Enterprises v. Chicago
Filed 5/22/13 Liberty National Enterprises v. Chicago Title Ins. CA2/8
NOT TO BE PUBLISHED IN THE
OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits
courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
LIBERTY
NATIONAL ENTERPRISES, L.P.,
Plaintiff and Appellant,
v.
CHICAGO TITLE
INSURANCE COMPANY,
Defendant and Appellant.
B234341
(Los Angeles
County
Super. Ct.
No. BC 380261)
APPEAL
from a judgment of the Superior Court
of
County, Helen I. Bendix and Ralph W. Dau,
Judges. Reversed.
Shernoff
Bidart Echeverria Bentley, Michael J. Bidart, Ricardo Echeverria; McDougal
and Associates, Donald C. McDougal, Norman Paul Breen; The Ehrlich Law
Firm and Jeffrey Isaac Ehrlich for Plaintiff and Appellant.
Hennelly
& Grossfeld, and Susan J. Williams for Defendant and Appellant.
Garrett
& Tully, Ryan C. Squire, Robert Garrett and Zi C. Lin for
California Land Title Association as Amicus Curiae on behalf of Defendant and
Appellant.
* * * * * *
Both
parties in this title insurance coverage dispute ‑‑ Chicago Title
Insurance Company (Chicago Title) and Liberty National Enterprises, L.P. (Liberty)
‑‑ appeal from the judgment awarding Liberty
$1,083,292.38 in
damages against Chicago Title. Chicago
Title is the insurer and Liberty is the insured entity. The court trifurcated trial of this
case. The first phase of trial
determined that Chicago Title had a duty to defend Liberty in a third party lawsuit
relating to the insured property. The
second phase of trial determined Liberty’s damages for breach of the
duty to defend (breach of contract). The
third phase of trial resolved Liberty’s remaining cause of action
for tortious breach of the implied covenant of good faith and fair
dealing. The jury found in Chicago
Title’s favor on the breach of the implied covenant claim. Thus, the damages awarded in the judgment
were solely those found by the court for breach of the duty to defend.
Chicago Title contends
that the court erred in finding it breached the duty to defend. Liberty, for its part, contends that the
court committed evidentiary and instructional errors in the phase three trial,
and that it erred in ruling Liberty was not entitled to “lost opportunityâ€
damages. We hold that Chicago Title had
no duty to defend the third party lawsuit for which Liberty demanded the
defense. This holding renders Liberty’s
appeal moot, as explained below. We
reverse the judgment against Chicago Title for $1,083,292.38 and direct the
trial court to enter judgment for Chicago Title.
factual background
The
commercial real estate property at the core of this title insurance dispute is
commonly known as the Broadway Trade Center (BTC property) in Downtown Los
Angeles. Liberty has owned the BTC
property since approximately January 21, 1998. As part of purchasing the BTC property,
Liberty obtained a preliminary title report and an owner’s title insurance
policy from Chicago Title.
Liberty
is a California limited partnership formed in August 1993. Shahram Afshani has been the manager of
Liberty’s property and business affairs since it came into existence. Liberty’s limited partners are Shahram, his
brothers Shahriar and Parviz Afshani, Shahram’s brother-in-law, Saied
Eshaghzadeh, and members of the Eshaghzadeh family.
corporation called A.F.S. Group, Inc.
A.F.S. Group, Inc.’s only shareholders are Shahram and Saied, and
Shahram is the president of A.F.S. Group, Inc.
The
Afshani brothers have a sister named Parvaneh Partielly. She was married to Alber Partielly, who died
in 2006. Their son is Parham “Dannyâ€
Partielly.
at least 1988 to March 18, 1994, a California limited partnership called
the Broadway Trade Center (BTC Partnership) owned the BTC property. Alber, Parvaneh, and Danny Partielly were
limited partners in the BTC Partnership.
The BTC property was encumbered by a first trust deed in favor of Union
Federal Bank as of 1988. The trust deed
secured a loan of more than $16 million.
Around
September 14, 1990, a California general partnership called American
Financial Services (AFS)
name="_ftnref3" title="">[3] loaned $2.3 million to the BTC Partnership
(AFS loan). The two partners making up
AFS were Shahram and Shahriar. A second
deed of trust on the BTC property secured the AFS loan.
Alber
and Parvaneh owned a 9.5 percent interest in the BTC property by virtue of
being limited partners in the BTC Partnership.
After AFS loaned the money to the BTC Partnership, Alber and Parvaneh
wanted to also acquire a 9.5 percent interest in the AFS loan. AFS agreed to sell Alber and Parvaneh a 9.5
percent interest in the promissory note and second trust deed. The parties entered into a loan participation
agreement on October 24, 1990.
Alber and Parvaneh paid AFS $218,500 to acquire a 9.5 percent
interest. The loan participation agreement
“confirmed†the Partiellys’ participation of 9.5 percent in the loan and
“interests received under the loan,†including a pro rata share of “any
participation by us [AFS] in the Collateral as a result of foreclosure or
otherwise.†Pursuant to the agreement,
AFS assigned a 9.5 percent interest in the AFS second trust deed to Alber and
Parvaneh. This assignment was never
recorded.
In
March 1993, the BTC Partnership defaulted on the AFS loan. Around August 2, 1993, the BTC
Partnership filed for bankruptcy. As of
that date, the BTC Partnership had also defaulted on the Union Federal Bank
loan. AFS obtained relief from the
automatic bankruptcy stay and foreclosed on its second trust deed on the BTC
property. AFS assigned a 90.5 percent
interest in the second trust deed (representing all but the 9.5 percent
interest assigned to the Partiellys) to The Garment Mart, a California limited
partnership. At the trustee’s sale in
March 1994, The Garment Mart was the successful bidder at its own sale and
acquired a 90.5 percent interest in title to the BTC property, taking subject
to Union Federal Bank’s first trust deed.
On March 24, 1994, The Garment Mart transferred its interest in
title to the Broadway Garment Mart (BGM), a California limited partnership. BGM was simply the new name chosen by The
Garment Mart after the California Secretary of State required it to change its
name. By the end of March 1994, Alber
and Parvaneh knew about the foreclosure of the BTC property, the trustee’s sale
to The Garment Mart, and the transfer of title from The Garment Mart to BGM.
The
BTC property was encumbered by four ground leases. Shahram, on behalf of BGM, decided to try to
acquire the ground leases, which were not included as security for either the
AFS loan or the Union Federal Bank loan, because he thought he could obtain
priority over the Union Federal Bank trust deed in this manner. Shahram’s brother-in-law, Saied, and Saied’s
family (the Eshaghzadehs) provided the funds to buy the ground leases. Shahram and the Eshaghzadehs acquired three
of the four ground leases through an entity called Security Trust Company
(Security Trust). They did not want
either Union Federal Bank or the BTC Partnership (i.e., the Partiellys) to
discover Shahram’s plan to buy the leases.
Union Federal Bank eventually discovered that Security Trust was buying
up the ground leases on the BTC property, and it purchased the fourth and last
ground lease by doubling the amount Security Trust offered for it.
On
or around March 29, 1994, BGM filed for
limited partners in BGM and support BGM’s plan of reorganization. They declined and appeared in the bankruptcy
action through counsel as secured creditors of BGM. In June 1994, BGM informed Alber and Parvaneh
that Union Federal Bank was foreclosing on its first trust deed on the BTC
property and that they should take appropriate action to protect their investment
in the property. Union Federal Bank
foreclosed on its first trust deed on July 11, 1994, and took title to the
BTC property, excluding that portion subject to the ground leases. The foreclosure by the bank wiped out all
junior interests in the BTC property.
The
FDIC
receiver of the bank in or around 1995.
Liberty entered into an agreement with the FDIC in or around
November 1997 to purchase title to the BTC property, including the fee
interest under the ground lease Union Federal Bank had purchased. Liberty also entered into agreements with
Security Trust to purchase the fee interests under the other three ground
leases encumbering the property. Chicago
Title handled the escrow for Liberty’s purchases of the BTC property and the
ground leases. Escrow closed on
January 21, 1998. On that date,
Chicago Title issued a title insurance policy to Liberty with a liability limit
of $6.5 million.
by Chicago Title to Liberty
subject policy was written on a standard American Land Title Association (ALTA)
owner’s policy form. In pertinent part,
the policy provides that Chicago Title insures Liberty against loss or damage,
as of the date of the policy, “by reason of:
[¶] 1. Title to the estate or interest described in
Schedule A being vested other than as stated therein; [or] [¶]
2. Any defect in or lien or
encumbrance on the title.†The date of
the policy is January 21, 1998, at 9:41 a.m., and Schedule A shows
title to the BTC property being vested in Liberty.
The
policy also provides that Chicago Title will “pay the costs, attorneys’ fees
and expenses incurred in defense of the title, as insured.†More specifically, upon written request by
Liberty, Chicago Title, “at its own cost and without unreasonable delay, shall
provide for the defense of an insured in litigation in which any third party
asserts a claim adverse to the title or interest as insured, but only as to
those stated causes of action alleging a defect, lien or encumbrance or other
matter insured against by this policy.â€
The
policy contains certain exclusions from coverage. As pertinent here, it excludes “[d]efects,
liens, encumbrances, adverse claims or other matters: [¶]
(a) created, suffered, assumed or agreed to by [Liberty]; [¶] (b) not known to [Chicago Title], not recorded
in the public records at Date of Policy, but known to [Liberty] and not
disclosed in writing to [Chicago Title] by [Liberty] prior to the date
[Liberty] became an insured under this policy;
[¶] (c) resulting in no loss or
damage to [Liberty]; [or] [¶] (d) attaching or created subsequent to Date
of Policy . . . .â€
Against Liberty
November 30, 2001, Alber and Parvaneh filed a lawsuit against Liberty and
other defendants. (Partielly v. Afshani (Super. Ct. L.A. County, 2001, No. BC262703) (
original complaint, but they served it with the first amended complaint (FAC)
filed on May 30, 2002. In addition
to Liberty, the FAC also named as defendants Shahram, his brothers Parviz and
Shahriar, AFS, A.F.S. Group, Inc., and Security Trust.
The
FAC alleged as follows in the “general allegations†section. Shahram was an agent of all entity defendants
and was an agent of Shahriar and Parviz as well. To facilitate and conceal a pattern of
fraudulent dealings, the defendants created a set of confusing and interlocking
fictitious entities. For instance,
Security Trust and Liberty were “one and the same parties comprised of the same
ownership interests.†The Afshani
brothers were the owners, managers, officers, and directors of the entity
defendants, including Liberty, and they consented to and ratified the actions
taken in the name of the entity defendants.
Moreover, each of the defendants was the agent, servant, employee, or
alter-ego of each of the remaining defendants, and there existed at all times a
unity of interest and ownership between the entity defendants and the
individual defendants. The individual
defendants used the entity defendants, including Liberty, to avoid their
obligations and duties to the Partiellys.
The
FAC further alleged that in 1990, the BTC Partnership owned the BTC property,
and the Partiellys acquired a 9.5 percent interest in the BTC property. In October of that year, the BTC
Partnership borrowed $2.3 million from AFS to operate and maintain the
property, which loan was secured by a trust deed. Also, the Partiellys entered into a loan
participation agreement with AFS and the Afshani brothers giving the Partiellys
a 9.5 percent interest in the loan “and in any and all interests of [AFS] and
the Afshani brothers†in the BTC property.
(Capitalization omitted.) As a
result of the Afshani brothers’ engagement in the loan participation agreement,
the defendants owed a fiduciary and general duty to the Partiellys as partners
to further the interests of all without exclusion or detriment to any member of
the participation agreement partnership.
The Partiellys were never properly paid funds collected by the
defendants pursuant to the participation agreement partnership, nor were they
given their ownership interest in “downstream transactions†regarding the
property. The downstream transactions undertaken
by the defendants to the exclusion and detriment of the Partiellys’ interests
included: (1) the acquisition of title
to the BTC property by The Garment Mart, a defendant-controlled entity, at a
foreclosure sale initiated by the defendants; (2) the transfer of title from
The Garment Mart to another defendant-controlled entity, BGM; and (3) a series
of transactions with the Eshaghzadeh family in which the defendants acquired
interests in the property “to gain an advantage superior to that of Union
Federal Bank,†which was in the process of foreclosing on the property. Union Federal Bank ultimately held a trustee
sale in July 1994, which the Partiellys alleged “did not have the effect
of wiping out all of the ownership interests (fee title or otherwise in the
nature of land leases).†As a result of
the transactions with the Eshaghzadeh family, and in connection with the
Eshaghzadehs, the defendants “were able to acquire full and complete title†to
the BTC property on January 21, 1998, through Liberty. These events took place without the Partiellys’
knowledge “and to the exclusion of [the Partiellys] resulting from a series of
representations made to [the Partiellys] in or about April, 1994, whereby
certain Afshani brother defendants falsely and fraudulently represented to [the
Partiellys] after inquiry being made that they had no further interests in the
subject property, that they did not want to further attempt to acquire
ownership of the subject property, that the property was no good and had no
downstream financial value and that they intended to walk away and take no
additional or active part, losing the original participation agreement loan
investment of $2.3 million, all of which were frauds and misrepresentations and
in violation of defendants’, and each of their, fiduciary duties and
obligations owed to [the Partiellys], their partners.†(Capitalization omitted.)
As
a result of the defendants’ conduct, the Partiellys alleged they had been
excluded from “any and all interest†in the BTC property, the contribution from
the Eshaghzadeh family towards acquiring the property, and the cash flow from
the property. In the defendants’
ultimate acquisition of the property, they acted for purposes of excluding the
ownership interests of the Partiellys and denying them “their fair share and entitlement
in†the property.
The
specific causes of action alleged in the FAC were for
declaratory and injunctive relief, quiet title, breach of fiduciary duty,
accounting, and unjust enrichment. All causes of action incorporated by reference
the general allegations summarized above.
The first cause of action for breach of contract alleged that the
defendants had breached the loan participation agreement. The second cause of action for common counts
alleged that the defendants became indebted to the Partiellys in or around 1998
because of their fraudulent and deceitful acts.
The third cause of action for fraud alleged that all defendants had made
false representations to the Partiellys regarding their entitlements under the
loan participation agreement ‑‑ specifically, that the Partiellys
would acquire a 9.5 percent interest in the $2.3 million loan, all fruits of
the collateral, and all ongoing participation and downstream interests in the
BTC property resulting from the efforts of their copartners (the
defendants). Later, around
April 1994, the defendants allegedly made false representations to the
effect that the Partiellys’ interest in the property was lost and nothing
further could be done. The defendants
made these alleged false representations to induce the Partiellys to enter into
the participation agreement, and later, to take no action with respect to the
BTC property after the foreclosure sales in 1994.
The
fourth cause of action for declaratory and injunctive relief alleged that the
defendants “conspired to and induced†the Partiellys to enter into the loan
participation agreement, whereby they “defrauded and deprived†the Partiellys
of their interest in the BTC property and the $2.3 million loan, and they
fraudulently obtained an interest in the property to the exclusion of the
Partiellys, “denying [them] their 9.5% interest of the same.†The Partiellys wanted the court to order the
defendants to restrain them from doing anything with the property and to
relinquish their interest in the property, and they also wanted a declaration
that they had a 9.5 percent interest in the property.
The
fifth cause of action for quiet title alleged that the defendants conspired and
induced the Partiellys to enter into the loan participation agreement, which
gave the Partiellys a 9.5 percent interest in the loan and any other interest
AFS and Shahram had in the BTC property, yet the defendants were “now
claim[ing]†100 percent interest in the property to the exclusion of the
Partiellys. They therefore wanted the
court to quiet title against the claims of the defendants and enter a judgment
that the Partiellys had title to the property and that the defendants had no
interest in the property adverse to the Partiellys’ 9.5 percent ownership.
tendered the defense of the Partielly
Action to Chicago Title on June 13, 2002.
Chicago Title assigned senior claims counsel Douglas S. Avery to handle the
claim. Chicago Title denied Liberty’s
claim in a letter from Avery dated July 11, 2002. Avery’s letter noted that, while the
Partiellys asserted a “9.5% interest in fee title to the insured property, the
claim arises out of an alleged Participation Agreement entered into by Shahram
Afshani as general partner of [AFS].â€
Avery noted that he did “not believe that a covered loss could be
sustained in the event the [Partiellys] prevail in establishing they have an interest
in the property based on the prior Participation Agreement,†and moreover,
“[t]he only way [the Partiellys] could prevail would be based on a theory which
would come directly within the Exclusions From Coverage.â€
Liberty
retained Donald McDougal to defend the Partielly
Action. He obtained a summary judgment
and dismissal of the case in July 2004.
The Partiellys appealed and the court of appeal reversed the judgment in
June 2006. After the remitter issued, the
parties settled the case for $500,000.
The settlement agreement included a provision stating that the
Partiellys’ claims “ha[d] no merit and that Defendants committed no wrongs
against [the Partiellys] with respect to the BTC Property, the AFS loan, the
acquisition of the ground lease fee interests and the purchase of the BTC Property
by Liberty.†(Capitalization omitted.)
procedural history
Liberty
filed this action against Chicago Title in November 2007, based on Chicago
Title’s denial of a duty to defend the Partielly
Action and a duty to indemnify Liberty.
The first amended complaint alleged causes of action for breach of
contract, breach of the implied covenant of good faith and fair dealing, and
declaratory relief.
court trifurcated the case for separate trials on coverage, damages, and breach
of the implied covenant of good faith and fair dealing, with the coverage issue
to be tried by the court first.
Specifically, the bench trial was to determine whether Chicago Title had
a duty to defend the Partielly Action
because of the quiet title and declaratory relief claims asserted in it. The court conducted the bench trial on the
coverage issue on March 25 and 26, 2009.
The parties filed declarations from Avery, McDougal, and Shahram in lieu
of direct examination testimony, and the parties were able to cross-examine
these witnesses in court.
On
October 26, 2009, the court filed its written statement of decision
finding that Chicago Title had a duty to defend the Partielly Action. The court found that, on its face, the
Partiellys’ FAC contained claims falling within the first insuring clause of
the policy ‑‑ that is, claims that title to the estate or interest
were vested not entirely in Liberty, but in some other persons or
entities. In particular, the court
noted, the Partiellys were seeking a declaration that they had a 9.5 percent
interest in the BTC property and an injunction ordering Liberty to relinquish
and surrender their interest in the property.
As well, they sought to quiet title and a judgment giving them title to
the property and stating that Liberty had no interest in the property adverse
to the Partiellys’ 9.5 percent interest.
The court additionally found that the claims fell within the second
insuring clause of the policy because they alleged a “defect in or lien or
encumbrance on the title.â€
Moreover,
the court found, none of the exclusions to coverage applied. There was no evidence that the Partiellys’
adverse claim to 9.5 percent of the property was “created, suffered, assumed or
agreed to†by Liberty, as described in exclusion 3.(a). As to exclusion 3.(b) for adverse claims
known to Liberty but not known to Chicago Title, the court said the evidence
established that neither Liberty nor Shahram had actual knowledge of the
Partiellys’ adverse claim when Chicago Title issued the policy in 1998. Instead, Shahram said he did not think the
Partiellys had any possible claim to a 9.5 percent interest in the BTC property
after Union Federal Bank foreclosed in 1994, and he had no actual knowledge that
the Partiellys were asserting such a claim until he received the Partiellys’
FAC in 2002. The court found Shahram to
be credible. Additionally, Avery
testified that when he was making his coverage decision, he had no reason to
believe that Shahram had actual knowledge of the Partiellys’ adverse claim
until service of the FAC in 2002. The
court said Avery “relied on a fiction that the Partiellys and [Shahram] should
be treated as one in [sic] the same
because of their familial connections,†but Avery had a duty to not just accept
the agency and alter ego claims in the Partielly
FAC. As to exclusion 3.(c) for adverse
claims “resulting in no loss or damage,†the court found that Liberty clearly
suffered loss when it paid the costs of defending and settling the
“attaching or created subsequent to†the date of the policy, the court found
the basis for the Partiellys’ adverse claim existed prior to the date of the
policy. The court went on to distinguish
the two cases on which Chicago Title principally relied to argue there was no
coverage, Safeco Title Ins. Co. v.
Moskopoulos (1981) 116 Cal.App.3d 658 (Moskopoulos)
and Barczewski v. Commonwealth Land Title
Ins. Co. (1989) 210 Cal.App.3d 406 (Barczewski).
The
court ruled, in sum, that “based on the terms of the Policy, the nature of the
claims made in the Partielly Complaint, and the facts known to Mr. Avery prior
to†his denial of Liberty’s claim, “Chicago Title should have accepted
Liberty’s tender of defense and defended Liberty in the Partielly Action, at the very least, under a reservation of
rights.†(Italics added.)
second trial phase was to determine the amount of damages for Chicago Title’s
breach of the duty to defend. This phase
was also a bench trial and took place on March 24, 25, and 26, 2010. The court issued its written statement of
decision on May 25, 2010. It
awarded Liberty over $1 million in damages and prejudgment interest.
third phase of trial commenced on May 23, 2011, and determined whether
Chicago Title committed tortious breach of the implied covenant of good faith
and fair dealing. This was the only
phase of the trial that was a jury trial as opposed to a bench trial. The jury found in favor of Chicago Title and
against Liberty on breach of the implied covenant of good faith and fair
dealing.
On June 10, 2011, the
court entered judgment in favor of Liberty for $1,083,292.38, the damages as determined by the court
after the first two phases of trial.
Both Chicago Title and Liberty filed timely notices of appeal. On February 21, 2013, we granted the
application of the California Land Title Association (CLTA) to file an amicus
brief in this matter.
discussion
Title’s sole contention on appeal is that the trial court erred in finding
Chicago Title breached the duty to defend.
In particular, it asserts that the Partielly
Action did not fall within the policy’s insuring clause, and even if the action
did, one or more of the exclusion clauses applied to exclude the action from
coverage, and it thus had no duty to defend.
We agree that the insuring clause did not cover the Partielly Action and need not reach the secondary argument that one
or more of the exclusions also applied.
and General Precepts Relating to Title Insurance
insurance is a contract to indemnify against loss through defects in the title
or against liens or encumbrances that may affect the title at the time when the
policy is issued.’†(Elysian
Investment Group v. Stewart Title Guaranty Co. (2002) 105 Cal.App.4th 315,
320.)
insurer issues the policy are outside the scope of coverage. (Rosen v. Nations Title Ins. Co.
(1997) 56 Cal.App.4th 1489, 1500 (Rosen).) “Title insurance, as opposed to other types
of insurance, does not insure against future events. It is not forward looking. It insures against losses resulting from
differences between the actual title and the record title as of the date title
is insured. The policy does not
guarantee the state of the title.†(Quelimane
Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 41.) Instead, title insurance protects against the
possibility that liens or other encumbrances exist, even though they were
missed in the title search or the preliminary title report. (Siegel
v. Fidelity Nat. Title Ins. Co. (1996) 46 Cal.App.4th 1181, 1191.) A title insurer issues its policies on the
basis of, and in reliance on, its own investigation into recorded instruments,
which should impart constructive notice.
(Quelimane Co. v. Stewart Title Guaranty Co.,
title insurer relies are generally public records concerning the status of
title. (Ibid.) To a large extent,
therefore, the title insurer is able to control the degree of risk it
undertakes in issuing a policy by performing its own investigation
beforehand. (Ibid.) But “[t]he records
pertaining to real property are complex and encumbrances may be missed by even
the most thorough search. Title
insurance is an acknowledgement that errors may have been made.†(Siegel
v. Fidelity Nat. Title Ins. Co., supra,
at p. 1191.)
There
are essentially two types of title insurance policies available in California
for owners of real property interests ‑‑ CLTA policies and ALTA
policies. (Lick Mill Creek Apartments
v. Chicago Title Ins. Co. (1991) 231 Cal.App.3d 1654, 1659.) CLTA policies insure primarily against
defects in title that are discoverable through an examination of the public
record. (Ibid.) CLTA policies protect
against some risks not apparent from inspection of recorded instruments, such
as “a forged, altered or improperly delivered deed, incompetency, incapacity,
marital rights, or irregularities in any probate proceeding.†(Moskopoulos, supra, 116
Cal.App.3d at p. 666.) ALTA policies,
such as the type Liberty purchased here, provide greater coverage in that they
also insure against “off-record defects, including rights of parties in
possession and not shown on the public records, water rights, and discrepancies
or conflicts in boundary lines and shortages in areas that are not reflected in
the public record.†(
Guaranty Co., supra, 105
Cal.App.4th at p. 318, fn. 1.)
But “[w]hile an ALTA policy provides greater coverage than a CLTA
policy, it does not follow that an ALTA policy extends coverage to matters not
affecting title.†(Lick Mill Creek
Apartments v. Chicago Title Ins. Co., supra,
at p. 1662.)
Well-established
precepts of insurance coverage guide us in determining whether a policy
requires a title insurer to defend a lawsuit filed by a third party against the
insured. “It has long been a fundamental
rule of law that an insurer has a duty to defend an insured if it becomes aware
of, or if the third party lawsuit pleads, facts giving rise to the potential
for coverage under the insuring agreement.
[Citations.] This duty, which
applies even to claims that are ‘groundless, false, or fraudulent,’ is separate
from and broader than the insurer’s duty to indemnify. [Citation.]
However, ‘“where there is no possibility of coverage, there is no duty
to defend . . . .â€â€™
[Citation.] [T]he determination
whether the insurer owes a duty to defend usually is made in the first instance
by comparing the allegations of the complaint with the terms of the
policy.†(Waller v. Truck Ins.
Exchange, Inc. (1995) 11 Cal.4th 1, 19 (Waller).) Facts both expressed and implied in the
complaint will determine whether the duty to defend arises. (Rosen,
supra, 56 Cal.App.4th at
p. 1496.) Facts extrinsic to the complaint give
rise to a duty to defend when they reveal a potential for coverage, though
conversely, when extrinsic facts eliminate that potential, an insurer may
decline to defend. (Waller, at p. 19.) The duty to defend applies even to noncovered
claims so long as any of the claims asserted in the complaint discloses the
potential for liability covered by the policy.
(Rosen, at pp.
1496-1497.) We resolve any doubt as to
whether the facts or allegations establish a duty to defend in the insured’s
favor. (Montrose Chemical Corp. v.
Superior Court (1993) 6 Cal.4th 287, 299-300.)
Though
the insurer’s duty to defend is broad, it “is not absolute but is measured by
the nature and kinds of risks covered by the policy.†(Rosen, supra,
56 Cal.App.4th at p. 1497.)
Insurance policies contain two parts, the insuring clause defining the
type of risks covered, and the exclusions, which remove coverage for certain
risks initially within the insuring clause.
(Ibid.) Before considering whether any exclusions
apply, we examine the insuring clause to determine whether coverage exists at
all. (Ibid.) An occurrence not
within the insuring clause does not also have to be specifically excluded. (Ibid.)
The
interpretation of an insurance policy presents a question of law and, as such,
we will independently review the proper construction. (Rosen, supra,
56 Cal.App.4th at p. 1497.) The clear and explicit
meaning of the policy provisions, interpreted in their ordinary and popular
sense, unless used by the parties in a technical sense or given a special
meaning by usage, controls judicial interpretation. (Waller,
supra, 11 Cal.4th at
p. 18.) We will consider a policy
provision ambiguous when it is capable of two or more constructions, both of
which are reasonable. (
Although an ambiguity in an insurance contract will be resolved
adversely to the insurer, some actual or apparent ambiguity must be present
before this rule comes into play. (Moskopoulos, supra, 116 Cal.App.3d at
p. 665.) We are not free to “impose
coverage by adopting a strained or absurd interpretation in order to create an
ambiguity where none exists.†(Rosen,
supra, 56 Cal.App.4th at
p. 1497.)
Coverage Under the Insuring Clause: The Moskopoulos
Case
the case at bar, Chicago Title relies heavily on Moskopoulos to argue that the Partielly
Action does not come within policy coverage, while Liberty argues the case is
distinguishable. Moskopolous is on point and demonstrates why the
occurrence.
In
Moskopoulos, the court held that
title insurance does not protect against alleged tortious conduct by the
insured in acquiring title. (Moskopoulos, supra, 116 Cal.App.3d at pp.
665-666.) Moskopoulos was a real estate
broker who entered into negotiations with a couple to buy their real property
that was scheduled for a foreclosure sale.
(Id. at
pp. 661-662.) He believed they had
come to an oral agreement for the sale, but the sellers thereafter sent him a
counteroffer. (Id. at p. 662.) After
they revoked the counteroffer, Moskopoulos filed an action against them for
specific performance and recorded a lis pendens with respect to the subject
property. (Ibid.) The trial court found
that Moskopoulos was aware of the upcoming foreclosure sale and that the lis
pendens would likely prevent the sellers from selling the property to someone
else or refinancing. (
The sellers settled with him and sold the property to him. (Id.
at p. 663.) On the date the sellers
conveyed the property to him, Safeco issued a policy insuring Moskopoulos’s
title to the property. (
The sellers then brought an action against Moskopoulos based on the
events leading up to his purchase of the subject property (sellers’
action). They alleged causes of action
for interference with contractual relations, constructive trust, fraud, breach
of fiduciary duty, rescission, and abuse of process. (Ibid.) Moskopoulos tendered defense of the sellers’
action to Safeco under his title insurance policy, and Safeco agreed to defend
him subject to a reservation of rights.
(Ibid.) Safeco then filed an action against
Moskopoulos seeking a declaration that it had no duty to defend him in the
sellers’ action. (Ibid.) Safeco’s declaratory
relief action was before the court of appeal.
The
court concluded that Safeco had no duty to defend Moskopoulos. (Moskopoulos, supra, 116 Cal.App.3d at p. 663
In relevant part, the insuring clause of the Safeco policy was identical
to the one here, in that it insured against loss or damage sustained by reason
of “‘[a]ny defect in or lien or encumbrance on [the] title.’†(Id.
at p. 664.)
title="">[6] Moskopoulos contended the causes of action
for rescission of the contract of sale and to have him declared a constructive
trustee of the property were adverse claims that amounted to defects in
title. (Ibid.) The court disagreed,
holding that the allegations of the sellers’ action pertained to Moskopoulos’s
conduct in his relations with the sellers ‑‑ in other words, the sellers’
action related “not to [Moskopoulos’s] title in the property, but to the manner
in which he acquired title.†(
the court explained that the sellers’ action alleged “intentionally tortious
conduct by [Moskopoulos], not a defect in his title. There [was] not a suggestion in the record or
the briefs of any matter constituting a defect in or lien or encumbrance on the
record title to the [subject] property, except as disclosed in the policy. Nor [was] there any suggestion of any
off-record risk in the chain of title coming within the policy coverage, such
as a forged, altered or improperly delivered deed, incompetency, incapacity,
marital rights, or irregularities in any probate
proceeding. . . . An
insurance company may limit the coverage of a policy issued by it. When it has done so, the plain language of
the limitation must be respected.†(Id.
at p. 666.) The court determined
that neither Moskopoulos’s conduct leading up to the sellers’ action nor the
filing of the sellers’ action came within policy coverage. (Ibid.)
Chicago
Title argues this case is just like Moskopoulos
in that the Partielly Action did
not allege defects in title, but tortious conduct in the manner in which
Liberty acquired title. Indeed, Chicago
Title argues, the Partielly FAC
stated that the defendants “were able to acquire full and complete title to the subject property on or about
January 21, 1998 through the entity defendant Liberty†‑‑ it
was simply that the Partiellys were seeking to obtain an interest in title
through equitable remedies based on tortious conduct by the defendants. (Italics added, capitalization omitted.)
Liberty
counters that the FAC is internally inconsistent about whether Liberty had 100
percent title to the property. It points
to allegations suggesting that the Partiellys actually owned a 9.5 percent interest in title to the property, not
just that they were seeking to obtain such
an interest. For instance, the FAC
alleged that the Partiellys acquired a 9.5 percent interest in the property in
1990 by virtue of the loan participation agreement, and Union Federal Bank’s
foreclosure on the property in 1994 “did not have the effect of wiping out all
of the ownership interests,†which suggests the Partiellys believed their 9.5
percent interest in the property endured and was never eliminated. Liberty further cites to the prayer for
relief, which asks for “a declaration that [the Partiellys] have a 9.5%
interest in the property,†an injunction ordering the defendants “to relinquish
and surrender [the Partiellys’] interest in the property to them,†and a
judgment that the Partiellys “have title to the property and that
defendants . . . have no interest in the property adverse to
[the Partiellys’] 9.5% ownership.â€
(Capitalization omitted.) Liberty
asserts that, on their face, these allegations stated title was not 100 percent
vested in Liberty. Moreover, Liberty
says, the Partiellys’ assertion of a quiet title claim was evidence that they
did not concede Liberty owned 100 percent title. This is purportedly because a quiet title
claim “inherently presupposes that the plaintiff . . . possesses
legal (as opposed to equitable) ownership in the property,†and the claim is
merely to eliminate an adverse claim and to perfect title in the legal owner.
Liberty
acknowledges that the Partielly
Action alleged tortious conduct by the insured in personal dealings, but it
maintains that this quiet title claim makes all the difference in
distinguishing this case from Moskopoulos. It says the plaintiffs suing Moskopoulos
conceded they no longer held title to the property, and sought to get title
back by invoking equitable claims. Those
plaintiffs alleged no quiet title claim.
Here, by contrast, the Partiellys had a quiet title claim presupposing
that they currently held legal title to a 9.5 percent interest. The Partiellys were therefore alleging a
defect in Liberty’s title, Liberty asserts.
We
are not persuaded by Liberty’s arguments and its attempt to distinguish
Action was not covered by the insuring clause of Liberty’s policy. To review, the insuring clause of the policy
insured against loss sustained because of “[t]itle to the estate or
interest . . . being vested other than†in Liberty, or “[a]ny
defect in or lien or encumbrance on the title.â€
According to our Supreme Court, “‘the words “defective title†mean that
the party claiming to own has not the whole title, but some other person has
title to a part of portion of the land.’â€
(Hocking v. Title Ins. & Trust Co. (1951) 37 Cal.2d 644,
649.) As in Moskopoulos, the Partielly Action
did not allege a defect in Liberty’s title, but tortious conduct in the manner
in which Liberty acquired title. (
see also Barczewski,
[lender’s action acknowledged that insured trust deed was recorded first and
entitled to legal priority as matter of public record, but alleged should not
be given legal priority because of insured’s tortious conduct].) The allegations of tortious conduct should be
apparent from our detailed discussion of the Partielly Action in the factual background section. The Partiellys alleged that they had a 9.5
percent interest in title to the BTC property by virtue of the loan
participation agreement, but they were deprived of that interest when the
defendants excluded them from “downstream transactions†in violation of a
purported partnership agreement, and fraudulently represented that the BTC
property was “no good†and that the defendants “intended to walk away and take
no additional or active part†in it. The
Partielly Action acknowledged that
Liberty had full and complete title
to the BTC property, and it sought to restore a 9.5 percent interest of which
the Partiellys were wrongfully deprived.
This situation is no different than Moskopoulos,
in which the insured held legal title to the subject property, but the sellers
sought to regain title (through a constructive trust or rescission) because the
insured’s alleged tortious conduct deprived them of it.
We
do not see inconsistencies regarding whether Liberty had full and complete
title. First, Liberty’s reliance on the
Partiellys’ allegation that Union Federal Bank’s foreclosure did not wipe out
all the ownership interests is unconvincing.
Liberty and Chicago Title stipulated at trial that the Union Federal
Bank foreclosure in fact wiped out all junior interests in the BTC property,
which would have included the Partiellys’ 9.5 percent interest in the second
trust deed. And Avery testified that
when he was making his coverage decision, he understood the foreclosure had
wiped out the interests of the second trust deed. Although this stipulated fact was extrinsic
to the Partielly FAC, we (and the
insurer) may rely on extrinsic facts to determine whether there was
coverage. (Waller,
Second,
the statements cited by Liberty in the prayer for relief do not assist it. In asking for a declaration and judgment that
the Partiellys have a 9.5 percent interest in the BTC property, the Partiellys
were setting forth what they hoped to achieve in terms of equitable relief via
the action. Such a request for future
relief is not inconsistent with the acknowledgement in the body of the FAC that
Liberty had acquired full and complete title.
Third, and last, Liberty’s insistence that the quiet title claim makes
all the difference ignores nuances in the law of quiet title. It is not always true that a quiet title
claim “inherently presupposes†the plaintiff has legal, as opposed to
equitable, title to the subject property.
To be sure, the general rule is that the holder of equitable title
cannot maintain a quiet title action against the holder of legal title. (Warren v. Merrill (2006) 143
Cal.App.4th 96, 113.) But an exception
exists “when legal title has been acquired through fraud.†(Id.
at p. 114.) In that case, available
“remedies include quieting title in the defrauded equitable title holder’s name
and making the legal title holder the constructive trustee of the property for
the benefit of the defrauded equitable titleholder.†(Ibid.) The Partiellys’ allegations of fraud in
Liberty’s acquisition of title fall squarely within the exception. In other words, when one looks at the
allegations of the Partielly FAC as a
whole, it was not inconsistent to state that Liberty had acquired full title
through tortious means but to also state a claim for quiet title.
In
sum, the insuring clause of Liberty’s policy did not cover the
not allege defective title, but tortious conduct in the manner in which Liberty
acquired title. There was no potential
for coverage and therefore no duty to defend the Partielly Action. The
judgment awarding Liberty damages against Chicago Title should be
reversed. We may end our inquiry here,
because an occurrence not within the insuring clause does not also have to be
excluded by the policy’s exclusions. We
need not address the parties’ arguments about whether any of the exclusions
apply.
Moreover,
our disposition of Chicago Title’s appeal renders Liberty’s appeal moot. Liberty’s contentions in its appeal relate
solely to purported errors the court made in the third phase of trial on breach
of the implied covenant of good faith and fair dealing. But when there is no duty to defend under the
terms of an insurance policy, there can be no action for breach of the implied
covenant of good faith and fair dealing.
(Waller, supra, 11
Cal.4th at p. 36 [when no potential for coverage and hence no duty to
defend under the policy, no action for breach of the implied covenant of good
faith and fair dealing lies “because the covenant is based on the contractual
relationship between the insured and the insurerâ€].) Indeed, this appears to be why the court
trifurcated proceedings and tried the duty to defend first ‑‑
because it was a threshold issue. There
was no duty to defend the Partielly
Action. Therefore, Liberty had no cause
of action for breach of the implied covenant of good faith and fair dealing. Any errors the trial court made in the third
phase of trial adjudicating that claim were thus irrelevant, and any
determination by us that the trial court erred would have no practical effect. Liberty’s appeal is moot and should be
dismissed. (MHC Operating Limited Partnership v. City of San Jose (2003) 106
Cal.App.4th 204, 214.)
DISPOSITION
Liberty’s
appeal is dismissed. The judgment against Chicago
Title is reversed. The trial court is
directed to enter judgment on all causes of action for Chicago Title. Chicago Title to recover
FLIER,
J.
WE CONCUR:
RUBIN,
Acting P. J.
GRIMES, J.
name="_ftn1" title="">[1] Involved in this case are members of the Afshani family,
the Eshaghzadeh family, and the Partielly family. For the sake of clarity, we refer to these
persons by their first names, rather than their shared surnames. We do not intend this informality to reflect
a lack of respect.
name="_ftn2" title="">[2] This history and the other subparts of the factual
background section summarize evidence adduced at trial, consisting of
stipulated facts, declarations filed by relevant individuals in lieu of direct
testimony, live testimony of those individuals, and exhibits.
