Judge Elaine Lu, Case 22STCV06447 2022-08-02 Tentative Ruling

On February 22, 2022, Plaintiffs Jacques Mathieu and Ruth Mathieu (jointly “Plaintiffs”) filed the instant wrongful foreclosure action against Defendants First American Nation, LLC (“FAN”), Mortgage Lender Services, Inc. (“MLS”)[1], and Chicago Title Insurance Company (“CTIC”). On April 22, 2022, Plaintiffs filed the operative First Amended Complaint (“FAC”) against defendants FAN, MLS, and CTIC. The FAC asserts six causes of action for (1) Wrongful Foreclosure against FAN and MLS, (2) Declaratory Relief against FAN and MLS, (3) Violation of Business and Professions Code §§ 17200, et seq. against FAN and MLS, (4) Negligence against CTIC, (5) Breach of Contract against CTIC, and (6) Breach of the Implied Covenant of Good Faith and Fair Dealing.

On May 23, 2022, Defendant CTIC filed the instant demurrer to the FAC. On July 6, 2022, CTIC filed a notice of rescheduling, advancing the hearing date from October 21, 2022 to August 2, 2022. On July 20, 2022, Plaintiffs filed an opposition. On July 26, 2022, Defendant CTIC filed a reply.

On February 6, 2006, the Subject Property – 4025 Sinova Street, Los Angeles, CA 90031 – was conveyed to Plaintiffs pursuant to a grant deed. (FAC ¶ 9, Exh. A.) The Subject Property was conveyed on February 6, 2006 subject to “two deeds of trust: 1) a prior first lien mortgage; and 2) a second lien mortgage and Deed of Trust in favor of Mortgage Electronic Registration Systems, Inc. (‘MERS’)[.]” (FAC ¶ 10, Exh. B.)

On October 1, 2009, Plaintiffs made their last payment on the second lien mortgage. (FAC ¶ 12.) “Between the date of the last payment in around October 2009, on the one hand, and the recording and mailing of the March 10, 2021-dated Notice of Default, on the other hand, [FAN], or its predecessors, failed to enforce the terms of the Deed of Trust or even contact the [Plaintiffs] of the alleged breach of the alleged payment obligations on the indebtedness secured by the Deed of Trust. Indeed, during that entire time period, not a single billing statement for the second lien mortgage was ever received by the [Plaintiffs].” (FAC ¶ 12.)

On June 26, 2015, the Plaintiffs “refinanced the Property, subject to a title search and title insurance provided by defendant [CTIC]. The title search performed by [CTIC] did not reveal the existence of the subject Deed of Trust. Had the title search by [CTIC] in 2015 revealed the existence of the subject Deed of Trust and the ongoing indebtedness that it secured, then the refinancing process in 2015 would have paid off the second lien mortgage at that time. Given, however, [CTIC]’s negligence and failure to disclose the Deed of Trust in its 2015 title report, no such payoff occurred at the time.” (FAC ¶ 13.) “Relying on the information in [CTIC]’s title report on the [Subject] Property, the [Plaintiffs], who had undergone a loan modification process years before that during the housing crisis and financial crisis during the late 2000s, reasonably believed that the second lien mortgage had been written off by MERS or its successor.” (FAC ¶ 14.)

On December 17, 2020, MERS assigned its interest under the deed of trust to FAN. (FAC ¶ 17.) On March 10, 2021, FAN recorded a notice of Default. (FAC ¶ 18, Exh. C.) “Prior to March 10, 2021, Plaintiffs did not know nor had any reasonable suspicion that the Deed of Trust was still valid and enforceable on the Property. Further, [CTIC]’s assurances through the Title Policy assured Plaintiffs that the Deed of Trust was no longer in effect.” (FAC ¶ 18.)

On April 27, 2021, Plaintiffs sent a letter to FAN demanding a withdrawal of the March 10, 2021, Notice of Default and stating that any foreclosure proceeding would result in the filing of the instant action for wrongful foreclosure. (FAC ¶ 19, Exh. D.) On January 31, 2022, RAN recorded a notice of Trustee’s Sale with a scheduled foreclosure sale of the Subject Property on February 24, 2022. (FAC ¶ 20, Exh. E.)

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack; or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal 3d 311, 318.) No other extrinsic evidence can be considered (i.e., no “speaking demurrers”). (Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881.)

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal. App. 4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dep’t of Water & Power (2006) 144 Cal. App. 4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal. App. 4th 968, 994.) “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.” (SKF Farms v. Superior Ct. (1984) 153 Cal. App. 3d 902, 905.) “The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.” (Hahn, supra, 147 Cal.App.4th at 747.)

Code of Civil Procedure § 430.41, subdivision (a) requires that “[b]efore filing a demurrer pursuant to this chapter, the demurring party shall meet and confer¿in person or by telephone¿with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” The parties are to meet and confer at least five days before the date the responsive pleading is due and if they are unable to meet the demurring party shall be granted an automatic 30-day extension. (CCP § 430.41(a)(2).) The demurring party must also file and serve a declaration detailing the meet and confer efforts. (Id.¿at (a)(3).)¿ If an amended pleading is filed, the parties must meet and confer again before a demurrer may be filed to the amended pleading. (Id.¿at (a).)

Defendant CTIC has fulfilled the meet and confer requirement. (Lazaran Decl. ¶¶ 2-4, Exh. A.)

By way of the instant motion, Defendant CTIC demurrers to the fourth, fifth, and sixth causes of action.

Defendant CTIC contends that the fourth cause of negligence fails as a matter of law because there is no valid cause for negligence against a title insurer based upon the issuance of a preliminary report for title insurance.

“‘The elements of a negligence cause of action are the existence of a legal duty of care, breach of that duty, and proximate cause resulting in injury.’” (McIntyre v. The Colonies-Pacific, LLC (2014) 228 Cal.App.4th 664, 671.)

“Title insurance is a contract for indemnity under which the insurer is obligated to indemnify the insured against losses sustained in the event that a specific contingency, e.g., the discovery of a lien or encumbrance affecting title, occurs.” (Lawrence v. Chicago Title Ins. Co. (1987) 192 Cal.App.3d 70, 74.) However, “[t]he policy of title insurance, however, does not constitute a representation that the contingency insured against will not occur.” (Id. at pp.74–75.) “Accordingly, when such contingency occurs, no action for negligence or negligent misrepresentation will lie against the insurer based upon the policy of title insurance alone.” (Id. at p.75.)

In addition, as legislated by statute, a “‘[p]reliminary report, ‘commitment’, or ‘binder’ are reports furnished in connection with an application for title insurance and are offers to issue a title policy subject to the stated exceptions set forth in the reports and such other matters as may be incorporated by reference therein. The reports are not abstracts of title, nor are any of the rights, duties or responsibilities applicable to the preparation and issuance of an abstract of title applicable to the issuance of any report. Any such report shall not be construed as, nor constitute, a representation as to the condition of title to real property, but shall constitute a statement of the terms and conditions upon which the issuer is willing to issue its title policy, if such offer is accepted.” (Ins. Code, § 12340.11, [bold added].) “‘[T]he issuance of a preliminary report to provide only a representation that a policy of title insurance will subsequently be issued insuring the title in the condition described in the preliminary report. The prospective insured reasonably concludes a transaction in reliance not on the preliminary report, but on the anticipated policy of title insurance. A title insurer expressly does not intend to induce a buyer or lender to consummate a transaction in reliance on a preliminary report of title. Title companies are in the business of issuing title insurance policies. They do not charge for preliminary reports, but their profits are derived from the premiums earned from selling insurance policies, where the amount of the premium is commensurate with the risk assumed.’” (Siegel v. Fidelity Nat. Title Ins. Co. (1996) 46 Cal.App.4th 1181, 1192.)

Accordingly, “Section 12340.11 has therefore established that a title insurer cannot be held liable for negligence in connection with a preliminary report, and that the recipient of the report cannot rely on it to represent the status of title to the property to be insured.” (Lee v. Fidelity National Title Ins. Co. (2010) 188 Cal.App.4th 583, 596.)

Here, the FAC alleges in relevant part that on “June 26, 2015, [Plaintiffs] refinanced the [Subject] Property, subject to a title search and title insurance provided by defendant [CTIC]. The title search performed by [CTIC] did not reveal the existence of the subject Deed of Trust. Had the title search by [CTIC] in 2015 revealed the existence of the subject Deed of Trust and the ongoing indebtedness that it secured, then the refinancing process in 2015 would have paid off the second lien mortgage at that time. Given, however, [CTIC]’s negligence and failure to disclose the Deed of Trust in its 2015 title report, no such payoff occurred at the time.” (FAC ¶ 13.) The FAC also attaches the Title Insurance Policy issued by CTIC listing “Bank of the West, a California state banking corp., a corporation, its successors and/or assigns” as the insured party. (FAC ¶ 57, Exh. F.) In sum, the FAC alleges that CTIC performed a title search in connection with a title policy for the third-party lender that did not reveal the Deed of Trust at issue.

There is no allegation that Plaintiffs specifically contracted for an abstract of title. (Soifer v. Chicago Title Co. (2010) 187 Cal.App.4th 365, 370, [“Section 12340.10 states that an ‘abstract of title’ is a “written representation, provided pursuant to a contract, whether written or oral, intended to be relied upon by the person who has contracted for the receipt of such representation, listing all recorded conveyances, instruments or documents which, under the laws of this state, impart constructive notice with respect to the chain of title to the real property described therein. An abstract of title is not a title policy as defined in Section 12340.2.’”], [bold added].) Rather, the FAC concedes that the negligence claim relies upon a title search with a title policy and thus a preliminary report. Further, there is no allegation that there was a separate contract between Plaintiffs and CTIC for an abstract of title.

In sum, Defendant CTIC cannot be liable for the alleged title insurance at issue. (Lee, supra, 188 Cal.App.4th at p.596.) Therefore, Defendant CTIC’s demurrer to the fourth cause of action is SUSTAINED.

Defendant CTIC asserts that the fifth cause of action fails because there is no alleged contract between the CTIC and Plaintiffs. The Court agrees.

“The elements of a cause of action for breach of contract are: ‘(1) the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to plaintiff.’” (Coles v. Glaser (2016) 2 Cal.App.5th 384, 391 [internal citations omitted].) “[A] third party — that is, an individual or entity that is not a party to a contract — may bring a breach of contract action against a party to a contract only if the third party establishes not only (1) that it is likely to benefit from the contract, but also (2) that a motivating purpose of the contracting parties is to provide a benefit to the third party, and further (3) that permitting the third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.” (Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 821.)

Here, the FAC alleges that “Plaintiffs are parties to or third-party beneficiaries of a policy for title insurance offered by defendant [CTIC].” (FAC ¶ 57, Exh. F.) “While the ‘allegations [of a complaint] must be accepted as true for purposes of demurrer,’ the ‘facts appearing in exhibits attached to the complaint will also be accepted as true and, if contrary to the allegations in the pleading, will be given precedence.’ ” (Moran v. Prime Healthcare Management, Inc. (2016) 3 Cal.App.5th 1131, 1145–1146.)

The allegation that Plaintiffs are parties or third-party beneficiaries is clearly contrary to the title insurance policy attached to the FAC. As noted above, the title insurance policy explicitly and very clearly notes that “Bank of the West, a California state banking corp., a corporation, its successors and/or assigns” is the insured party. (FAC, Exh. F.) Plaintiffs are solely listed as the individuals in whom title of the Subject Property was to vest. (FAC, Exh. F.) Moreover, Plaintiffs did not sign the title insurance policy. (FAC, Exh. F.) Thus, Plaintiffs are plainly not parties to the title insurance policy.

Nor are Plaintiffs third-party beneficiaries to the title insurance policy. As noted above, “Title insurance is a contract for indemnity under which the insurer is obligated to indemnify the insured against losses sustained in the event that a specific contingency, e.g., the discovery of a lien or encumbrance affecting title, occurs.” (Lawrence, supra, 192 Cal.App.3d at p.74.) Plaintiffs are not the insured. (FAC, Exh. F.) The interest insured is Bank of the West’s Deed of Trust on the Subject Property. (FAC, Exh. F.) Plaintiffs are not beneficiaries of this insurance contract, the motivating purpose of which was explicitly to protect Bank of the West’s interest in its deed of trust on the Subject Property. There can be no reasonable expectation that a third party with no interest in securing the Bank of the West’s Deed of Trust would be able to bring its own breach of contract claim.

“[I]f [Plaintiffs] sought an agreement indemnifying [them] against loss or damage suffered by reason of an additional senior encumbrance on the [Subject Property], or guaranteeing against the incorrectness of [CTIC]'s quick search of the records pertaining to title to that property, [they] could have purchased a policy of title insurance from [CTIC]. Having failed to do so, [Plaintiffs] cannot obtain the benefits [they] would have received from an insurance policy for which [they] never paid a premium.” (Soifer, supra, 187 Cal.App.4th at p.374.) Therefore, Defendant CTIC’s demurrer to the fifth cause of action is SUSTAINED.

Sixth Cause of action: Breach of the Implied Covenant of Good Faith and Fair Dealing

Defendant CTIC asserts that the sixth cause of action fails because there is no contract between the parties.

“The covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party's right to receive the benefits of the agreement actually made.” (Guz v. Bechtel Nat. Inc. (2000) 24 Cal.4th 317, 349.) “It cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement.” (Id. at pp.349–350.) Accordingly, “[a] breach of the implied covenant of good faith is a breach of the contract.” (Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1244.) Therefore, “[a] breach of the covenant of good faith and fair dealing does not give rise to a cause of action separate from a cause of action for breach of the contract containing the covenant.” (Smith v. International Brotherhood of Electrical Workers (2003) 109 Cal.App.4th 1637, 1645, Fn.3.)

Moreover, “[a] ‘breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself’ and it has been held that ‘[b]ad faith implies unfair dealing rather than mistaken judgment....’ [Citations.]” (Careau & Co., supra, 222 Cal.App.3d at p.1394.)

Accordingly, “[i]f the allegations do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated. Thus, absent those limited cases where a breach of a consensual contract term is not claimed or alleged, the only justification for asserting a separate cause of action for breach of the implied covenant is to obtain a tort recovery.” (Id. at p.1395.) However, tort recovery for breach of contract, even in bad faith, is limited solely to claims for breach of an insurance contract. (Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 87-103; See also Erlich v. Menezes (1999) 21 Cal.4th 543, 552–553, [“In holding that a tort action is available for breach of the [implied covenant of good faith] in an insurance contract, we have “emphasized the “special relationship” between insurer and insured, characterized by elements of public interest, adhesion, and fiduciary responsibility.’”)

As noted above, the Complaint does not allege any contract between Plaintiffs and CTIC. In the absence of a contract, there can be no breach of the implied covenant of good faith and fair dealing. Therefore, Defendant CTIC’s demurrer to the sixth cause of action is SUSTAINED.

Leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.) The burden is on the plaintiff to show the court that a pleading can be amended successfully. (Goodman v. Kennedy, supra, 18 Cal.3d at p.348; Lewis v. YouTube, LLC (2015) 244 Cal.App.4th 118, 226.)

Nothing in Plaintiffs’ opposition demonstrates a reasonable possibility that Plaintiffs will be able to amend the complaint to cure the defects identified above. There is no alleged contract between Plaintiffs and CTIC, and CTIC cannot as a matter of law be liable for negligence based on the issuance of a preliminary title report. Plaintiffs’ claims against CTIC are futile. The Court denies leave to amend.

Based on the foregoing, Defendant Chicago Title Insurance Company’s demurrer to the fourth, fifth, and sixth causes of action is WITHOUT LEAVE TO AMEND.

Chicago Title Insurance Company is to file and serve a proposed judgment of dismissal within ten (10) days of notice of this order.

The case management conference and OSC re dismissal of all unnamed Doe defendants are continued to November 18, 2022 at 8:30 am.

[1] Incorrectly named as Mortgage Lender Services, LLC as noted in MLS’s declaration of non-monetary status under Civil Code section 2924l filed on May 31, 2022.

County of Los Angeles

Department 26