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First Afg Financial Corporation v. Security Union Title Insurance Company


December 8, 2010


Appeal from a judgment of the Superior Court of Orange County, Sheila Fell, Judge. Reversed. (Super. Ct. No. 07CC05856)

The opinion of the court was delivered by: O'leary, Acting P. J.

First AFG Financial v. Security Union Title Ins.



California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.


Security Union Title Insurance Company (Security Union) appeals from a judgment after a court trial on First AFG Financial Corporation's (First AFG) negligence and breach of contract causes of action. Security Union argues the trial court erroneously determined a contract existed, there was negligence, the statute of limitations had not run, the amount of damages, and prejudgment interest was appropriate.

After oral argument, we invited the parties to submit supplemental briefing as to the applicability of Summit Financial Holdings, LTD. v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705 (Summit), to this appeal.*fn1 We agree Security Union was not a party to the contract, and it did not owe a duty of care to First AFG. We need not address its other contentions, and we reverse the judgment.


Before we provide a detailed explanation of the facts, an overview is helpful. Borrower's two parcels of real property secured three loans with the first lender. When borrower wanted to repay one of the loans, she obtained the first lender's approval to repay the loan by the first lender releasing its security interest on one of the parcels for all three notes. This permitted borrower to obtain a new loan from a second lender against that parcel, allowing the second lender a first security interest on the parcel. Borrower used the second lender's loan to repay the first lender for the one loan. The first lender intended to retain a security interest on the second parcel for the two remaining loans. As we explain below, that is not what happened, and we must address the issue of whether the title and sub-escrow company is liable to the first lender.

In December 2002, First AFG made three secured loans to Lorece Wright evidenced by three deeds of trust totaling $1,230,000 and secured by two parcels of real property located at 12500 and 12516 Long Beach Boulevard in the City of Lynwood. All three deeds of trust described the property in question as "12500 & 12516 Long Beach Blvd."

The three deeds of trust were recorded on December 27, 2002, in Los Angeles County in the following amounts: (1) Instrument No. 02-3191308 in the amount of $450,000; (2) Instrument No. 02-3191309 in the amount of $580,000; and (3) Instrument No. 02-3191310 in the amount of $200,000.

In July 2003, Wright arranged with First AFG to pay the $200,000 note by refinancing the parcel located at 12516 Long Beach Boulevard. First AFG initiated refinancing of 12516 Long Beach Boulevard. First AFG selected Long Beach Mortgage Company (Long Beach Mortgage) as the lender, and Security Union for title and sub-escrow services. Priority Escrow (Priority Escrow) provided escrow services. Long Beach Mortgage appraised the property, and First AFG performed an internal appraisal. Security Union prepared and forwarded to First AFG a preliminary title insurance policy and deed of trust for 12516 Long Beach Boulevard.

Priority Escrow prepared three "Amendment to Instructions" for

12516 Long Beach Boulevard dated October 7, 2003. There was an "Amendment to Instructions" for each of the deeds of trust identified by the above instrument numbers. The "Amendment to Instructions" authorized and instructed the escrow holder to prepare a "Substitution of Trustee and Full Reconveyance substituting in the Beneficiary for the original Trustee" on each of the deeds of trust. Wright and a First AFG representative signed the "Amendment to Instructions."

Priority Escrow prepared three "Substitution of Trustee and Full Reconveyance," one for each of the deeds of trust again identified by instrument numbers. A representative from First AFG signed each of the "Substitution of Trustee and Full Reconveyance."

On October 23, 2003, and again on November 14, 2003, First AFG sent a "Payoff Demand" letter to Priority Escrow explaining its liens were to be removed only on the 12516 Long Beach Boulevard property but its liens should remain on the

12500 Long Beach Boulevard property. The refinance closed and was recorded on November 25, 2003.

In February 2005, First AFG sent Security Union a letter describing the December 2002 refinance of both properties and the December 2003 refinance of only 12516 Long Beach Boulevard. The letter continued: "A recent audit of our record[s] indicates that Security Union recorded the reconveyance for both properties in direct violation of our Payoff Demand and eliminating our interest in the property and as result the owner of the property has secured a new lien. [¶] Our first lien in the amount of $450,000.00 and our second in the amount of $580,000.00 are no longer secured with these properties therefore; we are making a formal demand for the full payment of these liens to satisfy our security."

On July 13, 2005, Priority Escrow responded it was clear First AFG directed the reconveyance should only be filed to the 12516 Long Beach Boulevard property. The letter continued however that since Priority Escrow did not facilitate the payoff or record the documents, it could not correct the mistake. The letter stated it regretted Security Union was not willing to correct the error because these were functions of the title company. Wright continued to make interest-only payments until September 2005, and shortly thereafter, she declared bankruptcy.

On May 14, 2007, First AFG filed a complaint against Priority Escrow and Security Union for negligence and breach of contract. Security Union filed an answer and trial briefs. At a one-day bench trial, the trial court heard testimony from

Laura Woodbury, former Priority Escrow principal and manager, Naim Ismail, First AFG principal, and Mark Byer, a real estate appraiser. In addition, First AFG's counsel read the deposition testimony of Jeff Allen, a Security Union title officer responsible for the refinance.

First AFG offered Ismail's testimony. In addition to testifying generally about the facts above, Ismail testified concerning the value of the property located at 12500 Long Beach Boulevard for purposes of the July 2003 refinance. Based on his vast experience, he concluded the property was sufficient to securitize the two remaining loans for the refinance. Based on the income approach, the seven-unit apartment complex at 12500 Long Beach Boulevard was worth between $1,116,000 and $1,152,000.

First AFG also offered the testimony of Woodbury, who testified as an expert. Woodbury responded, "No," when asked whether there was a written contract between an escrow company and title company concerning their specific duties. She testified that as an escrow officer with 20 years experience, she expects the title company to ensure the documents to be recorded are consistent with the expressed intent of the parties before the title company records the documents. She explained the title company returns the documents to the escrow company if they are incorrect. She agreed an escrow company sends instructions to the title company concerning conditions that must be met before recording, and the instructions include payoff demands. She said "the instructions have to be followed . . . according to their payoff." On cross-examination, Woodbury admitted it is the escrow company, not the title company, that prepares the full conveyance.

First AFG's counsel read Allen's deposition testimony into the record. Allen testified Security Union provided title and sub-escrow services. He described sub-escrow services as follows: "'A sub-escrow is when at the time of closing we are supplied with demands and information in regards to the closing that we submit to our pay-out department, and our pay-out department then moves forward and issues the proper pay-out to the appropriate pay-out parties.'" He explained that when the title company receives documents, it is responsible for reviewing those documents to ensure they conform with the escrow instructions and payoff demand. Allen stated the deeds of trust referenced two parcels and he understood First AFG intended to release liens on only one of the parcels. Allen said he did not ensure the deeds of trust secured by the second property were protected because Security Union was not issuing a title policy for the second property. Allen admitted that based on First AFG's payoff demands on October 23 and November 14, 2003, both of which he received and were in Security Union's file, there should have been a "'partial reconveyance'" and the payoff demands and substitution of trustee and reconveyance documents were inconsistent. Although he initially disagreed the discrepancy should have been caught because the title company proceeds based on the documents provided, Allen said he was the person within Security Union who should have detected the discrepancy between First AFG's payoff demand and the reconveyance documents.

Security Union offered Byer's testimony. Byer testified he appraised the property in November 2008, and based on his inspection of the property and review of the city and bankruptcy files, the 12500 Long Beach Boulevard property was worth approximately $400,000 in November 2003. On cross-examination, Byer conceded an income valuation approach was preferable, but he utilized a market value approach because he had no information concerning the property's income in 2003.

The parties agreed they would file written closing arguments. First AFG filed its closing argument, Security Union replied, and First AFG responded and objected.

In the March 23, 2009, minute order, the trial court ruled in favor of First AFG as follows: First AFG "established a written contract between the parties" and the action was timely within the four-year statute of limitations. First AFG's negligence action was timely within the two-year statute of limitations. The court explained that in July 2003 First AFG "contracted with Security Union as sub-escrow with Priority Escrow" to refinance three notes secured by two parcels of real property. The court stated First AFG was to be paid for the $200,000 note and First AFG provided written instructions to Security Union that the two remaining notes would encumber both properties. The court found compelling Allen's deposition testimony "he had received the written instructions but failed to insure the security instruments remained as obligations against the 12500 [Long Beach Boulevard] property." The court said that when Wright was unable to meet her financial obligations, First AFG attempted to foreclose on the property but learned its security interest was extinguished by the 2003 refinance. The court said that "[i]n the division of duties between Priority Escrow and Security Union, [First AFG's] written instructions were lost." The court ruled Ismail was personally involved in the transactions and on at least two occasions could have mitigated its damages. The court stated that "the damages were caused in equal proportions by . . . First AFG and . . . Security Union[]" and each shall bear half of First AFG's loss. The court calculated the loss as $1,030,000 ($450,000 plus $580,000) plus interest from November 1, 2005. The court ruled First AFG was the prevailing party. The court stated that as the trial concluded within one calendar day, First AFG must prepare, serve, and submit judgment within 15 days.*fn2

On April 3, 2009, Security Union filed its objections and proposal for statement of decision and judgment. On July 8, 2009, the trial court entered judgment in favor of First AFG as follows: against Priority Escrow in the amount of $1,030,000 plus 10 percent interest from November 1, 2005; against Security Union in the amount of $515,000 plus 10 percent interest from November 1, 2005. The court ruled their liability was joint and severable up to $515,000 plus lawful interest. Finally, the court ruled First AFG was the prevailing party and was entitled to costs.

On July 30, 2009, Security Union filed its supplemental points and authorities in support of its objections and proposal for a statement of decision and judgment. Security Union filed its notice of appeal on November 4, 2009.


I. Standard of Review

Security Union concedes it did not request a statement of decision, and that because the bench trial was one day, the trial court was not required to issue a statement of decision. Citing Code of Civil Procedure section 634, Security Union contends, however, that because the trial court issued a minute order stating its reasons, Security Union should not be precluded from challenging the presumptions that flow from the court's minute order. Although it admits resolution of this issue is not critical to this appeal, Security Union asserts it disputed the trial court's finding a written contract existed and its method for calculating damages, and thus we cannot infer the trial court ruled in favor of First AFG on those issues. We disagree.

The bench trial was one day, and thus, the trial court was not required to issue a statement of decision. (Code Civ. Proc., § 632; Cal. Rules of Court,

rule 3.1590(n).) In its minute order, the trial court stated the minute order served as its "proposed statement of decision." Security Union did not request a statement of decision but subsequently objected to the trial court's proposed statement of decision.

"In order to avoid the application of this doctrine of implied findings, an appellant must take two steps. First, the appellant must request a statement of decision pursuant to [Code of Civil Procedure] section 632 . . . ; second, if the trial court issues a statement of decision, 'a party claiming omissions or ambiguities in the factual findings must bring the omissions or ambiguities to the trial court's attention' pursuant to

[Code of Civil Procedure] section 634. [Citation.]" (Ermoian v. Desert Hospital (2007) 152 Cal.App.4th 475, 494 (Ermoian.) Thus, Security Union cannot avoid the doctrine of implied findings.

In both jury and non-jury trials, factual findings made by the trier of fact are generally reviewed for substantial evidence. "Under the substantial evidence standard of review, our review begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the trial court's factual determinations. [Citations.] Substantial evidence is evidence of ponderable legal significance, reasonable in nature, credible, and of solid value. [Citation.] The substantial evidence standard of review applies to both express and implied findings of fact made by the court in its statement of decision. [Citation.]" (Ermoian, supra, 152 Cal.App.4th at p. 501.) We turn now to Security Union's contentions.

II. Breach of Contract

Security Union argues it is not liable to First AFG for breach of contract because there was no contract between it and First AFG. We agree.

"[T]he vital elements of a cause of action based on contract are mutual assent (usually accomplished through the medium of an offer and acceptance) and consideration. As to the basic elements, there is no difference between an express and implied contract. While an express contract is defined as one, the terms of which are stated in words [citation], an implied contract is an agreement, the existence and terms of which are manifested by conduct [citation]. [B]oth types of contract are identical in that they require a meeting of minds or an agreement [citation]. Thus, it is evident that both the express contract and contract implied in fact are founded upon an ascertained agreement or, in other words, are consensual in nature, the substantial difference being in the mode of proof by which they are established [citation]. . . . 'The true implied contract consists of obligations arising from a mutual agreement and intent to promise where the agreement and promise have not been expressed in words.' [Citation.]" (Division of Labor Law Enforcement v. Transpacific Transportation Co. (1977) 69 Cal.App.3d 268, 275, italics omitted.)

"'Under long standing contract law, a "contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful." [Citation.] Although "the intention of the parties is to be ascertained from the writing alone, if possible" [citation], "[a] contract may be explained by reference to the circumstances under which it was made, and the matter to which it relates" [citation]. "However broad may be the terms of a contract, it extends only to those things . . . which it appears that the parties intended to contract." [Citation.]' [Citation.]" (Markowitz v. Fidelity Nat. Title Co. (2006) 142 Cal.App.4th 508, 527 (Markowitz).)

Here, the parties to the escrow were the borrower, Wright, and the lender, Long Beach Mortgage, and the escrow holder was Priority Escrow. First AFG makes much of the fact it hired Security Union, but Security Union was not a party to the escrow--it provided sub-escrow and title services. The evidence at trial established sub-escrow services included making payoffs and recording the documents. Additionally, there was testimony there was no written contract between the escrow company, Priority Escrow, and the title company, Security Union.

There was testimony from Allen, the Security Union title officer responsible for the refinance that Security Union's file included both the October 23, 2003, and November 14, 2003, "Payoff Demand" letters. But these demand letters were addressed to Priority Escrow, the escrow holder, and agent to the escrow parties, Wright and Long Beach Mortgage. First AFG's "Payoff Demand" letters instructed Priority Escrow how to prepare the reconveyances. The "Payoff Demand" letters that were from First AFG and addressed to Priority Escrow did not establish a contract between First AFG and Security Union. Additionally, they did not constitute escrow instructions to Security Union. Although there was evidence Allen should have caught the discrepancies, Allen testified he performed the closing services based upon the reconveyances that were submitted to him, and not the "Payoff Demand" letters.

Security Union relies on Markowitz, supra, 142 Cal.App.4th 508, and Siegel v. Fidelity Nat. Title Ins. Co. (1996) 46 Cal.App.4th 1181 (Siegel), to argue its sub-escrow duties were limited and it owed a duty only to Long Beach Mortgage. These cases are instructive.

In Markowitz, supra, 142 Cal.App.4th 508, the court affirmed a non-suit of an owner's action against a title company that acted as a sub-escrow, based on the title company's failure to record a reconveyance of a deed of trust on the owner's real property securing a promissory note held by two other defendants. The appellate court reasoned an escrow existed with the title company functioning as a sub-escrow holder and owner had an interest in the escrow, but the owner was not a party to the escrow or to the escrow instructions. The court stated: "[The owner] did not submit any instructions to [the title company], written or oral, and he had little or no contact with [the title company]." (Id. at p. 526.) The court stated the title company's duties arose out of those instructions and were defined and limited by the terms of those instructions. The court concluded that "viewed in the context of the transaction," because the owner was not a party to the escrow and did not submit escrow instructions to the title company, the title company owed no duty to the owner. (Id. at pp. 527-528.)

In Siegel, supra, 46 Cal.App.4th 1181, the court reversed a judgment in favor of homeowners who sued a title insurance company for providing a preliminary title report that failed to disclose a lien recorded against the property. The court held the fact the title insurance company agreed with the escrow company to act as sub-escrow and undertake rudimentary escrow functions, such as paying out funds and recording documents, did not expand its duties or the scope of its agency as to the homeowners, who were not insureds under the title policy. The court stated: "It did not undertake to prepare or review the escrow documents or ensure that the parties' instructions were carried out." (Id. at p. 1194.)

The present situation is similar because Security Union was not a party to the escrow, and there was evidence Security Union was responsible for recording the documents Priority Escrow submitted to Security Union to perform its sub-escrow function. Security Union carried out its sub-escrow duties in accordance with the reconveyance documents provided to it by the escrow company, Priority Escrow. Therefore, we conclude the trial court erroneously concluded Security Union breached a written agreement with First AFG.

First AFG's reliance on the Money Store, supra, 98 Cal.App.4th 722, is misplaced. In that case, the lender agreed to provide loan funds to the escrow holder bank to facilitate the sale of a business. Under the escrow instructions supplied by the parties to the escrow, the escrow holder was authorized to comply with the lender's instructions. The lender transmitted "'closing instructions'" to the escrow holder, indicating the amount it would wire to the escrow holder upon demand and compliance with the lender's instructions, and indicated any deviation from the instructions without the lender's express authorization would be at the escrow holder's risk. (Id. at p. 726.) The escrow holder acknowledged receipt of the instructions, but failed to comply with the closing instructions received from the lender. The escrow holder instead complied with addendum instructions received from the buyer and seller without first obtaining the lender's express authorization. The court held that a contractual arrangement could arise when the lender agrees conditionally to provide loan funds and the escrow holder acknowledges acceptance of the conditions through receipt and acceptance of the lender closing instructions. (Id. at pp. 728- 729.)

Here, there was no contractual arrangement between Security Union and First AFG or between Security Union and Priority Escrow. Security Union was not a party to the escrow, and the "Payoff Demand" letters from First AFG to Priority Escrow that were forwarded to Security Union did not contractually bind Security Union. Those demand letters were First AFG's instructions to Priority Escrow on how to prepare the reconveyances and not escrow instructions to Security Union on how to record the reconveyances. Therefore, we conclude the trial court erroneously found Security Union breached a written agreement with First AFG.

III. Negligence

Security Union argues it is not liable to First AFG under a theory of negligence because it did not owe any duty to First AFG. Again, we agree.

As we explain above, after oral argument, we invited the parties to file supplemental letter briefing on the effect of Summit, supra, 27 Cal.4th 705, on this appeal. Summit is instructive. In that case, buyer financed the purchase of property by borrowing from lender. After the purchase, lender assigned the note to the assignee. At a later point, buyer refinanced with a new lender. (Id. at p. 709.) The old loan was paid off by the escrow paying lender. The assignee sued, claiming the escrow holder should have paid the funds to it, the assignee. The court concluded the escrow holder did not owe a duty to the assignee because it was not a party to the escrow. (Id. at pp. 707-708.)

The facts here are similar to Summit as Security Union was not a party to the escrow. Therefore, Security Union did not owe a duty of care to First AFG, and Security Union is not liable to First AFG under a negligence theory.


The judgment is reversed. Appellant is awarded its costs on appeal.


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