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SOMERSET SOUTH PROPS., INC. v. AMERICAN TITLE INS.

November 9, 1994

SOMERSET SOUTH PROPERTIES, INC., a California corporation, Plaintiff,
v.
AMERICAN TITLE INSURANCE COMPANY, a Florida corporation; and DOES 1 through 100, Inclusive, Defendants.



The opinion of the court was delivered by: MARILYN L. HUFF

 INTRODUCTION

 The plaintiff brought this action in federal court, pursuant to 28 U.S.C. ยง 1332, alleging claims for breach of the covenant of good faith and fair dealing, breach of contract, and for declaratory relief. The defendant now moves the court to dismiss the complaint. The defendant argues it had no potential duty to defend because the underlying action was limited to an allegation that loss was sustained due to a tortious misrepresentation. Further, the defendant argues, the insured did not suffer a compensable loss under the title insurance policy. Additionally, the defendant argues the court should dismiss the breach of the implied covenant claim because the plaintiff did not obtain a valid assignment of that claim.

 BACKGROUND

 On December 3, 1986, a deed of trust was recorded in favor of Naimco-Clairemont, Inc. Defendant American Title Insurance Company issued a title insurance policy to Naimco, effective December 31, 1986, regarding the trust deed. After a default occurred, the plaintiff alleges Naimco, as beneficiary, caused Alvarado, as trustee under the deed, to commence judicial foreclosure proceedings.

 Prior to the trustee's sale, plaintiff Somerset South Properties, Inc. requested information on the property from Alvarado and Naimco. Specifically, Somerset requested information regarding the priority of the trust deed. Anne Marie Stockard, an employee of Alvarado and Naimco, allegedly informed Somerset the trust deed was a second trust deed. The plaintiff, however, alleges the trust deed was a fourth trust deed. The plaintiff alleges it purchased the property under the mistaken belief the trust deed was a second trust deed.

 On May 25, 1989, the plaintiff purchased the property for $ 65,700. After discovering the true status of the deed, the plaintiff commenced an action against Alvarado, Naimco, and Stockard in state court. The plaintiff sought damages based upon theories of negligence and negligent misrepresentation. The plaintiff alleged "the defendants were liable for damages that occurred as a result of the misrepresentation . . . ." The defendants tendered the claims to American Title for defense. American Title agreed to defend the action, while reserving rights to deny coverage of liability.

 On January 9, 1991, Alvarado and Naimco filed a petition in bankruptcy court under Chapter 11. This bankruptcy was related to the Pioneer Mortgage bankruptcy. As a result of the bankruptcy filing, the state court action was automatically stayed. In May 1991, the plaintiff settled its claims against Stockard. American Title paid the plaintiff $ 7,500 in settlement. The action was dismissed without prejudice with regard to the claims asserted against Alvarado and Naimco.

 In June 1992, the bankruptcy court granted the plaintiff relief from the automatic stay. Consequently, the plaintiff filed a second action in state court against Alvarado and Naimco. In this action, the plaintiff again alleged Alvarado and Naimco were liable for damages as a result of the alleged misrepresentation. In July 1992, the claims were tendered to American Title for defense. In September 1992, American Title denied coverage and refused to provide a defense to Alvarado and Naimco in the second action.

 On December 23, 1993, Alvarado and Naimco executed a Stipulation for Entry of Judgment in the second action. The stipulation provided for the entry of judgment against Alvarado and Naimco in the amount of $ 100,000, plus attorney's fees in the amount of $ 30,736.37, and costs of $ 755.25, for a total sum of $ 131,491.62. In addition, Alvarado and Naimco assigned any rights they possessed against American Title to Somerset. In exchange, Somerset provided Alvarado and Naimco with a covenant not to execute the stipulated judgment against them. The judgment was entered without court approval of the settlement on February 22, 1993.

 Somerset then filed this action against American Title. In this action, Somerset alleges claims for breach of the covenant of good faith and fair dealing, breach of contract, and for declaratory relief. American Title now moves the court to dismiss the complaint.

 DISCUSSION

 A. STANDARD FOR A MOTION TO DISMISS

 When ruling on a motion to dismiss, the court must accept all material allegations of fact as true and must construe those allegations in the light most favorable to the nonmovant. North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). If the complaint fails to state a claim, the court should grant leave to amend unless it appears beyond a doubt the plaintiff would not be entitled ...


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