California Court of Appeals, Second District, Eighth Division
pub. order 6/13/13 (see end of opn.)
APPEAL from a judgment of the Superior Court of Los Angeles County, No. BC 380261 Helen I. Bendix and Ralph W. Dau, Judges.
Shernoff Bidart Echeverria Bentley, Michael J. Bidart, Ricardo Echeverria; McDougal and Associates, Donald C. McDougal, Norman Paul Breen; The Ehrlich Law Firm and Jeffrey Isaac Ehrlich for Plaintiff and Appellant.
Hennelly & Grossfeld, and Susan J. Williams for Defendant and Appellant.
Garrett & Tully, Ryan C. Squire, Robert Garrett and Zi C. Lin for California Land Title Association as Amicus Curiae on behalf of Defendant and Appellant.
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. Liberty’s general partner is a California corporation called A.F.S. Group, Inc. A.F.S. Group, Inc.’s only shareholders are Shahram and Saied, and Shahram is the president of A.F.S. Group, Inc.
The Afshani brothers have a sister named Parvaneh Partielly. She was married to Alber Partielly, who died in 2006. Their son is Parham “Danny” Partielly.
History of Ownership of the BTC Property
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) loaned $2.3 million to the BTC Partnership (AFS loan). The two partners making up AFS were Shahram and Shahriar. A second deed of trust on the BTC property secured the AFS loan.
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 to the Partiellys) to The Garment Mart, a California limited partnership. At the trustee’s sale in March 1994, The Garment Mart was the successful bidder at its own sale and acquired a 90.5 percent interest in title to the BTC property, taking subject to Union Federal Bank’s first trust deed. On March 24, 1994, The Garment Mart transferred its interest in title to the Broadway Garment Mart (BGM), a California limited partnership. BGM was simply the new name chosen by The Garment Mart after the California Secretary of State required it to change its name. By the end of March 1994, Alber and Parvaneh knew about the foreclosure of the BTC property, the trustee’s sale to The Garment Mart, and the transfer of title from The Garment Mart to BGM.
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 closed Union Federal Bank and became the receiver of the bank in or around 1995. Liberty entered into an agreement with the FDIC in or around November 1997 to purchase title to the BTC property, including the fee interest under the ground lease Union Federal Bank had purchased. Liberty also entered into agreements with Security Trust to purchase the fee interests under the other three ground leases encumbering the property. Chicago Title handled the escrow for Liberty’s purchases of the BTC property and the ground leases. ...