• Stockton Mortgage, Inc. v. Tope, C071210 (2015) --- Cal.Rptr. ---
  • March 5, 2015
  • Law Firm: McCormick Barstow Sheppard Wayte Carruth LLP - Fresno Office
    Stockton Management loaned $315,000 to Joshua Prinze for the purchase and rehabilitation of a single family home. Stockton Mortgage solicited money to fund the loan from various investors. The loan was secured by a deed of trust which listed Prinze as the borrower, Stockton Mortgage as the Trustee and Stockton Management as the lender/beneficiary. Soon after, Stockton Management assigned its interest under the deed of trust to the investors.
    Alliance Title Company issued a preliminary title report stating that the company was prepared to issue a policy of title insurance insuring loss sustained by reason of defect, lien or encumbrance not excepted from coverage. Among the exceptions listed in the preliminary title report was a notice of abatement action which had been previously recorded. The preliminary title report further stated "prior to close of Escrow Alliance Title Company will require that a FULL RELEASE be obtained." Alliance attempted to obtain a release with respect to the abatement action, but was unsuccessful because violations on the property continued to exist. However, Alliance did pay outstanding enforcement costs in the amount of $2,005. Alliance subsequently issued a title insurance policy, underwritten by First American Title Insurance Company, wherein the notice of abatement action was not mentioned.
    Prinze defaulted on the loan and the investors foreclosed and purchased the property. Stockton Mortgage submitted a claim to First American on behalf of itself and the investors for costs associated with obtaining a release of the notice of abatement action. First American denied the claim on several grounds including its assertion that the notice of abatement action did not qualify as a defect in or lien or encumbrance on the title.
    The investors sued Stockton Mortgage and Stockton Management alleging breach of contract, misrepresentation, fraud, breach of fiduciary duty and unfair business practices. These defendants then cross-complained against First American, Alliance, two (2) Alliance employees, and others alleging breach of the title insurance policy, breach of written and oral contracts, negligence, negligent misrepresentation, indemnity and declaratory relief. First American moved for summary judgment, which motion was granted.

    In affirming the trial court's decision, the Court of Appeal made several findings. First, citing Elysian Investment Group v. Stewart Title Guaranty Co. (2002) 105 Cal.App.4th 315, the court noted that the notice of abatement related to the physical condition of the property and raised the issue of future enforcement. The County agency issuing the notice had yet to repair or demolish the property, to assess costs against the owner, or to record the assessment as a lien. Thus, the notice of abatement action was not a defect, lien or encumbrance on the title. The court further determined that the accrual of enforcement costs, under the present facts, did not create a defect, lien or encumbrance on the title. Although there was evidence that the County had engaged in some limited abatement activity and had sought to recover its costs totaling $2,005, there was no evidence that a lien had been recorded. Furthermore, all outstanding costs had been paid by Alliance. The cross-complainants had failed to present any evidence that further costs had continued to accrue and furthermore, the title policy specifically excluded claims "attaching or created subsequent to Date of Policy."
    Cross-complainants further argued breach of written and oral contract in connection with the preliminary title report. However, the court determined that the preliminary title report was merely an offer, and not a contract, and therefore was not actionable. Since the only evidence the cross-complainants could present of an oral contract to obtain a release of the abatement action prior to close of escrow was the preliminary title report, no claim could be stated. The court concluded that the preliminary title report only showed that there may have been a separate oral agreement and such speculation was held to be insufficient.
    The cross-complainants next argued that First American owed a duty of care once it affirmatively undertook to remove the notice of abatement action. They cited Williams v. State of California (1983) 34 Cal.3d 18 in support of this contention. However, the Court of Appeal noted that the Supreme Court in Williams found that one who undertakes to render services gratuitously is liable for physical harm resulting from a failure to exercise reasonable care. Since the present case did not involve physical harm to the cross-complainants' body or property, this principle of law did not apply.
    With respect to the negligent misrepresentation claim, the court began with the alleged representation by Alliance that it would obtain a release of the notice of abatement prior to close of escrow. The court noted that a false promise for future performance can support an intentional misrepresentation claim but not a negligent misrepresentation claim. In addition, the cross-complainants could not establish intentional misrepresentation where it was undisputed that Alliance had tried to obtain a release but had failed. The court next considered the alleged representation in the title insurance policy that no notice of abatement action was recorded. It was undisputed that the title insurance policy said nothing about the action. The cross-complainants claimed that, by failing to include the notice of abatement action after including it in the preliminary title report, First American had impliedly represented that the action had been released. The court disagreed, concluding that the tort of negligent misrepresentation applies only to positive assertions and not implied misrepresentations.
    Finally, with respect to the claim for indemnity, the court noted that summary judgment had been properly entered as to each of the contract and negligence causes of action upon which the indemnity causes of action were prefaced. As such, the cross-complainants could not show fault and summary judgment was properly entered.
    Under the Court of Appeal's ruling, the mere existence of a notice of abatement does not necessarily trigger duties under a title insurance policy as the notice of abatement itself does not create a lien, defect or encumbrance on the property. Instead, there must be actual abatement activity and a lien recorded or, at minimum, enforcement costs incurred which have not been paid. Furthermore, the court suggested a lien would have to be filed even with respect to such costs before the title insurance would come into play and would have to be recorded for costs prior to the inception of the title insurance policy. In addition, representations made in the preliminary title report do not create duties on the part of the title insurer absent evidence of a separate oral contract or sufficient evidence supporting a claim of intentional or negligent misrepresentation.