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Cite
as: 2001 WL 1155690 (Cal.App. 2 Dist.))
Only
the Westlaw citation is currently available.
Court
of Appeal, Second District, Division 4, California.
David
T. MARTIN, Plaintiff and
Appellant,
v.
WORLD SAVINGS AND LOAN ASSOCIATION, Defendant and Respondent.
No.
B145688.
Oct.
2, 2001.
Deed
of trust trustor brought an action against beneficiary, asserting
trustor's right to control earthquake insurance proceeds. The Superior
Court, Los Angeles County, No. BC229914, David Horowitz, J., sustained
beneficiary's demurrer without leave to amend. Trustor appealed. The Court
of Appeal, Curry, J., held that trustor's conditional promise in the deed
of trust to name the beneficiary as loss payee and to allow the
beneficiary to control or direct the proceeds if the trustor obtained such
insurance did not require consideration separate from the loan itself.
Affirmed.
West
Headnotes
[1]
Administrative Law and Procedure k330
15Ak330
An
agency is free to interpret existing law in the course of discharging its
statutory duties.
[2]
Administrative Law and Procedure k796 15Ak796
The
court is not bound by an agency's interpretation of the law.
[3]
Mortgages k201 266k201
Deed
of trust trustor's conditional promise in the deed of trust to name the
beneficiary as loss payee and to allow the beneficiary to control or
direct the proceeds if the trustor obtained such insurance did not require
consideration separate from the loan itself.
[4]
Contracts k10(1) 95k10(1)
A
contract is illusory where one party provides no legal consideration
whatsoever.
[5]
Contracts k56
95k56
One
promise in a contract may be consideration for several counter promises.
Alan
M. Insul; Law Offices of Howard A. Snyder, Encino, Howard A. Snyder,
Michael G. Roussau; Quisenberry and Kabateck, John N. Quisenberry, Brian
S. Kabateck, Los Angeles, and Robert R. Brina, Pasadena, for Plaintiff and
Appellant.
Musick,
Peeler & Garrett, Costa Mesa, Barry D. Hovis, San Francisco, and
Cheryl A. Orr, Los Angeles, for Defendant and Respondent.
CURRY,
J.
*1
In Ziello v. Superior Court
(1995) 36 Cal.App.4th 321, 42 Cal.Rptr.2d 251 and
Foothill Village Homeowners Assn. v. Bishop (1999) 68 Cal.App.4th
1364, 81 Cal.Rptr.2d 195, this court held that property owners rather than
lenders must be allowed to control earthquake insurance proceeds where the
pertinent deeds of trust did not require earthquake insurance as a
condition for the loans, did not assign the proceeds to the lenders, and
did not give the lenders the right to share, control, or direct the
proceeds. The present appeal involves a deed of trust that, without
requiring the homeowner to obtain earthquake insurance, stated in a
provision that if such insurance
was obtained, the lender was to be named loss payee and would have the
right to control or direct the proceeds. Appellant David T. Martin
contends that the conditional promise to name the lender as loss payee was
unsupported by consideration and is,
therefore, illusory. Respondent World Savings and Loan Association
maintains that such a promise is fully enforceable. The trial court agreed
with respondent. We affirm.
FACTUAL
AND PROCEDURAL BACKGROUND
Appellant
purchased a residence in 1993 through a loan obtained from respondent. The
loan was secured by a deed of trust. The deed of trust contained a
provision requiring the borrower to maintain insurance. It stated:
"At my sole cost and expense, I will obtain and maintain hazard
insurance to cover all buildings and other improvements that now are or in
the future will be located on the Property. The insurance must cover loss
or damage caused by fire, hazards normally covered by 'extended coverage'
hazard insurance policies and other hazards for which Lender requires
coverage.... [¶] If I obtain earthquake insurance, any other hazard
insurance, credit life and/or disability insurance, or any other insurance
on or relating to the Property or the Secured Notes and which are not
specifically required by Lender, I will name Lender as loss payee of any
proceeds." The deed of trust goes on to say that any proceeds paid by
an insurer "will be applied first to reimburse Lender for costs and
expenses incurred in connection with obtaining the Proceeds, and then, at
Lender's option and in the order and proportion as Lender may determine in
its sole and absolute discretion, regardless of any impairment or lack of
impairment of security, as follows: (A) to the extent allowed by
applicable law, to the Sums Secured in a manner that Lender determines
and/or (B) to the payment of costs and expenses of necessary repairs or to
the restoration of the Property to a condition satisfactory to Lender,
such application to be made in the manner and at the times as determined
by Lender."
The
Northridge earthquake that took place on January 17, 1994, caused damage
to appellant's home. Appellant filed a claim that resulted in his insurer
agreeing to pay $60,000. Respondent obtained control of the proceeds.
[FN1] Appellant, joined by numerous other borrowers who found themselves
in similar situations, filed a complaint contending among other things
that for a lender to take control of earthquake insurance proceeds
contravened California law‑‑in particular, this court's
opinion in Ziello v. Superior Court,
supra, 36 Cal.App.4th 321, 42 Cal.Rptr.2d 251.
*2
Respondent demurred, contending that the deed of trust securing its loan
was distinguishable from the one involved in
Ziello, and that it, therefore, had a security interest in the
earthquake insurance proceeds with a concomitant right to control their
distribution. The court sustained the demurrer without leave to amend
because "[i]t is undisputed that Martin's deed of trust with World
Savings provides that if he obtains earthquake insurance, the proceeds of
that insurance shall be made payable to World Savings (the lender)."
Appellant noticed a timely appeal.
DISCUSSION
I
In
Ziello v. Superior Court, supra, 36 Cal.App.4th 321, 42 Cal.Rptr.2d
251, this court addressed the issue of whether a lender could assume
control of earthquake insurance proceeds where the deed of trust did not
require earthquake insurance and contained no reference to earthquake
insurance proceeds. We concluded that "[i]n the absence of special
provisions in the loan documents, a trustor‑borrower has no
obligation to procure insurance for the benefit of the mortgagee against
fire or other risk, and neither the trustor nor the beneficiary ordinarily
has an interest in the proceeds of insurance obtained by the other on its
own separate insurable interest" (id.
at p. 326, 42 Cal.Rptr.2d 251) and that "[t]he agreement of the
parties regarding the proceeds of required insurance has no application to
proceeds of additional insurance borrower chose to obtain for her own
benefit" (id. at p. 327, 42
Cal.Rptr.2d 251). Although the insurance policy named the lender as loss
payee, we held that "[t]he fact that lender is named as the loss
payee of the earthquake insurance does not determine its entitlement to
the insurance proceeds. The loss payable endorsement in an insurance
policy 'defines only the obligation of the insurer. [Citations.] The
provision is intended to protect the insurer by permitting it to pay the
named insured and to be thereafter free of claims by other persons who
might have an interest in the lost property.' (Ferro
v. Citizens Nat. Trust & Sav. Bank (1955) 44 Cal.2d 401, 410 [282
P.2d 849]....) The rights of the parties do not depend on the
interpretation of the loss‑payable clause of the policy.
[Citation.]" (Ziello, at
pp. 329‑330, 42 Cal.Rptr.2d 251.)
In
reaching our decision in Ziello,
we discussed an earlier case,
Alexander v. Security‑First Nat. Bank (1936) 7 Cal.2d
718, 62 P.2d 735, which had been relied on by the trial court to reach a
contrary conclusion. That case involved (1) a contractual obligation to
procure earthquake insurance, and (2) a lease provision requiring the
lessee to apply all insurance proceeds to repair the property. (Ziello v. Superior Court, supra, 36 Cal.App.4th at p. 329, 42
Cal.Rptr.2d 251.) We found Alexander
distinguishable because "[i]n our case [Ziello ] there was no requirement to procure earthquake insurance,
nor any broad provision as to the application of all insurance proceeds (whether required or not) to repair or
reduce indebtedness." (Ziello,
at p. 329, 42 Cal.Rptr.2d 251.)
*3
We relied on Ziello in
Foothill Village Homeowners Assn. v. Bishop, supra, 68 Cal.App.4th
1364, 81 Cal.Rptr.2d 195, which involved a condominium complex for which
the homeowners association voluntarily purchased earthquake insurance
prior to the Northridge earthquake. The insurance proceeds amounted to
approximately $2 million, but because the complex was severely damaged,
the homeowners voted not to rebuild. The issue was whether the earthquake
insurance proceeds should go to the lenders or to the individual owners.
We concluded that the lenders' claims to the proceeds failed for the same
reason that the similar claim failed in
Ziello, because "the lender never required the purchase of
earthquake insurance and the lender never explicitly included in any of
the loan documents a provision for it to share in the proceeds of any
earthquake insurance." (Id.
at pp. 1366‑1367, 81 Cal.Rptr.2d 195.) We stated in dicta that the
lender could have protected itself "by either requiring earthquake
insurance or inserting in the loan documents express provisions giving it a secured
interest in any insurance
proceeds without limitation." (Id.
at p. 1377, 81 Cal.Rptr.2d 195.)
[1][2]
In Foothill Village, we took
judicial notice of claims bulletin, No. 98‑4, issued on October 9,
1998, by the California Earthquake Authority (CEA). [FN2] The purpose of
the bulletin was to advise participating insurers in the process of
converting their earthquake policies to CEA policies and/or issuing new
CEA policies. It discussed the conditions under which a lender or
mortgagee could be named as a joint payee on a CEA policy. The CEA
interpreted Ziello as indicating
"that under many commonly used deed of trust forms the mortgagee may
have no legal right to control residential earthquake insurance
proceeds." The CEA advised its members that an exception would exist
(1) "where the mortgagee has required earthquake insurance as an
express condition for making the loan and that requirement is embodied in
the loan documents, forming part of the agreement between lender and
borrower"; or (2) "where the borrower has given the mortgagee
through express language in the loan documents (a) an assignment of all
insurance proceeds from all insurance policies that insure losses to the
encumbered real property, regardless of whether the insurance was required
as a condition for making the loan, (b) a right to share control or to
direct the application of insurance proceeds, whether or not the insurance
was required, or (c) the right to require of the borrower that the lender
be named in any of borrower's property insurance policies as mortgagee and
beneficiary of a so‑called 'standard mortgage clause." (CEA
Claims Bulletin No. 98‑4, Oct. 9, 1998, pp. 2‑3, fns.
omitted.)
Certainly
if the agreement between the parties both required the procurement of
earthquake insurance and gave the lender the right to direct the spending
of earthquake insurance proceeds, there would be no question as to its
right to control the proceeds. The issue here is whether the latter
without the former will lead to the result desired by respondent. To that
issue we now turn.
II
*4
The underlying basis of our decision in
Ziello was that the lender was seeking to obtain a windfall for which
it had not bargained. The agreement between the parties did not require
the borrower to maintain earthquake insurance for the lender's benefit and
contained no mention of disbursement of earthquake insurance proceeds. In
making that deal, the lender must have been aware that severe uninsured
damage to the property resulting from an earthquake would likely lead to
foreclosure, since few people can afford to make payments on a loan on an
uninhabitable residence merely to avoid foreclosure. Thus, the lender had,
in essence, accepted the risk that an earthquake could render the property
uninhabitable and cause the borrower to walk away from the loan.
Presumably, the lender took account of that possibility when setting its
loan rates and other charges. It would have been unfair to allow the
lender to take control of earthquake funds in
that situation.
[3]
Here, there is an element of windfall in what respondent seeks. Its deed
of trust did not require that appellant--or presumably any other of its
borrowers--obtain earthquake insurance. The borrowers were given absolute
discretion over whether or not to obtain such insurance and premiums were
paid for out of their own funds. Those borrowers who chose to obtain
earthquake insurance apparently got no better deal than those who did not.
Indeed, respondent is unlikely to know which of its borrowers purchased
earthquake insurance for its benefit until after an earthquake strikes.
There is, therefore, some truth to appellant's contention that nothing was
given in exchange for the borrower's promise to make the lender the loss
payee for purposes of earthquake insurance. Nevertheless, the contract as
a whole is supported by consideration. The lender promised to fund a loan,
and it did. In exchange, the borrower promised a number of things,
including the conditional promise that if earthquake insurance was
obtained, it would be treated the same as required insurance‑‑that
is, the lender would be named loss payee and would have the right to
control the disbursement of proceeds.
[4][5]
Appellant suggests that we consider his conditional promise to name the
lender the loss payee on any subsequently obtained earthquake insurance
policy in isolation, and examine whether it is supported by separate
consideration from respondent. While we agree that a contract is illusory
where one party provides no legal consideration whatsoever, appellant
identifies no authority for the proposition that every individual promise
in a contract must be supported by new and different consideration.
Generally speaking, the rule is to the contrary: one promise in a contract
"may be consideration for several counter promises." (1 Witkin,
Summary of Cal. Law (9th ed. 1987) Contracts, § 215, p. 224; accord, 2
Corbin on Contracts (rev. ed.1995) § 5.12, pp. 56‑57 ["A
single and undivided consideration may be bargained for and given as the
agreed equivalent of one promise or of two promises or of many promises.
The consideration is not rendered invalid by the fact that it is exchanged
for more than one promise. If it could support each of the promises taken
separately it is consideration for all of them." (Fns.omitted.)]; 3
Williston on Contracts (4th ed.1992) § 7:49, p. 761 ["In many
contracts, there is more than one promise on a side. If each promise on
one side is supported by a promise or performance allotted to it
exclusively as its consideration, the contract is divisible. But
frequently, all promises or performances on one side are indiscriminately
made consideration for all promises or performances on the other. And if
the performances or promises on one side fulfill the legal requirements of
consideration, they will support any number of counterpromises on the
other." (Fns.omitted.)].) Since in this case the lender obtained the
agreement we found lacking in Ziello,
and since the conditional promise to assign the right to earthquake
insurance proceeds to the lender did not require consideration separate
from the loan itself, we must affirm the trial court's determination.
DISPOSITION
*5
The judgment is affirmed.
We
concur: CHARLES S. VOGEL, P.J. and EPSTEIN, J.
FN1. Whether respondent sought to use the
proceeds to repair the premises or to pay down the loan is unclear from
the allegations of the complaint.
FN2. The CEA was established in 1995 to issue
policies of basic residential earthquake insurance. (Stats.1995, ch. 944,
§ 2.) The CEA is funded by participating residential property insurers,
bond sales, the purchase of reinsurance and premiums charged for policies
sold. (Ins.Code, §§ 10089.5, subds.(b), (f), (m), 10089.10, 10089.23,
10089.29, 10089.30; Wolfe v. State
Farm Fire & Casualty Ins. Co. (1996) 46 Cal.App.4th 554, 566, 53
Cal.Rptr.2d 878.) An agency is free to interpret existing law in the
course of discharging its statutory duties. (Regents
of University of California v. Public Employment Relations Bd. (1983)
139 Cal.App.3d 1037, 1042, 189 Cal.Rptr. 298.) We are not bound by an
agency's interpretation of the law. (See
Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th
1, 7, 78 Cal.Rptr.2d 1, 960 P.2d 1031.)
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