Hovannisian v. First Am. Title Ins. Co.

• Decision Date: 25 July 2017
• Docket Number: F072789
• Citation: 221 Cal.Rptr.3d 883,14 Cal.App.5th 420
• Court: California Court of Appeals Court of Appeals
• Parties: David HOVANNISIAN, et al., Plaintiffs and Appellants, v. FIRST AMERICAN TITLE INSURANCE COMPANY, Defendant and Respondent.

14 Cal.App.5th 420

221 Cal.Rptr.3d 883

David HOVANNISIAN, et al., Plaintiffs and Appellants,

v.FIRST AMERICAN TITLE INSURANCE COMPANY, Defendant and Respondent.

F072789

Court of Appeal, Fifth District, California.

Filed July 25, 2017

Wilkins, Drolshagen & Czeshinski, James H. Wilkins, Fresno, and Quentin Cedar, for Plaintiffs and Appellants.

Garrett & Tully, Ryan C. Squire, Pasadena, and Edward W. Racek, Los Angeles, for Defendant and Respondent.

OPINION

GOMES, Acting P. J.David and Linda Hovannisian purchased property from Wells Fargo Bank (Wells Fargo) at a foreclosure sale. Several months later they discovered there was a first priority deed of trust on the property that had not been extinguished by the foreclosure. The Hovannisians sued Wells Fargo for intentional and negligent misrepresentation based on a statement in Wells Fargo's deed of trust that it was a first deed of trust. Wells Fargo tendered defense of the action to its title insurer, First American Title Insurance Company (First American), which refused to indemnify or defend Wells Fargo. After Wells Fargo assigned any claim it had against First American to the Hovannisians, the Hovannisians sued First American for breach of contract and breach of the implied covenant of good faith and fair dealing. First American subsequently brought a summary judgment motion, arguing that coverage had terminated, there were no benefits due under the policy, and there was a genuine dispute as to coverage. The trial court granted the motion.

On appeal, the Hovannisians contend First American failed to establish that coverage did not continue under the title policy or there were no benefits due under the policy. They also contend triable issues of fact exist regarding their bad faith claim. Finding no merit to these contentions, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

In August 2006, Wells Fargo's predecessor, World Savings Bank (WSB), made a $120,000 loan to North West Holdings, LP, which was secured by a deed of trust against property located at 639 N. 4th Street, in Fresno (the Wells Fargo DOT). The Wells Fargo DOT stated that it was a "FIRST DEED OF TRUST." In connection with the Wells Fargo DOT, First American underwrote a lender's title insurance policy, which was issued to WSB with an effective date of August 28, 2006. As WSB's successor, Wells Fargo became the insured under the policy.

On January 13, 2012, the Hovannisians purchased the property for $28,792 at a non-judicial foreclosure sale by Wells Fargo.¹ The notice of trustee's sale, which was recorded on December 23, 2011, stated that the property would be sold at public auction to the highest bidder "without warranty express or implied as to title, use, possession or encumbrances...." The trustee's deed issued to the Hovannisians stated that the trustee "hereby grants and conveys, but without warranty, express or implied, ... all of its right, title, and interest" in the property.

In late April 2012, the Hovannisians received a letter from Duane Long, who claimed to own a first lien on the property and requested payment on the note secured by the property. Subsequent investigation revealed that Duane and Margaret A. Long, trustees of the Duane Long and Margaret A. Long Family Trust dated April 5, 1993, held a $38,000 note issued to Golden Trade LLC (the Long note), which was secured by the property through a deed of trust recorded in January 2003 (the Long DOT).

The Underlying Action

On May 31, 2012, the Hovannisians, through their attorney, submitted a letter to First American, which stated the Hovannisians were demanding that Wells Fargo pay the Longs the balance of the Long note "so that any cloud on the title can be removed." The Hovannisians claimed that Wells Fargo presented an unencumbered "First Deed of Trust" for foreclosure, which the Hovannisians reasonably relied on to purchase the property at foreclosure, and they reasonably believed they had purchased a title free of any encumbrances. The Hovannisians asked First American to consider the letter either a demand for Wells Fargo to present clear title or a claim on the title policy.

First American informed the Hovannisians on July 9, 2012 that it was unable to assist them, as they were not insureds under the policy and to the extent they were asserting a claim against Wells Fargo, they needed to contact Wells Fargo directly. First American added that even if it had an obligation to the Hovannisians, there were no deed warranties provided to them as a result of the foreclosure, as the property was conveyed "without warranty, express or implied[,]" and therefore they took the property subject to any encumbrances on title.

On October 30, 2012, First American received a written claim from Wells Fargo on the title policy, which was based on a July 19, 2012 demand letter Wells Fargo received from the Hovannisians' attorney. The Hovannisians demanded that Wells Fargo pay off the balance of the Long note and present them with a clear title, as they had been misled by both First American and Wells Fargo due to the statement in the Wells Fargo DOT that it was a "First Deed of Trust" for foreclosure, which they reasonably relied on to purchase the property. The Hovannisians claimed they reasonably believed the interest being foreclosed was a first deed of trust and that they were purchasing a title free of encumbrances.

First American denied Wells Fargo's claim. In a November 21, 2012 letter, First American explained there did not appear to be any legal merit to the Hovannisians' claims, as both the notice of the trustee's sale and the trustee's deed stated the conveyance was without express or implied warranty. Moreover, Wells Fargo did not have continuing coverage under the policy because it no longer retained an interest in the property. First American advised Wells Fargo to resubmit the claim should the Hovannisians file a lawsuit against it and it wanted First American to consider coverage under the policy.

The Hovannisians filed the underlying action against Wells Fargo on April 30, 2013.² They alleged two causes of action—intentional and negligent misrepresentation. These causes of action were based on the following allegations: (1) before January 13, 2012, Wells Fargo initiated foreclosure proceedings on the Wells Fargo DOT pursuant to a trustee sale; (2) the Wells Fargo DOT clearly stated the Wells Fargo lien was the first lien against the property; (3) Wells Fargo recorded a copy of the Wells Fargo DOT with the specific intent and purpose of inducing potential buyers to bid on and purchase the property at the trustee sale; (4) before sending out the notice of trustee sale, Wells Fargo knew the Wells Fargo DOT was not the first deed of trust on the property; (5) at the January 13, 2012 trustee sale, the Hovannisians made the highest bid and, relying on the affirmative representation on the Wells Fargo DOT, purchased the property with the understanding they bought an interest which had the recorded first position on the property; (6) in late April 2012, they received a letter from Duane Long, who claimed he owned a first lien on the property and requested payment on the note secured by a first deed of trust; and (7) notwithstanding their demands that Wells Fargo reimburse them for the cost and expense to satisfy the Long note and provide clear title, Wells Fargo refused to do so.

On May 24, 2013, Wells Fargo tendered the complaint to First American for defense and indemnity. On June 12, 2013, First American denied the tender of defense as it had no duty under the policy to indemnify Wells Fargo for the causes of action asserted in the complaint. First American again asserted there was no continuing coverage under the policy and even if there were, the causes of action related to tortious conduct that fell outside the policy's provisions.

Wells Fargo retendered the claim on June 24, 2013, asserting First American's rejection was inappropriate. Wells Fargo contended the causes of action alleged in the complaint were covered by the policy. It asserted there was continued coverage because the Wells Fargo DOT expressly warranted it was the first lien on the property. In addition, the Hovannisians claimed Wells Fargo was liable due to the warranties in its DOT and the conveyance to them. Wells Fargo also contended that if there was any negligence, it was First American which was negligent in investigating the chain of title and First American could not rely on an exclusion to deny indemnity. Wells Fargo stated that while First American could reserve its rights should the Hovannisians prove Wells Fargo intentionally engaged in fraud, that should not deprive Wells Fargo of its right to a defense or indemnity of the negligent misrepresentation claim.

First American denied the retender of defense on July 12, 2013. First American asserted coverage terminated because Wells Fargo sold the property without any covenants of warranties and the statement in the Wells Fargo DOT was not a warranty.

In December 2013, Wells Fargo and the Hovannisians entered into an assignment agreement by which Wells Fargo assigned and transferred to the plaintiffs "only those assignable claims and causes of action that [Wells Fargo] may now have or hereinafter acquire as against [First American] ... based on, arising from, related to, THE POLICY, including but not limited to the failure to defend, failure to settle, and/or failure to indemnify [Wells Fargo] in the [underlying action], any actions for breach of the implied covenant of good faith and fair dealing or bad faith refusal to defend, settle and/or indemnify [Wells Fargo] against the pending action. [Wells Fargo] makes no representations or warranties, express or implied, that such claims or causes of action are meritorious or assignable. Any claims for punitive damages that [Wells Fargo] may have against [First American] based on said acts, are specifically not assigned since they are not assignable as a matter of law." In...