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Najah v. Scottsdale Ins. Co.

California Court of Appeals, Second District, Fourth Division

September 30, 2014

JAMSHID NAJAH et al., Plaintiffs and Appellants,

APPEAL from a judgment of the Superior Court of Los Angeles County No. BC414185, Ramona G. See, Judge.

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Cummins & White, Larry M. Arnold, Melody S. Mosley; Law Office of Susan K. Pintar and Susan K. Pintar for Plaintiffs and Appellants.

Selman Breitman, Alan B. Yuter and Rachel E. Hobbs for Defendant and Respondent.



Appellants Jamshid Najah and Mark Akhavain sold a commercial property, taking back as partial payment a promissory note secured by a second deed of trust. When the borrower fell into default and the holder of the first deed of trust commenced foreclosure proceedings, appellants purchased from the senior lender the promissory note secured by the first deed of trust and took assignment of that trust deed. Appellants then instituted foreclosure proceedings on the second trust deed and reacquired the property by making a bid equal to the unpaid debt securing the second, including interest, costs, fees, and other expenses of foreclosure. The primary issue on appeal is whether appellants can pursue a claim for preforeclosure damage to the property deliberately caused by the purchaser under an insurance policy issued by respondent Scottsdale Insurance Company (Scottsdale) containing a mortgagee coverage provision. We conclude that appellants’ full credit bid at the foreclosure sale under the second deed of trust precluded appellants from making a claim on the insurance proceeds.[1] Appellants further contend that the trial court abused its discretion in finding that a defense offer to compromise under Code of Civil Procedure section 998 was reasonable. We conclude that the court did not abuse its discretion in making this finding. We therefore affirm the judgment of the trial court.

A. Background Facts

1. The Loans

In 2006, appellants sold a Riverside, California property to Orange Crest Realty Corporation (Orange Crest), whose principal was Ronald Shade.[2] Orange Crest borrowed $2,021,000 from the Lantzman Family Trust (Lantzman Trust), in return for a promissory note secured by a first deed of

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trust on the property.[3] Appellants took back a promissory note and a second deed of trust for an additional $2.55 million.

There was a structure located on the property at the time of the sale.[4] Although Shade’s professed intention was to demolish the building and develop the property for other uses, the $2.55 million promissory note payable to appellants stated, “[Orange Crest] will do no remodeling or construction on the property secured by this Note until the [Lantzman Trust] loan and this Note are paid in full.” The second deed of trust securing the $2.55 million note similarly required Orange Crest to “keep [the] property in good condition and repair, not to remove or demolish any building thereon; [and] to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged or destroyed thereon.”[5]

2. The Insurance

The $2.55 million note payable to appellants provided that Orange Crest would “furnish full all risk insurance with replacement cost guarantee insuring [appellants].”[6] Orange Crest obtained a commercial general liability policy from Scottsdale, listing the Lantzman Trust and appellants as mortgage holders. The original policy, which ran from February 16 to May 16, 2006, identified itself as a “special form” policy. However, the language which described the covered “causes of loss” stated it was a “basic form” policy and that only specific items were covered, including “vandalism, ” but not “theft.”[7] The policy defined “vandalism” as “willful and malicious damage to, or destruction of, the described property.”

The policy included a provision describing Scottsdale’s obligation to appellants and the Lantzman Trust as the mortgage holders: "We will pay for

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covered loss of or damage to buildings or structures to each mortgageholder shown in the Declaration in their order of precedence, as interests may appear. [¶]... The mortgageholder has the right to receive loss payment even if the mortgage holder has started foreclosure or similar action on the building or structure. [¶]... If we deny your [referring to Orange Crest’s] claim because of your acts or because you have failed to comply with the terms of this Coverage Part, the mortgageholder will still have the right to receive loss payment if the mortgageholder: [¶] (1) Pays any premium due under this Coverage Part at our request if you have failed to do so; [¶] (2) Submits a signed, sworn proof of loss with 60 days after receiving notice from us of your failure to do so; and [¶] (3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgageholder.”

The policy remained in effect until July 16, 2008, although Orange Crest stopped paying premiums in February 2008. The premiums needed to keep the policy in effect through July 16 were paid by the agent who obtained the policy for Orange Crest. Scottsdale did not request payment of insurance premiums from appellants.

3. The Default, Assignment and Foreclosure

In or about January 2008, Orange Crest ceased making payments on the loans. Shortly thereafter, the Lantzman Trust began the process of foreclosure under its first deed of trust.[8] To stop the foreclosure, in March 2008, appellants purchased the Lantzman Trust’s interest in the property for the balance due on the Lantzman Trust note, approximately $1.749 million, and the Lantzman Trust assigned its first trust deed to appellants. The assignment stated that it “grant[ed], assign[ed] and transfer[red]” to appellants “all beneficial interest under [the first] Deed of Trust, ” including “the note or notes as therein described or referred to, the money due and to become due thereon with interest, and all right accrued or to accrue under said Deed of Trust.”

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In November 2008, appellants foreclosed on the second deed of trust. At the foreclosure sale, appellants acquired the property by bidding $2, 878, 060.25, the amount of the unpaid debt on the second promissory ...

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