BANK OF SAN DIEGO v. COMMONWEALTH LAND TITLE INSURANCE COMPANY

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Court of Appeal, Fourth District, Division 1, California.

BANK OF SAN DIEGO, Plaintiff, Cross–Defendant and Appellant, v. COMMONWEALTH LAND TITLE INSURANCE COMPANY, Defendant, Cross–Complainant and Respondent.

No. D012068.

Decided: May 31, 1991

Sullivan, Hill, Lewin & Markham, David R. Markham, D. Scott Macrae and Stephen B. Morris, San Diego, for plaintiff, cross-defendant and appellant. Gold, Marks, Ring & Pepper, Stephen D. Marks, Elliot L. Shelton and Lee W. Potts, Los Angeles, for defendant, cross-complainant and respondent.

Plaintiff Bank of San Diego appeals a summary judgment in favor of defendant Commonwealth Land Title Insurance Company on the Bank's complaint and Commonwealth's cross-complaint.   We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

I

This litigation has its origin in the Bank's extension of substantial lines of credit to R.J. Carroll.   By August, 1985 the Bank was becoming increasingly nervous over Carroll's deteriorating performance on his unsecured loans which by then were in excess of $1,000,000.   In December 1985 a Bank vice-president articulated this concern in an interoffice memo that the “uncollateralized structure of $1,000,000 and [Carroll's] recent slippage in performance” required a cash flow budget for review and detailed analysis.   By the end of that month another Bank interoffice memo emphasized that in no circumstances should the Bank honor Carroll's overdrafts.

Notwithstanding these developments, in early 1986 the Bank extended a new advance of $150,000 to Carroll but insisted that it be secured by a trust deed recorded on February 14.   Shortly thereafter, in an effort to reduce its potential loss on the existing loans, the Bank restructured Carroll's unsecured lines of credit with Carroll delivering two trust deeds dated February 27, 1986, and recorded on March 5, 1986, as security for preexisting lines of credit of $350,000 and $500,000 (the March 5 trust deeds).   The Bank recognized, however, that in spite of this collateral, collection of the debt remained in jeopardy.   An internal credit memorandum commented that “recent events leave repayment source less than certain.   Downgrade given pending a clear resolution of this situation.”   When the transaction was reported to the Bank's directors' loan committee, it warned, “continue to watch these loans carefully.”

The Bank obtained ALTA policies 1 of title insurance on the trust deeds from Commonwealth through Union Land Title Company.   The Bank failed to disclose to Commonwealth any of the circumstances surrounding the trust deeds or its concern with Carroll's precarious financial position.   In addition, Commonwealth knew neither that deeds of trust secured antecedent indebtedness nor of Carroll's financial condition.

II

On May 7, 1986, Carroll filed a Chapter 11 bankruptcy petition.   On April 14, 1988, the Bank commenced an adversary proceeding against Carroll in the bankruptcy court to declare the March 5 trust deeds and an earlier, February 14, 1986, trust deed valid and not preferential.   The February 14, 1986, trust deed was given to the Bank to secure a new advance of $150,000.   Carroll responded by filing a counterclaim to avoid the trust deeds under section 547 2 of the Bankruptcy Code, alleging they were given for or on account of antecedent debt.3

After filing the adversary action the Bank requested Commonwealth defend the liens of the three trust deeds or indemnify it for any loss incurred if the liens were set aside.   Commonwealth declined to do so.

In a summary judgment proceeding the bankruptcy court held the February 12, 1986, trust deed was not voidable as a preference because it was given for contemporaneous and reasonably equivalent value.   The bankruptcy court also ruled that Carroll's financial statement on which the Bank relied in continuing to extend credit showed sufficient net worth to rebut the statutory presumption of insolvency.   Before trial the case was settled with the Bank allegedly suffering a loss in excess of $600,000.

The Bank then filed this action seeking declaratory relief and for damages alleging violations of the Insurance Code, breach of contract, bad faith and negligence.   Commonwealth cross-complained to rescind the policies based on the Bank's failure to disclose material facts affecting the risk insured by the policies.   After Commonwealth successfully moved for summary judgment on the complaint and on the cross-complaint, the Bank appealed.

DISCUSSION

ITHE COURT ACTED WITHIN ITS DISCRETION IN DENYING THE BANK'S REQUEST FOR A CONTINUANCE

 Before reaching the merits of the Bank's contentions, we first address and reject the Bank's claim that the court prejudicially erred in denying its request for a continuance to complete the discovery.   The Bank asked for additional time to inquire on Commonwealth's prior business practices involving issuing title policies insuring liens securing antecedent debt—a matter bearing on the materiality of the Bank's nondisclosure of the fact the March 5 trust deeds secured antecedent debt.

Code of Civil Procedure section 437c, subdivision (h), provides:  “If it appears from the affidavits submitted in opposition to a motion for summary judgment or summary adjudication or both that facts essential to justify opposition may exist but cannot, for reasons stated, then be presented, the court shall deny the motion, or order a continuance to permit affidavits to be obtained or discovery to be had or may make any other order as may be just.”

“Generally, power to determine when a continuance should be granted is within the discretion of the court, and there is no right to a continuance as a matter of law.  [Citation.]   However, Code of Civil Procedure section 437c mandates a continuance of a summary judgment hearing upon a good faith showing by affidavit that a continuance is needed to obtain facts essential to justify opposition to the motion.”  (Fisher v. Larsen (1982) 138 Cal.App.3d 627, 648, 188 Cal.Rptr. 216;  see also American Continental Ins. Co. v. C & Z Timber Co. (1987) 195 Cal.App.3d 1271, 1280, 241 Cal.Rptr. 466.)

Here the Bank presented its counsel's declaration asserting the Bank needed to complete the depositions of Commonwealth's agents Tussman, Morganroth and Rapp.   Counsel also asserted the need to “take one or two other depositions before opposing the summary judgment” and “to serve written discovery to obtain evidence concerning the issues raised by Commonwealth in its motion.”

Counsel's declaration, however, failed to adequately explain why any necessary discovery could not have been completed earlier.  (American Continental Ins. Co. v. C & Z Timber Co. supra, at p. 1280, 241 Cal.Rptr. 466;  Fisher v. Larsen, supra, 138 Cal.App.3d at p. 648, 188 Cal.Rptr. 216.)

As early as mid–1988 the Bank was aware of the controverted issue—later raised in Commonwealth's summary judgment motion—of the materiality of the nondisclosed fact the March 5 trust deeds secured antecedent debt.   In April and May 1988 the Bank learned Commonwealth contended the Bank's claims were excluded under the policies.   In its complaint filed in June 1988, the Bank specifically alleged if an applicant told Commonwealth a trust deed secured a note given for antecedent debt such information would not influence Commonwealth's decision whether to issue a policy or change policy premiums or language.   Depositions were taken in August and September 1988.   Except for the deposition of Commonwealth's agent Depta in February 1989, no action was taken to complete those depositions.   Until Commonwealth filed its summary judgment motion in January 1990, the only other discovery after September 1988 was a set of interrogatories and document discovery served by the Bank.   Thus, despite ample time to conduct discovery on the issue of Commonwealth's prior practices, the Bank did not avail itself of that opportunity.4

 A court does not abuse its discretion in denying a continuance to permit further discovery where the action has been pending a long time and extensive discovery has already been conducted.  (Fisher v. Larsen, supra, 138 Cal.App.3d 627, 188 Cal.Rptr. 216.)   In the circumstances here, the court properly denied the Bank's request for continuance.

II

SUMMARY JUDGMENT WAS PROPERLY GRANTED

Commonwealth took a two-pronged tactical approach to summarily resolve the Bank's claims directed to both the Bank's complaint and Commonwealth's cross-complaint.   The theory underlying Commonwealth's motion for summary judgment on the Bank's complaint was that the title insurance policies did not afford coverage for preferential transfers.   The basis for its motion on the cross-complaint was that Commonwealth was entitled to rescind the policies because the Bank failed to disclose material facts relating to the events surrounding the trust deeds in violation of the Bank's obligation under Insurance Code section 332.5

Although we fully understand the practicality underlying Commonwealth's dual approach, it nonetheless created the potential for, and ultimately resulted in, a conceptually inconsistent judgment.   Implicit in the court's conclusion that rescission was appropriate was its finding the Bank failed to disclose facts which were material.   However, the facts surrounding the circumstances of the Bank's receipt of the trust deeds were material only if the title policies provided coverage for losses resulting from preferential transfers.   Absent coverage the allegedly material facts are irrelevant involving matters extraneous to the risks covered by the policies.   In the interest of brevity, therefore, we focus primarily on Commonwealth's cross-complaint for rescission with its implicit concession of coverage.

A

STANDARD OF REVIEW

The purpose of summary judgment is to penetrate the language of pleadings to determine whether there are triable issues of material fact.  (Coyne v. Krempels (1950) 36 Cal.2d 257, 262–263, 223 P.2d 244.)   Through affidavits, declarations and information obtained through the discovery process (Code of Civ.Proc., § 437c, subd. (b)) the court must determine whether the parties possess evidence requiring the weighing procedures of trial.  (D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1, 20, 112 Cal.Rptr. 786, 520 P.2d 10.)   Consistent with the concern that a party's right to trial not be summarily resolved, a court must construe the affidavits of the moving party strictly and those of the opposing party liberally.  (Chern v. Bank of America (1976) 15 Cal.3d 866, 873, 127 Cal.Rptr. 110, 544 P.2d 1310.)   Consequently, summary judgment is proper only where the affidavits in support of the moving party are sufficient to sustain a judgment in that party's favor and where the opposing party does not by affidavit or declaration show facts which present a triable issue.  (Stationers Corp. v. Dun & Bradstreet, Inc. (1965) 62 Cal.2d 412, 417, 42 Cal.Rptr. 449, 398 P.2d 785.)   Because the trial court's determination is one of law based on the papers submitted, we have the responsibility to independently determine the construction and effect of those papers.  (Wagner v. Glendale Adventist Medical Center (1989) 216 Cal.App.3d 1379, 1385, 265 Cal.Rptr. 412.)

B

AN INSURED'S DUTY TO DISCLOSE MATERIAL INFORMATION1.THE MARCH 5 TRUST DEEDS

 Commonwealth correctly explains that an insured must inform an insurer of pertinent information regarding the risks for which the insured requests coverage.  Insurance Code section 332 provides:  “Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.”   Where the insured conceals material information, whether intentionally or unintentionally, the insurer is entitled to rescind the insurance.  (Ins.Code, § 331.)   Concealment is defined in Insurance Code section 330 as “[n]eglect to communicate that which a party knows, and ought to communicate ․”   Because the grounds for avoidance of an insurance policy based on misrepresentation or concealment must be with respect to a material fact, materiality is determined by the probable and reasonable effect that truthful disclosure would have had upon the insurer in determining the advantages of the proposed contract.  (Ins.Code, §§ 334, 360;  Holz Rubber Co., Inc. v. American Star Ins. Co. (1975) 14 Cal.3d 45, 61, 120 Cal.Rptr. 415, 533 P.2d 1055.)

 Here, the record clearly established that the Bank's failure to disclose the existence of an antecedent debt constituted concealment of a fact which Commonwealth considered material to its underwriting decision.   Disclosure of the existence of Carroll's antecedent debt with the Bank would have resulted in a determination not to issue the policies.   Union Land Title agents Depta and Rapp stated if the existence of the antecedent debt had been disclosed they would have not written the insurance but instead would have referred the matter to the underwriters, management or legal counsel because antecedent debt fell into the category of unusual risk.   Commonwealth's regional underwriting counsel Hunter stated Commonwealth would not have underwritten the risk if it had been told and confirmed the March 5 trust deed secured antecedent debt because liens securing antecedent debt are subject to avoidance as preferences in bankruptcy.   Morganroth, Commonwealth's vice-president and counsel for the past 13 or 14 years stated several banks had asked Commonwealth to issue policies on liens securing antecedent debt but he did not remember a single case where Commonwealth agreed to issue a policy after it was disclosed the lien secured such debt.   Thus Commonwealth's evidence clearly showed the existence of antecedent debt was material to its decision to issue a title insurance policy.

 Our conclusion that the information surrounding the circumstances of Carroll's delivery to the bank of the two March 5 trust deeds was material to Commonwealth, however, does not end our inquiry.  Insurance Code section 332 expressly requires that the insured must also know or believe that the facts are material to the contract.   Thus an applicant for insurance is not required to furnish information even though material to the insurer where the applicant neither subjectively nor objectively appreciates the significance of such information.  (See Thompson v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, 916, 109 Cal.Rptr. 473, 513 P.2d 353.)   Consequently, Commonwealth's burden was not merely to establish the information which the Bank failed to disclose was material to Commonwealth's underwriting decision, but was also required to resolve as being undisputed the Bank knew or had reason to believe the facts surrounding collateralizing Carroll's debts affected that decision.   Here Commonwealth satisfied that burden.

Elliot L. Shelton's reply declaration filed under seal pursuant to the court's order regarding confidentiality of discovery materials refers to certain of the Bank's internal memoranda and credit policies.   In light of the trial court's order regarding confidentiality and the parties' awareness of the contents of the documents to which we refer, it is sufficient to state that those documents clearly establish the Bank was well aware of the risks associated with restructuring loans and the potential challenges to such transactions in the bankruptcy court if the debtor later voluntary invoked the jurisdiction of that court or was involuntary placed there by other creditors.   The information contained in Shelton's reply declaration is not surprising since we would assume that banks and/or other institutions regularly extending credit would have sufficient understanding of the bankruptcy laws to appreciate that transmuting the status of an unsecured debtor to secured in circumstances where the debtor is in admittedly precarious financial straits would create problems in the event of the debtor's later bankruptcy.   We therefore hold that Commonwealth satisfied its burden establishing without factual dispute that the information the Bank failed to disclose was material to Commonwealth and the Bank was aware of that materiality.

 Our conclusion that Commonwealth was entitled to summary judgment on its cross-complaint to rescind the policies issued on the March 5 trust deeds reflects our rejection of the Bank's assertion that absent inquiry by the insurer the concealment by the insured must be intentional and fraudulent.   It is well-established that actual intent to deceive need not be shown.   (Thompson v. Occidental Life Ins. Co., supra, 9 Cal.3d 904, 916, 109 Cal.Rptr. 473, 513 P.2d 353;  Newman v. Fireman's Ins. Co. (1944) 67 Cal.App.2d 386, 392, 154 P.2d 451.)   Commonwealth was entitled to rescind the policies whether the Bank's concealment of a material fact was intentional or unintentional (Ins.Code, §§ 330–331) provided, as was established here, the Bank appreciated the importance of the facts preceding its acceptance of the trust deeds.   The trial court therefore properly granted summary judgment on Commonwealth's cross-complaint permitting rescission of the two March 5 trust deeds.

2.

THE FEBRUARY 14 TRUST DEED

 A somewhat different analysis is necessary with respect to the February 14 trust deed because that trust deed was not delivered to secure an antecedent debt.   Obviously with this factual/legal difference Commonwealth could not rescind because of the Bank's failure to disclose information material to a potential preferential transfer.   Accordingly, Commonwealth redirected its attack to the Bank's concealment of information pertaining to Carroll's “dubious” financial condition, a matter which it was unable to show was material to Commonwealth's issuance of the policy insuring that trust deed.   Therefore, the court erred in permitting rescission as to that policy.   This error, however, has little if any practical consequence in light of our conclusion that there was no potential for coverage under the policy insuring the February 14 trust deed.

Putting aside the provisions of this policy and whether facially its terms provide coverage for losses resulting from preferential transfers, our earlier discussion explains it is undisputed on this record that it was Commonwealth's practice not to issue title policies covering preferential transfers.   Here the debtor's complaint in the bankruptcy proceeding alleged the February 14 trust deed was a preference to secure an antecedent debt.   If, as the debtor alleged, the February 14 trust deed was given for antecedent debt, the Bank would have been under an obligation to disclose that fact with Commonwealth refusing to issue a policy covering that risk.   Absent an issued policy covering a loss claimed by the insured, Commonwealth would be obligated neither to indemnify nor defend.   The fact that the debtor's claim against the Bank to set aside the February 14 trust deed may have been groundless does not impose a greater duty than if the debtor's claim had merit.   Thus Commonwealth acted properly in rejecting the Bank's demand that it indemnify and defend the action attempting to set aside the trust deed as a preferential transfer.

III

COMMONWEALTH DID NOT HAVE A DUTY TO DEFEND

 It is well settled that the duty to defend is broader than the duty to indemnify.  (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 274, 54 Cal.Rptr. 104, 419 P.2d 168.)   In spite of the breadth of the insurer's responsibility it has no such duty where there is no potential for coverage.   (Jaffe v. Cranford Ins. Co. (1985) 168 Cal.App.3d 930, 934, 214 Cal.Rptr. 567.)   Since, as we have explained, two of the policies were rescinded and the other would not have included a provision covering the asserted loss in bankruptcy, Commonwealth was not obligated to provide a defense to the Bank.   (Barczewski v. Commonwealth Land Title Ins. Co. (1989) 210 Cal.App.3d 406, 413, 258 Cal.Rptr. 386.)

IV

CONCLUSION

As we have explained, the trial court judgment included mutually inconsistent findings that (1) there was no coverage under the policy, and (2) the Bank failed to disclose material information, entitling Commonwealth to rescind the policy.   As to the March 5 trust deeds, we have assumed arguendo that the policy provided coverage and concluded the judgment must be affirmed because the undisputed facts show the Bank failed to disclose material information which allows Commonwealth to rescind.   As to the February 14 trust deed, we have similarly assumed the theoretical possibility of coverage under the policy but concluded there was no actual possibility giving rise to a duty to defend because if the trust deed was not given for antecedent debt—as the bankruptcy court found—there was no loss;  if it was given for antecedent debt, Commonwealth would have been entitled to rescission for the same reasons as the March 5 trust deeds.

Having assumed but not decided the coverage issue, we are nonetheless obligated to affirm the judgment if it was correct for any reason.  (D'Amico v. Board of Medical Examiners, supra, 11 Cal.3d 1, 19, 112 Cal.Rptr. 786, 520 P.2d 10.)   We therefore affirm.

DISPOSITION

Judgment affirmed.

FOOTNOTES

1.   In light of the limited nature of our opinion we find it unnecessary to discuss whether the ALTA policies in issue here have broader or different coverage for preferential transfers than a CLTA standard coverage policy.

2.   11 United States Code section 547(b) provides:“Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—“(1) to or for the benefit of a creditor;“(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;“(3) made while the debtor was insolvent;“(4) made—“(A) on or within 90 days before the date of the filing of the petition;  or“(B) between ninety days and one year before the date of the filing of the petition if such creditor at the time of such transfer was an insider;  and“(5) that enables such creditor to receive more than such creditor would receive if—“(A) the case were a case under chapter 7 of this title;“(B) the transfer had not been made;  and“(C) such creditor received payment of such debt to the extent provided by the provisions of this title.”

3.   In the summary judgment proceedings in the underlying action the Bank admits the February trust deed was not given for an antecedent debt but concedes the March 5 trust deeds were given for antecedent debt.

4.   We also note in April 1989 before trial setting, the Bank stated in the joint at issue memorandum discovery would be completed by July 6, 1989.   In May 1989 the court set trial for August 20, 1990.

5.   Insurance Code section 332 provides:“Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.”

WIENER, Associate Justice.

KREMER, P.J., and NARES, J., concur.