omitted).

These conclusions fit neatly with the Eighth Circuit’s construction of

Exclusion 3(a), which the court adopts: the exclusion applies “where the

defects . . . [are] caused by deliberate, dishonest, illegal, or inequitable dealings

by the insured.” Chi. Title Ins. Co. v. Resolution Tr. Corp., 53 F.3d 899, 907

(8th Cir. 1995) (quotation omitted).

Applying that construction to the facts, the court concludes there

remains a genuine dispute of material fact as to whether the defective

Mortgages were the product of First Dakota’s “deliberate, dishonest, illegal, or

inequitable” acts. Old Republic refers the court to an email where Dakota MAC

employee Shane Pick stated, “Betty Clemensen will have to be at the closing to

sign the Mortgage and a Trust Certificate.” Docket No. 40, ¶ 24; Docket No.

37-10 at p. 3. Yet at Pick’s deposition, he testified to an understanding that

the power of attorney negated the need for Betty’s presence. Docket No. 37-2

at pp. 9-10 (Pick Depo. at pp. 35-39). It is not for this court on a motion for

summary judgment to weigh such evidence or make credibility determinations.

Kenney v. Swift Transp., Inc., 347 F.3d 1041, 1044 (8th Cir. 2003) (citation

omitted).

Old Republic argues the Spink County Circuit Court’s “dispositive finding

that [First Dakota] took a calculated risk and bore that risk” controls the

outcome. Docket No. 54 at p. 10. Presumably its argument arises under the

doctrine of collateral estoppel. See id. at pp. 8–9. The argument is misplaced.

Collateral estoppel bars the “relitigation of an essential fact or issue

involved in an earlier suit.” Estes v. Millea, 464 N.W.2d 616, 618 (S.D. 1990).

In other words, the issue must have been “essential to the judgment” in the

prior suit. In re Mehrer, 273 N.W.2d 194, 198 (S.D. 1979) (quotation omitted).

The circuit judge’s discussion of risk invoked by Old Republic related to First

Dakota’s claim of unjust enrichment brought against Betty’s Trust. See Docket

No. 37-1 at pp. 10–14. In resolving that claim, the circuit judge found that

First Dakota did not confer a benefit on to Betty’s Trust. Id. at p. 10. That

finding alone was fatal to the unjust enrichment claim. See Mack v. Mack, 613

N.W.2d 64, 69 (S.D. 2000). All that came thereafter, including the discussion

of risk, was merely dicta. It retains no power for purposes of collateral

estoppel. Even if it did, the circuit judge found First Dakota “bore the risk of

loss” by examining the text of various documents—the certificate of trust, the

power of attorney. See Docket No. 37-1 at p. 13. This court held above that

Exclusion 3(a) requires more than constructive knowledge—it requires proof of

fulfilled intent. For that purpose, the circuit judge’s opinion does not bar

litigation of whether Exclusion 3(a) bars coverage for First Dakota’s claim.

The court denies summary judgment as to Exclusion 3(a).

ii. Exclusion 3(b)

Exclusion 3(b) states:

The following matters are expressly excluded from the coverage of

this policy, and the Company will not pay loss or damage, costs,

attorneys’ fees, or expenses that arise by reason of

3 Defects, liens, encumbrances, adverse claims, or other

matters [hereinafter “defect”] . . .

(b) not Known to the Company, not recorded in the Public

Records at Date of Policy, but Known to the Insured

Claimant and not disclosed in writing to the Company by the

Insured Claimant prior to the date the Insured Claimant

became an Insured under this policy[.]

Docket No. 42-6 at p. 2; Docket No. 42-7 at p. 2.

“Knowledge” or “Known” is defined as “[a]ctual knowledge, not

constructive knowledge or notice that may be imputed to an insured by reason

of the Public Records or any other records that impart constructive notice of

matters affecting the Title.” Docket No. 42-6 at p. 3; Docket No. 42-7 at p. 3.

The South Dakota Supreme Court has yet to interpret Exclusion 3(b).

Old Republic points to a First Dakota training manual’s language that a

“Power of Attorney cannot sign for a trust” as sufficient to establish actual

knowledge. Docket No. 39 at p. 20. The court disagrees. Old Republic

supplies no facts showing any employee involved in creating the Mortgages was

aware of the manual. Absent such facts, Old Republic is merely imputing

knowledge to First Dakota “by reason of . . . other records,” an act expressly

proscribed by the policy’s definition of “Known.” Docket No. 42-6 at p. 3;

Docket No. 42-7 at p. 3.

Old Republic repeats the mistake by imputing knowledge to First Dakota

from the language of the Trust Agreement, the Certificate of Trust, and the

Power of Attorney. Docket No. 39 at pp. 20–21.

By providing no facts establishing First Dakota’s actual knowledge of the

defects, Old Republic fails to meet its burden of establishing that there is no

genuine dispute as to material fact on the issue. The court denies summary

judgment as to Exclusion 3(b).

b. Whether Old Republic Had a Duty to Defend the

Additional Claims in the Third Amended Complaint

In First Dakota’s complaint, it seeks declaratory judgment “that the

actions alleged by Klapperich in the Third Amended Complaint against [First

Dakota] are Covered Risks.” Docket No. 1, ¶ 43. It also seeks declaratory

judgment that Old Republic should pay “all . . . covered costs and expenses

associated with the Klapperich [Lawsuit].” Id. ¶ 44.

Old Republic interprets those claims as meaning it is on the hook for the

cost of defending all of Klapperich’s counts—from all iterations of the

Klapperich complaint—not just the declaratory judgment counts it did defend.

Cf. Docket No. 39 at pp. 8–16. As such, it briefed not only why the additional

counts are not Covered Risks, but why the “in for one, in for all” or “complete

defense” rule, adopted by South Dakota, is inapplicable in the title insurance

context.4 Id.

4 This rule states “[i]f just one claim falls within the policy coverage, the insurer

must defend even though the pleadings are ambiguous or reveal other claims

not covered in the policy, and notwithstanding that extraneous facts indicate

The court need not wade into the “complete defense” argument, a matter

of first impression in South Dakota, because First Dakota’s response brief

argues only one narrow issue: whether slander of title must be defended

because it is arguably a Covered Risk. Docket No. 48 at pp. 21–23. The

remaining arguments are waived. Satcher v. Univ. of Ark. at Pine Bluff Bd. of

Trs., 558 F.3d 731, 735 (8th Cir. 2009).

Condition 5 of the Title Policies state:

[Old Republic] shall provide for the defense of an Insured in

litigation in which any third party asserts a claim covered by this

policy adverse to the Insured[.] This obligation is limited to only

those stated causes of action alleging matters insured against by

this policy[.]

Docket No. 42-6 at p. 4; Docket No. 42-7 at p. 4.

Slander of title is a tort. RESTATEMENT (SECOND) OF TORTS § 624 (AM. LAW

INST. 1977). Old Republic argues it has no duty to defend First Dakota against

tort claims because “they are not attacks on title.” Docket No. 39 at p. 9. Old

Republic reasons that if the tort claims were “proven true, [they] would not

result in a loss under any of the Covered Risks listed in the Title Policies.” Id.

First Dakota argues the slander of title claim arises from the same fact

pattern as the counts defended by Old Republic:

that First Dakota knew or should have known that Clemensen did

not have the authority under the power of attorney to bind Betty’s

Trust to the mortgages, and therefore, First Dakota's filing of those

mortgages . . . “cast doubt upon the existence or extent of Betty’s

Trust’s property . . . which induced others not to deal with Betty’s

Trust with respect to [the Property].”

the claim is false, groundless or even fraudulent." Biegler v. Am. Fam. Mut.

Ins. Co., 621 N.W.2d 592, 599 (S.D. 2001) (quotation omitted).

Docket No. 48 at p. 22 (quoting Docket No. 37-21, ¶ 164).

First Dakota argues that this factual basis “is an attack on the validity of

the mortgages . . . the very risk that Old Republic agreed to insure.” Id. at

p. 23.

Old Republic has the better argument. In South Dakota, “if it is clear or

arguably appears from the face of the pleadings . . . that the alleged claim, if

true, falls within policy coverage, the insurer must defend.” Hawkeye-Security

Ins. Co. v. Clifford, 366 N.W.2d 489, 491 (S.D. 1985). As Old Republic points

out, if Klapperich’s slander of title claim proved true, his remedy would be

money damages. See Fix v. First State Bank, 807 N.W.2d 612, 617 (S.D. 2011)

(quoting SDCL § 21-3-1). But the Covered Risk First Dakota invokes here is

“loss or damage . . . by reason of . . . [t]he invalidity or unenforceability of the

lien of the Insured Mortgage upon the Title.” Docket No. 48 at p. 22; see

Docket No. 42-6 at pp. 1–2; Docket No. 42-7 at pp. 1–2. Klapperich’s slander

of title claim could never invalidate a lien nor render one unenforceable. For

that reason, the claim, if proven true, would not provide coverage. And with no

potential for coverage, there is no duty to defend. Hawkeye-Security Ins. Co.,

366 N.W.2d at 491.

Old Republic’s motion for summary judgment is granted as to the

question of its duty to defend.

2. Bad Faith Denial of Insurance Coverage

First Dakota alleges first-party and third-party bad faith refusal to pay

insurance benefits against Old Republic. Docket No. 1, ¶¶ 46–52.

a. First-Party Bad Faith

First Dakota asserts first-party bad faith against Old Republic for

“consciously engag[ing] in wrongdoing in processing or evaluating [First

Dakota]'s claims under its [Title Policies].” Id. ¶ 47. First Dakota accuses Old

Republic of denying coverage without having “any reasonable basis.” Id. ¶ 49.

First Dakota accuses Old Republic of invoking “wholly inapplicable” exclusions

to deny reimbursement, while “refusing adequate authority” to successfully

settle. Id. ¶ 52.

“[F]irst-party bad faith is an intentional tort that typically occurs when

an insurance company consciously engages in wrongdoing during its

processing or paying of policy benefits to its insured.” Harvieux v. Progressive

N. Ins. Co., 915 N.W.2d 697, 701 (S.D. 2018) (quotation omitted). To be

successful, a first-party bad faith claimant must prove “(1) an absence of a

reasonable basis for denial of policy benefits, and (2) the insurer’s knowledge of

the lack of a reasonable basis for denial.” Mordhorst v. Dakota Truck

Underwriters, 886 N.W.2d 322, 324 (S.D. 2016) (cleaned up and quotation

omitted). “Knowledge of the lack of a reasonable basis may be inferred and

imputed to an insurance company where there is a reckless indifference to

facts or to proofs submitted by the insured.” Id. (alteration and quotation

omitted). But “an insurer is permitted to challenge claims that are fairly

debatable.” Harvieux, 915 N.W.2d at 701.

Old Republic’s “primary argument for dismissal of [this] claim” is that “if

[First Dakota] is not entitled to indemnification under the Title Policies, then by

definition there cannot be bad faith by Old Republic.” Docket No. 54 at p. 12.

“And since both Exclusion 3(a) or [sic] 3(b) preclude [First Dakota] from

indemnification,” it argues, “then the entire basis on which [First Dakota’s] bad

faith claim is predicated is eliminated.” Id.

But this court does not agree with Old Republic that the question of

indemnification is a foregone conclusion. See Section B1, supra. Without that

predicate finding, the argument fails.

Similarly, Old Republic’s assertion that its reservation of rights “was

proper because the allegations, if proven true, would implicate Exclusions 3(a)

and 3(b),” Docket No. 39 at p. 23, relies on an interpretation of those

exclusions that conflicts with the court’s. Klapperich’s Count Two states “[a]t

all times relevant herein, [First Dakota] knew or should have known that

Clemensen did not have the authority to self-deal. Because the mortgages

described herein constituted acts of self-dealing . . . Clemensen had no power

or authority to execute the same.” Docket No. 37-21, ¶¶ 123–24 (emphasis

added). This court does not adopt an interpretation of Exclusion 3(a) that

embraces constructive knowledge, and Exclusion 3(b) requires actual

knowledge. So, application of the exclusions and proof of Klapperich’s

allegations are not co-extensive. As First Dakota points out, the “key issue” of

whether First Dakota had actual knowledge of a defect remains. Docket No. 48

at p. 12.

b. Third-Party Bad Faith

First Dakota asserts third-party bad faith against Old Republic for

“[r]epeatedly refusing adequate authority to settle the Klapperich claims” and

“[r]epeatedly refusing adequate authority to successfully mediate the

Klapperich claims.” Docket No. 1, ¶ 52(b)–(c).

“Third-party bad faith is based on principles of negligence and arises

when an insurer wrongfully refuses to settle a case brought against its insured

by a third-party.” Johnson v. UPS, 946 N.W.2d 1, 9 (S.D. 2020) (quotation

omitted).

Old Republic argues that the contract provides it the option, not a

mandate, to settle third-party claims, and so third-party bad faith cannot

apply. Docket No. 39 at p. 24. First Dakota argues that once Old Republic

opened the door to the possibility of settlement, it was required to “operate in

good faith.” Docket No. 48 at p. 18.

First Dakota’s argument aligns with South Dakota law, which already

recognizes the option of the insurer to settle. It holds third-party bad faith

arises when “an insurer breaches its duty to give equal consideration to the

interests of its insured when making a decision to settle a case brought against

its insured by a third party.” Zochert v. Protective Life Ins. Co., 921 N.W.2d

479, 489 (S.D. 2018) (emphasis added) (quotation omitted). The existence of

the option does not vitiate the duty—it animates it.

Old Republic argues it “offered $375,000 toward a settlement and was

willing to contribute more, but the mediation ended before Old Republic had

the opportunity to increase its offered contribution.” Docket No. 39 at p. 24.

First Dakota puts that figure into dispute, see Docket No. 48 at p. 18; Docket

No. 48-12 at p. 20 (Weishaar Depo. at pp. 129-31); Docket No. 48-14, and

supplies evidence that it was unable to settle due to lack of awareness of Old

Republic’s authority to settle for $600,000. Docket No. 48 at p. 18; Docket No.

48-12 at p. 20 (Weishaar Depo. at pp. 129-31); Docket No. 48-31 at p. 1; see

Kirchoff v. Am. Cas. Co., 997 F.2d 401, 405 (8th Cir. 1993) (applying South

Dakota law) (“Clearly, if Janice Millford valued Kirchoff’s claim at $300,000 . . .

but offered only $8000 to settle Kirchoff’s claim, evidence of that valuation was

relevant to the issue of whether CNA’s settlement offers were made in good

faith.”).

“The question of whether an insurer has acted in bad faith is generally a

question of fact.” Dakota, Minn. & E. R. Corp. v. Acuity, 771 N.W.2d 623, 629–

30 (S.D. 2009) (citation omitted). Old Republic fails to establish there is no

genuine issue of material fact remaining. The motion for summary judgment

on Count Two is denied.

C. First Dakota’s Motion for Partial Summary Judgment

First Dakota “seeks a judicial determination that the [Title Policies]

provide coverage for losses sustained by First Dakota as a result of a state

court ruling invalidating the mortgages insured by the policies.” Docket No. 44

at p. 1. In furtherance of that goal, it argues there is no question of material

fact remaining as to the applicability of Exclusions 3(a) or 3(b).

1. Exclusion 3(a)

Relying on the interpretation of Exclusion 3(a) the court ultimately

adopted, see Section B(1)(a)(i), supra, First Dakota argues it “quite obviously

did not intentionally cause a defect in the Mortgages given that the real estate

owned by Betty’s Trust constituted First Dakota’s primary collateral for Ron’s

loan.” Docket No. 44 at p. 9.

But as the court held above, it is not obvious. As Old Republic points

out, “[Shane] Pick . . . testified that he knew Betty would need to be at closing

to sign the Certificate of Trust and the Mortgages, and he communicated this

fact to the [First Dakota] loan officer who attended the closing.” Docket No. 49

at p. 8. The fact that he later testified at deposition that he believed the power

of attorney negated the need for Betty’s presence is not dispositive—it creates a

question of fact and credibility reserved for the factfinder.

First Dakota appeals to its loss of “millions of dollars when Ron

defaulted.” Docket No. 44 at p. 9. But Exclusion 3(a) recognizes the potential

for loss; it exists to insulate Old Republic from that loss. Contrary to First

Dakota’s briefing, there is no requirement that the creator “benefit” from its

creation. See id.

First Dakota’s argument about what Spink County Title thought or did

not think about the power of attorney also has no application here. See id. at

pp. 9–10. Exclusion 3(a) excludes coverage for defects “created, suffered,

assumed, or agreed to by the Insured Claimant.” Docket No. 42-6 at p. 2.

There is no saving clause permitting assignment of blame to an accomplice; the

thrust of Exclusion 3(a) is the insured’s intent. Even if First Dakota and Spink

County Title agreed to the defect, the exclusion would be triggered absent an

endorsement suggesting otherwise.

First Dakota’s intent or lack thereof as it pertained to the title defects

remains an open question of material fact. The motion for summary judgment

as to Exclusion 3(a) is denied.

2. Exclusion 3(b)

First Dakota argues that Exclusion 3(b) does not apply because “[t]here

is not a scintilla of evidence that First Dakota knew that the power of attorney

did not authorize Ron to sign the Mortgages.” Docket No. 44 at p. 13. But as

the court explained above, Shane Pick’s email is evidence of actual knowledge.

Whether that evidence is outweighed by other evidence remains a question for

the factfinder. The motion for summary judgment as to Exclusion 3(b) is

denied.

***

CONCLUSION

Based on the foregoing facts, law, and analysis, it is hereby

ORDERED that Old Republic’s motion for summary judgment (Docket

No. 36) is granted as to its duty to defend and denied on all remaining matters.

ORDERED that First Dakota’s motion for partial summary judgment

(Docket No. 41) is denied.

DATED this 18th day of November, 2024.

BY THE COURT:

Urarcim 2. Poff

VERONICA L. DUFFY

United States Magistrate Judge

30