Apex Mortgage Corporation v. Great Northern Insurance Company

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19-2525
A PEX MORTGAGE C ORPORATION,
Plaintiff-Appellant,
v.
G REAT NORTHERN INSURANCE C OMPANY, et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:17-cv-03376 — Virginia M. Kendall, Judge.
____________________
A RGUED FEBRUARY 20, 2020 — D ECIDED A UGUST 24, 2020
____________________
Before BAUER , EASTERBROOK , and MANION, Circuit Judges.
MANION, Circuit Judge. Federal Insurance Company re-
fused to cover Apex Mortgage for the settlement of state tort
claims filed against Apex. Apex sued but the district court
granted summary judgment for Federal. Because the record
contains an open question of material fact, summary judg-
ment should not have issued and remand is necessary.

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2 No. 19-2525
I. Background
Chuck and Richard Dai owned a Chicago laundromat. In
2000, they obtained a commercial loan from Apex secured by
a mortgage on the property. The Dais defaulted on the mort-
gage in 2007, though they avoided foreclosure through a pay-
ment agreement. But the laundromat ceased operations that
same year and the Dais defaulted again in 2008. The Dais then
offered the deed to Apex in lieu of foreclosure. Apex accepted
on the condition that the property was still marketable. An in-
spection in December 2008 revealed it was not: the property
was in disrepair, exposed to the elements, trashed, and open
to vagrants. Apex took measures to preserve the property and
sent the deed back to the Dais in April 2009.
On December 22, 2010, two Chicago firefighters lost their
lives battling a blaze at the abandoned laundromat. The fire-
fighters’ estates sued Apex in Illinois state court for negli-
gence under a premises liability theory. Apex and the estates
settled the matter. Apex turned to its umbrella insurance pro-
vider, Federal, for coverage, but Federal refused.1 According
to Federal, the insurance policy’s Foreclosure Exclusion
barred coverage because Apex controlled the property as a
“mortgagee in possession” at the time of the fire. The exclu-
sion states: “This insurance does not apply to any liability or
loss, cost or expense arising out of property you acquire by
1 Apex settled the Illinois action for $15 million. Apex’s general liabil-
ity policy with Great Northern Insurance Company covered $1 million of
the settlement. After tendering that amount, Great Northern was dis-
missed from this lawsuit in 2018. Apex sought coverage under its excess
and umbrella policy with Federal for the remaining $14 million.

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No. 19-2525 3
foreclosure, repossession, deed in lieu of foreclosure or as
mortgagee in possession.” Joint App’x at 48.
Apex sued in federal district court. The parties stipulated
that Pennsylvania law governs the coverage dispute. The dis-
trict court granted summary judgment for Federal, holding
the undisputed record demonstrated Apex was a mortgagee
in possession when the fire broke out. Apex appeals.
II. Discussion
Apex argues the steps it took to preserve the property fall
short of rendering it a “mortgagee in possession.” It pushes a
narrower definition of the term than that reached by the dis-
trict court. We do not read the caselaw in Apex’s favor. Nev-
ertheless, we must remand because a triable issue exists on
who possessed the property at the time of the fire.
A. “Mortgagee in possession”
Apex contends the district court misinterpreted
Pennsylvania law en route to defining “mortgagee in
possession.” The district court held to qualify as a mortgagee
in possession, a mortgagee need only obtain possession of the
property from the mortgagor upon default with the
mortgagor’s consent. Apex would add one more element: a
mortgagee qualifies as a mortgagee in possession if and only
if it takes possession of and operates the property to recoup
the defaulted loan. Mere possession is not enough, or so the
argument goes. Nor is taking control of the property simply
to secure it against devaluation caused by vandals, the
elements, etc. Because Apex did just that and nothing more, it
believes the mortgagee in possession label does not fit and the
policy exclusion does not apply.

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4 No. 19-2525
To support its position, Apex relies primarily on the fol-
lowing excerpt from Zisman v. City of Duquesne:
The term “mortgagee in possession” is applied
to one who has lawfully acquired actual posses-
sion of the premises mortgaged to him … for the
purpose of enforcing his security upon such
property or making its income help to pay his
debt; but the mere fact that the mortgagee re-
ceives the rents and profits does not constitute
him a mortgagee in possession, unless he
takes the rent in such a way as to take out of
the hands of the mortgagor the management
and control of the estate.
18 A.2d 95, 97 (Pa. Super. Ct. 1941) (emphasis added). Apex
reads the highlighted language to mean that a mortgagee
does not transform into a mortgagee in possession unless it
takes over the management and control of the property to
collect rents. But we do not accept Apex’s expanded definition
or its interpretation of Zisman. The cited language does not
instruct that “mortgagee in possession” applies only if the
mortgagee both acquires the property and operates it for the
purpose of putting the income toward the defaulted loan.
Rather, only if a mortgagee takes possession for such purpose
do management and control come into play; the mortgagee’s
operation of the property is not necessary otherwise. Zisman
does not exclude from the definition a mortgagee that simply
exercises its right to take possession of the property upon
default. 2
2 Apex also points to Woodlands Community Association v. Mitchell,
where the court held a mortgagee who takes possession of real estate upon

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No. 19-2525 5
Our study of Pennsylvania caselaw supports this conclu-
sion. Actual possession—not operation and management—is
king when defining mortgagee in possession: “‘Mortgagee in
possession’ is a term applied to the special status of a mortga-
gee who has obtained possession of property from the mort-
gagor with the consent of the latter.” Myers-Macomber Eng’rs
v. M. L. W. Constr. Corp., 414 A.2d 357, 359 (Pa. Super. Ct.
1979). 3 And the right of possession flows only from the bor-
rower’s default. In Erny v. Sauer, Pennsylvania’s high court
noted the mortgagee, upon default, “could have entered [the
property]” at his pleasure, “take[n] actual possession,” and
“used the land and reaped its profits.” 83 A. 205, 206 (Pa.
1912); see also Peoples-Pittsburgh Tr. Co. v. Henshaw, 15 A.2d
711, 714 (Pa. Super. Ct. 1940) (“[O]n default in the terms of the
mortgage, the mortgagee is entitled to possession of the prem-
ises if he can enter peaceably … .”). Erny does not say a mort-
gagee in possession is only one who then directs those profits
toward the default.
The mortgagee’s right of actual possession lasts until the
default is recovered. How the default is resolved does not
default does not become a mortgagee in possession by merely acting to
protect its security interest, e.g., changing the locks and winterizing the
property. 162 A.3d 306, 309 (N.J. Super. Ct. App. Div. 2017). But Woodlands
is of limited utility because, as far as we can tell, Pennsylvania courts have
not adopted its reasoning. We are resolving a matter of Pennsylvania law
here, not of New Jersey law. Indeed, New Jersey examines whether a
mortgagee is in possession on a case-by-case basis that measures the mort-
gagee’s actions against the circumstances. Id. (citing Scott v. Hoboken Bank
for Sav., 19 A.2d 327 (N.J. Super. Ct. 1941)). That standard does not appear
in any of the Pennsylvania cases we reviewed.
3 The parties do not appear to contest consent. It is provided in the
mortgage agreement.

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6 No. 19-2525
drive possession. For example, Tryon v. Munson, relied on by
Erny, held the title and right of possession passes to the mort-
gagee upon default “till payment shall be made.” 77 Pa. 250,
262 (1875). The Tryon court explained the mortgagee may
elect to “dispossess and hold out the mortgagor” until the mort-
gagor satisfies the default. Id. (emphasis added). The property
is the mortgagee’s to enjoy however it sees fit until the default
is cured, whether the cure comes from the mortgagee’s oper-
ation of the property or elsewhere. See id. (“[W]e perceive an
interest or estate in the land itself, capable of enjoyment, and
enabling the mortgagor to grasp and hold it actually … .”).
Thus a mortgagee who exercises its right of actual possession
upon default and moves to safeguard its security interest in
the property still fits the definition of “mortgagee in posses-
sion.”
Many cases discuss the duties of a mortgagee in posses-
sion, which echo Apex’s proffered definition. See, e.g., Myers-
Macomber, 414 A.2d at 360 (“The mortgagee in possession has
a duty to collect the rents and profits which accrue during his
occupancy and apply them to the mortgage debt.”); Landau v.
W. Pa. Nat’l Bank, 282 A.2d 335, 339 (Pa. 1971) (“A mortgagee
in possession must account for rents and profits, must main-
tain the mortgaged premises in good condition to prevent its
deterioration, and is liable for waste.”) (internal citations
omitted). But duties are not definitional elements—they tell
us only what a mortgagee, once in possession, must do. They
do not tell us what a mortgagee in possession is.
Timing is everything. If Apex was not a mortgagee in pos-
session at the time of the fire, then the policy’s exclusion does
not bar coverage. Perhaps an easier way to think of the issue
is not “what is a mortgagee in possession?” but “when does a

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No. 19-2525 7
mortgagee become a mortgagee in possession?” The answer:
a mortgagee becomes a mortgagee in possession when, upon
default, it takes actual possession of the property with consent
of the mortgagor. 4 Until the default is cured, whatever the
mortgagee does post-possession—secure the property, rent it
out, or do nothing at all—has no bearing on its status as a
mortgagee in possession.
B. Actual possession—a material dispute lingers
The next question is a factual one: did Apex have actual
possession of the property on December 22, 2010? If not, then
Federal cannot invoke the policy’s exclusion for “mortgagees
in possession.” The district court determined Apex indisput-
ably possessed the property, but we think the court jumped
the gun.
We review summary judgment de novo, asking whether a
genuine dispute exists over any material fact. Kopplin v. Wis.
Cent. Ltd., 914 F.3d 1099, 1102 (7th Cir. 2019).
Zisman equates “possession” with exerting “dominion
and control” over real property. 18 A.2d at 97–99. And Penn-
sylvania courts (albeit in tort context) define a “possessor” of
real property as one “who is in occupation of the land with
the intent to control it.” Stanton v. Lackawanna Energy, Ltd., 886
A.2d 667, 677 (Pa. 2005) (citing Restatement (Second) of Torts
4 Interpreting Pennsylvania caselaw, federal bankruptcy courts have
reached this same conclusion. See, e.g., In re Olick, 221 B.R. 146, 156 (Bankr.
E.D. Pa. 1998) (“To explain, a creditor becomes a mortgagee-in-possession
when it takes actual possession and control over a debtor’s property.”)
(emphasis added); In re Rodriguez, 218 B.R. 764, 781 (Bankr. E.D. Pa. 1998)
(“A mortgagee is entitled to possession of the subject real estate upon a
default in performance by the mortgagor.”).

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8 No. 19-2525
§ 328E). “Control” means physical control; a person exercis-
ing his possessory interest in land exerts physical control over
it with the intent to exclude others from occupying the prop-
erty. Restatement (First) of Property § 7. Under Pennsylvania
law, whether a party is a “possessor” of land is treated as a
question for the trier of fact. Blackman v. Fed. Realty Inv. Tr.,
664 A.2d 139, 142 (Pa. Super. Ct. 1995).
The district court held Apex must have been in possession
of the laundromat in December 2010 because it inspected and
cleaned the property, installed a tarp over the deteriorated
roof, boarded up the windows, and changed the locks.5 Ac-
cording to the district court, these facts were dispositive of
physical control. The changed locks in particular signified an
intent to exclude all others.
But other details deserve consideration, too. First, Apex in-
structed its realtor to post a notice at the property informing
the Dais how to obtain keys for the new locks. The record is
silent on whether the realtor followed through. But the Dais
did not testify that the notice wasn’t posted or made available,
only that they never were “provided with” and never “saw”
the information. In fact, Chuck Dai acknowledged Apex never
prevented or told him he could not access the property. Next,
after inspecting the property, Apex returned the deed to the
Dais in April 2009 along with a letter. The letter reminded the
Dais of their ownership and mortgage obligation, and it urged
them to inspect and secure the property. The Dais claim they
never received this letter or the deed. Granted, ownership is
5 Inspection of the property revealed it was open to vagrants. Apex’s
changing of the locks might be described more accurately as placing new
locks where the original ones had been bypassed or broken.

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No. 19-2525 9
not the same as possession. But even still, in July 2009, Chuck
Dai ordered a handyman to board up the property after being
cited for building code violations. Chuck met with a city in-
spector at the property to discuss these measures. Chuck tes-
tified the property was open prior to hiring the handyman. In
October 2009, Chuck entered into a settlement with Chicago
to cure the code infractions by November 2010. He failed to
do so and served 180 days in jail as a result. At no point in
dealing with the city did Chuck contest control of the prop-
erty. Meanwhile, Apex had no contact with the property after
April 2009. Together, these facts create a triable issue on who
possessed, i.e., physically controlled, the laundromat—or at
the very least, on whether Apex possessed the property with
the intent to exclude the Dais—at the time of the fire. Sum-
mary judgment, therefore, was premature.
A final point: Federal insists that by settling the Illinois
negligence suit, Apex is precluded from litigating insurance
coverage. The logic goes like this: (1) Apex conceded its prem-
ises liability under Illinois law by settling; (2) for a mortgagee
to be liable in Illinois, it must have exercised dominion and
control over the mortgaged property; (3) Pennsylvania uses
an identical standard to define mortgagee in possession; and
therefore (4) Apex must have been in control of the property
under Pennsylvania law, too, making it a mortgagee in pos-
session and triggering the policy’s exclusion.
Federal’s argument fails at step one. Settlement does not
create a judicial ruling. Nor does it vindicate a plaintiff’s
theory of liability. Parties can settle for any number of reasons
and the obligation to pay comes from the settlement itself (an
agreement), not from one party’s liability. The notion that a
party cannot litigate coverage after settling claims brought

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10 No. 19-2525
against it is not supported by the cases Federal cites. Instead,
those cases explain an insured can expect reimbursement of a
settlement made in “reasonable anticipation of liability” for
covered damages, where the covered claim was the “primary
focus” of settlement. Santa’s Best Craft, LLC v. St. Paul Fire &
Marine Ins. Co., 611 F.3d 339, 350 (7th Cir. 2010) (reviewing
Illinois law); Rosalind Franklin Univ. of Med. & Sci. v. Lexington
Ins. Co., 8 N.E.3d 20, 39 (Ill. App. Ct. 2014). Those items—
anticipation of liability, coverage, and primary focus—are
litigated regularly post-settlement. Such is the case here.
III. Conclusion
For all these reasons, we VACATE the district court’s grant
of summary judgment and R EMAND for resolution of the fac-
tual disputes outlined herein.

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