Mortgage Associates v. Fidelity & Deposit

• Decision Date: 23 December 2002
• Docket Number: No. B152466.,B152466.
• Citation: 105 Cal.App.4th 28,129 Cal.Rptr.2d 365
• Court: California Court of Appeals Court of Appeals
• Parties: MORTGAGE ASSOCIATES, INC., Plaintiff and Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, et al., Defendants and Respondents.

129 Cal.Rptr.2d 365

105 Cal.App.4th 28

MORTGAGE ASSOCIATES, INC., Plaintiff and Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, et al., Defendants and Respondents.

No. B152466.

Court of Appeal, Second District, Division 1.

December 23, 2002.

Ruben & Jones, Steven J. Ruben, Peter M. Kunstler and Ronald W. Makarem for Plaintiff and Appellant.

Sedgwick, Detert, Moran & Arnold, Michael R. Davisson, Hall R. Marston, Los Angeles; Stephen E. Anderson and Mark

E. Schiffman, Irvine, for Defendants and Respondents.

MIRIAM A. VOGEL, J.

As the result of a fraudulent scheme perpetrated by a mortgage lender's employees and third persons, the mortgage lender made several loans for more than the value of the mortgaged properties. The mortgage lender, unable to recoup its losses through foreclosure, submitted claims under its financial institution bond (which covered some but not all losses resulting from employee dishonesty) and under 16 title insurance policies it had purchased for the mortgaged properties. Both insurers denied the claims, and both were sued by the mortgage lender. The insurers' motions for summary judgment were granted, and the mortgage lender now appeals. We affirm both judgments.

FACTS

A.

Mortgage Associates, Inc. (MAI), a mortgage banking company, was in the business of making purchase money mortgage loans on real property. Most of MAI's business came from either loan brokers or real estate investors who had purchased foreclosure properties for resale at a profit and who referred their buyers to MAI. As relevant to this case, MAI had two types of insurance: (1) a financial institution bond issued by Fidelity and Deposit Company of Maryland (F & D) to cover losses resulting from employee dishonesty, and (2) title insurance policies purchased for each property from Fidelity National Title Insurance Company (Fidelity).

MAI sent every loan application to its underwriting department for an analysis of the borrower's credit and income history, and an appraisal of the property. If the analysis supported a loan under MAI's underwriting guidelines, the underwriting department would approve the loan and arrange funding through one of two lines of credit maintained by MAI at two banks. After the loan was funded, MAI would sell the loan on the secondary market and use the proceeds to pay back the banks.

B.

Sometime around June 1999, MAI discovered a "disturbing" pattern of "first-payment" defaults on loans originated by Ed and Dan Guinto, the principals of Pacific American Equities, an ostensible real estate investment company. MAI investigated and concluded that the Guintos had perpetrated a fraudulent real estate scheme by purchasing 16 or more properties below market value, setting up sham sales to "straw buyers" at inflated prices, and fabricating loan packages with appraisals that appeared to justify the purchase prices. The unsuspecting "buyers" (such as the Guintos' maintenance man) unknowingly became the purchasers and titleholders, and thus did not know about (and did not repay) the mortgage loans, the proceeds of which were paid to the Guintos as the sellers.

MAI concluded that two of its employees, loan underwriters Hermine Pili and William Raymond, were knowing participants in the Guintos' scheme, and MAI "believed" that Pili and Raymond had received "significant financial benefits" as payment for their participation because (according to MAI's thinking) they would not otherwise have jeopardized their positions, and because they quit their jobs shortly after MAI began its investigation—but MAI has never put a dollar amount on the financial benefit purportedly received by Pili and Raymond. MAI eventually obtained title to the properties in foreclosure but it lost money on the transactions because the properties had been so grossly overvalued.

C.

MAI reported its losses to both insurers, F & D and Fidelity. Both insurers denied the claims, and both were then sued by MAI in this action for damages for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. Both insurers answered, and both later moved (separately and on the different grounds discussed below) for summary judgment. Both motions for summary judgment were granted, and MAI now appeals.

I. THE JUDGMENT IN FAVOR OF F &D

MAI contends F & D's motion for summary judgment should have been denied. We disagree.

A.

The financial institution bond issued by F & D to MAI included the following provisions:

"[F & D], in consideration of an agreed premium, and in reliance upon all statements made and information furnished to [F & D] by [MAI] in applying for this bond, and subject to the Declarations, Insuring Agreements, General Agreements, Conditions and Limitations and other terms hereof, agrees to indemnify [MAI] for:

"INSURING AGREEMENTS "FIDELITY

"(A) Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.

"Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:

"(a) to cause [MAI] to sustain such loss; and

"(b) to obtain financial benefit for the Employee or another person or entity.

"However, if some or all of [MAI's] loss results directly or indirectly from Loans, that portion of the loss is not covered unless the Employee was in collusion with one or more parties to the transactions and has received, in connection therewith, a financial benefit with a value of at least $2,500." (Italics added.)

B.

The quoted coverage provisions, including the financial benefit requirement, were the product of negotiation between the banking industry and fidelity bond insurers and were carefully crafted to define the scope of the intended coverage. (F.D.I.C. v. Insurance Co. of North America (1st Cir. 1997) 105 F.3d 778, 786; Armentrout & Price, Financial Benefit Requirement (2002) www.manierherod.com/articles/finbenefitrequire.pdf [as of Dec. 23, 2002], p. 4, hereafter Armentrout & Price.)¹ The financial benefit requirement is "an essential part of these coverage provisions as it narrows coverage to loss incurred by the insured as a result of acts by an employee which are motivated by personal financial gain for the employee or an intended third party and not by an intent to benefit the employer (whether exclusive of or conjunctive with an intent for collateral benefit to the employee)." (Id.)

"The financial benefit requirement protects the insurer from claims where the employee's motivation is either undeterminable or intangible. The employee must, instead, have acted dishonestly with the intent or motivation to receive financial gain for himself or for some third party. It is this additional financial motivation which implicates coverage under the employee dishonesty coverage provisions. Not only does the financial benefit requirement limit coverage to that intended under the policy or bond, it also helps to focus coverage on truly dishonest conduct and not conduct which is merely improper, negligent, or incompetent. An employee [who] causes his employer to incur a loss without receipt of any financial benefit rarely acts with the intent or malice which is implicit in the employee dishonesty coverage." (Armentrout & Price, supra, at p. 4.) "The financial institution bond is not intended to guarantee against bad loans made by the insured. . .. The $2,500 minimum excludes claims where a loan officer received a small gift which is less likely to motivate the employee to make a fraudulent loan." (Id. at p. 9.)

C.

In support of its motion for summary judgment, F & D presented MAI's factually devoid discovery responses to establish that MAI had no evidence to support its claim that Pili and Raymond had received a financial benefit of $2,500 or more. MAI did not dispute that fact in the trial court, and it does not dispute it here. Instead, MAI contends the financial benefit requirement is an exclusion rather than a limitation on coverage, and that the burden was on F & D to prove that Pili and Raymond received less than $2,500. In MAI's view, its claim was sufficient because it presented facts "indicating" that Pili and Raymond "had received a financial benefit to participate in the Guinto scheme," and the "burden then shifted to F & D to demonstrate that MAI's claims were specifically excluded." Why? Because the insuring language uses the word "however" in the sentence identifying the financial benefit requirement. No authority is cited for this novel proposition and we know of none.²

The financial benefit requirement is plainly part of the insuring agreement, and we see no ambiguity in the language of the bond. (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822, 274 Cal. Rptr. 820, 799 P.2d 1253 [policy terms must be read in their ordinary and popular sense]; Pacific Employers Ins. Co. v. Superior Court (1990) 221 Cal.App.3d 1348, 1359, 270 Cal.Rptr. 779; National Ins. Underwriters v. Carter (1976) 17 Cal.3d 380, 386, 131 Cal.Rptr. 42, 551 P.2d 362 [the plain language of a limitation on coverage must be respected].) F & D clearly limited the extent of coverage, and it was MAI's burden to prove that its claim came within the coverage provisions of the bond. (Travelers Casualty & Surety Co. v. Superior Court (1998) 63 Cal.App.4th 1440, 75 Cal.Rptr.2d 54; Merced Mutual Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41, 47, 261 Cal.Rptr. 273; see also First Dakota Nat. v. St Paul Fire & Marine Ins. (8th Cir.1993) 2 F.3d 801, 810.)

F & D's motion for summary judgment showed the weakness in MAI's case (which the summary judgment statute permitted at the times relevant to this appeal), and MAI was unable to respond with evidence creating a triable issue of material fact. (Former Code Civ. Proc, § 437c, subd. (o)(2); Stats.1992, ch. 1348, § 1, p. 6703; Stats.1993, ch. 276, § 1, p. 1973; Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 580-593, 37 Cal. Rptr.2d 653.) Generously...