El Dorado Homes v. Fire Ins. Exchange

Filed 3/13/07 El Dorado Homes v. Fire Ins. Exchange CA4/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION TWO

APPEAL from the Superior Court of Riverside County. Edward D. Webster, Judge. Reversed.

Ezer Williamson & Brown, Michael J. Ezer and Richard E. Williamson for Plaintiff and Appellant.

Tharpe & Howell, Timothy D. Lake, Thomas F. Hozduk and Gerald M. Siegel for Defendant and Respondent.

I. INTRODUCTION

Edward and Anita Hollowell borrowed money from Rolf Schwalbe, Mary Lee Schwalbe, and Leonard F. Jones (Schwalbe and Jones) and gave Schwalbe and Jones a deed of trust on their property to secure the loan. Later, the Hollowells borrowed more money from Schwalbe and Jones, and gave Schwalbe and Jones a second deed of trust. The Hollowells obtained insurance against loss to the property from defendant Fire Insurance Exchange (FIE). The insurance policy included an endorsement making Schwalbe and Jones the loss payees. Under the endorsement, if a loss occurs and FIE is not liable to the Hollowells for the loss (because, for example, the loss is the Hollowells fault), FIE has the option of receiving an assignment from Schwalbe and Jones of the Hollowells debt and deed of trust in exchange for paying Schwalbe and Jones the amount owed on the Hollowells debt.

The residence was destroyed by fire. The Hollowells filed a claim with FIE, which denied the claim on the ground that the loss was the Hollowells fault.

The property was subsequently purchased by plaintiff El Dorado Homes, LLC (El Dorado), who paid the debt secured by the second deed of trust. El Dorado and Schwalbe and Jones entered into an agreement whereby Schwalbe and Jones purported to assign to El Dorado their claim against FIE for insurance proceeds, provided that any proceeds received must be first applied to the debt. The agreement does not contemplate the possibility that FIE will exercise its option to receive an assignment of the debt and deed of trust.

El Dorado, as Schwalbe and Joness assignee, sued FIE to recover the proceeds. FIE moved for summary judgment, which the trial court granted. We hold that the judgment must be reversed because FIE has failed to meet its initial burden of production with respect to a triable issue of material fact. FIE is required to demonstrate either that it has paid El Dorado the amount of the loss or that it has exercised its option to receive an assignment of the debt and deed of trust in exchange for payment of the amount of the debt.

II. SUMMARY OF UNDISPUTED FACTS

Edward and Anita Hollowell owned certain property in Temecula. The residence on the property was largely destroyed by fire on December 31, 2003. At the time of the fire, the property was encumbered by three deeds of trust securing different notes: A first deed of trust held by Schwalbe and Jones; a second deed of trust held by Schwalbe and Jones; and a third deed of trust held by Chris L. Boulter. The principal amounts of the notes secured by these deeds of trust were, at the time of the fire, $376,355.46, $60,000, and $25,000, respectively. Prior to the fire, the Hollowells had been delinquent in making payments on these notes.

Prior to the fire, FIE issued a policy to the Hollowells insuring against accidental direct physical loss to the Hollowells residence. The policy limit for loss to the property is $463,000. The Hollowells paid the policy premiums.

Any loss under the policy is to be paid to the Hollowells unless another payee is named. The policy includes a lenders loss payable endorsement that makes Schwalbe and Jones, its successors and assigns, the loss payees in whatever form or capacity its interests may appear. The endorsement provides that FIEs obligation to pay Schwalbe and Jones will not be invalidated or suspended by any act, omission, or neglect by the Hollowells, or by the happening of any event permitted by [the Hollowells] . . . or which they failed to prevent . . . , which under the provisions of this policy of insurance . . . would invalidate or suspend the insurance as to the [Hollowells] . . . . Under this provision, FIEs obligation to pay Schwalbe and Jones for a covered loss continues even if the insurance is invalidated as to the Hollowells on the ground that the loss was the Hollowells fault. In this event, what we will refer to as the mortgage assignment clause in the endorsement provides that FIE may pay Schwalbe and Jones the full amount of the Hollowells debt and receive from Schwalbe and Jones an assignment of the debt and the deeds of trust securing the debt.

Following the fire, the Hollowells submitted a claim under the policy for the loss caused by the fire. The Hollowells asserted that they were entitled to the full amount of the policy limit of $463,000.

In February 2004, the trustee of the third deed of trust sold the property to El Dorado at a nonjudicial foreclosure sale. El Dorado took title to the property subject to the first and second deeds of trust.

In April 2004, El Dorado paid the $62,212.42 balance of the loan secured by the second deed of trust. El Dorado also made monthly payments on the loan secured by the first deed of trust to keep that loan current.

Val-Chris Investments, Inc. (Val-Chris) acted as the servicing agent for Schwalbe and Jones with respect to the first and second deeds of trust. In March 2004, a representative of Val-Chris wrote to FIE expressing concern that FIE might pay insurance proceeds directly to the Hollowells rather than paying off Schwalbe and Jones. The following month, counsel for El Dorado and Val-Chris,^[1]wrote to FIE to request that all insurance proceeds under the policy of insurance be paid to satisfy the existing demands of the Loss Payees, as represented by their first and second trust deed notes.

In August 2004, El Dorado and Schwalbe and Jones entered into a written agreement titled, ASSINGMENT [sic] OF CLAIMS AND OTHER INTANGIBLES (the Assignment Agreement). Under the Assignment Agreement, Schwalbe and Jones purport to assign to El Dorado any claim Schwalbe and Jones have against FIE for insurance proceeds, provided that any insurance proceeds shall be applied first to the debt secured by the first deed of trust, and that any remaining proceeds would be paid to El Dorado.^[2]

On February 1, 2005, FIE denied the Hollowells claim on the ground that the loss was the Hollowells fault.^[3]

El Dorado filed a first amended complaint against FIE, the Hollowells, and others. The pleading alleges causes of action for declaratory relief, specific performance, breach of third party beneficiary contract, and equitable lien. These different counts seek substantially the same remedy: an order that any insurance proceeds payable to Schwalbe and Jones be paid to El Dorado, and not to the Hollowells. Essential to each cause of action is the allegation that, pursuant to statutory subrogation rights and the Assignment Agreement, El Dorado is subrogated to Schwalbe and Joness rights to receive insurance proceeds under the FIE policy.^[4]

FIE served a motion for summary judgment or, alternatively, summary adjudication of each cause of action. The court granted the motion for summary judgment and entered judgment thereon.^[5] El Dorado appealed.

III. Analysis

A. Standard of Review

We review a ruling granting a motion for summary judgment de novo. (Zavala v. Arce (1997) 58 Cal.App.4th 915, 925.) In practical effect, we assume the role of a trial court and apply the same rules and standards which govern a trial courts determination of a motion for summary judgment. (Ibid.) Under these rules and standards, summary judgment is proper where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. (Code Civ. Proc.,  437c subd. (c).) We apply the same three-step analysis required of the trial court in ruling on a motion for summary judgment. (Dawson v. Toledano (2003) 109 Cal.App.4th 387, 392.) First, we identify the issues framed by the pleadings . . . . (Riverside County Community Facilities Dist. v. Bainbridge 17 (1999) 77 Cal.App.4th 644, 653.) Second, we determine whether the moving party has met its statutory burden of proof. (Ibid.) When the moving party is a defendant, that party must make a prima facie showing of the nonexistence of any triable issue of material fact[.] (Hawkins v. Wilton (2006) 144 Cal.App.4th 936, 940.) Where the evidence presented by defendant does not support judgment in his favor, the motion must be denied without looking at the opposing evidence, if any, submitted by plaintiff. [Citations.] (Ibid.) Finally, if the moving party has met its statutory burden of proof and prima facie justifies a judgment, the burden shifts to the opposing party and we determine whether that party has met its burden under Code of Civil Procedure section 437c. (Riverside County Community Facilities Dist. v. Bainbridge 17, supra, at p. 653.) Because we review only the courts ruling and not its rationale, we need not express any view as to the correctness of the courts reasoning. (Continental Ins. Co. v. Columbus Line, Inc. (2003) 107 Cal.App.4th 1190, 1196; Bed, Bath & Beyond of La Jolla, Inc. v. La Jolla Village Square Venture Partners (1997) 52 Cal.App.4th 867, 873.)

B. Identifying the Issues

In identifying the factual issues for purposes of FIEs motion for summary judgment, we must first clarify the rights and obligations of the parties in light of the insurance policy, the Assignment Agreement, and the applicable law. Initially, this must be done as of the time of the loss. (Rosenbaum v. Funcannon (9th Cir. 1962) 308 F.2d 680, 684; 4 Couch on Insurance (3d ed. 1996)  65:14, p. 65-24.) We then analyze the effects of the subsequent events on these rights and obligations. (See, e.g., Bohn v. Louisiana Farm Bureau Mut. Ins. Co. (La.Ct.App. 1986) 482 So.2d 843, 852.)

1. The Rights and Obligations of the Parties at the Time of the Loss

Schwalbe and Joness rights to insurance proceeds, if any, arise from the lenders loss payable endorsement to the policy. According to this endorsement, loss shall be paid to the Payee named in the Declarations 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 be 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. Here, the declaration pages of the policy do not specify a Payee, as such. Schwalbe and Jones are named under the designation, mortgagee or other interest. (Capitalization omitted.) There is, however, no dispute that, as of the date of the fire, Schwalbe and Jones were the Payees for purposes of the lenders loss payable endorsement.

Significantly, FIEs obligation to pay Schwalbe and Jones is unaffected by the FIE denial of the Hollowells claim. Under the lenders loss payable endorsement, FIE is obligated to pay Schwalbe and Jones even if the insurance is invalidated as to the Hollowells because of any act, omission, [or] neglect by the Hollowells. Thus, the fact that FIE denied the Hollowells claim because they were at fault with respect to the fire does not affect FIEs obligation to pay Schwalbe and Jones under the loss payable endorsement. (See Home Savings of America v. Continental Ins. Co. (2001) 87 Cal.App.4th 835, 849-850 (Home Savings); see generally 4 Couch on Insurance, supra,  65:9, p. 65-18; 5A Appleman, Insurance Law and Practice (rev. ed. 1970)  3401, p. 282.)

This aspect of the endorsement ‑‑ the insurers continuing liability to the lender when the insurer has no liability to the named insured ‑‑ is a defining characteristic of a standard loss payable clause (also referred to as a union or New York clause). (See Home Savings, supra, 87 Cal.App.4that pp. 841-842, 849; Welch v. British American Etc. Co. (1905) 148 Cal. 223, 228-229; see generally 4 Couch on Insurance, supra,  65:8 - 65:9, pp. 65-16 - 65-18.) By contrast, under a simple or open loss payee clause, the lender is simply an appointee to receive the insurance fund recoverable in case of loss to the extent of his or her interest, and his or her right of recovery is no greater than the right of the mortgagor. (4 Couch on Insurance, supra,  65:15, pp. 65-24 - 65-25; see also Home Savings, supra, at pp. 841-842.) Under a standard loss payable clause, the lender is treated as an independent insured as if he had taken out a separate policy. (Mosee v. Firemens Ins. Co. of Newark (1927) 87 Cal.App. 473, 476; see also 4 Couch on Insurance, supra,  65:9, p. 65-18; 5A Appleman, Insurance Law and Practice, supra,  3401, p. 282.) When the insurance policy includes a standard loss payable clause, there are, in effect, two separate contracts, one between the insurer and the . . . owner of the property and the other between the insurer and the [lender]. The [owner] may lose his right of recovery on the policy without affecting the [lenders] rights. (Witherow v. United American Ins. Co. (1929) 101 Cal.App. 334, 340.)^[6] The policy may be cancelled as to the named insured without affecting the rights of the lender. (Mackey v. Bristol West Ins. Service of Cal., Inc. (2003) 105 Cal.App.4th 1247, 1267.)

FIEs obligation to pay Schwalbe and Jones is also unaffected by the fact that the value of the property after the fire is greater than the balance owed on the debts. The destruction of the residence by fire is indisputably a loss or damage for purposes of the policy. Under the lenders loss payee endorsement, Loss or damage, if any, under this policy, shall be paid to the Payee . . . as its interest appears. There is nothing in the policy or the endorsement that suggests that FIE can avoid its obligation to pay the lender merely because the value of the property is greater than the amount of the debt. As Appleman states, it does not matter what the value of the remaining security may be so far as the mortgagees right to recover the policy proceeds are concerned, and it is immaterial that there may be enough property remaining to be ample security for the debt . . . . (5A Appleman, Insurance Law and Practice, supra,  3405, p. 320; see also 4 Couch on Insurance, supra,  65:36, p. 65-54 [mortgagee under a standard loss payable clause acquires a right to the insurance proceeds even though the mortgagee suffers no actual economic loss].)^[7]

The phrase in the lenders loss payable clause, in whatever form or capacity its interest may appear, refers to the lenders insurable interest in the indebtedness secured by the property. (4 Couch on Insurance, supra,  65:15, pp. 65-24 - 65-25; 5A Appleman, Insurance Law and Practice, supra,  3401, p. 286.) Such interest exists so long as, and to the extent that, the lender is owed such indebtedness. The amount of the loss payable to Schwalbe and Jones is thereby limited to the amount necessary to satisfy the debt secured by the deeds of trust, even if this amount is less than the value of the physical loss to the property. (See Woody v. Lytton Savings & Loan Assn. (1964) 229 Cal.App.2d 641, 644-645; 4 Couch on Insurance, supra,  65:36, p. 65-54.) Thus, if, as the Hollowells asserted, the amount of the loss was at least the policy limit of $463,000, Schwalbe and Jones could receive only the amount owed to them at the time of the loss, or $436,755.46.

We next consider the application of the mortgage assignment clause. This clause provides: Whenever this Company shall pay to the Lender any sum for loss or damage under this policy and shall claim that as to the insured no liability therefor exists, this Company, at its option, may pay to the Lender the whole principal sum and interest and other indebtedness due or to become due from the insured, whether secured or unsecured (with refund of all interest not accrued), and this Company, to the extent of such payment shall thereupon receive a full assignment and transfer, without recourse, of the debt and all rights and securities held as collateral thereto.^[8]

If the mortgage assignment clause applies and FIE exercises its option, the payment by FIE to Schwalbe and Jones is, in effect, a payment for the purchase of the Hollowells debt and the deeds of trust securing that debt. (See Savings Bank of Ansonia v. Schancupp (1928) 108 Conn. 588, 595 [144 A. 36, 38] (Schancupp); see also Dollar Federal Sav. & Loan Asso. v. Herbert Kallen, Inc. (1978) 66 A.D.2d 793 [410 N.Y.S.2d 1004, 1006]; 4 Couch on Insurance, supra,  65:93, p. 65-123.) The Schancupp court explained this rule: The effect of this mortgage clause is that from the time the policy becomes void as to the mortgagor the insurance is only in favor of the mortgagee on its interest as such and not an insurance on the property generally, to which the mortgagor or his successor in interest therein should be entitled. That the mortgagee should receive the primary benefit and the insurers the opportunity for ultimate reimbursement through such security as the mortgage note and mortgage may afford, accords with the general legal and equitable rights of the parties. [Citation.] The insurers, through their subrogation, virtually occupy the position of a purchaser from the mortgagee for value. [Citation.] The payment, by them, does not operate to reduce or extinguish the mortgage debt or discharge the mortgage, but to satisfy . . . the mortgagees claim and assign it to the insurers, leaving it in full force as against the mortgagor and those claiming under him, with no right, on their part, to claim a reduction of the debt by the payment to the mortgagee. [Citations.] (Schancupp, supra, 144 A. at p. 39; see also 16 Couch on Insurance, supra,  224:27, p. 224-44 - 224-48; Wholesale Sports Warehouse Co. v. Pekin Ins. Co. (S.D. Iowa 1984) 587 F.Supp. 916, 920-921; Zeiger v. Farmers & Laborers Cooperative Ins. Assn. (Mo. 1948) 358 Mo. 353 [214 S.W. 2d 426, 428].)

Under the mortgage assignment clause in this case, if the insurance is invalidated as to the Hollowells and FIE exercises its option under that clause and pays the entire amount of the debt owed to Schwalbe and Jones, FIE is entitled to receive from Schwalbe and Jones a full assignment of the debt and the deed of trust. This exchange is essential to the independent insurance contract between FIE and Schwalbe and Jones. In this situation, Schwalbe and Jones are fully protected from the risk that their debt will not be repaid. The assignment of the debt and deed of trust shifts that risk to FIE. The underlying debt is unaffected by the transaction, except insofar as the debt is then owed to FIE instead of Schwalbe and Jones. If the debt is not paid, FIE would be able to pursue its remedies as the beneficiary under the deed of trust.

El Dorado insists that the mortgage assignment clause cannot operate in this manner because the result would be circular: The right hand giveth ([FIE] pays the loss payee) and the left hand then taketh away ([FIE] initiates foreclosure and the loss payee gives back the money to prevent it.) The perceived circularity does not exist. The loss payee, having received the full amount it is owed from FIE, would not, as El Dorado believes, have any need or desire to prevent foreclosure. The party who would be interested in preventing foreclosure is not the loss payee (Schwalbe and Jones), but the owner of the property (El Dorado). That is as it should be. El Dorado purchased the property subject to the Schwalbe and Jones deeds of trust and, if the associated debt is not repaid, should expect to lose the property through foreclosure.

The foregoing assumes that FIE exercises its option under the mortgage assignment clause to receive an assignment of the debt and deed of trust. If, however, FIE does not exercise this option, FIE must still pay Schwalbe and Jones for the loss. Although Schwalbe and Jones receive payment for the loss, they are not required to give FIE any interest in the debt or the deed of trust. In this respect, the mortgage assignment clause differs from similar clauses addressed in other cases in which a payment of less than the full amount of the debt will entitle the insurer to be subrogated to the rights of the lender against the debtor to the extent of such payment. (See, e.g., Schancupp, supra, 144 A. at p. 37; Surratt v. Fire Assn of Philadelphia (4th Cir. 1930) 43 F.2d 467, 468; Wholesale Sports Warehouse Co. v. Pekin Ins. Co., supra, 587 F.Supp. at pp. 918-919.) By contrast, the mortgage assignment clause in this case presents an all-or-nothing choice for FIE: pay the amount of the entire debt and receive a full assignment of the debt and deed of trust; or pay less than the entire debt and receive nothing in exchange. (See Chase v. National Indemnity Co. (1954) 129 Cal.App.2d 853, 861-862.)^[9]

El Dorado argues that the option does not specify a time within which it must be exercised and that a reasonable time is therefore implied. (See, e.g., Allen v. Smith (2002) 94 Cal.App.4th 1270, 1280-1281, disapproved on another point in San Diego Watercrafts, Inc. v. Wells Fargo Bank (2002) 102 Cal.App.4th 308, 315.) It further argues that any reasonable time has expired and the option cannot, therefore, be exercised. We disagree. Under the mortgage assignment clause, the option to receive the assignment of the debt and deed of trust can be exercised [w]henver [FIE] shall pay to the Lender any sum for loss or damage under this policy . . . . The clause thus contemplates that the option will be exercised concurrently with tender of the payment of the entire debt. With respect to the time for payment, the lenders loss payee endorsement is silent. The body of the policy provides that payment shall be made within 60 days after the parties reach an agreement, a court judgment, or an appraisal award. There has been no agreement or appraisal. We construe the phrase, court judgment, to refer to a final judgment, which, by virtue of this appeal, has not occurred. Because the time for payment has not occurred, the time for exercising the option has not expired.^[10]

To summarize, Schwalbe and Jones were entitled, as of the time of the loss, to recover the amount of the debt secured by the first and second deeds of trust up to the amount of the loss; and (if FIE is not liable to the Hollowells) FIE had the right to receive from Schwalbe and Jones an assignment of the debt and deeds of trust upon exercise of its option and the tender of payment to Schwalbe and Jones of the full amount of the debt. If FIE does not exercise this option, then FIE must pay the loss to Schwalbe and Jones without receiving an assignment of the debt and deed of trust.

2. The Effect on the Rights and Obligations of the Parties of the Pay Off of the Debt Secured by the Second Deed of Trust

We next consider the effect, if any, of El Dorados payment of the debt secured by the second deed of trust.

El Dorado purchased the property and paid the debt secured by the second deed of trust. At this point, another principle becomes relevant: [W]here a mortgage has been paid and the debt satisfied, whether before or after fire or other loss, the mortgagee suffers no loss and no longer has an insurable interest in the property. Stated otherwise, if the mortgage debt is fully or partially extinguished prior to settlement of the loss, the mortgagees interest is accordingly lowered and if it has no interest in the property, it can recover nothing despite its independent contract with the insurer. (4 Couch on Insurance, supra,  65:36, p. 65-54; see also Rosenbaum v. Funcannon, supra, 308 F.2d at p. 684; cf. Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 606 [when full amount of underlying obligation owed to beneficiary is paid at nonjudicial foreclosure sale, the creditor cannot subsequently recover insurance proceeds payable for damage to the property].) Thus, when El Dorado paid the full amount owing on the debt secured by the second deed of trust, that obligation was extinguished. To that extent, Schwalbe and Joness rights to insurance proceeds was thereafter limited to the debt secured by the first deed of trust. Instead of a right to receive $436,755.46 (the sum of the debt secured by the first and second deeds of trust), Schwalbe and Jones were now entitled to the amount owed on solely the debt secured by the first deed of trust, or $376,355.46.

El Dorado contends that by paying the debt secured by the second deed of trust, it became subrogated to Schwalbe and Joness rights to receive whatever insurance proceeds Schwalbe and Jones were entitled to receive for such debt. It relies principally upon Civil Code section 2903, which provides: Every person, having an interest in property subject to a lien, has a right to redeem it from the lien, at any time after the claim is due, and before his right of redemption is foreclosed, and, by such redemption, becomes subrogated to all the benefits of the lien, as against all owners of other interests in the property, except in so far as he was bound to make such redemption for their benefit. This section has no application here. Schwalbe and Joness rights to insurance proceeds from FIE is not a benefit of the lien, but a right under the insurance policy and the lenders loss payable endorsement. The cases El Dorado relies upon, Fleming v. Kagan (1961) 189 Cal.App.2d 791 and A. F. C., Inc. v. Brockett (1967) 257 Cal.App.2d 40, are inapposite. In both cases, the party asserting subrogation by virtue of a payment of anothers mortgage debt sought to assert the mortgagees rights against the debtor. Here, by contrast, El Dorado does not seek subrogation of Schwalbe and Joness rights against the debtor (the Hollowells), but against FIE, who was not a party to the underlying debt or the second deed of trust.

3. The Effect of the Assignment Agreement on the Rights and Obligations of the Parties

We now turn to an analysis and interpretation of the Assignment Agreement. Initially, we note that to the extent the Assignment Agreement purports to assign a claim for insurance proceeds attributable to the debt secured by the second deed of trust, it has no effect. One cannot give another a larger right than he has himself[.] [Citation.] (Bliss v. California Cooperative Producers (1947) 30 Cal.2d 240, 250.) As set forth above, Schwalbe and Joness insurable interest is limited to repayment of the debts secured by the subject property. Once the debt secured by the second deed of trust was fully paid, that debt was extinguished and Schwalbe and Jones could no longer recover any insurance proceeds with respect to that debt. Any attempt to assign a claim to such proceeds was without effect.

The Assignment Agreement also purports to assign any and all right to causes of action and claims of any kind that [Schwalbe and Jones have] or may have against [FIE] in and to the fire insurance proceeds under the First Trust Deed, with the specific understanding that any such assignment shall not pertain to retention by [El Dorado] of any monies that might be paid by [FIE] under any fire insurance policy in which Schwalbe and Jones are the named Loss Payees under the First Trust Deed, it being understood that any such proceeds shall be used to pay off and satisfy the First Trust Deed, and any remaining balance received from [FIE] shall be paid or delivered to [El Dorado].

Addressing the last clause first, the language, any remaining balance received from [FIE] shall be paid or delivered to [El Dorado], suggests that the insurance proceeds could exceed the amount of the debt secured by the first deed of trust. This, however, is not possible. As explained above, the maximum amount that Schwalbe and Jones could receive under the loss payable endorsement is the amount owed on the debt secured by the first deed of trust; there could be no remaining balance. The last clause, therefore, is superfluous.

Reasonably construing the Assignment Agreement, and without regard to the last, superfluous clause, Schwalbe and Jones assigns to El Dorado the right to collect from FIE any insurance proceeds due with respect to the debt secured by the first deed of trust, provided that the proceeds are applied to the debt. The clear intent of the parties is to obtain money from FIE to pay the debt secured by the first deed of trust. The agreement does not purport to be an assignment of the debt or the deed of trust, and does not delegate to El Dorado the obligation to assign the debt and deed of trust to FIE in the event FIE exercises its option under the mortgage assignment clause. The debt and deed of trust, and the conditional obligation to assign the debt and deed of trust to FIE, remain with Schwalbe and Jones.

The Assignment Agreement can be applied ‑‑ and its purpose fulfilled ‑‑ if FIE tenders the insurance proceeds to El Dorado without exercising its option to receive an assignment of the debt and deed of trust. In this situation, FIE receives nothing in exchange for its payment of the proceeds, and the proceeds can be applied to the debt in accordance with the Assignment Agreement. The intent and purpose of both the lenders loss payable endorsement and the Assignment Agreement can be fulfilled: El Dorado (as Schwalbe and Joness assignee) obtains money from FIE in satisfaction of FIEs obligation under the loss payable endorsement and the debt is paid in accordance with the Assignment Agreement.

The purpose of the Assignment Agreement ‑‑ to obtain insurance proceeds to pay the debt ‑‑ cannot be achieved if FIE exercises its option under the mortgage assignment clause. In this situation, the payment by FIE and the assignment of the debt and deed of trust by Schwalbe and Jones are concurrent conditions. (See Civ. Code,  1437 [Conditions concurrent are those which are mutually dependent, and are to be performed at the same time]; see generally 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts,  792, pp. 882-883.) Thus, if FIE exercises its option, it is entitled to receive an assignment of the debt and deed of trust upon payment of the entire amount of the debt. The debt cannot be concurrently assigned to FIE and paid with the insurance proceeds. Because the debt cannot be paid from the insurance proceeds when FIE exercises its option, the Assignment Agreement can have no operative effect in this situation.

We will interpret contracts to make them lawful and operative, if we can do so without violating the intention of the parties. (Civ. Code,  1643.) Here, it is clear that the parties to the Assignment Agreement intended an assignment of the insurance proceeds for the purpose of applying the proceeds to the debt, and did not contemplate or intend an assignment of the proceeds when the proceeds could not be applied to the debt. The insurance proceeds cannot be applied to the debt when FIE exercises its option to receive an assignment of the debt. Therefore, when FIE exercise its option, the Assignment Agreement does not apply; the right to the insurance proceeds, and the right to sue to recover such proceeds, remains with Schwalbe and Jones.

To summarize, the applicability of the Assignment Agreement and, therefore, El Dorados right to receive the insurance proceeds depends upon whether FIE exercises its option to receive an assignment of the debt and deed of trust. If FIE does not exercise the option, El Dorado can pursue its right under the Assignment Agreement to the insurance proceeds, which would be applied to the debt. On the other hand, the Assignment Agreement does not apply, and El Dorado has no right to the insurance proceeds, if FIE exercises the option and tenders the full amount of the debt to Schwalbe and Jones.

4. The Issues on FIEs Motion for Summary Judgment

Based upon the foregoing analysis, the factual issues framed by the pleadings are: (1) whether, without considering the Assignment Agreement, Schwalbe and Jones are the loss payees under the Hollowells insurance policy and the lenders loss payable endorsement; (2) whether and to what extent there is a loss payable under the policy; (3) whether El Dorado has the right under Civil Code section 2903 to be subrogated to Schwalbe and Joness rights to recover insurance proceeds with respect to the second deed of trust; and (4) whether El Dorado has the right under the Assignment Agreement to recover insurance proceeds with respect to the first deed of trust. Under the analysis set forth above, the undisputed facts produce answers to the first three issues: Schwalbe and Jones are the loss payees (without considering the Assignment Agreement); there is a loss payable under the policy to the extent of the debt secured by the first deed of trust; and Civil Code section 2903 does not provide El Dorado with any subrogation rights under these circumstances. The resolution of the fourth issue depends upon whether FIE exercises its option to receive an assignment of the debt and deed of trust. If FIE can establish that it has exercised its option under the mortgage assignment clause, it is entitled to judgment on El Dorados claims as a matter of law.

C. FIEs Burden of Producing Evidence

FIE can satisfy its initial burden of production on the question of its exercise of the option with evidence that it has tendered the payment of the entire debt to Schwalbe and Jones and given notice to Schwalbe and Jones that it is exercising the option. FIE has not, however, submitted any facts in support of its motion relative to either the tender of payment or the exercise of the option. Accordingly, it has not met its initial burden and is not entitled to summary judgment.

IV. DISPOSITION

The judgment is reversed. Appellant shall recover its costs on appeal.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

/s/ King

J.

We concur:

/s/ Ramirez

P.J.

/s/ Hollenhorst

J.

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^[1] The letter is written by Robert H. Somers of Somers & Somers, LLP. Mr. Somers states in the letter that his firm represents Val-Chris Investments, Inc., in connection with their recent purchase of the property previously owned by the Hollowells. However, El Dorado, not Val-Chris, was the purchaser of the property. The letter is attached to a declaration by Attorney Somers in which he states that his firm, Somers & Somers, is counsel to El Dorado. The letter is among several letters offered as evidence [of] a claim made on behalf of Schwable [sic] and Jones, as well as El Dorado as their assignee . . . .

^[2] The Assignment Agreement, which El Dorado concedes is somewhat inartfully drafted, provides, in part: Assignor [Schwalbe and Jones] hereby transfers, assigns to Assignee [El Dorado] the Assigned Items, which includes any and all right to causes of action and claims of any kind that Assignor has or may have against [FIE] in and to the fire insurance proceeds under the First Trust Deed, with the specific understanding that any such assignment shall not pertain to retention by Assignee of any monies that might be paid by [FIE] under any fire insurance policy in which Schwalbe and Jones are the named Loss Payees under the First Trust Deed, it being understood that any such proceeds shall be used to pay off and satisfy the First Trust Deed, and any remaining balance received from [FIE] shall be paid or delivered to Assignee. The phrase, Assigned Items, is defined in the Assignment Agreement as Schwalbe and Joness claim against [FIE], in connection with the First Trust Deed, and . . . their claim, including all proceeds received from [FIE], in connection with the Second Trust Deed.

The Assignment Agreement further provides that, with respect to the First Trust Deed Assignor does not assign their right to receive and retain insurance proceeds, which proceeds are to be applied against the balance of the debt due under the First Trust Deed. [] . . . [] Assignor agrees that in the event Assignor receives all or any portion of the Assigned Items from [FIE], that any such Assigned Items will be applied to satisfy the First Trust Deed, with any remaining monies received by Assignor to be held in trust for the benefit of Assignee, and such Assigned Items shall be promptly transferred to Assignee upon such acquisition or receipt, saveandexcept, all insurance proceeds shall first be applied to satisfy the First Trust Deed.

^[3] According to FIEs investigator, the source of the fire was the introduction of an open flame into an accumulation of flammable liquids that had been spilled or poured on the floor surface. Mrs. Hollowell said that she had left the house more than one hour before the fire was discovered by a neighbor. Nevertheless, based on other evidence, the investigator concluded that Mr. or Mrs. Hollowell should have been aware that a fire was in progress at the time they left the residence. Although the claim was not denied until February 2005, there is evidence in the record that more than one year earlier, on January 29, 2004, FIE prepared a claim to be filed with the Fraud Division of the California Department of Insurance stating that FIE suspected the Hollowells claim was fraudulent.

^[4] The first amended complaint refers to Civil Code section 2904 as a statutory source of El Dorados subrogation rights. In its opposition to the motion for summary judgment, El Dorado states that the correct Civil Code section is 2903, not 2904. On appeal, El Dorado relies only on Civil Code section 2903 for its statutory subrogation argument. Our analysis is based upon this reliance.

^[5] The judgment is in favor of FIE and against El Dorado. No other parties are named in the judgment. Following the entry of judgment, El Dorado and the Hollowells entered into a stipulation that the order for summary judgment shall also apply in favor of the Hollowells and that judgment may be entered in accordance with the stipulation. The stipulation, however, was never signed by the court. The Hollowells have not appeared in this appeal.

^[6] The consideration for this contract with the lender is the consideration for which the policy was issued to the owner. (4 Couch on Insurance, supra,  65:32, p. 65-49; but see Home Savings, supra, 87 Cal.App.4th at p. 842 [The typical consideration given by the lienholder in return for obtaining a standard clause is the lienholders promise to pay premiums on demand].) The lender-insurer contract has been held to exist, and the lender entitled to its benefits, even though the lender is unaware of, and never accepted, the policy. (Tarleton v. De Veuve (9th Cir. 1940) 113 F.2d 290, 297; Home Savings, supra, at p. 854;cf. Fageol T. & C. Co. v. Pacific Indemnity Co. (1941) 18 Cal.2d 731, 739.) The lender can, however, refuse the benefits of the policy and thereby render the loss payable clause ineffectual. (Mosee v. Firemens Ins. Co. of Newark, supra, 87 Cal.App. at p. 477; 4 Couch on Insurance, supra,  65:32, p. 65-49.)

^[7] FIE contends that it does not have to pay the lender when, as here, the value of the property after the loss is greater than the balance owed on the secured debts. FIE relies primarily upon Kreshek v. Sperling (1984) 157 Cal.App.3d 279. In Kreshek, both the insured owner of property and the insureds lender asserted the right to insurance proceeds paid by the insurer. The issue was the proper apportionment of fire insurance proceeds between the two claimants. (Id. at p. 281.) The court held that the covenant of good faith and fair dealing, implied in the deed of trust between the owner and the lender, gave the owner the right to receive the proceeds unless the lenders security interest was impaired by the loss. (Id. at p. 283.) Kreshek has no application here. We are not concerned with a dispute between an owner and his lender over proceeds, but whether the lender (or its assignee) is entitled to the proceeds in the absence of a valid claim by the insured owner. Milstein v. Security Pac. Nat. Bank (1972) 27 Cal.App.3d 482, on which FIE also relies is inapposite for the same reason.

^[8] It is important to note that this clause applies only when FIE claims that it has no liability to the Hollowells. This denial must have a reasonable basis. (16 Couch on Insurance (3d ed. 2000)  224:28, p. 224-48.) If there is no such denial (or the denial is unreasonable), then the proceeds are payable to Schwalbe and Jones (subject to the insureds claim to the proceeds under Kreshek v. Sperling, supra, 157 Cal.App.3d 279); and, if paid to Schwalbe and Jones, they are applied to the debt. (See Lee v. Murphy (1967) 253 Cal.App.2d 205, 208; 4 Couch on Insurance, supra,  65:90, p. 65-121; United Stores of America, Inc. v. Firemans Fund Ins. Co. (8th Cir. 1970) 420 F.2d 337, 339.) Here, it is undisputed that FIE has denied the Hollowells claim, and there is no contention by the parties on appeal that such denial was unreasonable. The mortgage assignment clause is thus applicable.

^[9] Failing to exercise the option and pay the entire debt would appear to make financial sense for FIE only when the amount of the loss payable to the lender, or the value of the debt and the property securing the debt, is less than the expense of taking an assignment of the debt and deed of trust. It may make sense for the insurer to pay a claim of $1,000, for example, without exercising this option to avoid the expense and risk associated with an assignment of a $500,000 obligation and deed of trust.

^[10] At oral argument, El Dorado asserted that FIEs failure to pay or exercise the option earlier is unreasonable and constitutes bad faith. (See, e.g., Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 575.) In holding that FIEs time for exercising the option has not expired, we in no way address any issues relative to FIEs handling of the claim. El Dorado does not allege any cause of action in the controlling pleading based on bad faith; nor was this argument raised in El Dorados brief on appeal. Therefore, we do not address or decide this issue. (See Government Employees Ins. Co. v. Superior Court (2000) 79 Cal.App.4th 95, 98, fn. 4 [plaintiff cannot raise new, unpleaded issues in opposing summary judgment]; Wurzl v. Holloway (1996) 46 Cal.App.4th 1740, 1754, fn. 1 [points not raised in opening brief are deemed waived or abandoned].)