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Rli Insurance Company v. Bank of America

March 7, 2013


(Super. Ct. No. SCV27567)

The opinion of the court was delivered by: Duarte , J.

RLI Ins. v. Bank of America



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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

A developer obtains a large construction loan to build a luxury vacation resort and enters into contracts to sell several penthouse condominiums at the resort. The purchasers deposit earnest money which, in accordance with state law, is covered by surety bonds. The developer defaults on the construction loan and the lender bank forecloses. The condominium purchasers sue the developer and the sureties for the return of their earnest money deposits. One surety cross-complains, claiming the bank is responsible "in some manner." Thus begins the surety's unsuccessful search for a cause of action under which the bank may properly be held liable for the return of the earnest money deposits.

The surety, RLI Insurance Company (RLI), appeals from a judgment of dismissal after the trial court sustained, without leave to amend, the demurrer of the lender, Bank of America (the Bank), to RLI's first amended complaint. RLI contends the trial court abused its discretion in sustaining the demurrer without leave to amend. RLI asserts it can amend its cross-complaint to state that the RLI surety bonds were assigned to the Bank and under that assignment the Bank assumed the obligations under the surety bonds, including the obligation to reimburse RLI.

As we will explain, the trial court properly sustained the demurrer without leave to amend. RLI's theory of assignment is based on the loan documents. The allegations of RLI's proposed second amended cross-complaint show that according to the loan agreement, the assignment of the surety bonds was "as further security for the Loan." "It has long been the law in California, reaffirmed by the Uniform Commercial Code, that an assignment for security transfers the rights but not the obligations inherent in the assigned contract." (Black v. Sullivan (1975) 48 Cal.App.3d 557, 564 (Black).) Because RLI's proposed amendment does not, and cannot, allege that the Bank assumed the obligations of the surety bonds, its proposed causes of action for statutory reimbursement, equitable subrogation, restitution, equitable indemnity, and implied contractual indemnity must fail. We shall affirm the judgment.


In reviewing an order sustaining a demurrer, we assume the factual allegations pleaded to be true and consider matters that may be judicially noticed. (Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42.) The following facts are alleged or are cognizable by judicial notice.

Background to RLI's Cross-Complaint

The Bank made a $147,000,000 construction loan to Highlands Hotel Company, LLC (Highlands) for the acquisition, development and construction of a resort hotel, including 23 condominium residences, at Truckee, California, and recorded a deed of trust on the property. Highlands entered into sales contracts with various individuals to purchase residential units at the project (purchasers). These purchasers deposited earnest money in escrow. RLI issued a surety bond in favor of the purchasers in the amount of $5,000,000. A second surety, International Fidelity Insurance Company, issued a surety bond in favor of the purchasers in the amount of $3,000,000.*fn1 Highlands defaulted on the construction loan and the Bank initiated foreclosure proceedings. Highlands declared bankruptcy and a receiver was appointed.

Several purchasers (plaintiffs) who had deposited earnest money for the purchase of condominiums brought suit against Highlands and the sureties for return of their earnest money deposits. They subsequently filed a first amended complaint.

RLI's Cross-Complaint

RLI filed a cross-complaint against the receiver, the other surety, and the Bank. As to the receiver and the Bank, RLI sought equitable indemnity. RLI alleged "that the Receivership Estate and Bank of America are responsible in some manner for the occurrences alleged in Plaintiffs' First Amended Complaint, and that their breaches, and/or failures or refusal to perform or consummate, or to prevent the performance of the Sales Contracts is the direct cause of the claims, including, but not limited to, the return of earnest money deposits and damages alleged by Plaintiffs, if any, which Plaintiffs may prove at trial."

The Bank demurred to this cross-complaint.

The trial court sustained the demurrer with leave to amend. The court found the allegation that the Bank was "responsible in some manner" was insufficient to show the Bank and RLI were jointly and severally liable to plaintiffs as required for equitable indemnity. Even if the cause of action was construed as one for implied contractual indemnity, there was no allegation of a contract between RLI and the Bank.

RLI's First Amended Cross-Complaint

RLI's first amended cross-complaint (FACC) alleged that the earnest money deposits were used to pay for construction and development of the project for the benefit of the Bank. The FACC purported to state three causes of action against the Bank. The first was titled "Unjust Enrichment." It alleged that after the condominiums were completed "and despite the fact that the condominium units were available for close of escrow, Bank of America refused to withdraw the lien against the condominium units created by its recorded deed of trust. By refusing to withdraw the subject lien, [RLI] is informed and believes that Bank of America prevented escrows to close on the Sales Contracts and prevented condominium units from being sold to Plaintiffs and Diner." The FACC alleged the Bank's refusal or failure to permit close of escrow on the condominium units "resulted in unjust enrichment" of the Bank because the Bank benefited from the use of the earnest money deposits.

The fourth cause of action was a common count for "Money Paid." It alleged that the Bank "became indebted to [RLI] for money paid, laid out, and expended, or to be paid, laid out or expended on behalf of Highlands Hotel under the RLI Surety Bond."

The fifth cause of action sought declaratory relief. It alleged there was an actual controversy regarding the Bank's obligations to RLI under the surety bonds. RLI contended that by virtue of the Bank's receipt of or benefit by the earnest money deposits and the Bank's refusal to release its lien when the condominium units were ready for sale, the Bank was unjustly enriched, was obligated to pay RLI for sums expended on account of the surety bonds, and that RLI should be subrogated to the interests, including security, held by the Bank. ...

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