Judge Gail Killefer, Case 21STCV33357 2023-04-17 Tentative Ruling

TENTATIVE: Defendant’s demurrer is sustained. Plaintiffs are granted 30 days leave to amend. Defendant is to give notice.

This action arises in connection with the ownership of commercial property located at 10523 Burbank Blvd., North Hollywood, CA 91601 (the “Property”) by FH10523, LLC and Fariborz Halimi (“Plaintiffs”). The Property was previously owned by another entity, F.H. Investments, LLC and was reorganized as FH10523, LLC on June 25, 2015. Plaintiffs obtained a commercial liability insurance policy (the “Policy”) for the Property from Defendant AMCO Insurance Company (“AMCO”). Defendant E360 Insurance Services (“E360”) acted as FH10523’s insurance broker. Defendant Keybank, N.A (“Keybank”) acted as FH10523, LLC’s loan servicer.

On January 22, 2018, Eduardo Phillips filed a premises liability action against F.H. Investments and FH10523, LLC for a slip and fall claim (the “Underlying Action”). Plaintiffs contend the AMCO Policy covered the claim, and tendered the Underlying Action claim to AMCO. On March 7, 2019, AMCO issued a Reservation of Rights letter, agreeing to insure F.H. Investments, LLC. and not FH10523, LLC. AMCO continued accepting premium payments from FH10523, LLC until at least January 2020. On September 11, 2019, AMCO completed its investigation and declined to insure or defend FH10523. Plaintiff Halimi, as the managing member of FH10523, LLC., contends FH10523, LLC was forced to hire independent counsel and Halimi suffered emotional distress during the Underlying Action as a result.

Plaintiffs’ operative First Amended Complaint (“FAC”) alleges four causes of action: (1) breach of contract against AMCO; (2) bad faith denial of insurance claim and breach; (3) negligent failure to obtain insurance coverage against E360; and (4) negligence against Keybank.

Defendant Keybank now demurs to the second and fourth causes of action of the FAC. Plaintiffs oppose the demurrer.

Keybank’s request is granted. The existence and legal significance of these documents are proper matters for judicial notice. (Evid. Code § 452(d), (h).)

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (CCP § 430.30(a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) The court “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. . . .” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525 (Berkley).) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (CCP § 452; see also Stevens v. Sup. Ct. (1999) 75 Cal.App.4th 594, 601.) “When a court evaluates a complaint, the plaintiff is entitled to reasonable inferences from the facts pled.” (Duval v. Board of Trustees (2001) 93 Cal.App.4th 902, 906.)

The general rule is that the plaintiff need only allege ultimate facts, not evidentiary facts. (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.) “All that is required of a plaintiff, as a matter of pleading, even as against a special demurrer, is that his complaint set forth the essential facts of the case with reasonable precision and with sufficient particularity to acquaint the defendant with the nature, source and extent of his cause of action.” (Rannard v. Lockheed Aircraft Corp. (1945) 26 Cal.2d 149, 156-157.) “[D]emurrers for uncertainty are disfavored and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th 841, 848, fn. 3, citing Lickiss v. Fin. Indus. Regulatory Auth. (2012) 208 Cal.App.4th 1125, 1135.) In addition, even where a complaint is in some respects uncertain, courts strictly construe a demurrer for uncertainty “because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.)

Demurrers do not lie as to only parts of causes of action where some valid claim is alleged but “must dispose of an entire cause of action to be sustained.” (Poizner v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.) “Generally it is an abuse of discretion to sustain a demurrer without leave to amend if there is any reasonable possibility that the defect can be cured by amendment.” (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.)

The law implies a covenant of good faith and fair dealing in every contract, including insurance policies. (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 720.) The obligations imposed by the implied covenant are imposed by law to govern the manner in which the express contractual obligations must be discharged – i.e., fairly and in good faith. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573; California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 54; Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co. (2001) 90 Cal.App.4th 335, 346.)

“[T]he essence of the implied covenant of good faith and fair dealing is that ‘[t]he [insurer] must refrain from doing anything that will injure the right of the insured to receive the benefits of the [insurance] agreement, the terms and conditions of which define the duties and performance to which the insured is entitled.” (Brandwein v. Butler (2013) 218 Cal.App.4th 1485, 1514-15.) Breach of a specific provision of the insurance contract is not a necessary prerequisite to bringing a bad faith claim. (Carson v. Mercury Ins. Co. (2012) 210 Cal.App.4th 409, 429; see also Cal. Prac. Guide: Insurance Litigation (Updated 2020) Chap. 12 at 12:27; see CACI 2330-2350.)

The elements of a breach of the implied obligation of good faith and fair dealing in a first party failure to pay case is: (1) plaintiff suffered a loss covered under an insurance policy with defendant; (2) defendant was notified of the loss; 3) defendant unreasonably failed to pay or delayed payment of policy benefits; 4) plaintiff was harmed; and 5) defendant’s failure to pay or delay in payment of policy benefits was a substantial factor in causing plaintiff’s harm. (CACI No. 2331.) Reasonableness is determined by whether the insurer had proper cause for its conduct. (CACI No. 2331.)

Here, Keybank contends the second cause of action is insufficiently pled “because there is no allegation in the FAC that KeyBank was an insurer under the Policy.” (Dem., 5-6.) Further, Defendant contends the attached Policy of the FAC specifically shows:

“[t]he Policy reflects the lender holding a lien on the Property (the mortgagee) – ReadyCap Commercial, LLC – as an additional insured under the Policy. For contact purposes, ReadyCap’s address is shown to be care of KeyBank, thus reflecting KeyBank’s role as a servicer on behalf of the lender holding the lien on the Property, not as a servicer for either of the Plaintiffs.

In addition, the Second Cause of Action states no claim against KeyBank for Breach of the Implied Covenant of Good Faith and Fair Dealing. Again, such a claim belongs only to an insured, against an insurer.” (Dem., 6.)

“The Second Cause of Action never alleges the existence of any contract between either of the Plaintiffs and KeyBank. In fact, the Second Cause of Action itself contains not a single allegation at all against KeyBank. Thus, it is clear, from both the FAC itself and Exhibit 1, that there is no insurer-insured relationship, or any other contractual relationship, between either Plaintiff and KeyBank.” (Dem., 7.)

Further, Keybank contends a demurrer to the second cause of action is merited as there are:

“no specific allegations regarding the existence of a contract by which either Plaintiff and KeyBank agreed that KeyBank would act as Plaintiffs’ loan servicer (and Exhibit 1 shows just the opposite – that KeyBank was acting on behalf of the lender holding a mortgage on the Property, and not on behalf of the borrower or owner of the Property). Further, there are no specific allegations regarding any contractual agreement by which Key [sic] undertook to ensure either FH10523 or Halimi that they would be insured under the Policy. And, last, there are no specific allegations regarding any undertaking by KeyBank to pay, for the benefit of FH10523 or Halimi, premiums owed under the Policy.” (Dem., 7.)

Lastly, Keybank also contends the second cause of action is insufficiently pled as the Policy, attached and incorporated as Exhibit 1 to the FAC, “states that any claim made thereunder must be brought within one year of such claim arising,” and the Underlying Action was brought nearly 4 years ago. (Dem., 7-8; citing FAC, Exh. 1, p.44.)

In opposition, Plaintiffs “concede that the second cause of action for breach of the implied covenant of good faith and fair dealing in denying the insurance claim does not extend to Keybank.” (Opp., 3.)

As Plaintiffs have conceded the second cause of action does not extend to Keybank, and as this court’s review of the second cause of action of the FAC shows it to be insufficiently pled, the court therefore sustains Defendant Keybank’s demurrer as to the second cause of action.

Negligence consists of the following elements: (1) the defendant owed the plaintiff a duty of care; (2) the defendant breached that duty; and (3) the breach proximately caused the plaintiff’s damages or injuries. (Lueras v. BAS Home Loan Servicing, LP (2013) 221 Cal.App.4th 49, 62 (Lueras).) “The existence of a duty of care owed by a defendant to a plaintiff is a prerequisite to establishing a claim for negligence.” (Nymark v. Heart Fed. Savs. & Loan Ass’n (1991) 231 Cal.App.3d 1089, 1095.) “Whether a duty of care exists is a question of law to be determined on a case-by-case basis.” (Lueras, 221 Cal.App.4th at p. 62.)

The economic loss rule requires plaintiff to recover in contract for purely economic loss due to disappointed contractual expectations unless he can demonstrate harm above and beyond a broken contractual promise. (Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979, 988.) An “economic loss” consists of damages for inadequate value, costs of repair, and replacement, or consequent loss of profits, without any claim of personal injury or damages to other property. (Robinson, supra, 34 Cal.4th at 988; see also Jimenez v. Superior Court (2002) 29 Cal.4th 473.) “A person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations. Instead, ‘[c]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.’ [Citations.]” (Stop Loss Ins. Brokers, Inc. v. Brown & Toland Medical Group (2006) 143 Cal.App.4th 1036, 1041.) “ “Tort damages have been permitted in contract cases where a breach of duty directly causes physical injury [citation]; for breach of the covenant of good faith and fair dealing in insurance contracts [citation]; for wrongful discharge in violation of fundamental public policy [citation]; or where the contract was fraudulently induced. [citation.]” (Robinson, supra, 34 Cal.4th at 989-990, [quoting Erlich v. Menezes (1999) 21 Cal.4th 543, 551.)

Defendant Keybank contends that Plaintiffs’ fourth cause of action is insufficiently pled because Plaintiffs failed to plead that Defendant Keybank owed Plaintiffs any duty, beyond conclusory statements to that effect. (Demurrer, 8-9.) This court further notes a lender owes a borrower no duty other than what is set forth in the loan documentation between the parties. (Nymark v. Heart Fed. Sav & Loan Ass’n (1991) 231 Cal.App.3d 1089, 1096.)

Alternatively, Defendant contends “[t]here was no common law duty, however, on the part of Key [sic] to ensure that either Plaintiff was an insured under the Policy. Of course, any such duty may only be found in contract. Further, there was no common law duty, on the part of Key [sic], to ensure payment of premiums under the Policy for the benefit of either Plaintiff.” (Demurrer, 8.)

In opposition, Plaintiffs contend Defendant Keybank owed Plaintiffs a duty of care in servicing the Policy loan. (Opposition, 4-6.) Although “as a general rule, a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money,” (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096; Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4^th 1150, 1180), a lender may be found to owe a duty of care to a borrower upon a balancing of multiple factors; called the Biakanja factors. (Jolly v. Chase Home Finance, LLC (2013) 213 Cal. App. 4th 872, 901; Biakanja v. Irving (1958) 49 Cal.2d 647, 650.) The factors include “the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.” (Biakanja, supra, 49 Cal.2d at 650.)

Plaintiffs contend “Keybank’s role in servicing the loan agreement intended to affect FH10523 because Keybank was responsible for ensuring that FH10523 was insured,” but, as explained above, this contention is contradicted by a clear reading of the Policy. Further, Plaintiffs contend:

“Keybank assumed a vital responsibility in ensuring that FH10523 and its property were insured against third-party claims or catastrophe. As a loan servicer, Keybank offers its services to many members of the public. The risk of harm here is significant and it is in the public interest to hold those who assume the obligation of safeguarding individuals and business from uninsured harm that could lead to financial ruin absent a duty of care.” (Opp., 6.)

However, Plaintiffs fail to point to support for these contentions within the Policy and within the allegations made in the FAC.

In reply, Keybank correctly contends “none of the allegations contained in the FAC state any claim for negligence against Keybank.” (Reply, 3.) The court agrees.

Here, the FAC alleges that “Defendant Keybank acted as FH10523 loan servicer – tasked with collecting payments from FH10523 to pay for and maintain property insurance coverage for FH10523.” (FAC ¶ 45.) Defendant allegedly “breached its duty of care when Keybank failed to ensure FH10523 was insured, when Keybank failed to maintain property insurance for FH10523 despite collecting premium payment from FH10523, and when Keybank failed to inform FH10523 that it was not insured.” (FAC ¶ 46.) However, as explained above, the Policy shows no agreement for Keybank to act as Plaintiffs’ loan servicer and further, shows no agreement for Keybank to undertake additional duties to maintain insurance for Plaintiffs or inform them of any lack of insurance.

The court agrees with Defendant that the fourth cause of action is insufficiently pled. The FAC fails to allege Keybank undertook any duties towards Plaintiffs as their alleged loan servicer. Furthermore, the FAC fails to plead sufficient factual allegations to establish any such duty pursuant to the Biankaja factors.

For these reasons, Defendant’s demurrer to the fourth cause of action is sustained.

[1] Defendant Keybank submits the declaration of its counsel, Garrick Vanderfin (“Vanderfin”), to demonstrate compliance with statutory meet and confer requirements. Vanderfin attests that on January 17, 2023, he emailed Plaintiffs’ counsel to set a time to meet and confer telephonically and counsel for the parties telephonically conferred on January 26, 2023 (Vanderfin Decl. ¶¶ 4-5.) Vanderfin attests following the conversation, the parties have been unable to reach a resolution regarding the issues raised in this demurrer. (Vanderfin Decl. ¶¶ 5-6 .) The Vanderfin Declaration is sufficient for purposes of CCP § 430.41.