Opinion
A148355
11-06-2017
CHARLES FLYNN, INDIVIDUALLY AND AS TRUSTEE, etc., Plaintiff and Appellant, v. JALEH ASHTIANI KHOSROWPANAH, AS EXECUTOR, etc. et al., Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Marin County Super. Ct. No. CIV1404483)
A group of lenders (the Flynn Parties) loaned money to Roy Smally, Jr. and Vivi Mitchell (the Smallys) for the purchase of real property. The purchaser obtained a property insurance policy, which named the Flynn Parties' loan servicing agent, Marin Mortgage Bankers Corp. (MMB), as mortgagee. After the property was damaged in a fire, MMB participated in a lawsuit against the property insurer and, in its own name, was awarded compensatory, bad faith, and punitive damages. In the meantime, MMB had become insolvent, and its judgment creditors (respondents here) claimed a right to the judgment proceeds. The Flynn Parties claimed that MMB brought the action against the insurer only as their agent and that the proceeds therefore belonged to them. The insurer deposited the judgment with the court and this interpleader action ensued. The trial court concluded that MMB acted not only as an agent, but also on its own behalf, and awarded all of the interpleaded funds to its judgment creditors. We shall reverse the judgment.
At the time of the original deed of trust, the lenders were "Charles J. Flynn and/or Mik P. Flynn, Trustees, or their successors in trust, under the Flynn Family Living Trust, dated May 7, 1999." It appears that the original lenders later assigned their interest in the deed of trust to a larger group, comprised of Charles Flynn, individually and as Trustee of the Flynn Family Living Trust dated May 7, 1999, Flynn/MMB Mortgage Fund, LLC and MMB First Mortgage Fund, LP; Elizabeth Appell; Rose Ann Alioto, as Trustee of the Roseanne Alioto Separate Property Trust u/a/d/ 3/8/1994; Joseph Floyd, as Trustee of Floyd Construction Profit Sharing Trust; George W. Van Houten, Jr., as Trustee of the George W. Van Houten, Jr. 2001 Trust; Yasuko Niiyama; Howard Strassner on behalf of Fisserv ISS & Co. FBO Howard Strassner IRA; Paul K. Lamson and Sandra L. Lamson, as Trustees of the Paul K. Lamson and Sandra L. Lamson Revocable Trust dated April 6, 1996. The precise identity of the lenders at any given point is not germane to the issues before us. For the sake of simplicity, we shall refer to the lenders throughout the periods at issue here simply as the "Flynn Parties."
I. BACKGROUND
A. The Smally Action
We are familiar with the background of this case through our review of an appeal in the underlying case, Smally v. Nationwide Insurance Company (April 7, 2014, A133533) [nonpub. opn.]) (the Smally action). As we explained in that opinion, the Smallys purchased a property insurance policy from Nationwide Insurance Company (Nationwide) for a property in Vallejo (the property). There was a fire at the property in August 2008, and the Smallys made a claim under the policy. Nationwide denied the claim on the ground the policy had been cancelled for nonpayment of the premium; the Smallys, however, claimed they had never received a cancellation notice. MMB, listed in the policy as the mortgagee, also made a claim under the policy for payment of its insured interest. Nationwide and MMB were unable to reach an agreement on the amount Nationwide owed to MMB under the policy.
The Smallys filed a complaint against Nationwide, MMB, and others, alleging causes of action for reformation, breach of contract, breach of the covenant of good faith and fair dealing, and negligent misrepresentation. MMB, in turn, filed a cross-complaint against Nationwide and the Smallys for declaratory relief and against Nationwide for breach of contract and breach of the covenant of good faith and fair dealing. In its cross-complaint, MMB alleged that among the documents memorializing the loan transaction was a deed of trust indicating MMB was the servicing agent for the lender and that MMB was the "nominee and/or trustee of the Lender." It also alleged that, as mortgagee, it had a "right to assert a separate and independent claim against the insurer," and that, based on the fact that the Smallys "now owe in excess of $550,000 to Cross-Complainant, [MMB], as the servicing agent for the lender, and the separate and distinct obligations owing by NATIONWIDE to [MMB], this court is requested to enter a declaration that Cross-Complainant, [MMB], has a separate, distinct, and superior right to the policy benefits under the Nationwide Policy, which are separate and apart from any entitlement owing to Cross-Defendants, [the Smallys]." MMB also alleged it had an insurable interest in the property.
The jury rendered a verdict in favor of the Smallys and MMB on their claims for breach of contract and breach of the implied covenant of good faith and fair dealing and awarded damages. The jury awarded the Smallys $338,596, representing the amount of policy benefits that Nationwide failed to pay, and an additional $110,000 for loss of rental value as a result of Nationwide's breach of the covenant of good faith and fair dealing. It found Nationwide had wrongfully failed to pay MMB $338,596 in policy benefits and that MMB's additional damages for breach of the covenant of good faith and fair dealing were $347,582. The jury found Nationwide had acted with malice, oppression, or fraud against MMB and awarded $1.2 million in punitive damages. The trial court concluded the two $338,596 policy benefit awards were duplicative and entered judgment ordering Nationwide to pay $338,596 in policy benefits to MMB, $110,000 in damages for breach of the implied covenant of good faith of fair dealing to the Smallys, $347,582 for breach of the covenant of good faith and fair dealing to MMB, $1.2 million in punitive damages to MMB, and "Brandt" attorney fees of $179,438 to the Smallys and $300,000 to MMB.
Brandt v. Superior Court (1985) 37 Cal.3d 813 (Brandt).
Both the Smallys and Nationwide appealed. In the Smally appeal, we concluded the trial court correctly ruled that the two awards of policy benefits were duplicative. We remanded the matter for a redetermination of the bad faith damages suffered by MMB, modified the award of attorney fees to the Smallys, and otherwise affirmed the judgment.
On remand, the trial court ordered Nationwide to pay to MMB $338,596 in contract damages; $271,404 for breach of the implied covenant of good faith and fair dealing; and $1,200,000 in punitive damages, as well as interest, Brandt fees, and costs.
B. The Current Action
The current action was originally brought by a law firm that represented MMB in the Smally action, Commins & Knudsen, P.C., seeking a declaration that its attorney's lien for costs and expenses was senior to other liens against the judgment. The named defendants were MMB, Nationwide, and two individuals who had obtained judgments against MMB in unrelated actions, Massoud Khosrowpanah and Manuel Huertas, and had each filed notices of lien in the Smally action. Nationwide deposited $3,161,874.06 with the court and was discharged from further liability.
Commins & Knudsen later settled with the parties and is not a party to this appeal.
Jaleh Ashtiani Khosrowpanah, Trustee of the Massoud Khosrowpanah and Jaleh Khosrowpanah Trust U/A/D August 28, 1996 (Khosrowpanah), and Manuel Huertas (Huertas) have filed separate respondents' briefs. We shall refer to them collectively as "respondents."
The Flynn Parties cross-complained, asserting their right to MMB's judgment proceeds; their cross-complaint is at the heart of the dispute before us now. They alleged that they lent money to the Smallys to purchase the Property, and that, pursuant to a loan servicing agreement (Agreement), MMB acted as their servicing agent for the loan and the note and deed of trust that secured it. The Smallys obtained an insurance policy on the property that listed MMB as the "lender," but in fact, the Flynn Parties alleged, MMB had no insurable interest on the property; rather, the Flynn Parties were the lenders with the insurable interest. The cross-complaint alleged that after the fire, Flynn hired counsel to try to settle the claims with Nationwide and, when that effort failed, he "hired litigation counsel to sue Nationwide on behalf of the lenders, through MMB, as servicing agent and nominal cross-complainant." Accordingly, "MMB, as lenders' servicing agent, cross-complained against Nationwide Insurance for payment of the claim under the Lender's Loss Payable Endorsement in the Nationwide policy and for the breach of the covenant of good faith and fair dealing under the policy." The Flynn Parties alleged that MMB had no actual interest in the property, in receiving benefits under the insurance policy, in the Smally action, or in the judgment, and had no standing to sue Nationwide, except as a servicer or agent acting on behalf of the Flynn Parties. Likewise, they alleged that the Flynn Parties, not MMB, sustained damages as a result of Nationwide's actions. Because MMB was acting "solely and exclusively" as their agent "pursuant to agreement to recover the amount of [the judgment]," they alleged, the Flynn Parties were entitled to the disputed funds.
The Flynn Parties alleged that before the beginning of the Smally litigation, "MMB assigned all rights and obligations it had under the Agreement, under Policy, and in the imminent litigation, to Charles Flynn," one of the lenders. Before they filed the cross-complaint in the current action, the Flynn Parties signed an agreement that provided, inter alia, "The undersigned investors also understand that in April, 2009, Charles Flynn, the individual, took an assignment of the rights and obligations to the litigation from servicing agent Marin Mortgage Bankers, the named defendant and cross-complainant in the Action (the 'Assignment'). The undersigned investors understand that the Assignment included the obligation by Charles Flynn to fully fund the Action along with an assignment of the proceeds of the litigation, and that Charles Flynn undertook the assignment of this obligation and risk in order to protect the interests, and enforce the rights, all of the undersigned investors." At trial, counsel for the Flynn Parties disavowed the allegation that MMB assigned to Flynn all rights and obligations under the agreement and policy, on the ground that MMB had nothing to convey. It is undisputed, however, that Flynn undertook the financing of the Smally litigation.
The trial court ruled against the Flynn Parties, concluding MMB did not act solely as their agent when it obtained the judgment in its own name. The court awarded the interpleaded funds to Huertas and Khosrowpanah, MMB's judgment creditors.
C. Relationship of MMB and Flynn Parties
1. The Loan Servicing Agreement
The May 22, 2006 "Loan Purchase Servicing and Tenancy in Common Agreement" between MMB and the Flynn Parties (the "Lenders") recited that MMB, defined as "Servicer," had made or arranged a loan to be secured by a deed of trust, which would encumber the property. Paragraph 2, entitled "Relationship of Parties," recited: "The Lenders acknowledge that Servicer is serving as their agent with respect to the Note and that no other relationship between the Lenders and Servicer, including that of a partnership, joint venture or tenancy-in-common, is created by this Agreement. Notwithstanding the foregoing, the Lenders acknowledge that Servicer or an affiliate of Servicer may also own a Fractional Interest, in which case Servicer or its affiliate shall, to the extent of its Fractional Interest, be a Lender and be entitled and subject to all the rights and obligations of a Lender under this agreement."
Paragraph 3, "Appointment," stated: "The Lenders hereby appoint Servicer as their agent to service the Note, to protect their interest in and enforce their rights under the Note, Deed of Trust and any other Loan Documents and, if necessary, to manage, refinance or sell the Property, all in accordance with the terms of the Agreement. In connection with this appointment, the Lenders have granted Servicer an irrevocable durable power of attorney, coupled with an interest, as provided in Section 16 below. Servicer hereby accepts this appointment and agrees to exercise diligent and good faith efforts in the execution of its duties as agent in accordance with reasonable and customary commercial practice."
Paragraph 16, "Power of Attorney," recited: "The Lenders hereby grant Servicer an irrevocable, durable power of attorney, coupled with an interest, to perform all acts that Servicer is authorized to perform pursuant to this Agreement including, without limitation, the power to enforce the terms of the Loan Documents, to take title to the Property as trustee or nominee for the Lenders, to cause title to the Property to be taken in the name of all Lenders as tenants in common, to sell, transfer, encumber, convey, and lease the Property or any interest in the Property, to initiate legal action against any Lender who has failed to timely pay its share of loan servicing fees, property management fees or an Assessment when such amounts are due and to manage, encumber and sell the Property. . . . Servicer is expressly authorized to do the following: . . . file, prosecute and defend legal actions and otherwise enforce the terms of the Loan Documents; employ attorneys, accountants, appraisers, contractors and other third parties . . . ." The "Loan Documents" were defined as "the Note, Deed of Trust, and any other agreements, security instruments and other documents executed in connection therewith."
Under the Agreement, MMB was entitled to receive a monthly servicing fee of a percentage of the principal balance; half of any late charges and prepayment penalties; 100 percent of any default interest collected and any forbearance fee; and a monthly property management fee in the event of foreclosure.
2. The Deed of Trust
The original Deed of Trust, dated May 19, 2006, listed the Smallys as "Borrower," the Flynn Parties as "Lender," and MMB as "Trustee." It provided: "Borrower agrees to provide, maintain and deliver to Lender fire insurance satisfactory and with loss payable to Lender." It provided for notices to be given to "Lender, in care of Lender's Servicing Agent . . . , [MMB]."
3. The Insurance Policy
The Nationwide insurance policy listed the Smallys as the Insured and MMB as the Mortgagee. The "Lender's Loss Payable Endorsement" provided: "Loss or damage, if any, under this policy, shall be paid to the Payee named on the first page of this policy, its successors and assigns, hereinafter referred to as 'the Lender', in whatever form or capacity its interests may appear and whether said interest is vested in said Lender in its individual or in its disclosed or undisclosed fiduciary or representative capacity, or otherwise, or vested in a nominee or trustee of said Lender." The Flynn Parties were not named in the insurance policy.
4. Efforts to Resolve Insurance Claim
MMB made a claim on the Nationwide policy in September 2008, after the property was damaged in a fire. In an April 2009 email to Nationwide's counsel, John Hook, MMB's attorney, Spencer Scheer, stated: "[Nationwide] is questioning whether MMB has an insurable interest (standing) to assert a claim under the policy. I explained to you about fractionalized lender interests and how the servicing agent coordinates investor efforts, and I directed you to the servicing provisions in the servicing agreement that I provided. I further advised you that MMB, would if necessary obtain any documents necessary to evidence investor approval. I requested that you confirm to me that [Nationwide] was not now taking the position that it could avoid its obligations under the policy because MMB was acting as the agent for the lender/insured and you assured me that this was not the case."
In May 2009, while the insurance claim was pending, MMB wrote to the Flynn Parties asking them to sign authorizations to allow MMB to "handle and negotiate this fire claim on your behalf." The letter was signed by an employee in MMB's "Loan Servicing Department." The Flynn Parties signed the authorizations, which acknowledged that MMB "is our authorized servicing agent and is authorized to negotiate and resolve any claim for fire insurance proceeds or fire damage relating to the subject property and to obtain and distribute fire insurance proceeds."
II. DISCUSSION
A. Standard of Review
The Flynn Parties contend the trial court erred in concluding MMB acted on its own behalf, as well as on theirs, in seeking and obtaining the Smally judgment. " 'We review the trial court's findings of fact to determine whether they are supported by substantial evidence. [Citation.] To the extent the trial court drew conclusions of law based upon its findings of fact, we review those conclusions of law de novo. [Citation.]' [Citation.]" (ASP Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th 1257, 1266.) "When the decisive facts are undisputed, we are confronted with a question of law and are not bound by the findings of the trial court." (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799.) When interpreting a contract, " '[w]e review the agreement and the extrinsic evidence de novo, even if the evidence is susceptible to multiple interpretations, unless the interpretation depends upon credibility. [Citation.] If it does, we must accept any reasonable interpretation adopted by the trial court. [Citation.]' [Citation.]" (ASP Properties Group, supra, at pp. 1266-1267.)
"California law recognizes a relationship known as agency where one party, the agent, 'represents another, called the principal, in dealings with third persons.' [Citations.]" (Rental Housing Owners Assn. of Southern Alameda County, Inc. v. City of Hayward (2011) 200 Cal.App.4th 81, 91.) " 'The question of whether there exists an agency relationship is one of fact [citations], and for the [trier of fact] to decide unless the evidence is susceptible of but a single inference.' [Citation.]" (McCollum v. Friendly Hills Travel Center (1985) 172 Cal.App.3d 83, 91; see also Magnecomp Corp. v. Athene Co. (1989) 209 Cal.App.3d 526, 536 ["Ordinarily, the question of agency is one of fact; however, where the evidence is undisputed the issue becomes one of law"].) We review a trial court's factual finding for substantial evidence. (See Harley-Davidson, Inc. v. Franchise Tax Bd. (2015) 237 Cal.App.4th 193, 216.)
B. The Trial Court's Ruling
With these principles in mind, we consider the trial court's ruling. Citing Earl Fruit Co. v. Herman (1928) 90 Cal.App. 640, 644-645, the trial court concluded that an agent may sue in its own name on behalf of a principal, whether or not the agency was known to the other contracting party. The court then reasoned that, if an agent may pursue an action in its own name for an undisclosed principal, it must necessarily also be able to obtain a judgment at the conclusion of the action. Accordingly, the court concluded, "it appears that MMB could sue on its principal's behalf, if it established it acted solely as an agent."
The court then considered whether MMB was acting solely in an agency capacity when it obtained the judgment. It concluded that the documents executed before the fire did not conclusively establish whether MMB had an interest separate from that of the Flynn Parties. The court noted that the deed of trust listed the Flynn Parties (as originally constituted, see fn. 1, ante) as "Lender," required the Smallys, as "Borrower," to "provide, maintain and deliver to Lender fire insurance satisfactory and with loss payable to Lender," and listed MMB as "Lender's Servicing Agent." The Agreement expressed the Flynn Parties' desire to appoint MMB "as their agent to service the Note and to protect their interest in and enforce their rights under the Note, Deed of Trust and any other agreements, security instruments and other documents executed in connection therewith . . . , all in accordance with the terms of this Agreement." The Agreement recited that MMB served "as their agent with respect to the Note and that no other relationship between the Lenders and Servicer, . . . is created by this Agreement"; provided that the Flynn Parties appointed MMB "as their agent to service the Note, to protect their interest in and enforce their rights under the Note, Deed of Trust, and any other Loan Documents and, if necessary, to manage, refinance or sell the Property, all in accordance with the terms of this Agreement"; and authorized MMB to litigate in order to enforce the terms of the loan documents. In connection with this appointment, the Flynn Parties granted MMB "an irrevocable durable power of attorney, coupled with an interest, as provided in Section 16 below."
The court concluded that the loan servicing agreement indicated that MMB might have its own interest as a lender; it expressly gave MMB an irrevocable power of attorney coupled with an interest; and it expressly authorized MMB to litigate, as the Flynn Parties' agent, only those actions necessary to enforce loan documents. The court also noted that the insurance policy named MMB as the mortgagee, and that, although the Lenders Loss Payable endorsement held out the possibility that MMB might be acting for an undisclosed principal, it did not say whether MMB in fact acted for one. The trial court therefore concluded: "On their face, the plain language of the documents establishes MMB as the Mortgagee/Lender and the beneficiary under the Lender Loss Payable endorsement. The documents support the view that MMB did have an insurable interest in the property, and did not act solely as the Lender's agent. The policy recites MMB as mortgagee. The [Agreement] contemplates that MMB may have a 'fractional interest' and, further, grants it one. [Fn. omitted.]"
The trial court went on to describe MMB's actions in pursuit of the insurance claim, and other evidence which, in the court's view, demonstrated MMB was acting on its own behalf, not merely on behalf of the Flynn Parties: In September 2008, MMB's counsel informed Nationwide that MMB had obtained a security interest in the insured property and was named as an additional loss payee and that MMB was making a claim for payment of its insured interest. In June 2009, Nationwide informed MMB's attorney, "The company is prepared to pay your client and the beneficial owners of the mortgage the actual cash value of the building structure just prior to the loss . . ." In October 2009, Nationwide's counsel wrote to Scheer: "I would appreciate your advising me of the name of your client who I assume is a representative of the Bank," and asked why a check had not been cashed. Scheer replied: "My Client is Marin Mortgage Bankers. My Client contact is Charles Flynn. Mr. Flynn has advised me that MMB does not want to accept the check." Flynn testified in the Smally action that in this letter, Scheer was making a claim on MMB's behalf. MMB later twice engaged new counsel to represent it in this action, and its fee agreements did not indicate the action was brought on behalf of the Flynn Parties. The court also noted that one of the investors, Elizabeth Appell, testified she never instructed Flynn to hire counsel, that Flynn never discussed filing a lawsuit on behalf of MMB, that Scheer did not represent her, and that she never spoke with Scheer regarding the negotiations between MMB and Nationwide. Another invester, Howard Strassner, testified that he did not know who Scheer or subsequent counsel were and that he did not have the right to direct Flynn to hire different counsel.
In fact, Flynn testified in the Smally action that he worked as a loan agent for MMB, which was a small lender, and that he was involved in the loan to the Smallys, and that after the loan was funded, various individuals invested in it. He testified that in addition to being a loan agent, he or his family trust was also an investor in some of the loans MMB extended, including the Smally loan. He also testified that MMB had been damaged by the case: "Q. Mr. Flynn, could you tell the jury how Marin has been damaged by Nationwide in this case? [¶] A. Well, it's put a lot of stress on us. We're a small company. We're fighting a very large company."
The trial court also relied on the fact that MMB's cross-complaint in the Smally action referred both to the money the Smallys owed it "as the servicing agent for the lender" and to the "separate and distinct obligations owing by NATIONWIDE to MARIN MORTGAGE BANKERS," and asked the court for a declaration that MMB had a "separate, distinct, and superior right to the policy benefits under the Nationwide Policy, which are separate and apart from any entitlement owing to Cross-Defendants, SMALLY and MITCHELL." (Italics added.) The court reasoned: "Thus, MMB distinguished the monies owed to it by the Smallys, in its capacity as a servicing agent, from the money owed to it as a 'separate distinct and superior right' by Nationwide. To dispel all doubt, MMB asserted in the breach of contract action that the claim notice Scheer had submitted to Nationwide 'advised that Cross-Complainant, MARIN MORTGAGE BANKERS, had an insurable interest in the property to the extent of its loan . . .' [Citation.] Pursuant to these allegations, and accompanying proof (including Flynn's own testimony), the court entered judgment against Nationwide and for MMB.[]" The court concluded that MMB knew how to describe its status as an agent, but chose to plead and prove its own, direct claims against Nationwide and the resulting injuries. And, the court reasoned, MMB could not now take a position that was inconsistent with the one it asserted in the Smally litigation—that is, it could not now use the same documents to argue it had no right to the Smally judgment at all.
The relevant portion of MMB's cross-complaint in the Smally action alleged: "Cross-Complainant, MARIN MORTGAGE BANKERS, based on the loan transaction and loan documents attendant thereto, the Nationwide Policy which includes paragraph 15, entitled Mortgage Clause, the Lender's Loss Payable Endorsement, the designation of Marin Mortgage Bankers Corporation as the mortgagee on page 1 of the declarations page, and the other provisions of the Policy, as well as the fact that Cross-Defendants, SMALLY and MITCHELL, now owe in excess of $550,000 to Cross-Complainant, MARIN MORTGAGE BANKERS, as the servicing agent for the lender, and the separate and distinct obligations owing by NATIONWIDE to MARIN MORTGAGE BANKERS, this court is requested to enter a declaration that Cross-Complainant, MARIN MORTGAGE BANKERS, has a separate, distinct, and superior right to the policy benefits under the Nationwide Policy, which are separate and apart from any entitlement owing to Cross-Defendants, SMALLY and MITCHELL."
The court also noted that, not only had the Flynn Parties alleged in the current action that MMB, in 2009, assigned to Flynn all rights and obligations it had under the Agreement and the insurance policy, but the Flynn Parties signed an agreement in 2014 that recited that "in April, 2009, Charles Flynn, the individual, took an assignment of the rights and obligations in the litigation from servicing agent Marin Mortgage Bankers, . . ." which included "the obligation by Charles Flynn to fully fund the [Smally] Action along with an assignment of the proceeds of the litigation . . ." This document, the court concluded, indicated that MMB in fact had an interest to assign, and that the Flynn Parties so believed.
C. Analysis
1. Summary
It is undisputed that the entire amount of the loan to the Smallys came from the lenders, and MMB provided none of it. It is also undisputed that MMB acted as a servicing agent for the loan. The trial court nevertheless found that MMB was asserting some sort of interest in the insurance proceeds by virtue of its having some sort of interest in the Smallys' property. We have found no evidence, however, that MMB actually had any such interest or, if it did, what that interest was; and the trial court never identified the nature of MMB's purported interest. As we shall explain, this requires reversal of the judgment.
2. Legal Principles
The question in this case is whether MMB had its own interest in the property or whether it pursued the Smally cross-complaint solely in its capacity as agent for the lenders. There appears to be no dispute that (1) if MMB acted solely on the lenders' behalf, the proceeds of that action belong not to it but to the Flynn Parties, and that (2) if, on the other hand, MMB had its own interest in the property, the proceeds (or at least part of them) rightfully belonged to MMB and are subject to its creditors' liens.
A party may not receive insurance proceeds without an insurable interest. (Gillis v. Sun Ins. Office, Ltd. (1965) 238 Cal.App.2d 408, 412; Ins. Code, § 280 ["[I]f the insured has no insurable interest[,] the contract is void"]; Napavale, Inc. v. United Nat'l Indem. Co. (1959) 169 Cal.App.2d 119, 124 [" 'The simple rule that one cannot insure for his own benefit the property of another in which he has no interest still governs' "].) The insurable interest must exist when the insurance takes effect and when the loss occurs, and an insurance policy's stipulation to the contrary is void. (Gillis, supra, 238 Cal.App.2d at p. 412; Ins. Code, §§ 286, 287.)
The Insurance Code also defines an "insurable interest": "Every interest in property, or any relation thereto, or liability in respect thereof, of such a nature that a contemplated peril might directly damnify the insured, is an insurable interest." (Ins. Code, § 281.) " 'In common parlance, we speak of a house as being insured, but, strictly speaking, it is not the house but the interest of the owner therein that is insured, and, whether that interest is founded upon a legal title, an equitable lien, a lien, or such other lawful interest therein as will produce a direct and certain pecuniary loss to the insurer by its destruction, he has an insurable interest therein.' [Citation.]" (Burns v. California FAIR Plan Assn. (2007) 152 Cal.App.4th 646, 651.)
3. Evidence Purporting to Show MMB's Interest
The Agreement recited that the lenders granted MMB a "durable power of attorney, coupled with an interest." The trial court, and respondents, point to this provision as evidence that MMB had its own interest in the property. "For an agency to be coupled with an interest the agent must have a 'specific, present and coexisting' beneficial interest in the subject matter of the agency." (Woolley v. Embassy Suites, Inc. (1991) 227 Cal.App.3d 1520, 1532 (Woolley).) As this division has explained, " 'California decisional law has consistently followed the definition of [a power coupled with an interest] set out by Chief Justice Marshall in Hunt v. Rousmanier (1823) 21 U.S. (8 Wheat.) 174, 203: " 'A power coupled with an interest,' is a power which accompanies, or is connected with, an interest. The power and the interest are united in the same person." [Citation omitted.]' [Citation.]. Such a power is irrevocable if there is a ' "coexisting interest in the subject of the agency." ' [Citations.] ' "The agency must be created for the benefit of the agent in order to protect some title or right in the subject of the agency or secure some performance to him. [Citation.]" ' [Citation.] [¶] Because the purpose of a power coupled with an interest is to protect the agent's interest in the subject and its value, this kind of power of attorney is not an 'agency' as that term is commonly understood. Rather, the creator of the power relinquishes irrevocably any authority to direct the attorney in fact who is permitted, under such an arrangement, to act solely in his own interests." (Bonfigli v. Strachan (2011) 192 Cal.App.4th 1302, 1309.)
A recital that an instrument creates an irrevocable power of attorney coupled with an interest, such as that in the Agreement at issue here, is not sufficient to create such an interest. As explained in Pacific Landmark Hotel, Ltd. v. Marriott Hotels, Inc. (1993) 19 Cal.App.4th 615, 625-626 (Pacific Landmark), "While the circumstances and intent of parties to a contract may be relevant to whether there is a contractual right to revoke an agency, they are not relevant to the existence of the power to revoke. . . . '[W]here no specific, present property interest has been found, the courts have consistently held the agency revocable, . . . in spite of express declarations in the contract that it was coupled with an interest and irrevocable. [Citations.]' . . . Thus, even if the parties intended to create an irrevocable agency, one coupled with an interest, unless they do so and such an interest does in fact exist, the statutory power to revoke may be exercised." (Italics added.) Here, the language of the Agreement may show an intent to convey an interest, but does not itself demonstrate any such conveyance.
Khosrowpanah argues MMB had such an interest for two reasons. First, she contends MMB faced liability to the Smallys if it failed to pay insurance premiums on demand. But she does not explain how MMB's potential personal liability to the purchasers of the property would create a power "coupled with an interest" granted by the lenders, or, indeed, any interest in the property itself. She also argues that the requisite pecuniary interest is found in MMB's right under the LSA to receive fees and other charges. However, it is well established that "[m]onetary compensation, in whatever form it may take, does not create a power coupled with an interest . . . . [Citations.]" (Woolley, supra, 227 Cal.App.3d at p. 1532; accord Pacific Landmark, supra, 19 Cal.App.4th at p. 625.) Nor is there any authority to support the notion that a contractual right to receive fees from lenders or to share in late charges paid by the purchasers somehow creates a pecuniary interest in the property.
The Agreement recites that the relationship between Lenders and MMB is that of principal and agent with respect to the note and that no other relationship is created by the Agreement. Although it recognizes that MMB or an affiliate may also own a fractional interest (in which case it would also be a lender to the extent of its fractional interest), there is no claim that MMB in fact ever owned such an interest. Indeed, the insurance policy itself acknowledges that MMB might be acting in an "undisclosed fiduciary or representative capacity."
The trial court and respondents point to the communications between MMB and Nationwide as evidence that MMB pursued the claims on its own behalf. For instance, MMB's counsel told Nationwide that MMB had a security interest in the property and was making a claim, and he identified his client as MMB. These communications are in no way dispositive. In April 2009, in response to a question from Nationwide's counsel about whether MMB had an insurable interest in the property, MMB's attorney explained that the servicing agent coordinated the efforts of the lenders, who had fractionalized interests, and that MMB was acting as the agent for the lenders. Further, the Flynn Parties explicitly authorized MMB to negotiate and resolve their insurance claims and distribute the proceeds. Respondents argue that, although MMB was authorized to negotiate with Nationwide for the insurance proceeds, it was not authorized to pursue a legal action to recover precisely the same proceeds. We are not persuaded by this attempt to split hairs. There is no basis to conclude MMB was acting as an agent in pursuing the claim but on its own behalf in enforcing the same claim in court.
We also note that the loan service agreement authorized MMB "to protect [the Flynn Parties'] interest in and enforce their rights under the Note, Deed of Trust and any other Loan Documents" and to "prosecute and defend legal actions and otherwise enforce the terms of the Loan Documents." One of the Flynn Parties' rights under the Deed of Trust was to have the Smallys provide fire insurance payable to them.
We recognize that Flynn testified in the Smally action, in response to a question about how MMB had been damaged by Nationwide, that "it's put a lot of stress on us. We're a small company. We're fighting a very large company." But this testimony does not show that MMB had an insurable interest in the property. Indeed, Flynn went on to testify that it had been difficult for him to face the investors, who were concerned about the delay in resolving the claim, and that "It's like Nationwide has given our investors the flu." Similarly, the alleged assignment to Flynn of MMB's rights and obligations under the Agreement, under the policy, and in the litigation does not show that MMB had an insurable interest that it was pursuing on its own behalf. Neither the allegation in the Flynn Parties' cross-complaint in this action nor the 2014 agreement among Flynn and the other Flynn parties reciting that such an assignment had been made specifies any rights MMB possessed and assigned to Flynn. And there is nothing in the record to indicate that MMB in fact had any interest in the property to assign, as opposed to, for example, some contractual right it might have had under the Agreement.
Respondents made much of this and other testimony in the Smally case that, they argue, shows MMB was seeking a recovery on its own behalf in derogation of the rights of the investors (a "faithless fiduciary"). But we have not been apprised of any evidence introduced in the Smally action seeking to prove damages that would be owing to MMB itself (as opposed to the investors), as a result of Nationwide's bad faith.
Flynn testified that he undertook the litigation for the benefit of the lenders. His understanding was that if MMB received servicing fees—presumably the fees the lenders owed it under the Agreement—it would pass those fees on to Flynn to defray the costs of the litigation.
The trial court developed a theory that MMB made a strategic decision to pursue the Nationwide claim on its own behalf because it was "worried the Lenders had no standing to pursue the [bad faith and punitive damages] claim[s]," and that MMB reversed course only after the other MMB creditors emerged "to lay claim to the Smally judgment proceeds." Further, the trial court theorized, MMB raised its status as an agent in the Smally cross-complaint, so the issue of how the proceeds should be distributed could have been litigated in the Smally case; "[h]aving failed to do so (for the strategic reasons discussed above), that failure binds the Flynn Parties here." This appears to be unfounded conjecture.
Nationwide was aware since at least April, 2009, that MMB did not itself have an insurable interest in the property, but was acting on behalf of a group of lenders; at that time, MMB's counsel was assured that Nationwide did not take the position that MMB's status as an agent would negate its obligations under the policy. In any event, such a strategic concern could easily have been resolved by identifying any interest MMB had in the property, thus allowing it to pursue the claim both on its own behalf and in its representative capacity, in which case an apportionment would have been expected. The fact that MMB did not identify any interest in the property in the course of the Smally litigation, and the fact that Nationwide did not challenge MMB's standing based on MMB's status as an agent, point to the opposite conclusions from those reached in the trial court—that MMB had no strategic reason to pursue a claim on its own behalf, as it had no concern that Nationwide would challenge its standing to sue on behalf of the principals, and so had no reason to litigate apportionment of the proceeds.
Respondents argue, however, that, as non-parties to the insurance policy, the Flynns are not entitled to challenge whether MMB had an insurable interest in the property. They rely on Countrywide Home Loans, Inc. v. Tutungi (1998) 66 Cal.App.4th 727, 732 (Countrywide), which involved a dispute between the former owners of a condominium (the borrowers) and the successor owner, Countrywide Home Loans (which had foreclosed on the property) over the right to the benefit of insurance proceeds obtained by the condominium's homeowners' association after the property was damaged in an earthquake. (Id. at pp. 729-730.) The borrowers argued that the homeowners' association had no insurable interest in the project because it was not an owner. The appellate court rejected this argument, stating, "This should come as a surprise to both the association and [the insurer], which respectively paid thousands of dollars in premiums and nearly $2 million in loss benefits on the policy. However, [the insurer] having paid those benefits to the association, borrowers are not entitled to contest the insurability of the association's interest. [Citation.]" (Id. at p. 732.)
The court in Countrywide relied on Jenkins v. Hill (1939) 35 Cal.App.2d 521, 524 (Jenkins), which considered whether the plaintiff, who had cared for a decedent until his death, was entitled to the proceeds of a life insurance policy; the estate of the decedent was the beneficiary of the policy, and the decedent had made a gift of the policy to the plaintiff. This procedure was followed because an insurance agent had told the decedent that the plaintiff, to whom he was not married, did not have an insurable interest in his life. (Id. at pp. 523-524.) The appellate court first concluded that the plaintiff had an insurable interest, then went on: "But if there is any uncertainty as to that conclusion there can be none as to this: that the insurer is the only party who can raise the question of insurable interest, and that, if the insurer waives the question of interest and pays the money to the named beneficiary, or into court, neither the personal representative nor the creditors can claim the proceeds on that ground. [Citations.]" (Id. at p. 524; see also In re Marriage of Bratton (1994) 28 Cal.App.4th 791, 793 [former husband lacks standing to challenge legality of former wife's insurance policy on his life].)
Neither Countrywide nor Jenkins controls here because in those cases, non-parties to the insurance policies were challenging a beneficiary's insurable interest. Here, the Flynn parties are asserting rights as a party to the insurance contract—as the principals of MMB, which was acting as their agent—something contemplated on the face of the policy. The question before us is whether there is any evidentiary support for the claim that MMB was also acting to protect its own insurable interest in the property, an issue the Flynn Parties are entitled to raise.
Respondents also rely on the fact that MMB sought and was awarded damages for breach of the duty of good faith and fair dealing, as well as punitive damages. They argue that damages for bad faith may only be awarded to a party in privity with an insurer. (See Austero v. National Cas. Co. (1976) 62 Cal.App.3d 511, 517 [wife of insured not entitled to recover for her own damages caused by insurer's breach of duty of good faith and fair dealing]; Coleman v. Gulf Ins. Group (1986) 41 Cal.3d 782, 794-795 [plaintiffs who sued city for wrongful death may not recover from city's insurer for breach of covenant of good faith and fair dealing in conduct of litigation].) They also argue that punitive damages may be awarded only to a party who was actually injured. (See Dugar v. Happy Tiger Records, Inc. (1974) 41 Cal.App.3d 811, 819 [punitive damages allowed only to immediate person injured; plaintiff who prosecutes action solely as assignee of cause of action may not recover punitive damages]; Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942 [damages for emotional distress and claims for punitive damages not assignable].) None of these cases, however, suggests that an agent may not pursue such claims on behalf of an injured principal, and they are accordingly not persuasive. As we have already noted, the policy itself contemplated that MMB might be acting in an undisclosed representative capacity.
The consequential damages awarded in the Smally action related entirely to the amounts due under the policy, to be used either to rebuild the property or to pay down the loan, and so would pertain only to the lenders, and not to any losses that might have been asserted by MMB as the servicing agent.
For the reasons we have discussed, we conclude that the record does not support a finding that MMB was acting on its own behalf, rather than solely as an agent of the Flynn Parties, in pursuing and litigating its claims against Nationwide. The documents and the other evidence demonstrate that MMB acted as the Flynn Parties' agent in pursuing the claims against Nationwide. And, as explained in Earl Fruit Co. v. Herman, supra, 90 Cal.App. at pp. 644-645: "The right of an agent to sue on a contract which has been entered into in his own name has met with universal recognition. Whenever the agent contracts directly with a third person, the law allows the agent, treated as a principal, to sue on the contract in his own name, whether the fact of the agency was or was not known to the other contracting party." (See also Baumgarten v. California Pacific Title & Trust Co. (1932) 127 Cal.App. 649, 660 ["The rule that every action must be prosecuted in the name of the real party in interest [citation] is subject to the further rule that a person with whom or in whose name a contract is made for the benefit of another, is a trustee of an express trust which permits him to sue with like effect as though he were the principal. [Citation.]"].)
We find unpersuasive respondents' contention that, in arguing that it acted only as an agent of the Flynn Parties in pursuing the Smally action, MMB makes an improper collateral attack on the judgment in that action or tries, in effect, to rewrite the Smally judgment. As Khosrowpanah notes, our decision in the Smally appeal stated in passing that "both the Smallys and MMB had an insurable interest in the property—the Smallys, as the named insured, and MMB as the lienholder." But in that action, we had no occasion to consider whether MMB brought the action solely in its capacity as agent, as it was entitled to do. (Earl Fruit Co. v. Herman, supra, 90 Cal.App. at pp. 644-645.)
In the circumstances, we must reverse the judgment of the trial court.
III. DISPOSITION
The judgment is reversed.
/s/_________
Rivera, J., Acting P.J. We concur: /s/_________
Streeter, J. /s/_________
Kennedy, J.
Judge of the Superior Court of California, County of Contra Costa, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.