Case Information
*1 Filed 9/30/14
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT
DIVISION FOUR
JAMSHID NAJAH et al., B241097 c/w B245960 Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No. BC414185) v.
SCOTTSDALE INSURANCE
COMPANY,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County, Ramona G. See, Judge. Affirmed.
Cummins & White, Larry M. Arnold, Melody S. Mosley; Law Office of Susan K. Pintar and Susan K. Pintar for Plaintiffs and Appellants.
Selman Breitman, Alan B. Yuter and Rachel E. Hobbs for Defendant and Respondent.
Appellants Jamshid Najah and Mark Akhavain sold a commercial property, taking back as partial payment a promissory note secured by a second deed of trust. When the borrower fell into default and the holder of the first deed of trust commenced foreclosure proceedings, appellants purchased from the senior lender the promissory note secured by the first deed of trust and took assignment of that trust deed. Appellants then instituted foreclosure proceedings on the second trust deed and reacquired the property by making a bid equal to the unpaid debt securing the second, including interest, costs, fees, and other expenses of foreclosure. The primary issue on appeal is whether appellants can pursue a claim for preforeclosure damage to the property deliberately caused by the purchaser under an insurance policy issued by respondent Scottsdale Insurance Company (Scottsdale) containing a mortgagee coverage provision. We conclude that appellants’ full credit bid at the foreclosure sale under the second deed of trust precluded appellants from making a claim on the insurance proceeds. [1] Appellants further contend that the trial court abused its discretion in finding that a defense offer to compromise under Code of Civil Procedure section 998 was reasonable. We conclude that the court did not abuse its discretion in making this finding. We therefore affirm the judgment of the trial court.
Because we conclude liability is precluded by appellants’ full credit bid, we do not address other issues raised in the briefs, including whether the insurance at issue covered damage intentionally caused by the purchaser as “vandalism.”
A. Background Facts
1. The Loans In 2006, appellants sold a Riverside, California property to Orange Crest Realty Corporation (Orange Crest), whose principal was Ronald Shade. [2] Orange Crest borrowed $2.021 million from the Lantzman Family Trust (Lantzman Trust), in return for a promissory note secured by a first deed of trust on the property. [3] Appellants took back a promissory note and a second deed of trust for an additional $2.55 million.
There was a structure located on the property at the time of the sale. [4] Although Shade’s professed intention was to demolish the building and develop the property for other uses, the $2.55 million promissory note payable to appellants stated, “[Orange Crest] will do no remodeling or construction on the property secured by this Note until the [Lantzman Trust] loan and this Note are paid in full.” The second deed of trust securing the $2.55 million note similarly required Orange Crest to “keep [the] property in good condition and repair, not to remove or [2] Appellants purchased the property in 2004 for $1.8 million .
[3]
In California, a real property loan generally involves two documents, a
promissory note and a security instrument known as a deed of trust. (
Alliance
Mortgage Co. v. Rothwell
(1995)
been vacant at least since appellants purchased it in 2004 .
demolish any building thereon; [and] to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged or destroyed thereon.” [5]
2. The Insurance The $2.55 million note payable to appellants provided that Orange Crest would “furnish full all risk insurance with replacement cost guarantee insuring [appellants].” [6] Orange Crest obtained a commercial general liability policy from Scottsdale, listing the Lantzman Trust and appellants as mortgageholders. The original policy, which ran from February 16 to May 16, 2006, identified itself as a “special form” policy. However, the language which described the covered “causes of loss” stated it was a “basic form” policy and that only specific items were covered, including “vandalism,” but not “theft.” [7] The policy defined “vandalism” as “willful and malicious damage to, or destruction of, the described property.”
The policy included a provision describing Scottsdale’s obligation to appellants and the Lantzman Trust as the mortgageholders: “We will pay for covered loss of or damage to buildings or structures to each mortgageholder shown [5] The first deed of trust securing the promissory note payable to the Lantzman Trust also required Orange Crest to “keep the Property in good repair” and not “commit waste or permit impairment or deterioration of the Property.” [6] Both deeds of trust similarly required Orange Crest to “provide, maintain and deliver to [the mortgagees] fire insurance satisfactory [to] and with loss payable to [the mortgagees].” A special form insurance policy covers all risks except those specifically
excluded
; a basic form policy covers only risks that are specifically
included
. (See
Rios v. Scottsdale Ins. Co
. (2004)
[¶] . . . The mortgageholder has the right to receive loss payment even if the mortgageholder has started foreclosure or similar action on the building or structure. [¶] . . . If we deny your [referring to Orange Crest’s] claim because of your acts or because you have failed to comply with the terms of this Coverage Part, the mortgageholder will still have the right to receive loss payment if the mortgageholder: [¶] (1) Pays any premium due under this Coverage Part at our request if you have failed to do so; [¶] (2) Submits a signed, sworn proof of loss with 60 days after receiving notice from us of your failure to do so; and [¶] (3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgageholder.”
The policy remained in effect until July 16, 2008, although Orange Crest stopped paying premiums in February 2008. The premiums needed to keep the policy in effect through July 16 were paid by the agent who obtained the policy for Orange Crest. Scottsdale did not request payment of insurance premiums from appellants.
3.
The Default, Assignment and Foreclosure
In or about January 2008, Orange Crest ceased making payments on the
loans. Shortly thereafter, the Lantzman Trust began the process of foreclosure
under its first deed of trust. To stop the foreclosure, in March 2008, appellants
[8]
California’s statutory scheme (Civ. Code, §§ 2924-2924k) provides the
creditor/beneficiary with a “quick, inexpensive and efficient remedy” against a
defaulting debtor. (
Moeller v. Lien
(1994)
In November 2008, appellants foreclosed on the second deed of trust. At the foreclosure sale, appellants acquired the property by bidding $2,878,060.25, the amount of the unpaid debt on the second promissory note, including interest, fees, and the costs of foreclosure.
4.
The Insurance Claim
In February 2008, shortly after Orange Crest stopped making payments but
months before the foreclosure, appellant Akhavain visited the property for the first
time since the 2006 sale to Orange Crest. He observed severe damage to the
building and debris everywhere. After several unsuccessful attempts to locate
Shade to determine what had happened and whether Orange Crest would be able to
make a balloon payment about to become due, Akhavain and Najah returned in
early March to conduct a more thorough examination of the building and inventory
satisfy the obligation.” (
Pacific Inland Bank v. Ainsworth
(1995) 41 Cal.App.4th
277, 280.) Third parties may appear at the sale and bid cash for the property,
offering more or less than the balance due on the debt. (
Ibid
.) The mortgagee may
do the same, although unlike third parties, the mortgagee is permitted to bid all or a
portion of the outstanding debt instead of cash. (
Id
. at pp. 280-281; accord,
Alliance Mortgage
,
of the damage. Among other things, they observed electrical wires hanging from the ceiling; broken mirrors, furniture and bathroom fixtures; damaged walls, ceilings and carpets; and interior doors removed and left lying on the floor. In addition, a number of items that had been in place and functional at the time of the sale were missing, including air conditioning and heating units, kitchen appliances and equipment, breaker panels, the main water heater, commercial laundry equipment, light poles, mailboxes, furniture, tiles and drywall. [9]
In April 2008, after purchasing the Lantzman Trust’s interest, appellants filed a police report with the Riverside Police Department. In May 2008, appellants submitted a claim to Scottsdale.
B. The Complaint
In May 2009, six months after reacquiring the property at the foreclosure sale, appellants brought suit against Scottsdale for breach of its insurance contract and tortious breach of the implied covenant of good faith and fair dealing. [10] The operative first amended complaint (FAC) alleged that in or about February 2008, appellants discovered that damage had occurred to the property due to theft and/or vandalism and that the loss was covered by the insurance policies issued by [9] During the litigation, Shade was deposed and admitted having removed the missing items. He recalled two incidents of vandalism caused by unknown parties: one involving a broken window and the other involving water damage from a broken copper pipe. Shade’s deposition testimony was introduced into evidence at trial. At the time appellants filed suit, Scottsdale had not formally denied the
claim. Appellants received a formal denial shortly before trial.
Scottsdale. According to the FAC, it would cost at least $500,000 to repair the damaged building.
The FAC asserted claims for breach of contract and tortious breach of the implied covenant of good faith and fair dealing. It asserted that Scottsdale’s conduct was “malicious, oppressive or fraudulent within the meaning of . . . Civil Code [s]ection 3294,” entitling appellants to punitive damages.
C. Scottsdale’s Motions for Summary Judgment and Summary Adjudication Scottsdale moved for summary judgment, contending (a) that appellants had extinguished the debt and any claim to insurance proceeds by acquiring the property at the foreclosure sale with a full credit bid, and (b) that the damage was not covered by the policy. [11] The court denied the motion. Scottsdale subsequently moved for summary adjudication on the issue of punitive damages. The court granted the motion, finding appellants had presented no evidence raising a triable issue of fact to support that Scottsdale had acted with malice, fraud or oppression.
D. The Trial
Prior to trial, Scottsdale moved to bifurcate adjudication of the insurance
coverage issue from the claim for tortious breach of the covenant of good faith and
fair dealing. The court granted the motion. Counsel for the parties framed five
As explained, at a foreclosure sale under a deed of trust, anyone may bid on
the property -- including, of course, the mortgageholder, who may choose to bid
more or less than the amount of the debt. (
Alliance Mortgage
,
supra
, 10 Cal.4th at
p. 1238.) If the mortgageholder bids “an amount equal to the unpaid principal and
interest of the mortgage debt, together with the costs, fees and other expenses of
the foreclosure,” it is said to have made a “full credit bid.” (
Cornelison v.
Kornbluth
,
issues for the court to determine in the first phase: (1) “Do the [appellants] have an insurable interest in the applicable Scottsdale insurance policies? If so, what is the insurable interest the [appellants] have in the Scottsdale policies?”; (2) “If it is determined that the [appellants] had an insurable interest in the applicable Scottsdale policies, which ‘Causes of Loss’ Form is included in the applicable Scottsdale policies -- a Basic Form or a Special Form?”; (3) “If it is determined the [appellants] had an insurable interest in the applicable Scottsdale policies, is the [appellants’] alleged loss, or any part of the alleged loss, covered under the [applicable] Scottsdale policies?”; (4) “Are [appellants] entitled to coverage [under] the Mortgageholders provisions of the Building and Personal Property Coverage Form due to the acts of Orange [Crest] Realty/Shade?”; (5) “If it is determined that the applicable policy forms use the terms ‘vandalism,’ what is the meaning of the term ‘vandalism’ as used in those policy forms?”
After hearing evidence, the court issued a written statement of decision. The court found in favor of Scottsdale on the issues of insurable interest and coverage. The court ruled that an owner cannot vandalize or steal his own property, as those terms are defined by California law, and thus any damage or removal of property by Shade on behalf of Orange Crest was not recoverable under the policy. The court further found that except for the two minor items involving a broken window and copper pipe, the damage to the building and removal of fixtures and other items was undertaken by Shade on behalf of Orange Crest. In addition, the court found that any claim appellants had to insurance proceeds as mortgagees under the second deed of trust was extinguished by their full credit bid at the foreclosure sale. With respect to their rights as the holders of the first deed of trust, the court preliminarily agreed with appellants that the Lantzman Trust had assigned its right to insurance proceeds to appellants when it assigned that deed of trust to them. *10 The court concluded, however, that appellants’ full value purchase of the Lantzman Trust’s first deed of trust in a private transaction extinguished the debt and any right to insurance proceeds. Judgment was entered in favor of Scottsdale. Appellants noticed an appeal.
E. Costs
Prior to trial, Scottsdale served an offer to settle for $30,000 under Code of Civil Procedure section 998. Appellants did not accept. After judgment was entered in Scottsdale’s favor, it filed a memorandum of costs seeking a total of $86,022.84, including $41,317.55 for expert witness expenses. Appellants filed a motion to tax costs, contending they should not be required to pay the expert witness costs under section 998 because Scottsdale’s offer was unrealistic and made in bad faith. Appellants pointed out that prior to submitting the offer, Scottsdale’s motion for summary judgment on liability issues had been denied. Appellants also noted that none of Scottsdale’s experts had testified at trial. The trial court denied the motion to tax with respect to the expert expenses, finding that Scottsdale’s offer to compromise was made in good faith, and that appellants had failed to show the expenses were unreasonable or unnecessary to the conduct of the litigation. Appellants separately noticed an appeal of the costs award. The two appeals were consolidated.
DISCUSSION
A. Appellants’ Right to Recover Insurance Benefits Under the Mortgagee Insurance Provided by Scottsdale Was Foreclosed by Their Full Credit Bid at the Foreclosure Sale
Under the full credit bid rule, when the lienholder obtains a property at a
foreclosure sale by making a full credit bid -- bidding an amount equal to the
unpaid debt, including interest, costs, fees, and other expenses of foreclosure -- “it
is precluded for purposes of collecting its debt from later claiming that the property
was actually worth less than the bid. [Citations.]” (
Alliance Mortgage
,
supra
,
sale “establishes the value of the [liened property] as being equal to the outstanding
indebtedness” and “the nonexistence of any impairment of the security”];
Countrywide Home Loans, Inc. v. Tutungi
(1998)
Apart from preventing double recovery, the full credit bid rule serves to
protect the integrity of the foreclosure auction. In discussing the full credit bid
rule, our Supreme Court has said, “‘[t]he purpose of the trustee’s sale is to resolve
the question of value . . . through competitive bidding . . . .’” (
Cornelison v.
Kornbluth
,
Appellants contend the trial court erred in concluding that the full credit bid rule precluded them from recovering insurance benefits under the Scottsdale policy. Although we do not wholly agree with the court’s reasoning, for the reasons set forth below, we concur that the full credit bid rule precludes appellants’ recovery. [13]
To appreciate why the full credit bid rule has this effect on the recovery of
insurance proceeds, we first set forth certain basic principles governing mortgagee
insurance. Under the policy at issue here, Scottsdale agreed to “pay for covered
“A trial court’s order is affirmed if correct on any theory, even if the trial
court’s reasoning was not correct.” (
J.B. Aguerre, Inc. v. American Guarantee &
Liability Ins. Co
. (1997)
loss of or damage to buildings or structures to each mortgageholder shown in the
Declarations in their order of precedence, as interests may appear.” The policy
included a provision stating that even if Scottsdale denied a claim for “covered loss
of or damage to buildings or structures” due to “[Orange Crest’s] acts” or because
Orange Crest “failed to comply with the terms of this Coverage Part,” the
“mortgageholders” would “still have the right to receive loss payment,” so long as
certain conditions were met.
[14]
This language created what has come to be known
as a “standard mortgage clause.” (
Home Savings of America v. Continental
Insurance Co
. (2001)
p. 849, quoting 4 Couch on Insurance,
supra
, at § 65:57, p. 65-82; accord,
Zurich
Ins, Co. v. Wheeler
(9th Cir. 1988)
There is a trade-off for the broad coverage afforded under a standard
mortgage clause. The amount payable to the mortgagee under the policy is limited
to the amount necessary to satisfy the debt, even if it is less than would be required
to repair the physical damage to the property, and once the debt is satisfied, “[the
lienholder] ha[s] no further claim on any insurance proceeds.” (
Washington
Mutual Bank v. Jacoby
(2009)
This rule holds true whether the party making the claim for insurance
proceeds is the holder of the first trust deed or a more junior creditor. In
Caruso v.
Great Western Savings
, the second trust deed holders made a full credit bid and
became owners of a property damaged by soil subsidence and subject to a first
deed of trust held by Great Western. The holders of the second subsequently
attempted to assert a complaint in intervention in a dispute between Great Western
and the prior owners over the right to allocate insurance proceeds for the damage
to the land. The court held that “the rule . . . that a full credit bid at a foreclosure
sale extinguishes the underlying lien . . . appl[ies] as well to a foreclosing junior
lienholder as it does to a foreclosing senior lienholder.” (
Caruso v. Great Western
Savings, supra,
Appellants do not dispute that their full credit bid at the foreclosure sale on
the second trust deed extinguished that debt. However, they contend their position
is different from the creditors in the cases cited above because they were the
holders of two deeds of trust securing two separate debts. They assert that they
should be entitled to pursue any remedy that would have been available to a third
party holding a separate trust deed. (See
Caruso v. Great Western
,
This position was rejected by the court in
Romo v. Stewart Title of
California
(1995)
As implicitly recognized in
Romo
, applying the full credit bid rule to the
combined debt where the holder of multiple deeds of trust forecloses on the most
junior protects the integrity of the foreclosure auction process. The court in
Altus
Bank
,
The same rationale in support of the full credit bid rule was recognized in a
New York high court decision,
Whitestone Sav. & Loan Asso. v. Allstate Ins. Co
.
(N.Y. 1971)
[15]
Courts from multiple jurisdictions have relied on
Whitestone
’s reasoning to
preclude lenders making full credit bids from pursuing insurance claims or other
claims reliant on the property’s value being less than the bid. (See, e.g.,
Chrysler
Capital Realty, Inc. v. Grella
(2d Cir. 1991)
This reasoning applies regardless of whether the mortgagee holds one or
multiple deeds of trust. By making a full credit bid at the foreclosure sale on their
more junior lien, appellants set an effective bid price for any other party interested
in acquiring the property at $4.627 million -- the total of their bid and their
outstanding lien -- notwithstanding that appellants believed the property to be
worth far less. In order to out-bid appellants, any other party would have had to
bid an amount greater than appellants’ $2.878 million credit bid, and would have
taken the property subject to appellants’ outstanding $1.749 million lien on the first
trust deed. (See
Penziner v. West American Finance Co
. (1937)
proceeds in the amount between what they freely paid to secure the property for themselves and the amount they now claim the property to be worth.
Appellants cite
Kolodge v. Boyd
(2001)
Kolodge
is not dispositive of the question raised here. There, the plaintiff
had presented evidence that in bidding only the amount of the principal due on the
note securing the third trust deed, he had not made a full credit bid, as the amount
of the outstanding debt had increased.
[17]
The primary issue addressed in
Kolodge
was whether the plaintiff had reasonably relied on the appraisals supporting
inflated values for the properties when he made the bid at the foreclosure sale and,
if so, whether he could assert claims for negligence. (
Kolodge, supra,
88
[16]
The deeds of trust were not in the same position on both properties as there
was a senior lien on one of the properties. However, as the presence of the senior
lien is immaterial to the holding of the case or our discussion of it, we refer to the
deeds of trust held by the plaintiff in
Kolodge
as the first, second, and third. The evidence indicated that the indebtedness on the note securing the third
deed of trust had nearly doubled due to accrued interest, late charges, and other
components of a full credit bid. (
Kolodge
,
Appellants also purport to rely on the decision in
Evans v. California Trailer
Court, Inc
. (1994)
In short, a lender who makes a full credit bid despite believing the value of the property to be impaired subverts the integrity of the foreclosure auction at the expense of the insurer or any other party whom the lender intends to pursue through legal action postforeclosure by “depriv[ing] the foreclosure process of the competitive impact of third-party bidding.” (Rest.3d Property, Mortgages, § 4.8, com. (a).) This is true whether the lender made the full credit bid reflexively or whether it did so intending to drive away competitive bids. The aggregation rule proposed by appellants would place such a lender on the same footing as the lender who made a fair bid and risked losing the property to a higher bidder.
Moreover, adopting the aggregation rule proposed by appellants would
almost inevitably lead to the end of the effectiveness of the full credit bid rule. If
applicability of the rule turned on total debt rather than the manner in which the
property is acquired at foreclosure, it would be a simple matter for a lender to
divide a single loan between two promissory notes secured by two separate deeds
of trust, and, following a default, secure the property for itself by foreclosing with
a full credit bid on the junior loan while still maintaining its option to pursue
additional claims currently prohibited by the rule. A similar concern was
expressed in
Simon v. Superior Court of Contra Costa County
(1992)
prohibition contained in the anti-deficiency statute (Code Civ. Proc., § 580d): “We will not sanction the creation of multiple trust deeds on the same property, securing loans represented by successive promissory notes from the same debtor, as a means of circumventing the provisions of section 580d. The elevation of the form of such a contrived procedure over its easily perceived substance would deal a mortal blow to the antideficiency legislation of this state. Assuming, arguendo, legitimate reasons do exist to divide a loan to a debtor into multiple notes thus secured, section 580d must nonetheless be viewed as controlling where, as here, the senior and junior lenders and lienors are identical and those liens are placed on the same real property.” ( Simon v. Superior Court of Contra Costa County, at pp. 77-78.) The concerns underlying the full credit bid rule are of similar importance to those underlying the anti-deficiency statute. The rule shields not only insurers, but also borrowers and third parties involved in the loan transaction, from pursuit by a lender who, despite having achieved title to the property through a full credit bid at a nonjudicial foreclosure sale, seeks additional compensation. Appellants’ full credit bid established that at the time of the foreclosure sale, the property was equivalent to the value of the total debt they held. Their claim [19] Under the antideficiency statute, “no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property . . . in any case in which the real property . . . has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.” (Code Civ. Proc., § 580d.) “This provision means that a lender that chooses to sell property securing a debt through private nonjudicial foreclosure cannot pursue the borrower for any deficiency resulting from the difference between the net proceeds received from the foreclosure sale and the total amount of the debt. It prohibits actions against the borrower on the note, and [does] not . . . appl[y] to actions for tort.” ( Michelson v. Camp , 72 Cal.App.4th at pp. 962-963.) *25 against Scottsdale for preforeclosure damage was therefore precluded by the full credit bid rule.
B. The Trial Court Did Not Abuse Its Discretion in Finding Scottsdale’s
Section 998 Offer to Have Been Made in Good Faith
Code of Civil Procedure section 998, subdivision (c)(1) provides: “If an
offer [of compromise] made by a defendant is not accepted and the plaintiff fails to
obtain a more favorable judgment or award, the plaintiff shall not recover his or
her postoffer costs and shall pay the defendant’s costs from the time of the offer.”
Costs awardable under this subdivision include “costs of the services of expert
witnesses, who are not regular employees of any party, actually incurred and
reasonably necessary in either, or both, preparation for trial or arbitration, or during
trial or arbitration, of the case by the defendant.” (Code Civ. Proc., § 998,
subd. (c)(1); see
Bates v. Presbyterian Intercommunity Hospital, Inc
. (2012)
Section 998 is designed to encourage the settlement of lawsuits before trial.
(
Regency Outdoor Advertising, Inc. v. City of Los Angeles
(2006)
“‘The reasonableness of a defendant’s section 998 settlement offer is
evaluated in light of “what the offeree knows or does not know at the time the offer
is made.”’” (
Bates supra,
Here, appellants’ primary argument to support their contention that the offer to compromise was unreasonable is the evidence developed through discovery as of September 2010, when Scottsdale served its offer, indicating damage to the property necessitated repairs in excess of $500,000. However, nothing precluded the trial court from concluding that the $30,000 offer was reasonable based on the determination -- with which we agree -- that Scottsdale had no liability.
Appellants also point to the fact that Scottsdale’s motion for summary
judgment on liability issues had been denied a few months prior to the offer to
compromise. The Supreme Court rejected a similar argument in
Regency Outdoor
Advertising, Inc. v. City of Los Angeles
,
DISPOSITION
The judgment is affirmed. The order awarding costs is affirmed. CERTIFIED FOR PUBLICATION.
MANELLA, J.
We concur:
EPSTEIN, P. J.
WILLHITE, J.