Najah v. Scottsdale Ins. Co.

• Decision Date: 30 September 2014
• Docket Number: c/w B245960,B241097
• Citation: 230 Cal.App.4th 125,178 Cal.Rptr.3d 400
• Court: California Court of Appeals Court of Appeals
• Parties: Jamshid NAJAH et al., Plaintiffs and Appellants, v. SCOTTSDALE INSURANCE COMPANY, Defendant and Respondent.

230 Cal.App.4th 125

178 Cal.Rptr.3d 400

Jamshid NAJAH et al., Plaintiffs and Appellants

v.SCOTTSDALE INSURANCE COMPANY, Defendant and Respondent.

B241097

c/w B245960

Court of Appeal, Second District, Division 4, California.

Filed September 30, 2014

Cummins & White, Larry M. Arnold, Melody S. Mosley, Orange County; Law Office of Susan K. Pintar and Susan K. Pintar, Los Angeles County, for Plaintiffs and Appellants.

Selman Breitman, Alan B. Yuter and Rachel E. Hobbs, Los Angeles County, for Defendant and Respondent.

Opinion

MANELLA, J.

Appellants Jamshid Najah and Mark Akhavain sold a commercial property, taking back as partial payment a promissory note secured by a second deed of trust. When the borrower fell into default and the holder of the first deed of trust commenced foreclosure proceedings, appellants purchased from the senior lender the promissory note secured by the first deed of trust and took assignment of that trust deed. Appellants then instituted foreclosure proceedings on the second trust deed and reacquired the property by making a bid equal to the unpaid debt securing the second, including interest, costs, fees, and other expenses of foreclosure. The primary issue on appeal is whether appellants can pursue a claim for preforeclosure damage to the property deliberately caused by the purchaser under an insurance policy issued by respondent Scottsdale Insurance Company (Scottsdale) containing a mortgagee coverage provision. We conclude that appellants' full credit bid at the foreclosure sale under the second deed of trust precluded appellants from making a claim on the insurance proceeds.¹ Appellants further contend that the trial court abused its discretion in finding that a defense offer to compromise under Code of Civil Procedure section 998 was reasonable. We conclude that the court did not abuse its discretion in making this finding. We therefore affirm the judgment of the trial court.

A. Background Facts

1. The Loans

In 2006, appellants sold a Riverside, California property to Orange Crest Realty Corporation (Orange Crest), whose principal was Ronald Shade.² Orange Crest borrowed $2,021,000 from the Lantzman Family Trust (Lantzman Trust), in return for a promissory note secured by a first deed of trust on the property.³ Appellants took back a promissory note and a second deed of trust for an additional $2.55 million.

There was a structure located on the property at the time of the sale.⁴ Although Shade's professed intention was to demolish the building and develop the property for other uses, the $2.55 million promissory note payable to appellants stated, “[Orange Crest] will do no remodeling or construction on the property secured by this Note until the [Lantzman Trust] loan and this Note are paid in full.” The second deed of trust securing the $2.55 million note similarly required Orange Crest to “keep [the] property in good condition and repair, not to remove or demolish any building thereon; [and] to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged or destroyed thereon.”⁵

2. The Insurance

The $2.55 million note payable to appellants provided that Orange Crest would “furnish full all risk insurance with replacement cost guarantee insuring [appellants].”⁶ Orange Crest obtained a commercial general liability policy from Scottsdale, listing the Lantzman Trust and appellants as mortgageholders. The original policy, which ran from February 16 to May 16, 2006, identified itself as a “special form” policy. However, the language that described the covered “causes of loss” stated it was a “basic form” policy and that only specific items were covered, including “vandalism,” but not “theft.”⁷ The policy defined “vandalism” as “willful and malicious damage to, or destruction of, the described property.”

The policy included a provision describing Scottsdale's obligation to appellants and the Lantzman Trust as the mortgage holders: “We will pay for covered loss of or damage to buildings or structures to each mortgageholder shown in the Declaration in their order of precedence, as interests may appear. [¶] ... The mortgageholder has the right to receive loss payment even if the mortgageholder has started foreclosure or similar action on the building or structure. [¶] ... If we deny your [ (referring to Orange Crest's) ] claim because of your acts or because you have failed to comply with the terms of this Coverage Part, the mortgageholder will still have the right to receive loss payment if the mortgageholder: [¶] (1) Pays any premium due under this Coverage Part at our request if you have failed to do so; [¶] (2) Submits a signed, sworn proof of loss with[in] 60 days after receiving notice from us of your failure to do so; and [¶] (3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgageholder.”

The policy remained in effect until July 16, 2008, although Orange Crest stopped paying premiums in February 2008. The premiums needed to keep the policy in effect through July 16 were paid by the agent who obtained the policy for Orange Crest. Scottsdale did not request payment of insurance premiums from appellants.

3. The Default, Assignment and Foreclosure

In or about January 2008, Orange Crest ceased making payments on the loans. Shortly thereafter, the Lantzman Trust began the process of foreclosure under its first deed of trust.⁸ To stop the foreclosure, in March 2008, appellants purchased the Lantzman Trust's interest in the property for the balance due on the Lantzman Trust note, approximately $1,749,000, and the Lantzman Trust assigned its first trust deed to appellants. The assignment stated that it “grant[ed], assign[ed] and transfer[red]” to appellants “all beneficial interest under [the first] Deed of Trust,” including “the note or notes as therein described or referred to, the money due and to become due thereon with interest, and all right accrued or to accrue under said Deed of Trust.”

In November 2008, appellants foreclosed on the second deed of trust. At the foreclosure sale, appellants acquired the property by bidding $2,878,060.25, the amount of the unpaid debt on the second promissory note, including interest, fees, and the costs of foreclosure.

4. The Insurance Claim

In February 2008, shortly after Orange Crest stopped making payments but months before the foreclosure, appellant Akhavain visited the property for the first time since the 2006 sale to Orange Crest. He observed severe damage to the building and debris everywhere. After several unsuccessful attempts to locate Shade to determine what had happened and whether Orange Crest would be able to make a balloon payment about to become due, Akhavain and Najah returned in early March to conduct a more thorough examination of the building and inventory of the damage. Among other things, they observed electrical wires hanging from the ceiling; broken mirrors, furniture and bathroom fixtures; damaged walls, ceilings and carpets; and interior doors removed and left lying on the floor. In addition, a number of items that had been in place and functional at the time of the sale were missing, including air conditioning and heating units, kitchen appliances and equipment, breaker panels, the main water heater, commercial laundry equipment, light poles, mailboxes, furniture, tiles and drywall.⁹

In April 2008, after purchasing the Lantzman Trust's interest, appellants filed a police report with the Riverside Police Department. In May 2008, appellants submitted a claim to Scottsdale.

B. The Complaint

In May 2009, six months after reacquiring the property at the foreclosure sale, appellants brought suit against Scottsdale for breach of its insurance contract and tortious breach of the implied covenant of good faith and fair dealing.¹⁰ The operative first amended complaint (FAC) alleged that in or about February 2008, appellants discovered that damage had occurred to the property due to theft and/or vandalism and that the loss was covered by the insurance policies issued by Scottsdale. According to the FAC, it would cost at least $500,000 to repair the damaged building.

The FAC asserted claims for breach of contract and tortious breach of the implied covenant of good faith and fair dealing. It asserted that Scottsdale's conduct was “malicious, oppressive or fraudulent within the meaning of ... Civil Code [s]ection 3294,” entitling appellants to punitive damages.

C. Scottsdale's Motions for Summary Judgment and Summary Adjudication

Scottsdale moved for summary judgment, contending (a) that appellants had extinguished the debt and any claim to insurance proceeds by acquiring the property at the foreclosure sale with a full credit bid, and (b) that the damage was not covered by the policy.¹¹ The court denied the motion. Scottsdale subsequently moved for summary adjudication on the issue of punitive damages. The court granted the motion, finding appellants had presented no evidence raising a triable issue of fact to support that Scottsdale had acted with malice, fraud or oppression.

D. The Trial

Prior to trial, Scottsdale moved to bifurcate adjudication of the insurance coverage issue from the claim for tortious breach of the covenant of good faith and fair dealing. The court granted the motion. Counsel for the parties framed five issues for the court to determine in the first phase: (1) “Do the [appellants] have an insurable interest in the applicable Scottsdale insurance policies? If so, what is the insurable interest the [appellants] have in the Scottsdale policies?”; (2) “If it is determined that the [appellants] had an insurable interest in the applicable Scottsdale policies, which ‘Causes of Loss' Form is included in the applicable Scottsdale policies—a Basic Form or a Special Form?”; (3) “If it is determined the [appellants] had an insurable interest in the applicable Scottsdale policies, is the [appellants'] alleged loss, or any part of the alleged loss,...