Seamen's Bank v. Superior Court

• Decision Date: 08 April 1987
• Court: California Court of Appeals Court of Appeals
• Parties: The SEAMEN'S BANK FOR SAVINGS, Petitioner, v. SUPERIOR COURT of the State of California for the County of Los Angeles, Respondent. Eileen J. SMITH, John W. Smythe and Beverly E. Hegg, Real Parties in Interest. LASC C536776.

Page 31

236 Cal.Rptr. 31

190 Cal.App.3d 1485

The SEAMEN'S BANK FOR SAVINGS, Petitioner, v. SUPERIOR COURT of the State of California for the County of Los Angeles, Respondent.

Eileen J. SMITH, John W. Smythe and Beverly E. Hegg, Real Parties in Interest.

LASC C536776.

Court of Appeal, Second District, Division 7, California.

April 8, 1987.

As Modified April 29, 1987.

Hufstedler, Miller, Carlson & Beardsley, Seth M. Hufstedler, Dennis M. Perluss, Evelyn Balderman Hutt and Nancy C. Brown, Los Angeles, for petitioner

No appearance for respondent.

Bostwick & Ackerman and Lee B. Ackerman, Santa Monica, for real party in interest Eileen J. Smith.

Rodi, Pollock, Pettker, Galbraith & Phillips and John P. Pollock, Thomas P. Phillips, Sonja A. Inglin and Robina R. Royer, Los Angeles, for real party in interest John W. Smythe.

Allred, Maroko, Goldberg & Ribakoff and John S. West, Los Angeles, for real party in interest Beverly E. Hegg.

JOHNSON, Associate Justice.

We issued an alternative writ of mandate to review the trial court's order overruling demurrers by The Seamen's Bank for Savings to cross-complaints filed by Eileen J. Smith, Beverly E. Hegg and John W. Smythe. We have now concluded a peremptory writ of mandate should issue directing the trial court to sustain the demurrers.

FACTS AND PROCEEDINGS BELOW

1. Background

The National Mortgage Equity Corporation (NMEC) marketed Mortgage Pass-Through Certificates to institutional investors including The Seamen's Bank for Savings. The certificates represented undivided Bank of America acted as escrow agent and trustee in connection with NMEC's issuance and marketing of the certificates. Nineteen institutions, including Seamen's, purchased over $233 million in certificates.

interests in pools of secured real estate loans. Each certificate represented a number of individual loans collected into a pool by NMEC and sold to institutional investors for a price equal to the aggregate principal balances of the loans in the pool. The institution buying the certificate received a fixed rate of interest stated in the certificate.

Several years after Bank of America undertook its escrow and trustee function Seamen's informed the bank of irregularities in the processing and documentation of transactions underlying Seamen's purchase of NMEC certificates. Bank of America initiated an investigation and found virtually all the loans that comprised the pools were worthless: the borrowers were in default; the real estate that supposedly secured the loan was fraudulently inflated in value; mortgage guarantee insurance did not exist; in some cases several loans were secured by the same property. The bank also concluded the investing institutions stood to lose all or most of the money they invested in the NMEC pools and this loss was caused by the bank's employees failing to use ordinary care, diligence and skill in performing their duties as escrow and trust officers with respect to the NMEC transactions.

Bank of America also recognized its employees' negligence rendered it liable to the investors for their losses. Therefore, the bank undertook settlement negotiations with the investors. As a result, the bank agreed to repurchase the certificates or replace the mortgages represented by the certificates. In return, the investors assigned to the bank all rights, claims, and causes of action they might have against bank officers, employees, agents or other third parties responsible for their loss. The total amount paid by the bank in cash or replacement collateral to resolve its liability to the investors was approximately $133 million. The bank estimates the realizable value of collateral and mortgage guarantee insurance claims assigned to it is $38 million. Accordingly, the bank estimates its loss in resolving the liability to the investors is $95 million.

2. Litigation

(a) Bank of America versus its employees

The underlying action is a suit by Bank of America seeking to recover from present and former employees its losses resulting from its settlement with the NMEC investors. Smith, Hegg and Smythe are three such employees.

The bank's complaint alleges Smythe was trust officer in the Los Angeles District Trust Office of the bank. Smythe was the bank officer principally responsible for the management, supervision and oversight of the trust services furnished by the bank in connection with the NMEC transactions. Hegg was the Vice-President and Manager of the Inglewood main office of the bank. She was the bank officer principally responsible for the bank's management, supervision and oversight of escrow services provided in connection with the NMEC transactions. Smith was the trust administrator in the Inglewood office. She was the bank officer principally responsible for the administration of trusts pertaining to the NMEC transactions, including the review of mortgages and related trust documents. Smith, Smythe and Hegg thus had primary responsibility for administration of the bank's obligations as escrow agent and trustee for the NMEC investment accounts.

The bank alleges that Smith, Smythe and Hegg as officers of the bank were obligated to care for and control the NMEC transactions. Their duties included, for example, (a) reviewing all documents furnished to the bank for each loan to determine whether the documents had been properly executed and conformed to the requirements of the bank's agreement with NMEC; (b) notifying NMEC promptly in writing of any defect or deficiency or any According to the complaint, Smythe failed to read the NMEC agreements, to apply the bank's criteria or to supervise the bank's employees for protection of the investors. He signed receipts for items never received; he signed authentication certificates without underlying documentation; and he permitted other employees to do the same. Smith performed her duties with a similar lack of care, failing to review documentation, to conduct trust account reviews, or otherwise to perform the duties with which she was charged to protect the interest of the investor institutions. Hegg likewise performed negligently by failing to ensure that there was adequate training, supervision and oversight of the personnel responsible for NMEC escrows.

breach by NMEC of its representations or warranties that materially and adversely affected the interests of the investors; (c) certifying the authenticity of the mortgage-backed securities issued by NMEC; and (d) exercising all rights and powers vested in the bank in the event of default.

(b) Bank of America employees versus the investors

Defendants Smith, Hegg and Smythe filed cross-complaints against the defrauded investors including Seamen's. ¹ The cross-complaints alleged that if Smith, Hegg and Smythe are liable to the bank they are entitled to indemnification from the investors on the grounds of equity and implied contract. The three defendants also seek declaratory relief as to the bank's settlement agreement with Seamen's.

The equitable indemnity claim is based on allegations the investors owed a general duty to the bank to act as reasonably prudent investors and owed specific duties to review the investments as set out in the escrow services contract and associated documents. The contractual indemnity claim is based on the theory the defendants, Smith, Hegg and Smythe, are third party beneficiaries of contracts executed by Seamen's. The three defendants allege, on information and belief, a controversy exists between them and Seamen's over whether Seamen's settlement agreement with the bank fully and finally extinguished all claims Seamen's may have against them arising out of the NMEC transactions.

(c) Demurrers to cross-complaints and petition for review

Seamen's demurred to the cross-complaints of Smith, Hegg and Smythe on the ground the cross-complaints failed to state causes of action. The trial court overruled the demurrers. We took the extraordinary step of intervening in this case at the pleading stage because the cross-complaint alleges indemnification theories that go beyond the current law and if these theories are erroneously allowed to proceed substantial trial expenses would be needlessly imposed on the three cross-complainants, the 19 investors and, indirectly, the public-at-large. (Cf. San Diego Unified Port Dist. v. Superior Court (1977) 67 Cal.App.3d 361, 364-365, 136 Cal.Rptr. 557.)

DISCUSSION

I. A DEFENDANT HAS NO CAUSE OF ACTION FOR EQUITABLE INDEMNITY AGAINST THE VICTIM OF HIS OWN TORT

In Munoz v. Davis (1983) 141 Cal.App.3d 420, 425, 190 Cal.Rptr. 400, we observed, "[I]n the case law of equitable indemnity ... one point stands clear: there can be no indemnity without liability." We went on to explain, "[U]nless the prospective indemnitor and indemnitee are jointly and severally liable to the plaintiff there is no basis for indemnity." (Ibid.; citations omitted.) Munoz was an attorney sued by a client for malpractice. Munoz claimed he was entitled to equitable indemnity from Davis because if Davis had not negligently injured Munoz' client Munoz never would have had the opportunity to commit malpractice in representing the client. (Ibid.) The bank employees make a similar argument in the case at bench. If Seamen's had acted as a reasonably prudent investor the NMEC transactions would never have

                reached their desks and they never would have had the opportunity to negligently perform their duties.  We rejected Munoz' claim for equitable indemnity because Davis owed no duty to Munoz' client to ensure that his legal claims were competently prosecuted and because there was no equitable basis for shifting Munoz' liability to Davis.  (Id., at pp. 426-427, 190 Cal.Rptr. 400.)   We reject the bank employees' claims for similar reasons
                

1. Seamen's and the bank employees are not joint tortfeasors because Seamen's owed no duty of care to the bank

The bank employees cite no case holding an investor owes a duty of care to an escrow...