Filed 7/16/15; pub. order 8/14/15 (see end of opn.)

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

FIRST AMERICAN TITLE INSURANCE D067137

COMPANY,

Plaintiff and Respondent, (Super. Ct. No. INC1104681) v.

SPANISH INN, INC. et al.,

Defendants and Appellants.

APPEAL from a judgment of the Superior Court of Riverside County, John G.

Evans, Judge. Affirmed.

Law Offices of Nejat Kohan, Inc., and Nejat Kohan, for Defendants and

Appellants.

Law Offices of Hall & Bailey, John L. Bailey, Barbara M. Moore; and William D.

Cloud for Plaintiff and Respondent.

This is one of many appeals arising from litigation over the renovation of a hotel

property in Palm Springs. In this appeal, the project's developers challenge the trial

court's grant of summary adjudication in favor of the title insurer, which sought contractual indemnity from the developers for legal expenses incurred in defending the

project's construction lender against mechanic's lien foreclosure actions. The developers

contend the trial court erred because triable issues of fact exist regarding whether the

mechanic's lien claims were covered by the title policy and regarding the amount of the

title insurer's damages. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Defendants Spanish Inn, Inc. (Spanish Inn), Hormoz Ramy, and Nejat Kohan

owned or otherwise held an interest in the Spanish Inn Hotel property in Palm Springs.

In order to renovate and rehabilitate the property, Spanish Inn borrowed $6 million from

Nara Bank under a written construction loan agreement. To secure the loan, Nara Bank

recorded a construction deed of trust against the property. To protect its construction

deed of trust, Nara Bank required that Spanish Inn procure a lender's title insurance

policy to protect against loss resulting from mechanic's liens. First American Title

Insurance Company (First American) issued the policy. Before it would do so, however,

First American required that defendants agree to indemnify it if any mechanic's liens

were recorded against the property due to the contractor's or the owners' failure to pay for

work furnished to the project. Accordingly, defendants and First American entered into a

written "Indemnity Agreement I (Mechanic's Liens)" (the Indemnity Agreement).

Major modifications to the project caused its budget to increase and timeline to

expand. Nara Bank agreed to lend an additional $1.3 million to Spanish Inn, but required

that Hormoz and Ramy also contribute an additional $300,000 to the project.

2 After Spanish Inn missed the completion deadline under the construction loan

agreement, Nara Bank declared the loan to be in default. Kohan, who also served as the

project's contractor, recorded a mechanic's lien against the property for $800,000.

Subcontractor J.H. Thompson & Sons, Inc. (Thompson) also recorded a mechanic's lien

against the property for approximately $85,000.

Nara Bank assigned its construction deed of trust to Pacifica L 39 LLC (Pacifica),

which later purchased the property at a nonjudicial foreclosure sale. It is undisputed that

Pacifica, as Nara Bank's successor, is an insured under the title policy.

Kohan and Thompson each filed lawsuits to foreclose on their mechanic's liens.

Pacifica tendered those claims to First American, which accepted the tender. First

American then retained counsel to defend against the foreclosure actions and to seek

indemnity from defendants under the Indemnity Agreement. First American's counsel

made a written demand under the Indemnity Agreement that defendants defend Pacifica

against the mechanic's lien foreclosure actions, obtain releases of the mechanic's liens,

and indemnify First American for all costs and fees incurred in connection with the

mechanic's liens. Defendants declined.

First American then sued defendants for express indemnity, breach of contract,

and specific performance. It later moved for summary adjudication of the first two

claims. First American sought damages of $250,876.53, which consisted of $207,119.58

in costs and attorney fees incurred in defending against the mechanic's lien foreclosure

actions and in seeking indemnity from defendants; $20,950 that First American paid to

settle with Thompson; plus 10 percent interest on the total.

3 Defendants opposed the motion on two grounds. First, they argued that the claim

arising from Kohan's mechanic's lien fell within an exclusion from coverage in the title

policy for "liens . . . created, suffered, assumed or agreed to by the insured claimant"

(Exclusion 3(a)). Defendants asserted that Nara Bank, as the predecessor-in-interest to

the insured claimant (Pacifica), "created" the mechanic's lien "by failing to provide the

full loan amount it contracted to provide." This caused Spanish Inn to default on the

loan, which, in turn, caused Kohan to record his mechanic's lien. Thus, defendants

reasoned, Nara Bank created the mechanic's lien, which placed the lien squarely within

Exclusion 3(a), which excused First American from defending against it, which, in turn,

excused defendants from indemnifying First American. Second, defendants argued that

triable issues of fact existed regarding the amount of First American's damages.

The trial court granted First American's motion. The court ruled that defendants

had not presented admissible evidence sufficient to create a triable issue of fact regarding

whether Kohan's mechanic's lien fell within Exclusion 3(a) because "the only evidence

offered by Defendants is the declaration of NEJAT KOHAN, which is a factual narrative

of Defendants' dealing with Nara Bank and a legal conclusion that Nara Bank

intentionally failed to disburse the funds for Defendants to pay for the completion of the

work needed to obtain a certificate of occupancy by the specified date in order to cause

Defendants' default, and, that the declaration is argument and not based upon facts that

show that Nara Bank's failure to disburse funds was wrongful."

4 The trial court also found that defendants had not raised a triable issue of fact

regarding damages. First, the court found First American had submitted evidence to

support the legal expense component of its claim, which shifted the burden to defendants

to present evidence that created a triable issue of fact regarding the reasonableness of that

component. The court found that defendants failed to satisfy this burden. Second, the

court ruled that defendants' challenge to the reasonableness of the Thompson settlement

amount "does not create a triable issue because the validity of the [Thompson] lien claim

and the amount indisputably paid in settlement are not relevant to the issues on [First

American]'s Motion." The court granted First American's motion to dismiss the

remaining cause of action for specific performance and entered judgment in favor of First

American.

Defendants timely appealed.

DISCUSSION

Defendants contend the trial court erred by granting summary adjudication of First

American's claims because triable issues of fact existed regarding (1) whether Kohan's

mechanic's lien claim fell within Exclusion 3(a), and (2) the reasonableness of First

American's damages.

A. Standard of Review

"On appeal from a ruling on a motion for summary judgment, the appellate court

conducts its own independent review of the moving and opposition papers and applies the

same standard as the trial court in determining whether the motion was properly granted.

The appellate court is not bound by the trial court's stated reasons for its ruling on the

5 motion, as the appellate court reviews only the ruling and not its rationale." (Bed, Bath &

Beyond of La Jolla, Inc. v. La Jolla Village Square Venture Partners (1997) 52

Cal.App.4th 867, 873.)

B. Indemnity Framework

Indemnity is " 'the obligation resting on one party to make good a loss or damage

another party has incurred.' " (McCrary Construction Co. v. Metal Deck Specialists, Inc.

(2005) 133 Cal.App.4th 1528, 1536 (McCrary).) "Parties to a contract . . . may define

therein their duties toward one another in the event of a third party claim against one or

both arising out of their relationship." (Crawford v. Weather Shield Mfg. Inc. (2008) 44

Cal.4th 541, 551.) In general, an indemnity agreement "is construed under the same rules

as govern the interpretation of other contracts. Effect is to be given to the parties' mutual

intent [citation], as ascertained from the contract's language if it is clear and explicit

[citation]. Unless the parties have indicated a special meaning, the contract's words are to

be understood in their ordinary and popular sense." (Id. at p. 552.)

We review de novo the trial court's interpretation of the Indemnity Agreement

" 'unless the interpretation turns upon the credibility of extrinsic evidence.' " (McCrary,

supra, 133 Cal.App.4th at p. 1535.)

C. Analysis

In a contractual indemnity action in which the indemnitee settles the underlying

liability without trial, "the indemnitee must prove that liability is covered by the contract,

that liability existed, and the extent thereof." (Peter Culley & Assocs. v. Superior Court

(1992) 10 Cal.App.4th 1484, 1497, 1498 (Culley).)

6 Defendants do not appear to contest that First American's indemnity claim "is

covered by the contract" (Culley, supra, 10 Cal.App.4th at p. 1497); that is, that the

nature of First American's claim is within the scope of those covered by the Indemnity

Agreement.

The determination of whether "liability existed" (Culley, supra, 10 Cal.App.4th at

p. 1497) depends on whether the lien claims tendered to First American were covered by

the title policy. We conclude they were, though for a different reason than the trial court

cited. That is, instead of interpreting Exclusion 3(a), we need only interpret the

Indemnity Agreement.

The Indemnity Agreement expressly gave First American the right to conclusively

determine coverage under the title policy:

"5.6 Determination of Coverage. Any determination of coverage by First American shall be conclusive evidence that the matter is within the Title Policy coverage as to the Mechanic Liens for purposes of this Agreement."

First American determined that the tendered claims were covered by the title policy.

Therefore, regardless of whether Exclusion 3(a) would otherwise have excluded coverage

for Kohan's lien, or whether defendants' factual defenses would otherwise have precluded

coverage for Thompson's lien, First American was expressly authorized to—and did—

7 find that the tendered claims were "within the Title Policy." Thus, First American

established that "liability existed."1 (Culley, supra, 10 Cal.App.4th at p. 1498.)

Defendants argue that under the implied covenant of good faith and fair dealing,

"the provision of the policy giving First American the unfettered right to determine

whether an exclusion applies may not be enforced against Spanish Inn." We disagree.

"[A]lthough it has been said the implied covenant finds 'particular application in

situations where one party is invested with a discretionary power affecting the rights of

another' [citations], if the express purpose of the contract is to grant unfettered discretion,

and the contract is otherwise supported by adequate consideration, then the conduct is, by

definition, within the reasonable expectation of the parties and 'can never violate an

implied covenant of good faith and fair dealing.' " (Wolf v. Walt Disney Pictures &

Television (2008) 162 Cal.App.4th 1107, 1120-1121; Third Story Music, Inc. v. Waits

(1995) 41 Cal.App.4th 798, 808 (Waits) ["courts are not at liberty to imply a covenant

directly at odds with a contract's express grant of discretionary power except in those

relatively rare instances when reading the provision literally would, contrary to the

parties' clear intention, result in an unenforceable, illusory agreement."].)

Applying this principle, federal courts in California have rejected implied-

covenant challenges to provisions in indemnity agreements similar to the one here.

(Travelers Cas. and Sur. Co. of America v. Highland Partnership, Inc. (S.D. Cal., Nov.

1 It is, therefore, unnecessary for us to address First American's evidentiary objections to Kohan's declaration, which relate only to facts regarding whether Nara Bank's conduct brought Kohan's mechanic's lien within Exclusion 3(a).

8 26, 2012, 10CV2503 AJB DHB) 2012 WL 5928139, at *7; Travelers Cas. and Sur. Co.

of America v. Dunmore (E.D. Cal., Dec. 4, 2014, 2:07-CV-02493 TLN) 2014 WL

6886004, at *6-7.)2

Defendants imply this is one of "those relatively rare instances when reading the

provision literally would, contrary to the parties' clear intention, result in an

unenforceable, illusory agreement." (Waits, supra, 41 Cal.App.4th at p. 808.) In other

words, without implying a good faith standard on First American's discretionary power,

the Indemnity Agreement would fail for lack of mutuality and consideration. We are not

persuaded. The Indemnity Agreement establishes that First American's rights were

supported by adequate consideration—namely, its issuance of a $6 million title insurance

policy. Defendants acknowledged as much in the Indemnity Agreement. In a paragraph

captioned "estoppel" and printed in italicized, bolded, and all-capitalized typeface, the

Indemnity Agreement specifies that First American's willingness to do so in this case was

riskier than usual:

"Notwithstanding any possible difference in the parity of the parties hereto, Indemnitor understands that First American is undertaking a risk significantly greater than that undertaken in the normal course of providing title insurance policies and related services by entering

2 The provision in those cases provided: "Company shall have the right in its sole discretion, to determine for itself and its indemnitors whether any claim, demand or suit brought against Company or any Indemnitor in connection with or relating to any Bond shall be paid, compromised, settled, tried, defended or appealed, and its determination shall be final, binding and conclusive upon the Indemnitors. Company shall be entitled to immediate reimbursement for any and all Loss incurred under the belief it was necessary or expedient to make such payments." (Travelers Cas. and Sur. Com. of America v. Dunmore, supra, 2014 WL 6886004, at *5; Travelers Cas. and Sur. Co. of America v. Highland Partnership, Inc., supra, 2012 WL 5928139, at *7.)

9 into this agreement and issuing policies of title insurance in reliance on this agreement, and therefore, indemnitor hereby declares its willingness to enter into this agreement and to induce First American to accept this agreement, realizing that Indemnitor's best interest, in the opinion of Indemnitor, is being served thereby."

Therefore, defendants' mutuality and consideration argument fails.

Even if we were to conclude that the implied covenant of good faith and fair

dealing governed First American's discretionary power, defendants still have not pointed

to any evidence that would give rise to a triable issue of material fact regarding First

American's exercise of that right in this case, as required. (Wiz Technology, Inc. v.

Coopers & Lybrand (2003) 106 Cal.App.4th 1, 11 (Wiz) ["To avoid summary judgment,

admissible evidence presented to the trial court, not merely claims or theories, must

reveal a triable, material factual issue."].) That defendants disagree with First American's

conclusive determination does not establish that the determination was reached other than

in good faith.

Finally, we turn to the "extent" of liability. (Culley, supra, 10 Cal.App.4th at

p. 1498.) First American submitted declarations from its in-house senior claims counsel

and its outside counsel, together with outside counsel's billing statements, to establish the

extent of legal expenses it incurred in defending against the mechanic's lien claims and in

seeking indemnity from defendants. Although defendants argued to the trial court that

the "amount claimed for attorneys fees is not reasonable," defendants did not respond to

10 First American's evidence with evidence of their own, as required.3 (Wiz, supra, 106

Cal.App.4th at p. 11; Premier Medical Management Systems, Inc. v. California Ins.

Guarantee Ass'n (2008) 163 Cal.App.4th 550, 563-564 ["Respondents supported their fee

requests with declarations describing the joint defense and the division of labor, with

billing records to establish the hours of work. Appellants had two options to oppose such

a showing: attack the itemized billings with evidence that the fees claimed were not

appropriate, or obtain the declaration of an attorney with expertise in the procedural and

substantive law to demonstrate that the fees claimed were unreasonable. They did

neither."], italics added.)

First American's evidence also established the "extent" of its liability arising from

the settlement of the Thompson lien claim. Defendants' response to First American's

separate statement of undisputed material facts identified this item as "Undisputed,

except Defendants do not concede that such amount was actually owed to J.H.

Thompson." Kohan's declaration explained that the amount of the Thompson settlement

was unreasonable because "Thompson was actually overpaid and owed Spanish Inn a

refund." In other words, defendants contend no "liability existed." (Culley, supra, 10

Cal.App.4th at p. 1497.) For the reasons discussed above, the parties agreed First

American's determination that coverage exists is conclusive on the issue. Accordingly,

defendants' attempt to repackage their attack on that determination as an attack on

damages fails.

3 The only "[s]upporting [e]vidence" defendants cited in their response to First American's separate statement of undisputed material fact was "[l]egal [a]rgument."

11 Because First American established through undisputed evidence that it was

entitled to indemnity under the Indemnity Agreement, we conclude the trial court did not

err by granting First American's motion for summary adjudication.

DISPOSITION

The judgment is affirmed. First American is entitled to its costs on appeal.

NARES, J.

WE CONCUR:

BENKE, Acting P. J.

McINTYRE, J.

12 Filed 8/14/15

CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

FIRST AMERICAN TITLE INSURANCE D067137

COMPANY,

Plaintiff and Respondent,

v.

SPANISH INN, INC. et al., (Super. Ct. No. INC1104681)

Defendants and Appellants.

ORDER CERTIFYING OPINION

FOR PUBLICATION

THE COURT:

The opinion in this case filed July 16, 2015, was not certified for publication. It

appearing the opinion meets the standards for publication specified in California Rules of

Court, rule 8.1105(c), the requests pursuant to California Rules of Court, rule 8.1120(a)

for publication are GRANTED.

13 IT IS HEREBY CERTIFIED that the opinion meets the standards for publication

specified in California Rules of Court, rule 8.1105(c); and

ORDERED that the words "Not to Be Published in the Official Reports" appearing

on page 1 of said opinion be deleted and the opinion herein be published in the Official

Reports.

BENKE, Acting P. J.

Copies to: All parties

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