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Bank of Sacramento v. Stewart Title Guaranty Co.

September 27, 2010



This matter comes before the Court on Defendant Stewart Title Guaranty Company's ("Defendant's") Motion to Dismiss (Doc. 54) Plaintiff Bank of Sacramento's ("Plaintiff's") Second Amended Complaint ("SAC") (Doc. 51) for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Plaintiff opposes the motion.*fn1 For the reasons set forth below, Defendant's motion is granted.


The SAC alleges that in 2006 Plaintiff made a $10.8 million loan made to R&B Land Investments, LLC ("R&B"), to fund the purchase of certain real property ("the property") in Dixon, California, from Andrews Dixon LLC ("Andrews Dixon"). Plaintiff received a deed of trust on the property as security for its loan, and purchased a lender's title insurance policy, Policy No. M-2229-000825979 ("the policy") from Defendant, dated July 17, 2006. Plaintiff's title insurance policy from Defendant insured Plaintiff against loss or damage sustained by any defect in or lien or encumbrance on the title, unmarketability of the title, lack of right of access to and from the land, the invalidity or unenforceability of the lien of the insured mortgage upon the title, and the priority of any lien or encumbrance over the lien of the insured. The policy listed specific items that were excluded from coverage. It also contained a general exclusionary clause that excluded, among other items, any defects, liens or encumbrances not known to Defendant, and not recorded, but known to Plaintiff.

R&B subsequently defaulted on the loan. Andrews Dixon then sued Plaintiff in early 2008. The suit alleged that Andrews Dixon's interest in the property was senior to Plaintiff's interest in the property, based on an unrecorded option agreement ("the option agreement") that Andrews Dixon and R&B executed prior to the close of escrow. In February 2008, Andrews Dixon also filed a lis pendens on the property. Based on R&B's default, Plaintiff foreclosed on the property and purchased it at the Trustee's sale with a credit bid. However, because of the lis pendens, Plaintiff was unable to sell the property.

Plaintiff alleges that Defendant knew about the option agreement, and that the option agreement was mentioned in the policy. Plaintiff alleges that Defendant later fraudulently altered the policy to remove mention of the option agreement. Plaintiff tendered its defense to Defendant in the lawsuit and the accompanying lis pendens matter filed by Andrews Dixon, pursuant to the title insurance policy. Defendant agreed to represent Plaintiff with its panel counsel, and filed a motion to expunge the lis pendens in March 2008.

Though Defendant agreed to represent Plaintiff, numerous conflicts and disagreements regarding representation arose, including allegations that Defendant was improperly accessing attorney-client privileged information. A dispute arose over whether or not Plaintiff knew about the unrecorded option agreement and whether Plaintiff had disclosed it to Defendant. Defendant later apologized for its conduct, and continued defending Plaintiff using its panel counsel. In August 2008, the motion to expunge the lis pendens was denied, with the Superior Court judge finding that Plaintiff knew about the option agreement, and was therefore not a bona fide purchaser. In March 2009, Defendant informed Plaintiff that based on the Superior Court's findings, Defendant believed it had a conflict and would no longer use its panel counsel. New defense counsel was chosen by Plaintiff, and substituted in as counsel. Defendant continued to pay for the defense. In December 2009, a tentative settlement agreement was reached between Plaintiff and Andrews Dixon. The settlement was finalized and the option agreement was terminated and lis pendens removed in January 2010. Plaintiff then owned the title free and clear of encumbrances. Defendant paid $2.1 million to Andrews Dixon on Plaintiff's behalf to settle the litigation.

During the two years in which litigation was ongoing and the lis pendens was in place, Plaintiff was unable to sell the property. In 2008, Plaintiff had received two preliminary offers to buy the property, in the $10.8 million range. In May 2008, the property was appraised as having a fair market value of $9 million. On November 25, 2009 the property was appraised to have a value of $4.3 million. On February 16, 2010, Plaintiff sent a demand letter to Defendant, demanding that Defendant pay it $8.7 million, as reimbursement for loss and damage covered under the policy. On February 27, 2010, Defendant denied the claim of loss and damage, based on the conditions and exclusions in paragraphs 4(b), 6(b), 8(a) and 8(b) of the policy.

Thus, the SAC now seeks to recover from Defendant the difference between what the property was worth in early 2008, and what it was worth in late 2009 at the end of the settlement proceedings and removal of the lis pendens.

This matter was originally filed in Sacramento Superior Court on March 17, 2009, and was removed to this Court by Defendant on March 19, 2009. On March 18, 2009 Defendant brought a motion for declaratory relief (seeking an order that it had no duty to defend or indemnify Plaintiff because Plaintiff failed to disclose the option agreement), which it later voluntarily dismissed. Plaintiff then filed a First Amended Complaint ("FAC"), which alleged that Defendant breached the policy by failing to defend it with un-conflicted counsel. Defendant brought a motion to dismiss the FAC, which was ultimately rendered moot by a stay of the proceedings pending settlement of the underlying title dispute. After the settlement, Plaintiff filed the SAC, bringing the current claims for relief.

Plaintiff seeks $6.5 million for decline in market value of the property, an additional in $300,000 in carrying costs and at least $1.9 million in prejudgment interest, based on the allegation that Defendant's failure to swiftly resolve the title issue resulted in economic damage.


A. Legal Standard

A party may move to dismiss an action for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). In considering a motion to dismiss, the court must accept the allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Scheur v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Schere, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322 (1972). Assertions that are mere "legal conclusions," however, are not entitled to the assumption of truth. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949-50 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). To survive a motion to dismiss, a plaintiff needs to plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007). "Notwithstanding this deference, it is improper for a court to assume the plaintiff can prove fact which he or she has not alleged." Ozuna v. Home Capital Funding, 2009 WL 2496804, at *1 (S.D. Cal. Aug. 13, 2009). Dismissal is appropriate where the plaintiff fails to state a claim supportable by a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

Upon granting a motion to dismiss, a court has discretion to allow leave to amend the complaint. See Fed. R. Civ. Pro. 15(a). "Absent prejudice, or a strong showing of any [other relevant] factor[], there exists a presumption under Rule 15(a) in favor of granting leave to amend." Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (emphasis in original). "Dismissal with prejudice and without leave ...

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