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Court of Appeal, Second District, Division 7, California.

ASSOCIATES NATIONAL MORTGAGE CORPORATION, a corporation, Plaintiff and Appellant, v. FARMERS INSURANCE EXCHANGE, a reciprocal or inter-insurance exchange, Defendant and Respondent.

No. B042021.

Decided: January 25, 1990

Parker, Stanbury, McGee, Babcock & Combs, Arthur T. Schaertel and Julie Y. Hatamiya, for plaintiff and appellant. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone and Bruce M. Warren, for defendant and respondent.

Appellant Associates National Mortgage Corporation (Associates) appeals from summary judgment entered in its action against respondent Farmers Insurance Exchange (Farmers) for insurance bad faith.   We conclude the trial court properly granted summary judgment and affirm.


In April, 1985, Farmers issued a homeowners insurance policy covering property owned by Terri Harris.   The policy was effective through December, 1985.   Associates, the mortgagee on the property, was named as a loss payee on the policy.

The policy covered losses to the property's dwelling and separate structures with certain exceptions not relevant here.   Under the policy, the insureds were required to notify Farmers within sixty days of any loss.   Further, any suit “arising on or out of this policy must be brought within one year after the loss.”

On June 20, 1985, foreclosure proceedings were instituted on the insured property.   On September 5, 1985, there was a fire on the insured property.   On October 29, 1985, Associates contacted Farmers to notify it of Associates' claim.   Between January and May of 1986, Associates attempted to obtain proof of loss claims from Farmers.   Farmers did not forward these claim forms until July, 1986.

On September 4, 1986, Associates submitted a proof of loss which was rejected.   Associates filed a second proof of loss on October 3, 1986 which was rejected by Farmers on December 8, 1986.   Associates requested Farmers reconsider its decision to deny the claim.   On January 7, 1987, Farmers reaffirmed its denial of coverage.

During this period, on January 23, 1986, a foreclosure sale was held for the insured property.   The minimum bid for the property was $88,799.98.   Following the sale Associates took title to the property.

On December 7, 1987, Associates filed a complaint against, inter alia, Farmers for tortious refusal to pay benefits under the policy.   Associates sought damages for the loss of benefits under the policy, attorney's fees incurred in attempting to obtain benefits, loss of credit, interest on borrowed money, emotional distress, incidental expenses and punitive damages.

On August 19, 1988, Farmers moved for summary judgment arguing Associates' action was barred by the policy's one-year limitation period.   Farmers further argued Associates' action was barred because Associates purchased the insured property at the foreclosure sale with a full-credit bid, thereby extinguishing Farmers' obligations under the policy.   A full credit bid is a bid equal to the unpaid principal and interest of the mortgage debt plus costs, fees and other expenses of the foreclosure.  (Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 607, 125 Cal.Rptr. 557, 542 P.2d 981;  Passanisi v. Merit–McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1503, fn. 5, 236 Cal.Rptr. 59.)

In support of the motion, Farmers provided the declaration of one of its attorneys, Douglas Barard, who authenticated a letter he received from Associates' vice-president, D.N. Wurst, which stated:  “The property was bid in foreclosure at $88,799.98.   It represented total indebtedness at the time.” 1

In opposition, Associates offered the declaration of one of its officers who stated “I am employed as a vice-president for plaintiff [Associates].   I have personal and first hand knowledge of all the following facts․  On January 23, 1986 a foreclosure sale occurred.   At that time, the minimum amount sought was $88,799.98.   However, no one bid at the foreclosure sale.”

In reply, Farmers objected to the declaration arguing the declarant failed to provide sufficient facts to establish he had personal knowledge concerning what occurred at the foreclosure sale.   Farmers further provided an authenticated Trustee's Deed Upon Sale which stated the insured property was sold to Associates for $88,799.98.

 On September 22, 1988, the trial court held Associates' action was barred by the policy's limitation period.   Notice of entry of judgment was filed March 23, 1989 and Associates filed its notice of appeal on May 12, 1989.2



The standard of review for summary judgments is well-settled.   Summary judgment is only properly granted when there is no triable issue as to any material fact and the moving party is entitled to judgment as a matter of law.  (Dolquist v. City of Bellflower (1987) 196 Cal.App.3d 261, 266, 241 Cal.Rptr. 706.)   The moving party must establish by declarations and admissible evidence the claims or defenses of the opposing party are meritless on any legal theory.  (Code Civ.Proc., § 437c, subd. (b);  Frazier, Dame, Doherty, Parrish & Hanawalt v. Boccardo, Blum, Lull, Niland, Teerlink & Bell (1977) 70 Cal.App.3d 331, 339, 138 Cal.Rptr. 670;  Sheffield v. Eli Lilly Co. (1983) 144 Cal.App.3d 583, 611, 192 Cal.Rptr. 870.)

When examining the sufficiency of affidavits or declarations filed in a summary judgment proceeding, the moving party's affidavits are strictly construed and those of the opposing party are liberally construed.   (Dolquist v. City of Bellflower, supra, 196 Cal.App.3d at p. 266, 241 Cal.Rptr. 706;  Sheffield v. Eli Lilly Co., supra, 144 Cal.App.3d at p. 611, 192 Cal.Rptr. 870.)   Declarations must be based upon personal knowledge,, affirmatively show the declarant is competent to testify as to the matters stated, and set forth admissible evidence.  (Code Civ.Proc., § 437c, subd. (d).)

Finally, summary judgment will be affirmed if it is supported on any grounds argued to the trial court regardless of the ground upon which the trial court based its decision.  (Folberg v. Clara G.R. Kinney Co. (1980) 104 Cal.App.3d 136, 140, 163 Cal.Rptr. 426;  Snider v. Snider (1962) 200 Cal.App.2d 741, 756, 19 Cal.Rptr. 709.)


 Associates argues the trial court erred in granting summary judgment because the insurance bad faith action is not an action on or arising out of the policy.   On this issue we agree with the appellant, Associates.

As Farmers correctly notes, its one-year limitation period is based upon a similar provision set forth in Insurance Code section 2071.  Insurance Code section 2071 provides:  “No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity ․ unless commenced within 12 months next after inception of the loss.”   Courts have held this one-year limitation period is reasonable and enforceable against the insured.  (See State Farm Fire & Casualty Co. v. Superior Court (1989) 210 Cal.App.3d 604, 608, 258 Cal.Rptr. 413.)

However, courts have also consistently held an action based upon breach of the covenant of good faith and fair dealing is not an action “on the policy” and, therefore, not subject to the one-year limitation period.   The seminal case on this issue is Murphy v. Allstate Ins. Co. (1978) 83 Cal.App.3d 38, 147 Cal.Rptr. 565.   There, Justice Kaufman discussed the distinction between actions based upon the policy and tort actions which arise from the contractual relationship between an insurer and its insured.

“[T]he duty of good faith and fair dealing is not strictly a contractual obligation.   It is an obligation imposed by law which governs a party to a contract in discharging its contractual responsibilities․  ‘Where ․ an [insurer] fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of the covenant of good faith and fair dealing.’  ․

“[T]here is a significant difference between ‘arising out of the contractual relationship’ and ‘on the policy.’   In a broad sense, all of plaintiffs' alleged causes of action may be said to ‘arise out of the contractual relationship’ but as we have seen, they are not actions ‘on the policy.’   Much of the conduct complained of in the third and fourth causes of action occurred long after the fire loss and related to the repair and restoration of plaintiffs' home and personal property and the employment of persons and firms to do that work, the institution and prosecution of this interpleader action.   Here again, the damages claimed were not caused by any risk insured against under the policy and were not recoverable under the policy.”  (Id. at pp. 48–49, 147 Cal.Rptr. 565.)

Murphy was followed by Frazier v. Metropolitan Life Ins. Co. (1985) 169 Cal.App.3d 90, 214 Cal.Rptr. 883, where the plaintiff sued an insurer for, inter alia, bad faith when it refused to pay the full benefits of a life insurance policy.   The plaintiff sought damages for the unpaid insurance proceeds, emotional distress and punitive damages.   The insurer argued the action was barred by the policy's limitation period.

The Court of Appeal, relying on Murphy, rejected this argument and held the action was not one on the policy.   In so doing, the Court explained the fallacy underlying the insurer's contention that the claim was time barred.   The court noted that until the insurer has rejected a claim and evidenced bad faith, the insured has no reason to commence an action.

“Mrs. Frazier's action does not commence until [the insurer] denies her claim on the grounds of suicide.   Prior to such time Mrs. Frazier's has a right (so far as the policy limitation is concerned) to sit back and wait until denial of claim before urging bad faith.   Because it is not until [the insurer] actually denies the claim on the ground of suicide that Mrs. Frazier can actually ascertain whether or not [the insurer] has acted in bad faith.   So long as [the insurer] continues to tell Mrs. Frazier they are trying to uncover new evidence, they have not committed an ultimate act of bad faith, and Mrs. Frazier has a right to rely upon their assurances.”  (Id. at pp. 103–104, 214 Cal.Rptr. 883.)

Farmers contends the rule enunciated in Murphy and followed by Frazier has subsequently been rejected by other courts.   This contention seriously misstates the holdings of these subsequent cases.

The first case Farmers claims rejected the Murphy rule is C & H Foods Co. v. Hartford Ins. Co. (1984) 163 Cal.App.3d 1055, 211 Cal.Rptr. 765.   In C & H, plaintiffs sued their insurer for bad faith for denying coverage.   The insurance policy contained a one-year limitation provision similar to that found here.   Plaintiffs failed to even notify their insurer of the loss until after the one-year period expired.   The trial court sustained the insurer's demurrer and the Court of Appeal affirmed.

On appeal, the plaintiffs argued their bad faith claim should not be barred under the policy's limitation period.   The court held Murphy did not apply since “there is no question concerning the date of accrual of the causes of action with which we are here concerned, or that the underlying causes of action were not ‘on the policy.’ ”  (Id. at p. 1067, 211 Cal.Rptr. 765.)   The court further held the demurrer was proper as to these causes of action because the plaintiff's failed to state facts which would constitute the cause of action.  (Ibid.)  Thus, the court in C & H never reached the issue of whether the one-year policy limitation period barred the bad faith claims.

The second case upon which Farmers' relies is Abari v. State Farm Fire & Casualty Co. (1988) 205 Cal.App.3d 530, 252 Cal.Rptr. 565.   In Abari, the plaintiff commenced an action against his insurer for, inter alia, insurance bad faith.   The plaintiff's insurance policy contained a one-year limitation period for actions on the policy.   Both the claim and the action were made well after the one-year period.   The trial court sustained the insurer's demurrer and the Court of Appeal affirmed.

The Abari court acknowledged the rule enunciated in Murphy.  (Id. at p. 536, 252 Cal.Rptr. 565.)   However, the court held the rule did not apply since the plaintiff's action was limited to the benefits under the policy.   “Abari's pleading thus reveals his bad faith and unfair practices claims are a transparent attempt to recover on the policy, not withstanding his failure to commence suit within one year of accrual.”  (Ibid., original emphasis.)

The final case, Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal.App.3d 565, 251 Cal.Rptr. 319, is in accord with Abari.   The insured's claim was “fundamentally a claim on the policy and is thus time barred.”  (Id. at p. 575, 251 Cal.Rptr. 319; see California Practice Guide:  Bad Faith (TRG Supp.1989), § 10:37, p. 15.)

If Associates only sought damages recoverable under the policy, we would be inclined to agree with Farmers that the action was one on the policy and, therefore, subject to the policy's one-year limitation period.   However, it has sought more.

In addition to benefits under the policy, Associates seeks to recover damages incurred because of Farmers' alleged bad faith including attorney's fees and damages resulting from the foreclosure on the property, loss of credit, interest on money borrowed and emotional distress.   These damages would not be ordinarily available if Associates was suing on the policy.  (See Brandt v. Superior Court (1985) 37 Cal.3d 813, 817, 210 Cal.Rptr. 211, 693 P.2d 796;  Merlo v. Standard Life & Accident Ins. Co. (1976) 59 Cal.App.3d 5, 16, 130 Cal.Rptr. 416;  Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 580, 108 Cal.Rptr. 480, 510 P.2d 1032;  Frazier v. Metropolitan Life Ins. Co., supra, 169 Cal.App.3d at pp. 103–104, 214 Cal.Rptr. 883 [plaintiff recovered damages for policy benefits, emotional distress and punitive damages].)   Accordingly, the bad faith action is not subject to the policy's one-year limitation.3


 Farmers argues in the alternative that summary judgment was properbecause Associates lost any right to the proceeds under the policy when it purchased the insured property with a full credit bid.   On this issue we agree with respondent, Farmers.

As Farmers correctly argues, a full credit bid by a mortgagee at a nonjudicial foreclosure sale extinguishes the mortgagee's rights to any insurance proceeds payable for damage to a property.  (Cornelison v. Kornbluth, supra, 15 Cal.3d at p. 606, 125 Cal.Rptr. 557, 542 P.2d 981.)   Farmers is also correct that if the insurer properly concludes there is no coverage under the policy, it cannot be held liable for bad faith.  (See Suarez v. Life Ins. Co. of North America (1988) 206 Cal.App.3d 1396, 1407, 254 Cal.Rptr. 377;  Kopczynski v. Prudential Ins. Co. (1985) 164 Cal.App.3d 846, 849, 211 Cal.Rptr. 12.)

Farmers provided the trial court with competent evidence that Associates made a full credit bid at the foreclosure sale.   Mr. Wurst's letter admits a bid was made at the foreclosure sale in the full amount of the indebtedness owing Associates.   Further, the trust deed following foreclosure indicates the property was conveyed to Associates in consideration of the full amount of the indebtedness.

Associates claims in its Statement of Facts that no bids were received at the foreclosure sale and cites to the declaration of one of its vice-presidents, Sonny Hastings.   We examine that declaration now to determine whether it is sufficient to create a triable issue of fact.

It is well-settled a declaration in support or opposition of a motion for summary judgment must demonstrate the personal knowledge of the declarant.  (Code Civ.Proc., § 437c, subd. (d);  Cullincini v. Deming (1975) 53 Cal.App.3d 908, 914, 126 Cal.Rptr. 427;  Snider v. Snider, supra, 200 Cal.App.2d at pp. 753–754, 126 Cal.Rptr. 427;  see 3 California Practice Guide:  Civil Procedure Before Trial (TRG 1989), § 10:53, pp. 10–18—10–19.)   The bare statement alone claims the affiant has personal knowledge of the facts set forth in the declaration is insufficient to establish personal knowledge.  (Snider v. Snider, supra, 200 Cal.App.2d at p. 753–754, 126 Cal.Rptr. 427.)

Here, Mr. Hastings's declaration is bereft of any facts which would indicate his personal knowledge of what occurred at the foreclosure sale.   He does not indicate he was present at the sale or that he has any relationship with the foreclosure proceedings or the foreclosed property.   Further, there is no evidence he was even employed by Associates at the time of the sale or that he has reviewed company records which would disclose what occurred.   Since Farmers timely objected to this declaration on the basis of lack of personal knowledge, it should not have been considered by the trial court.

Absent any competent evidence to controvert Farmers' evidence concerning Associates' purchase of the insured property, there is no triable issue of fact that Associates' right to the insurance proceeds was extinguished.   Accordingly, Farmers' properly concluded there was no coverage under the policy and its denial of Associates' claim cannot be deemed bad faith.

We note Associates argued below Farmers should not be permitted to benefit from Associates' purchase of the insured property since the foreclosure resulted from Farmers' bad faith.   This argument is incorrect for two reasons.

First, the mortgagor was in default and Associates commenced foreclosure proceedings well before the fire occurred.   Second, even if Farmers somehow contributed to the foreclosure proceedings, Associates was under no obligation to make a full credit bid at the foreclosure sale.   To the contrary, it would have been in Associates' interest not to make a full credit bid to permit it to recover from the insurance proceeds.

As the Supreme Court explained in Cornelison v. Kornbluth, supra, 15 Cal.3d at p. 607, 125 Cal.Rptr. 557, 542 P.2d 981, “[a]t the nonjudicial foreclosure sale, the beneficiary is entitled to make a credit bid up to the amount of his indebtedness, since it would be useless to require him to tender cash which would only be immediately returned to him.  [Citation.]  However, the mortgagee is not required to open the bidding with a full credit bid, but may bid whatever amount he thinks the property is worth.   Indeed, ‘many creditors continually enter low credit bids ․ to provide access to additional security or additional funds.’   ․ ‘In such a case, a deficiency balance of the debt would have remained for which [the mortgagee] would have had an entitlement out of the insurance policy.   The extinguishment of the mortgage or deed of trust by the foreclose would not have affected [the mortgagee's] right to be paid the remainder of the debt under the policy.’ ”   (Citations omitted;  accord 4 Miller & Starr, California Real Estate (2d ed.1989), Deeds of Trust and Mortgages, § 9.149, p. 492.)

Despite the prejudice to its own interests, the uncontroverted evidence establishes Associates' extinguished its right to coverage under the insurance policy when it made a full credit bid at the foreclosure sale.   Since there was no coverage under the insurance policy, Farmers cannot be held liable for bad faith.   The judgment is therefore affirmed.


The judgment is affirmed.   Respondent is to recover its costs on appeal.


1.   Neither party chose to designate Farmers' separate statement of undisputed facts or reply to Associates' opposition to motion for summary judgment in the clerk's transcript.   Since the documents are crucial to the disposition of this appeal, the Court has taken judicial notice of the superior court file in this case pursuant to Evidence Code section 452.

2.   Farmers subsequently moved this Court to dismiss the appeal claiming the trial court, on its own motion, vacated the judgment on August 29, 1989.   However, a superior court is divested of jurisdiction upon the filing of a notice of appeal and cannot vacate a judgment which is valid on its face.  (See Takahashi v. Fish & Game Com. (1947) 30 Cal.2d 719, 725, 185 P.2d 805, rev'd on other grounds, 334 U.S. 410, 68 S.Ct. 1138, 92 L.Ed. 1478 [“An appeal removes from the jurisdiction of the trial court the subject matter of the judgment or order appealed from, including all issues going to the validity or correctness of such judgment or order.   The trial court has no power thereafter to amend or correct the judgment or order, or to vacate or to set it aside];  Linstead v. Superior Court (1936) 17 Cal.App.2d 9, 12, 61 P.2d 355;  Foggy v. Ralph F. Clark & Associates, Inc. (1987) 192 Cal.App.3d 1204, 1211, 238 Cal.Rptr. 130;  Code Civ.Proc., § 916;  see generally 9 Witkin, Cal. Procedure (3d ed.1985), Appeal, § 6, pp. 36–37 and cases cited therein.)   Since there is no dispute the judgment is valid on its face, the trial court lacked the jurisdiction to vacate the judgment.   We therefore deny Farmers' motion to dismiss.

3.   Farmers argues Associates should not have waited until the claim was denied to file its action for bad faith.   This argument is contrary to Farmers' own interests.   To require a party to sue its own insurer for bad faith before there is any evidence that such bad faith has occurred will only encourage potentially meritless actions and force insurers to incur needless costs defending against these premature claims.  (See Frazier v. Metropolitan Life Ins. Co., supra, 169 Cal.App.3d at pp. 103–104, 214 Cal.Rptr. 883.)

JOHNSON, Associate Justice.

LILLIE, P.J., and WOODS, J., concur.

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