First American Title Ins. Co. v. Spanish Inn ( 2015 )

Filed 7/16/15; pub. order 8/14/15 (see end of opn.)
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
FIRST AMERICAN TITLE INSURANCE D067137
COMPANY,
Plaintiff and Respondent,
(Super. Ct. No. INC1104681)
v.
SPANISH INN, INC. et al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of Riverside County, John G.
Evans, Judge. Affirmed.
Law Offices of Nejat Kohan, Inc., and Nejat Kohan, for Defendants and
Appellants.
Law Offices of Hall & Bailey, John L. Bailey, Barbara M. Moore; and William D.
Cloud for Plaintiff and Respondent.
This is one of many appeals arising from litigation over the renovation of a hotel
property in Palm Springs. In this appeal, the project's developers challenge the trial
court's grant of summary adjudication in favor of the title insurer, which sought
contractual indemnity from the developers for legal expenses incurred in defending the
project's construction lender against mechanic's lien foreclosure actions. The developers
contend the trial court erred because triable issues of fact exist regarding whether the
mechanic's lien claims were covered by the title policy and regarding the amount of the
title insurer's damages. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Defendants Spanish Inn, Inc. (Spanish Inn), Hormoz Ramy, and Nejat Kohan
owned or otherwise held an interest in the Spanish Inn Hotel property in Palm Springs.
In order to renovate and rehabilitate the property, Spanish Inn borrowed $6 million from
Nara Bank under a written construction loan agreement. To secure the loan, Nara Bank
recorded a construction deed of trust against the property. To protect its construction
deed of trust, Nara Bank required that Spanish Inn procure a lender's title insurance
policy to protect against loss resulting from mechanic's liens. First American Title
Insurance Company (First American) issued the policy. Before it would do so, however,
First American required that defendants agree to indemnify it if any mechanic's liens
were recorded against the property due to the contractor's or the owners' failure to pay for
work furnished to the project. Accordingly, defendants and First American entered into a
written "Indemnity Agreement I (Mechanic's Liens)" (the Indemnity Agreement).
Major modifications to the project caused its budget to increase and timeline to
expand. Nara Bank agreed to lend an additional $1.3 million to Spanish Inn, but required
that Hormoz and Ramy also contribute an additional $300,000 to the project.
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After Spanish Inn missed the completion deadline under the construction loan
agreement, Nara Bank declared the loan to be in default. Kohan, who also served as the
project's contractor, recorded a mechanic's lien against the property for $800,000.
Subcontractor J.H. Thompson & Sons, Inc. (Thompson) also recorded a mechanic's lien
against the property for approximately $85,000.
Nara Bank assigned its construction deed of trust to Pacifica L 39 LLC (Pacifica),
which later purchased the property at a nonjudicial foreclosure sale. It is undisputed that
Pacifica, as Nara Bank's successor, is an insured under the title policy.
Kohan and Thompson each filed lawsuits to foreclose on their mechanic's liens.
Pacifica tendered those claims to First American, which accepted the tender. First
American then retained counsel to defend against the foreclosure actions and to seek
indemnity from defendants under the Indemnity Agreement. First American's counsel
made a written demand under the Indemnity Agreement that defendants defend Pacifica
against the mechanic's lien foreclosure actions, obtain releases of the mechanic's liens,
and indemnify First American for all costs and fees incurred in connection with the
mechanic's liens. Defendants declined.
First American then sued defendants for express indemnity, breach of contract,
and specific performance. It later moved for summary adjudication of the first two
claims. First American sought damages of $250,876.53, which consisted of $207,119.58
in costs and attorney fees incurred in defending against the mechanic's lien foreclosure
actions and in seeking indemnity from defendants; $20,950 that First American paid to
settle with Thompson; plus 10 percent interest on the total.
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Defendants opposed the motion on two grounds. First, they argued that the claim
arising from Kohan's mechanic's lien fell within an exclusion from coverage in the title
policy for "liens . . . created, suffered, assumed or agreed to by the insured claimant"
(Exclusion 3(a)). Defendants asserted that Nara Bank, as the predecessor-in-interest to
the insured claimant (Pacifica), "created" the mechanic's lien "by failing to provide the
full loan amount it contracted to provide." This caused Spanish Inn to default on the
loan, which, in turn, caused Kohan to record his mechanic's lien. Thus, defendants
reasoned, Nara Bank created the mechanic's lien, which placed the lien squarely within
Exclusion 3(a), which excused First American from defending against it, which, in turn,
excused defendants from indemnifying First American. Second, defendants argued that
triable issues of fact existed regarding the amount of First American's damages.
The trial court granted First American's motion. The court ruled that defendants
had not presented admissible evidence sufficient to create a triable issue of fact regarding
whether Kohan's mechanic's lien fell within Exclusion 3(a) because "the only evidence
offered by Defendants is the declaration of NEJAT KOHAN, which is a factual narrative
of Defendants' dealing with Nara Bank and a legal conclusion that Nara Bank
intentionally failed to disburse the funds for Defendants to pay for the completion of the
work needed to obtain a certificate of occupancy by the specified date in order to cause
Defendants' default, and, that the declaration is argument and not based upon facts that
show that Nara Bank's failure to disburse funds was wrongful."
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The trial court also found that defendants had not raised a triable issue of fact
regarding damages. First, the court found First American had submitted evidence to
support the legal expense component of its claim, which shifted the burden to defendants
to present evidence that created a triable issue of fact regarding the reasonableness of that
component. The court found that defendants failed to satisfy this burden. Second, the
court ruled that defendants' challenge to the reasonableness of the Thompson settlement
amount "does not create a triable issue because the validity of the [Thompson] lien claim
and the amount indisputably paid in settlement are not relevant to the issues on [First
American]'s Motion." The court granted First American's motion to dismiss the
remaining cause of action for specific performance and entered judgment in favor of First
American.
Defendants timely appealed.
DISCUSSION
Defendants contend the trial court erred by granting summary adjudication of First
American's claims because triable issues of fact existed regarding (1) whether Kohan's
mechanic's lien claim fell within Exclusion 3(a), and (2) the reasonableness of First
American's damages.
A. Standard of Review
"On appeal from a ruling on a motion for summary judgment, the appellate court
conducts its own independent review of the moving and opposition papers and applies the
same standard as the trial court in determining whether the motion was properly granted.
The appellate court is not bound by the trial court's stated reasons for its ruling on the
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motion, as the appellate court reviews only the ruling and not its rationale." (Bed, Bath &
Beyond of La Jolla, Inc. v. La Jolla Village Square Venture Partners (1997) 52
Cal. App. 4th 867, 873.)
B. Indemnity Framework
Indemnity is " 'the obligation resting on one party to make good a loss or damage
another party has incurred.' " (McCrary Construction Co. v. Metal Deck Specialists, Inc.
(2005) 133 Cal. App. 4th 1528, 1536 (McCrary).) "Parties to a contract . . . may define
therein their duties toward one another in the event of a third party claim against one or
both arising out of their relationship." (Crawford v. Weather Shield Mfg. Inc. (2008) 44
Cal. 4th 541, 551.) In general, an indemnity agreement "is construed under the same rules
as govern the interpretation of other contracts. Effect is to be given to the parties' mutual
intent [citation], as ascertained from the contract's language if it is clear and explicit
[citation]. Unless the parties have indicated a special meaning, the contract's words are to
be understood in their ordinary and popular sense." (Id. at p. 552.)
We review de novo the trial court's interpretation of the Indemnity Agreement
" 'unless the interpretation turns upon the credibility of extrinsic evidence.' " (McCrary,
supra, 133 Cal.App.4th at p. 1535.)
C. Analysis
In a contractual indemnity action in which the indemnitee settles the underlying
liability without trial, "the indemnitee must prove that liability is covered by the contract,
that liability existed, and the extent thereof." (Peter Culley & Assocs. v. Superior Court
(1992) 10 Cal. App. 4th 1484, 1497, 1498 (Culley).)
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Defendants do not appear to contest that First American's indemnity claim "is
covered by the contract" (Culley, supra, 10 Cal.App.4th at p. 1497); that is, that the
nature of First American's claim is within the scope of those covered by the Indemnity
Agreement.
The determination of whether "liability existed" (Culley, supra, 10 Cal.App.4th at
p. 1497) depends on whether the lien claims tendered to First American were covered by
the title policy. We conclude they were, though for a different reason than the trial court
cited. That is, instead of interpreting Exclusion 3(a), we need only interpret the
Indemnity Agreement.
The Indemnity Agreement expressly gave First American the right to conclusively
determine coverage under the title policy:
"5.6 Determination of Coverage. Any determination of coverage by
First American shall be conclusive evidence that the matter is within
the Title Policy coverage as to the Mechanic Liens for purposes of
this Agreement."
First American determined that the tendered claims were covered by the title policy.
Therefore, regardless of whether Exclusion 3(a) would otherwise have excluded coverage
for Kohan's lien, or whether defendants' factual defenses would otherwise have precluded
coverage for Thompson's lien, First American was expressly authorized to—and did—
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find that the tendered claims were "within the Title Policy." Thus, First American
established that "liability existed."1 (Culley, supra, 10 Cal.App.4th at p. 1498.)
Defendants argue that under the implied covenant of good faith and fair dealing,
"the provision of the policy giving First American the unfettered right to determine
whether an exclusion applies may not be enforced against Spanish Inn." We disagree.
"[A]lthough it has been said the implied covenant finds 'particular application in
situations where one party is invested with a discretionary power affecting the rights of
another' [citations], if the express purpose of the contract is to grant unfettered discretion,
and the contract is otherwise supported by adequate consideration, then the conduct is, by
definition, within the reasonable expectation of the parties and 'can never violate an
implied covenant of good faith and fair dealing.' " (Wolf v. Walt Disney Pictures &
Television (2008) 162 Cal. App. 4th 1107, 1120-1121; Third Story Music, Inc. v. Waits
(1995) 41 Cal. App. 4th 798, 808 (Waits) ["courts are not at liberty to imply a covenant
directly at odds with a contract's express grant of discretionary power except in those
relatively rare instances when reading the provision literally would, contrary to the
parties' clear intention, result in an unenforceable, illusory agreement."].)
Applying this principle, federal courts in California have rejected implied-
covenant challenges to provisions in indemnity agreements similar to the one here.
(Travelers Cas. and Sur. Co. of America v. Highland Partnership, Inc. (S.D. Cal., Nov.
1 It is, therefore, unnecessary for us to address First American's evidentiary
objections to Kohan's declaration, which relate only to facts regarding whether Nara
Bank's conduct brought Kohan's mechanic's lien within Exclusion 3(a).
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26, 2012, 10CV2503 AJB DHB) 2012 WL 5928139, at *7; Travelers Cas. and Sur. Co.
of America v. Dunmore (E.D. Cal., Dec. 4, 2014, 2:07-CV-02493 TLN) 2014 WL
6886004, at *6-7.)2
Defendants imply this is one of "those relatively rare instances when reading the
provision literally would, contrary to the parties' clear intention, result in an
unenforceable, illusory agreement." (Waits, supra, 41 Cal.App.4th at p. 808.) In other
words, without implying a good faith standard on First American's discretionary power,
the Indemnity Agreement would fail for lack of mutuality and consideration. We are not
persuaded. The Indemnity Agreement establishes that First American's rights were
supported by adequate consideration—namely, its issuance of a $6 million title insurance
policy. Defendants acknowledged as much in the Indemnity Agreement. In a paragraph
captioned "estoppel" and printed in italicized, bolded, and all-capitalized typeface, the
Indemnity Agreement specifies that First American's willingness to do so in this case was
riskier than usual:
"Notwithstanding any possible difference in the parity of the parties
hereto, Indemnitor understands that First American is undertaking a
risk significantly greater than that undertaken in the normal course
of providing title insurance policies and related services by entering
2 The provision in those cases provided: "Company shall have the right in its sole
discretion, to determine for itself and its indemnitors whether any claim, demand or suit
brought against Company or any Indemnitor in connection with or relating to any Bond
shall be paid, compromised, settled, tried, defended or appealed, and its determination
shall be final, binding and conclusive upon the Indemnitors. Company shall be entitled to
immediate reimbursement for any and all Loss incurred under the belief it was necessary
or expedient to make such payments." (Travelers Cas. and Sur. Com. of America v.
Dunmore, supra, 2014 WL 6886004, at *5; Travelers Cas. and Sur. Co. of America v.
Highland Partnership, Inc., supra, 2012 WL 5928139, at *7.)
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into this agreement and issuing policies of title insurance in reliance
on this agreement, and therefore, indemnitor hereby declares its
willingness to enter into this agreement and to induce First American
to accept this agreement, realizing that Indemnitor's best interest, in
the opinion of Indemnitor, is being served thereby."
Therefore, defendants' mutuality and consideration argument fails.
Even if we were to conclude that the implied covenant of good faith and fair
dealing governed First American's discretionary power, defendants still have not pointed
to any evidence that would give rise to a triable issue of material fact regarding First
American's exercise of that right in this case, as required. (Wiz Technology, Inc. v.
Coopers & Lybrand (2003) 106 Cal. App. 4th 1, 11 (Wiz) ["To avoid summary judgment,
admissible evidence presented to the trial court, not merely claims or theories, must
reveal a triable, material factual issue."].) That defendants disagree with First American's
conclusive determination does not establish that the determination was reached other than
in good faith.
Finally, we turn to the "extent" of liability. (Culley, supra, 10 Cal.App.4th at
p. 1498.) First American submitted declarations from its in-house senior claims counsel
and its outside counsel, together with outside counsel's billing statements, to establish the
extent of legal expenses it incurred in defending against the mechanic's lien claims and in
seeking indemnity from defendants. Although defendants argued to the trial court that
the "amount claimed for attorneys fees is not reasonable," defendants did not respond to
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First American's evidence with evidence of their own, as required.3 (Wiz, supra, 106
Cal.App.4th at p. 11; Premier Medical Management Systems, Inc. v. California Ins.
Guarantee Ass'n (2008) 163 Cal. App. 4th 550, 563-564 ["Respondents supported their fee
requests with declarations describing the joint defense and the division of labor, with
billing records to establish the hours of work. Appellants had two options to oppose such
a showing: attack the itemized billings with evidence that the fees claimed were not
appropriate, or obtain the declaration of an attorney with expertise in the procedural and
substantive law to demonstrate that the fees claimed were unreasonable. They did
neither."], italics added.)
First American's evidence also established the "extent" of its liability arising from
the settlement of the Thompson lien claim. Defendants' response to First American's
separate statement of undisputed material facts identified this item as "Undisputed,
except Defendants do not concede that such amount was actually owed to J.H.
Thompson." Kohan's declaration explained that the amount of the Thompson settlement
was unreasonable because "Thompson was actually overpaid and owed Spanish Inn a
refund." In other words, defendants contend no "liability existed." (Culley, supra, 10
Cal.App.4th at p. 1497.) For the reasons discussed above, the parties agreed First
American's determination that coverage exists is conclusive on the issue. Accordingly,
defendants' attempt to repackage their attack on that determination as an attack on
damages fails.
3 The only "[s]upporting [e]vidence" defendants cited in their response to First
American's separate statement of undisputed material fact was "[l]egal [a]rgument."
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Because First American established through undisputed evidence that it was
entitled to indemnity under the Indemnity Agreement, we conclude the trial court did not
err by granting First American's motion for summary adjudication.
DISPOSITION
The judgment is affirmed. First American is entitled to its costs on appeal.
NARES, J.
WE CONCUR:
BENKE, Acting P. J.
McINTYRE, J.
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Filed 8/14/15
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
FIRST AMERICAN TITLE INSURANCE D067137
COMPANY,
Plaintiff and Respondent,
v.
SPANISH INN, INC. et al., (Super. Ct. No. INC1104681)
Defendants and Appellants.
ORDER CERTIFYING OPINION
FOR PUBLICATION
THE COURT:
The opinion in this case filed July 16, 2015, was not certified for publication. It
appearing the opinion meets the standards for publication specified in California Rules of
Court, rule 8.1105(c), the requests pursuant to California Rules of Court, rule 8.1120(a)
for publication are GRANTED.
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IT IS HEREBY CERTIFIED that the opinion meets the standards for publication
specified in California Rules of Court, rule 8.1105(c); and
ORDERED that the words "Not to Be Published in the Official Reports" appearing
on page 1 of said opinion be deleted and the opinion herein be published in the Official
Reports.
BENKE, Acting P. J.
Copies to: All parties
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