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Stockton Mortgage, Inc. v. Tope

California Court of Appeals, Third District, San Joaquin

December 23, 2014

STOCKTON MORTGAGE, INC. et al., Cross-complainants and Appellants,
MICHAEL TOPE et al., Cross-defendants and Respondents.

Super. Ct. No. 39-2009-00213904-CU-BC-STK

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Downey Brand, Anthony L. Vignolo and Jennifer L. Williams for Cross-complainants and Appellants.

Garrett & Tully, Ryan C. Squire, Anna Didak and Zi C. Lin for Cross-defendants and Respondents.


BLEASE, Acting P. J.

This is an appeal from a cross-defendant’s summary judgment granted First American Title Insurance Company (First American) in a cross-action to recover moneys under a policy of title insurance following a default on a real estate loan to purchase and rehabilitate a residence. The property was subject to a notice of abatement action issued by San Joaquin County requiring repair of defects in the rehabilitation of the residence. The principal claim is that First American breached the title insurance policy by failing to provide coverage for the notice of abatement action.

Plaintiffs, investors in a real estate loan, sued defendants and cross-complainants Stockton Mortgage Real Estate Loan Servicing Corporation (SMRELS), Stockton Mortgage, Inc. (Stockton Mortgage), Stockton Management & Development, Inc. (Stockton Management), and Ross F. Cardinalli Jr. (collectively cross-complainants) for damages arising from cross-complainants’ alleged failure to follow up on the status of the release of a notice of abatement action. Cross-complainants, in turn, initiated the instant action against First American, Alliance Title Company (Alliance), and two of Alliance’s employees for damages, indemnity, and declaratory relief arising out of First American’s refusal to provide coverage under the title insurance policy, and Alliance’s alleged representation, on behalf of First American, that it would obtain a release of the notice of abatement action prior to the close of escrow.

First American moved for summary judgment on the principal grounds that the notice of abatement action is not covered under the title insurance policy, cross-complainants are not insured under the title insurance policy, and the preliminary title report relied on by cross-complainants is not a contract. The trial court granted First American’s motion and entered summary judgment in its favor. Cross-complainants appeal. We shall affirm the judgment.

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A. The Loan to Joshua Prinze

Stockton Management loaned $315, 000 to Joshua Prinze to “assist with the purchase and rehabilitation of” a single family home located at 2447 West Michigan Avenue in Stockton. SMRELS solicited the money used to fund the loan from various investors. Prospective investors were advised that the property “is being purchased as a shell and is to be completely remodeled....” The purchase price of the property was $230, 000. $72, 575 in construction funds were to be held by SMRELS and disbursed on a work progress basis. The seller carried a second of $25, 000.

The loan was secured by a deed of trust encumbering the property. The deed of trust was recorded November 4, 2005, and lists Prinze as the borrower, Stockton Mortgage as the trustee, and Stockton Management as the lender/beneficiary.

On November 21, 2005, Stockton Management assigned all of its beneficial interest under the deed of trust to the investors.

B. The Preliminary Title Report

On September 29, 2005, in response to the title insurance application, Alliance issued a preliminary title report, which stated in pertinent part: “[T]his Company... is prepared to issue, or cause to be issued, as of the date hereof, a Policy or Policies of Title Insurance... insuring against loss which may be sustained by reason of any defect, lien or encumbrance not shown or referred to as an Exception herein or not excluded from coverage pursuant to the printed Schedules, Conditions and Stipulations of said Policy forms” Among the exceptions to coverage listed in the preliminary title report was a notice of abatement action, recorded June 17, 2004, along with the following statement: “Prior to close of Escrow Alliance Title Company will require that a FULL RELEASE be obtained.

C. The Notice of Abatement Action

The notice of abatement action referenced in the preliminary title report, read as follows: “The owner of record was most recently notified of the aforementioned non-complying conditions on May 25, 2004. [¶] Pursuant to provisions of Section 17985 of the California Health & Safety Code, this NOTICE OF ABATEMENT ACTION has been caused to be recorded in the office of the County Recorder. [¶] The Enforcement Agency may declare this notice null and void by filing a Release of Notice of Abatement Action. The

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filing of such release shall be contingent upon the issuance of necessary permits, payment of required fees, if any, correction or removal of violations and inspection to verify compliance with applicable requirements.” An unrecorded notice and order to abate housing and dangerous building violations, dated May 25, 2004, listed 26 violations of Health and Safety Code section 17920.3, [1] including various structural, mechanical, electrical, and plumbing violations.

On June 9, 2005, Alliance wrote to the San Joaquin County Environmental Health Department (County) concerning the notice of abatement action. The letter read in pertinent part: “It is the intent of the parties to the above referenced escrow to pay the above referenced lien in full upon closing. [¶] In order to comply with these intentions, you are requested to provide our office with your satisfaction of matured installment, which will be recorded only when we have funds necessary to satisfy your demand, if any. [¶] If the above lien has been paid, please send a release for recording along with this letter stating the lien has been paid in full.” Alliance sent an identical letter on July 27, 2005.

On September 26, 2005, the County faxed a response to Alliance, stating: “Unfortunately a Release of Abatement Action CANNOT be issued. Violations on the property continue to exist. Once the violations get corrected and our enforcement costs get paid in full then we will issue a Release of Abatement Action. Included is an invoice for our enforcement costs, a list of violations that were found on the property and information on how to obtain permits to bring the property up to code.”

The outstanding enforcement costs in the amount of $2, 005 were paid by Alliance on November 7, 2005. The notice of abatement action, however, was not released because the violations had not been corrected.

D. The Title Insurance Policy

Alliance issued a lender’s title insurance policy, underwritten by First American, which stated in part, “SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B, AND THE CONDITIONS AND STIPULATIONS, FIRST AMERICAN... insures, as of Date of Policy shown in Schedule A [(November 4, 2005)], against loss or damage, not exceeding the Amount of Insurance stated

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in Schedule A [($315, 000)], sustained or incurred by the insured by reason of: [¶]... [¶] 2. Any defect in or lien or encumbrance on the title; [¶] 3. Unmarketability of the title.” The policy further stated that First American “will also pay the costs, attorneys’ fees and expenses incurred in defense of the title or the lien of the insured mortgage, as insured, but only to the extent provided in the Conditions and Stipulations.” The notice of abatement action that was excepted from coverage in the preliminary title report was not mentioned in the title insurance policy. Additional policy provisions are set forth in the discussion of the breach of contract (title insurance policy) cause of action.

E. Prinze’s Default and Foreclosure

In 2006 Prinze defaulted on the loan. At that time, all rehabilitation funds ($72, 575) had been distributed, and none of the work on the property had been completed. The investors foreclosed on the property and purchased it at a trustee’s sale. The beneficiaries under the trustee’s deed upon sale are the investors.

F. Stockton Mortgage’s Claim Under the Title Insurance Policy

On July 14, 2008, Stockton Mortgage submitted a claim to First American on behalf of itself and the investors under the title insurance policy for the costs associated with obtaining a release of the notice of abatement action. On October 27, 2008, First American denied the claim. It found the notice of abatement action was not a defect in or lien or encumbrance on the title and did not affect the marketability of title, and thus, was not covered under the policy. As for the claim that the notice of abatement action was listed in the preliminary title report along with the notation that “Prior to close of Escrow Alliance Title Company will require that a FULL RELEASE be obtained, ” First American found that neither the preliminary title report nor the title insurance policy were representations as to the state of title, and thus, the claim was not covered. First American further concluded that the matter “appear[ed] to [be] related to administration of escrow, ” and First American was not the escrow holder.

G. The Investors’ Suit Against Cross-Complainants

On June 9, 2009, some of the investors (plaintiffs) sued cross-complainants for breach of contract, misrepresentation, fraud, breach of fiduciary duty, and

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unfair business practices.[2] The operative complaint[3] alleged: (1) at the time cross-complainants were preparing to make the loan to Prinze, they obtained a title report that revealed the notice of abatement action; (2) the release of the notice of abatement action was a condition for making the loan; (3) unknown to plaintiffs, cross-complainants failed to obtain a release of the notice of abatement action; and (4) had cross-complainants followed up on the status of the release prior to making the loan either the notice of abatement action would have been released or the loan would not have been made. Plaintiffs claimed they had been “damaged by loss of their investment monies in ...

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