RLI Ins. v. Bank of America
A developer obtains a large construction loan to build a luxury vacation resort and enters into contracts to sell several penthouse condominiums at the resort. The purchasers deposit earnest money which, in accordance with state law, is covered by surety bonds. The developer defaults on the construction loan and the lender bank forecloses. The condominium purchasers sue the developer and the sureties for the return of their earnest money deposits. One surety cross-complains, claiming the bank is responsible “in some manner.†Thus begins the surety’s unsuccessful search for a cause of action under which the bank may properly be held liable for the return of the earnest money deposits.
The surety, RLI Insurance Company (RLI), appeals from a judgment of dismissal after the trial court sustained, without leave to amend, the demurrer of the lender, Bank of America (the Bank), to RLI’s first amended complaint. RLI contends the trial court abused its discretion in sustaining the demurrer without leave to amend. RLI asserts it can amend its cross-complaint to state that the RLI surety bonds were assigned to the Bank and under that assignment the Bank assumed the obligations under the surety bonds, including the obligation to reimburse RLI.
As we will explain, the trial court properly sustained the demurrer without leave to amend. RLI’s theory of assignment is based on the loan documents. The allegations of RLI’s proposed second amended cross-complaint show that according to the loan agreement, the assignment of the surety bonds was “as further security for the Loan.†“It has long been the law in California, reaffirmed by the Uniform Commercial Code, that an assignment for security transfers the rights but not the obligations inherent in the assigned contract.†(Black v. Sullivan (1975) 48 Cal.App.3d 557, 564 (Black).) Because RLI’s proposed amendment does not, and cannot, allege that the Bank assumed the obligations of the surety bonds, its proposed causes of action for statutory reimbursement, equitable subrogation, restitution, equitable indemnity, and implied contractual indemnity must fail. We shall affirm the judgment.
Comments on RLI Ins. v. Bank of America