Both parties in this title insurance coverage dispute — Chicago Title Insurance Company (Chicago Title) and Liberty National Enterprises, L.P. (Liberty) — appeal from the judgment awarding Liberty $1,083,292.38 in damages against Chicago Title. Chicago Title is the insurer and Liberty is the insured entity. The court trifurcated trial of this case. The first phase of trial determined that Chicago Title had a duty to defend Liberty in a third party lawsuit relating to the insured property. The second phase of trial determined Liberty's damages for breach of the duty to defend (breach of contract). The third phase of trial resolved Liberty's remaining cause of action for tortious breach of the implied covenant of good faith and fair dealing. The jury found in Chicago Title's favor on the breach of the implied covenant claim. Thus, the damages awarded in the judgment were solely those found by the court for breach of the duty to defend.
Chicago Title contends that the court erred in finding it breached the duty to defend. Liberty, for its part, contends that the court committed evidentiary and instructional errors in the phase three trial, and that it erred in ruling Liberty was not entitled to "lost opportunity" damages. We hold that Chicago Title had no duty to defend the third party lawsuit for which Liberty demanded the defense. This holding renders Liberty's appeal moot, as explained below. We reverse the judgment against Chicago Title for $1,083,292.38 and direct the trial court to enter judgment for Chicago Title.
The commercial real estate property at the core of this title insurance dispute is commonly known as the Broadway Trade Center (BTC property) in downtown Los Angeles. Liberty has owned the BTC property since approximately January 21, 1998. As part of purchasing the BTC property, Liberty obtained a preliminary title report and an owner's title insurance policy from Chicago Title.
Liberty is a California limited partnership formed in August 1993. Shahram Afshani has been the manager of Liberty's property and business affairs since it came into existence. Liberty's limited partners are Shahram, his brothers Shahriar and Parviz Afshani, Shahram's brother-in-law, Saied Eshaghzadeh, and members of the Eshaghzadeh family.
From at least 1988 to March 18, 1994, a California limited partnership called the Broadway Trade Center (BTC Partnership) owned the BTC property. Alber, Parvaneh, and Danny Partielly were limited partners in the BTC Partnership. The BTC property was encumbered by a first trust deed in favor of Union Federal Bank as of 1988. The trust deed secured a loan of more than $16 million.
Around September 14, 1990, a California general partnership called American Financial Services (AFS)
Alber and Parvaneh owned a 9.5 percent interest in the BTC property by virtue of being limited partners in the BTC Partnership. After AFS loaned the money to the BTC Partnership, Alber and Parvaneh wanted to also acquire a 9.5 percent interest in the AFS loan. AFS agreed to sell Alber and Parvaneh a 9.5 percent interest in the promissory note and second trust deed. The parties entered into a loan participation agreement on October 24, 1990. Alber and Parvaneh paid AFS $218,500 to acquire a 9.5 percent interest. The loan participation agreement "confirmed" the Partiellys' participation of 9.5 percent in the loan and "interests received under the loan," including a pro rata share of "any participation by us [(AFS)] in the Collateral as a result of foreclosure or otherwise." Pursuant to the agreement, AFS assigned a 9.5 percent interest in the AFS second trust deed to Alber and Parvaneh. This assignment was never recorded.
In March 1993, the BTC Partnership defaulted on the AFS loan. Around August 2, 1993, the BTC Partnership filed for bankruptcy. As of that date, the BTC Partnership had also defaulted on the Union Federal Bank loan. AFS obtained relief from the automatic bankruptcy stay and foreclosed on its second trust deed on the BTC property. AFS assigned a 90.5 percent interest in the second trust deed (representing all but the 9.5 percent interest assigned
The BTC property was encumbered by four ground leases. Shahram, on behalf of BGM, decided to try to acquire the ground leases, which were not included as security for either the AFS loan or the Union Federal Bank loan, because he thought he could obtain priority over the Union Federal Bank trust deed in this manner. Shahram's brother-in-law, Saied, and Saied's family (the Eshaghzadehs) provided the funds to buy the ground leases. Shahram and the Eshaghzadehs acquired three of the four ground leases through an entity called Security Trust Company (Security Trust). They did not want either Union Federal Bank or the BTC Partnership (i.e., the Partiellys) to discover Shahram's plan to buy the leases. Union Federal Bank eventually discovered that Security Trust was buying up the ground leases on the BTC property, and it purchased the fourth and last ground lease by doubling the amount Security Trust offered for it.
On or around March 29, 1994, BGM filed for bankruptcy. Shahram asked Alber and Parvaneh to become limited partners in BGM and support BGM's plan of reorganization. They declined and appeared in the bankruptcy action through counsel as secured creditors of BGM. In June 1994, BGM informed Alber and Parvaneh that Union Federal Bank was foreclosing on its first trust deed on the BTC property and that they should take appropriate action to protect their investment in the property. Union Federal Bank foreclosed on its first trust deed on July 11, 1994, and took title to the BTC property, excluding that portion subject to the ground leases. The foreclosure by the bank wiped out all junior interests in the BTC property.
The FDIC
The subject policy was written on a standard American Land Title Association (ALTA) owner's policy form. In pertinent part, the policy provides that Chicago Title insures Liberty against loss or damage, as of the date of the policy, "by reason of: [¶] 1. Title to the estate or interest described in Schedule A being vested other than as stated therein; [or] [¶] 2. Any defect in or lien or encumbrance on the title." The date of the policy is January 21, 1998, at 9:41 a.m., and schedule A shows title to the BTC property being vested in Liberty.
The policy also provides that Chicago Title will "pay the costs, attorneys' fees and expenses incurred in defense of the title, as insured." More specifically, upon written request by Liberty, Chicago Title, "at its own cost and without unreasonable delay, shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy."
The policy contains certain exclusions from coverage. As pertinent here, it excludes "[d]efects, liens, encumbrances, adverse claims or other matters: [¶] (a) created, suffered, assumed or agreed to by [Liberty]; [¶] (b) not known to [Chicago Title], not recorded in the public records at Date of Policy, but known to [Liberty] and not disclosed in writing to [Chicago Title] by [Liberty] prior to the date [Liberty] became an insured under this policy; [¶] (c) resulting in no loss or damage to [Liberty]; [or] [¶] (d) attaching or created subsequent to Date of Policy...."
On November 30, 2001, Alber and Parvaneh filed a lawsuit against Liberty and other defendants. (Partielly v. Afshani (Super. Ct. L.A. County, 2007, No. BC262703) (Partielly Action).) The Partiellys did not serve Liberty with the original complaint, but they served it with the first amended complaint (FAC) filed on May 30, 2002. In addition to Liberty, the FAC also named as defendants Shahram, his brothers Parviz and Shahriar, AFS, A.F.S. Group, Inc., and Security Trust.
The FAC alleged as follows in the "general allegations" part. Shahram was an agent of all entity defendants and was an agent of Shahriar and Parviz as
The FAC further alleged that in 1990, the BTC Partnership owned the BTC property, and the Partiellys acquired a 9.5 percent interest in the BTC property. In October of that year, the BTC Partnership borrowed $2.3 million from AFS to operate and maintain the property, which loan was secured by a trust deed. Also, the Partiellys entered into a loan participation agreement with AFS and the Afshani brothers giving the Partiellys a 9.5 percent interest in the loan "and in any and all interests of [AFS] and the Afshani brothers" in the BTC property. (Capitalization omitted.) As a result of the Afshani brothers' engagement in the loan participation agreement, the defendants owed a fiduciary arid general duty to the Partiellys as partners to further the interests of all without exclusion or detriment to any member of the participation agreement partnership. The Partiellys were never properly paid funds collected by the defendants pursuant to the participation agreement partnership, nor were they given their ownership interest in "downstream transactions" regarding the property. The downstream transactions undertaken by the defendants to the exclusion and detriment of the Partiellys' interests included (1) the acquisition of title to the BTC property by The Garment Mart, a defendant-controlled entity, at a foreclosure sale initiated by the defendants; (2) the transfer of title from The Garment Mart to another defendant-controlled entity, BGM; and (3) a series of transactions with the Eshaghzadeh family in which the defendants acquired interests in the property "to gain an advantage superior to that of Union Federal Bank," which was in the process of foreclosing on the property. Union Federal Bank ultimately held a trustee sale in July 1994, which the Partiellys alleged "did not have the effect of wiping out all of the ownership interests (fee title or otherwise in the nature of land leases)." As a result of the transactions with the Eshaghzadeh family, and in connection with the Eshaghzadehs, the defendants "were able to acquire full and complete title" to the BTC property on January 21, 1998, through Liberty. These events took place without the Partiellys' knowledge "and to the exclusion of [the Partiellys] resulting from a series of representations made to [the Partiellys] in or about April, 1994, whereby certain Afshani brother defendants falsely and fraudulently represented to [the
As a result of the defendants' conduct, the Partiellys alleged they had been excluded from "any and all interest" in the BTC property, the contribution from the Eshaghzadeh family towards acquiring the property, and the cash flow from the property. In the defendants' ultimate acquisition of the property, they acted for purposes of excluding the ownership interests of the Partiellys and denying them "their fair share and entitlement in" the property.
The specific causes of action alleged in the FAC were for breach of contract, common counts, fraud, declaratory and injunctive relief, quiet title, breach of fiduciary duty, accounting, and unjust enrichment. All causes of action incorporated by reference the general allegations summarized above. The first cause of action for breach of contract alleged that the defendants had breached the loan participation agreement. The second cause of action for common counts alleged that the defendants became indebted to the Partiellys in or around 1998 because of their fraudulent and deceitful acts. The third cause of action for fraud alleged that all defendants had made false representations to the Partiellys regarding their entitlements under the loan participation agreement — specifically, that the Partiellys would acquire a 9.5 percent interest in the $2.3 million loan, all fruits of the collateral, and all ongoing participation and downstream interests in the BTC property resulting from the efforts of their copartners (the defendants). Later, around April 1994, the defendants allegedly made false representations to the effect that the Partiellys' interest in the property was lost and nothing further could be done. The defendants made these alleged false representations to induce the Partiellys to enter into the participation agreement, and later, to take no action with respect to the BTC property after the foreclosure sales in 1994.
The fourth cause of action for declaratory and injunctive relief alleged that the defendants "conspired to and induced" the Partiellys to enter into the loan participation agreement, whereby they "defrauded and deprived" the Partiellys of their interest in the BTC property and the $2.3 million loan, and they fraudulently obtained an interest in the property to the exclusion of the Partiellys, "denying [them] their 9.5% interest of the same." The Partiellys wanted the court to order the defendants to restrain them from doing anything with the property and to relinquish their interest in the property, and they also wanted a declaration that they had a 9.5 percent interest in the property.
Liberty tendered the defense of the Partielly Action to Chicago Title on June 13, 2002. Chicago Title assigned senior claims counsel Douglas S. Avery to handle the claim. Chicago Title denied Liberty's claim in a letter from Avery dated July 11, 2002. Avery's letter noted that, while the Partiellys asserted a "9.5% interest in fee title to the insured property, the claim arises out of an alleged Participation Agreement entered into by Shahram Afshani as general partner of [AFS]." Avery noted that he did "not believe that a covered loss could be sustained in the event the [Partiellys] prevail in establishing they have an interest in the property based on the prior Participation Agreement," and moreover, "[t]he only way [the Partiellys] could prevail would be based on a theory which would come directly within the Exclusions From Coverage."
Liberty retained Donald McDougal to defend the Partielly Action. He obtained a summary judgment and dismissal of the case in July 2004. The Partiellys appealed and the Court of Appeal reversed the judgment in June 2006. After the remitter issued, the parties settled the case for $500,000. The settlement agreement included a provision stating that the Partiellys' claims "ha[d] no merit and that Defendants committed no wrongs against [the Partiellys] with respect to the BTC Property, the AFS loan, the acquisition of the ground lease fee interests and the purchase of the BTC Property by Liberty." (Capitalization omitted.)
Liberty filed this action against Chicago Title in November 2007, based on Chicago Title's denial of a duty to defend the Partielly Action and a duty to indemnify Liberty. The first amended complaint alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief.
The court trifurcated the case for separate trials on coverage, damages, and breach of the implied covenant of good faith and fair dealing, with the coverage issue to be tried by the court first. Specifically, the bench trial was to determine whether Chicago Title had a duty to defend the Partielly Action because of the quiet title and declaratory relief claims asserted in it. The court conducted the bench trial on the coverage issue on March 25 and 26, 2009. The parties filed declarations from Avery, McDougal, and Shahram in lieu of direct examination testimony, and the parties were able to cross-examine these witnesses in court.
On October 26, 2009, the court filed its written statement of decision finding that Chicago Title had a duty to defend the Partielly Action. The court found that, on its face, the Partiellys' FAC contained claims falling within the first insuring clause of the policy — that is, claims that title to the estate or interest were vested not entirely in Liberty, but in some other persons or entities. In particular, the court noted, the Partiellys were seeking a declaration that they had a 9.5 percent interest in the BTC property and an injunction ordering Liberty to relinquish and surrender their interest in the property. As well, they sought to quiet title and a judgment giving them title to the property and stating that Liberty had no interest in the property adverse to the Partiellys' 9.5 percent interest. The court additionally found that the claims fell within the second insuring clause of the policy because they alleged a "defect in or lien or encumbrance on the title."
Moreover, the court found, none of the exclusions to coverage applied. There was no evidence that the Partiellys' adverse claim to 9.5 percent of the property was "created, suffered, assumed or agreed to" by Liberty, as described in exclusion 3(a). As to exclusion 3(b) for adverse claims known to Liberty but not known to Chicago Title, the court said the evidence established that neither Liberty nor Shahram had actual knowledge of the Partiellys' adverse claim when Chicago Title issued the policy in 1998. Instead, Shahram said he did not think the Partiellys had any possible claim to a 9.5 percent interest in the BTC property after Union Federal Bank foreclosed in 1994, and he had no actual knowledge that the Partiellys were asserting such a claim until he received the Partiellys' FAC in 2002. The court found Shahram to be credible. Additionally, Avery testified that when he was making his coverage decision, he had no reason to believe that Shahram had actual knowledge of the Partiellys' adverse claim until service of the FAC in 2002. The court said Avery "relied on a fiction that the Partiellys and [Shahram] should be treated as one in [sic] the same because of their familial connections," but Avery had a duty to not just accept the agency and alter ego claims in the Partielly Action FAC. As to exclusion 3(c) for adverse claims "resulting in no loss or damage," the court
The court ruled, in sum, that "based on the terms of the Policy, the nature of the claims made in the Partielly Complaint, and the facts known to Mr. Avery prior to" his denial of Liberty's claim, "Chicago Title should have accepted Liberty's tender of defense and defended Liberty in the Partielly Action, at the very least, under a reservation of rights." (Italics added.)
The second trial phase was to determine the amount of damages for Chicago Title's breach of the duty to defend. This phase was also a bench trial and took place on March 24, 25, and 26, 2010. The court issued its written statement of decision on May 25, 2010. It awarded Liberty over $1 million in damages and prejudgment interest.
The third phase of trial commenced on May 23, 2011, and determined whether Chicago Title committed tortious breach of the implied covenant of good faith and fair dealing. This was the only phase of the trial that was a jury trial as opposed to a bench trial. The jury found in favor of Chicago Title and against Liberty on breach of the implied covenant of good faith and fair dealing.
On June 10, 2011, the court entered judgment in favor of Liberty for $1,083,292.38, the damages as determined by the court after the first two phases of trial. Both Chicago Title and Liberty filed timely notices of appeal. On February 21, 2013, we granted the application of the California Land Title Association (CLTA) to file an amicus curiae brief in this matter.
Chicago Title's sole contention on appeal is that the trial court erred in finding Chicago Title breached the duty to defend. In particular, it asserts that the Partielly Action did not fall within the policy's insuring clause, and even
There are essentially two types of title insurance policies available in California for owners of real property interests — CLTA policies and ALTA policies. (Lick Mill Creek Apartments v. Chicago Title Ins. Co. (1991) 231 Cal.App.3d 1654, 1659 [283 Cal.Rptr. 231].) CLTA policies insure primarily
In the case at bar, Chicago Title relies heavily on Moskopoulos to argue that the Partielly Action does not come within policy coverage, while Liberty argues the case is distinguishable. Moskopolous is on point and demonstrates why the Partielly Action is not a covered occurrence.
Chicago Title argues this case is just like Moskopoulos in that the Partielly Action did not allege defects in title, but tortious conduct in the manner in which Liberty acquired title. Indeed, Chicago Title argues, the Partielly Action FAC stated that the defendants "were able to acquire full and complete title to the subject property on or about January 21, 1998 through the entity defendant Liberty" — it was simply that the Partiellys were seeking to obtain
Liberty counters that the FAC is internally inconsistent about whether Liberty had 100 percent title to the property. It points to allegations suggesting that the Partiellys actually owned a 9.5 percent interest in title to the property, not just that they were seeking to obtain such an interest. For instance, the FAC alleged that the Partiellys acquired a 9.5 percent interest in the property in 1990 by virtue of the loan participation agreement, and Union Federal Bank's foreclosure on the property in 1994 "did not have the effect of wiping out all of the ownership interests," which suggests the Partiellys believed their 9.5 percent interest in the property endured and was never eliminated. Liberty further cites to the prayer for relief, which asks for "a declaration that [the Partiellys] have a 9.5% interest in the property," an injunction ordering the defendants "to relinquish and surrender [the Partiellys'] interest in the property to them," and a judgment that the Partiellys "have title to the property and that defendants ... have no interest in the property adverse to [the Partiellys'] 9.5% ownership." (Capitalization omitted.) Liberty asserts that, on their face, these allegations stated title was not 100 percent vested in Liberty. Moreover, Liberty says, the Partiellys' assertion of a quiet title claim was evidence that they did not concede Liberty owned 100 percent title. This is purportedly because a quiet title claim "inherently presupposes that the plaintiff ... possesses legal (as opposed to equitable) ownership in the property," and the claim is merely to eliminate an adverse claim and to perfect title in the legal owner.
Liberty acknowledges that the Partielly Action alleged tortious conduct by the insured in personal dealings, but it maintains that this quiet title claim makes all the difference in distinguishing this case from Moskopoulos. It says the plaintiffs suing Moskopoulos conceded they no longer held title to the property, and sought to get title back by invoking equitable claims. Those plaintiffs alleged no quiet title claim. Here, by contrast, the Partiellys had a quiet title claim presupposing that they currently held legal title to a 9.5 percent interest. The Partiellys were therefore alleging a defect in Liberty's title, Liberty asserts.
We do not see inconsistencies regarding whether Liberty had full and complete title. First, Liberty's reliance on the Partiellys' allegation that Union Federal Bank's foreclosure did not wipe out all the ownership interests is unconvincing. Liberty and Chicago Title stipulated at trial that the Union Federal Bank foreclosure in fact wiped out all junior interests in the BTC property, which would have included the Partiellys' 9.5 percent interest in the second trust deed. And Avery testified that when he was making his coverage decision, he understood the foreclosure had wiped out the interests of the second trust deed. Although this stipulated fact was extrinsic to the Partielly Action FAC, we (and the insurer) may rely on extrinsic facts to determine whether there was coverage. (Waller, supra, 11 Cal.4th at p. 19.)
Liberty's appeal is dismissed. The judgment against Chicago Title is reversed. The trial court is directed to enter judgment on all causes of action for Chicago Title. Chicago Title to recover costs on appeal.
Rubin, Acting P. J., and Grimes, J., concurred.