Rosen v. Nations Title Ins. Co., B106165

• Decision Date: 14 July 1997
• Docket Number: No. B106165,B106165
• Court: California Court of Appeals Court of Appeals
• Parties: , 97 Cal. Daily Op. Serv. 6444 Peter J. ROSEN et al., Plaintiffs and Appellants, v. NATIONS TITLE INSURANCE COMPANY, Defendant and Respondent.

Page 714

66 Cal.Rptr.2d 714

56 Cal.App.4th 1489, 97 Cal. Daily Op. Serv. 6444

Peter J. ROSEN et al., Plaintiffs and Appellants, v. NATIONS TITLE INSURANCE COMPANY, Defendant and Respondent.

No. B106165.

Court of Appeal, Second District, Division 5, California.

July 14, 1997.

Certified for Partial Publication ^*

As Modified Aug. 12, 1997.

Polston, Schwartz, Hamilton & Fenster, Stephen M. Fenster and Howard J. Ettinger, Beverly Hills, for Plaintiffs and Appellants.

Mark E. Schiffman, Irvine, Lois S. Carver, for Defendant and Respondent.

GODOY PEREZ, Associate Justice.

Plaintiffs, a group of real estate lender-investors, appeal from the summary judgment granted on behalf of defendant Nations Title Insurance Company. For the reasons set forth below, we affirm that judgment.

FACTS AND PROCEDURAL HISTORY

Barrich Company, Inc. ("Barrich") was a real estate developer building two homes in the Laurel Canyon area of Los Angeles. Brentwood Bank of California ("the bank") was the project's construction lender and the bank's loans were secured by first trust deeds on both properties. Barrich eventually defaulted on the construction loans and the bank began foreclosure proceedings. In early 1992, Barrich filed a chapter 11 bankruptcy petition in the federal bankruptcy court, which stayed the foreclosure pursuant to 11 U.S.C. § 362.

In June 1992, Barrich filed a bankruptcy court motion for permission to incur more debt--a so-called "priming lien loan"--in order to finish its construction project and thus generate more revenue for itself and its creditors. Such priming loans gain court-ordered priority over any existing encumbrances and are authorized by 11 U.S.C. § 364(d). The motion was granted in July 1992 over the bank's strong opposition. The bankruptcy court's order authorized Barrich to obtain two loans of $165,000 each, both of which would be secured by trust deeds taking priority over the bank's existing trust deeds. The court ordered that the loan funds be used only to complete the construction project or to pay expenses essential to preserve the assets of Barrich's bankruptcy estate. No other restrictions on the use or disbursement of the loan proceeds were ordered.

American Mutual Mortgage, Inc. ("AMM"), is in the business of making and arranging loans secured by real property. AMM arranged for a group of investors to fund two loans of $165,000 each on the two properties which Barrich sought to develop. Those investors are the plaintiffs and appellants: Peter J. Rosen, M.D., trustee of the Peter J. Rosen, M.D., Inc., a Medical Corporation Profit Sharing Plan; Bear, Stearns & Company, Inc., Custodian for the William Lamond IRA Rollover Account; Jerry and Susan Grosslight, Trustees of the Jerry and Susan Grosslight Living Trust; Dennis and Ida Block; Milton P. Kaplan, M.D., Trustee of the Milton P. Kaplan, M.D., Inc., a Medical Corporation Pension Plan; Wade Yoshii, M.D.; Sanford Polse, M.D., Trustee of the Sanford Polse M.D. Profit Sharing Plan; Thomas Neuman, DPM, Trustee of the Thomas Neuman, DPM, a Professional Corporation Pension Plan; and Helene K. Swartz, Trustee Retirement Trust for C-Kay Associates, Inc. ¹

Appellants' loan funds were placed in escrow. The trust deeds securing the loan funds were recorded at 3:01 p.m. on September 4, 1992, and the loan funds were disbursed later. After appellants' trust deeds were recorded, TRW Title Insurance Co. ("TRW") issued two title insurance policies in favor of appellants in connection with their trust deeds. The policies by their terms were effective at the same time and date that appellants' trust deeds recorded. ²

Nations was aware that the bank's preexisting trust deeds were subordinated to appellants' trust deeds due to the bankruptcy court's order granting Barrich's priming motion, and issued the policies knowing that the bank had challenged the priming loan motion On August 24, 1993, the bank, having previously obtained permission from the bankruptcy court to do so, foreclosed on its trust deeds and took title to the construction project properties subject to appellants' priming loan trust deeds. In October 1993, Barrich defaulted on appellants' priming loans and appellants began foreclosure proceedings. In December 1993, the bank sued Barrich and appellants in federal district court in order to obtain a declaration that appellants' priming loan trust deeds should be subordinated to the bank's trust deeds. The gravamen of this action was two-fold: (1) in violation of the bankruptcy court's order, Barrich had squandered appellants' loan funds on matters unrelated to the construction project; and (2) appellants negligently permitted this to happen by failing to monitor Barrich's use of those funds. ³

and might do so again. The bank's subordinated trust deeds were noted in and not excluded from coverage by the title policies.

Appellants tendered the defense of the bank's action to Nations. Nations denied the tender on the grounds that the asserted defect in appellants' title was created by appellants and that the allegations in the bank's action did not relate to the validity of the priming lien order itself but instead arose from conduct which occurred after the policy was issued and which was therefore outside the scope of coverage. Appellants paid for their own defense and eventually prevailed in the bank's action when the trial court for that action found no evidence the loan funds had been misused by Barrich.

On October 20, 1995, appellants sued Nations for bad faith and breach of the title policy. Both parties later filed cross-motions for summary judgment. The trial court issued a tentative ruling on June 13, 1996, granting Nations' motion and denying appellants' as moot. The court based its ruling on the fact that title insurance only applies to defects in title as of the date escrow closes, that the title defect alleged in the bank's action arose from events occurring after escrow closed and the title policies issued, and that as a result, the bank's action fell outside the express scope of coverage as stated in the policies. The motion was granted that day and judgment was entered July 10, 1996. This appeal followed.

STANDARD OF REVIEW

Summary judgment is granted when a moving party establishes the right to the entry of judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) In reviewing an order granting summary judgment, we must assume the role of the trial court and redetermine the merits of the motion. In doing so, we must strictly scrutinize the moving party's papers. (Chevron U.S.A., Inc. v. Superior Court (1992) 4 Cal.App.4th 544, 549, 5 Cal.Rptr.2d 674.) The declarations of the party opposing summary judgment, however, are liberally construed to determine the existence of triable issues of fact. (Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1556, 8 Cal.Rptr.2d 552.) All doubts as to whether any material, triable, issues of fact exist are to be resolved in favor of the party opposing summary judgment. (Ibid.)

While the appellate court must review a summary judgment motion by the same standards as the trial court, it must independently determine as a matter of law the construction and effect of the facts presented. (Saldana v. Globe-Weis Systems Co. (1991) 233 Cal.App.3d 1505, 1510-1511, 1513-1515, 285 Cal.Rptr. 385.)

A defendant moving for summary judgment meets his burden of proof of showing that a cause of action has no merit if that party shows that one or more elements of the cause of action, even if not separately pleaded, cannot be established, or that there is a complete defense to the action. (Code Civ. Proc., § 437c, subd. (o)(2).) Once the defendant does so, the burden shifts back to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or defense. In doing so, the plaintiff cannot rely on the mere allegations or

                denial of his pleadings, "but, instead, shall set forth the specific facts showing that a triable issue of material fact exists...."  (Ibid.;   see Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 590, 37 Cal.Rptr.2d 653.)
                

DISCUSSION

1. Scope of Coverage ⁴

Appellants contend that Nations breached its duty to defend them, thus giving rise to claims for breach of contract and tortious breach of the implied covenant of good faith and fair dealing ("bad faith"). It is axiomatic that if Nations had no duty to defend, there was no breach of contract. The bad faith claim is also dependent on the existence of a duty to defend. Absent such a contractual duty, the cause of action cannot stand. (Golden Security Thrift & Loan Assn. v. First American Title Ins. Co. (1997) 53 Cal.App.4th 250, 258, 61 Cal.Rptr.2d 442, hereafter "Golden Security.")

An insurer must defend its insured if the insurer becomes aware of, or if a lawsuit against its insured pleads, facts which give rise to potential liability under the policy. The duty arises so long as the facts--either as expressed or implied in the complaint or as learned from other sources--give rise to a potentially covered claim. It is implicit in this rule that the duty to defend is broader than the duty to indemnify. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 19, 44 Cal.Rptr.2d 370, 900 P.2d 619, hereafter "Waller.")

The duty of defense is a continuing one, arising on the tender of defense and lasting until either the underlying lawsuit ends or until it has been shown that there is no potential for coverage. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153, hereafter "Montrose.") The insured's desire to secure a defense paid by the insurer is as important as the desire to obtain indemnity for possible liability. An immediate duty to defend is therefore necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf. (Id. at pp. 295-296, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) As a...