First Commercial Mortgage Co. v. Reece

• Citation: 108 Cal.Rptr.2d 23,89 Cal.App.4th 731
• Decision Date: 31 May 2001
• Docket Number: No. B137132.,B137132.
• Court: California Court of Appeals
• Parties: FIRST COMMERCIAL MORTGAGE COMPANY, Plaintiff and Appellant, v. Donald R. REECE et al., Defendants and Respondents.

108 Cal.Rptr.2d 23

89 Cal.App.4th 731

FIRST COMMERCIAL MORTGAGE COMPANY, Plaintiff and Appellant, v. Donald R. REECE et al., Defendants and Respondents.

No. B137132.

Court of Appeal, Second District, Division 3.

May 31, 2001.

Severson & Werson, Jan T. Chilton, San Francisco, and Suzanne M. Hankins, for Plaintiff and Appellant.

Chapin, Shea, McNitt & Carter and Neil Gunny, Orange, for Defendant and Respondent Donald R. Reece.

Wiezorek, Rice & Dieffenbach, Steven C. Rice, Long Beach; and Herman Thordsen, Santa Ana, for Defendants and Respondents Andrade Financial and John Andrade.

KLEIN, P.J.

Plaintiff and appellant First Commercial Mortgage Company dba FCMC Mortgage Company (First Commercial), an Arkansas corporation, appeals a judgment following a grant of summary judgment in favor of defendants and respondents Donald R. Reece (Reece), John Andrade and Andrade Financial, a California corporation (Andrade) (collectively, defendants).

The defendants allegedly fraudulently induced First Commercial to make a loan based on an inflated appraisal and false information. First Commercial sold the loan to First Nationwide Mortgage Company (Nationwide). The borrowers defaulted, Nationwide foreclosed, and made a successful full credit bid at the trustee's sale. Pursuant to their contract, Nationwide then required First Commercial to make it whole. In exchange for repaying Nationwide, First Commercial received the foreclosed property, which it sold at a loss. First Commercial sued defendants to recoup its losses.

The essential issue presented is whether the full credit bid by Nationwide bars First Commercial's causes of action against third party nonborrowers for fraud, negligent misrepresentation and breach of contract.

The rule that a full credit bid operates as an admission by the bidding lender of the property's value does not preclude a claim by the repurchasing lender that it suffered damages from the compelled repurchase as a consequence of the defendant's misrepresentation or breach. Accordingly, the judgment is reversed.

FACTUAL AND PROCEDURAL BACKGROUND

In May 1996, First Commercial made a $207,593 purchase money loan to Juan Lima and Roberto Bracamontes, secured by a deed of trust on real property, namely, a duplex located on North Alma Avenue in Los Angeles. First Commercial alleges it was induced to make the loan, in part, by an appraisal report prepared by Reece wherein he grossly inflated the property's value to $215,000, when in fact the property was worth less than $100,000. Andrade was the loan broker.

First Commercial sold the loan to Nationwide. The borrowers defaulted. On April 15, 1997, Nationwide foreclosed and acquired title to the subject property by making a credit bid of $224,183, the full amount of the unpaid debt. Pursuant to their contract, Nationwide demanded that First Commercial repurchase the loan so as to reimburse Nationwide for its loan loss. First Commercial complied and Nationwide reconveyed the property to First Commercial. First Commercial subsequently sold the property and recovered $79,252. First Commercial claims that as a result of the fraud, it sustained damages in the amount of $148,362.

First Commercial's verified complaint pled causes of action against both Reece and Andrade for fraud and negligent misrepresentation, as well as a cause of action against Andrade for breach of contract.

Defendants answered and thereafter moved for summary judgment. Defendants did not offer any evidence to dispute the allegation in First Commercial's complaint that First Commercial was contractually obligated to indemnify Nationwide. Defendants simply contended First Commercial's claims were barred as a matter of law by Nationwide's full credit bid. Defendants adopted as an undisputed fact the allegation in First Commercial's complaint that "[First Commercial] made a $207,593 loan based in part upon the presentation of a false and misleading appraisal report." The defense theory on summary judgment rested on the undisputed fact that "[o]n April 15, 1997, the property was acquired with a $224,182.88 credit bid—the same amount as the unpaid debt."

In opposition, First Commercial argued its claims were not barred by the full credit bid at the trustee's sale. First Commercial emphasized the full credit bid was made by Nationwide; First Commercial was compelled to repurchase the property from Nationwide pursuant to their written agreement. Therefore, the notion that First Commercial "should bear the consequences of the actions of its successor in interest at a foreclosure sale, which First Commercial did not control, is contrary to the stated policy of the full credit bid rule, that policy being to make the bidder bear the consequences of its' bid."

On July 16,1999, the matter came on for hearing. The trial court granted summary judgment, ruling "the April 1997 Full Credit Bid at foreclosure satisfied the loan debt herein as a matter of law and that, therefore, plaintiff can prove no recoverable damage."

First Commercial filed a timely notice of appeal from the judgment.

CONTENTIONS

First Commercial contends the full credit bid rule does not bar its claims for fraud, negligent misrepresentation and breach of contract, in that First Commercial neither conducted, nor bid at, the nonjudicial foreclosure sale.

DISCUSSION

1. Standard of review.

As stated in PMC, Inc. v. Saban Entertainment, Inc. (1996) 45 Cal.App.4th 579, 590, 52 Cal.Rptr.2d 877, summary judgment "motions are to expedite litigation and eliminate needless trials. [Citation.] They are granted `if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.' [Citations.]"

A defendant meets its burden upon such a motion by negating an essential element of the plaintiffs case, or by establishing a complete defense, or by demonstrating the absence of evidence to support the plaintiffs case. Once the moving defendant has met its initial burden, the burden shifts to the plaintiff to show that a triable issue of one or more material facts exists. (PMC, Inc., supra, 45 Cal.App.4th at p. 590, 52 Cal.Rptr.2d 877; Leslie G. v. Perry & Associates (1996) 43 Cal.App.4th 472, 482, 50 Cal. Rptr.2d 785.)

We review the trial court's ruling on a motion for summary judgment under the independent review standard. (Rosse v. DeSoto Cab Co. (1995) 34 Cal.App.4th 1047, 1050, 40 Cal.Rptr.2d 680.)

2. The full credit bid rule.

"At a nonjudicial foreclosure sale, if the lender chooses to bid, it does so in the capacity of a purchaser. [Citation.] The only distinction between the lender and any other bidder is that the lender is not required to pay cash, but is entitled to make a credit bid up to the amount of the outstanding indebtedness. [Citations.] The purpose of this entitlement is to avoid the inefficiency of requiring the lender to tender cash which would only be immediately returned to it. [Citation.] A `full credit bid' is a bid `in an amount equal to the unpaid principal and interest of the mortgage debt, together with the costs, fees and other expenses of the foreclosure.' [Citation.] If the full credit bid is successful, i.e., results in the acquisition of the property, the lender pays the full outstanding balance of the debt and costs of foreclosure to itself and takes title to the security property, releasing the borrower from further obligations under the defaulted note. [Citation.]" (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1238, 44 Cal.Rptr.2d 352, 900 P.2d 601.)¹

Under the "`full credit bid rule,' when a lender makes such a bid, it is precluded for purposes of collecting its debt from later claiming that the property was actually worth less than the bid. [Citations.] Thus, the lender is not entitled to insurance proceeds payable for prepur-chase damage to the property, prepur-chase net rent proceeds, or damages for waste, because the lender's only interest in the property, the repayment of its debt, has been satisfied, and any further payment would result in a double recovery. [Citation.]" (Alliance Mortgage Co., supra, 10 Cal.4th at pp. 1238-1239, 44 Cal. Rptr.2d 352, 900 P.2d 601.)

In Comelison v. Kornbluth (1975) 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981, the Supreme Court addressed the effect of a full credit bid in a nonjudicial foreclosure sale. In Cornelison, the plaintiff sold a single-family dwelling, taking back a promissory note secured by a first deed of trust on the property. (Id. at p. 594, 125 Cal.Rptr. 557, 542 P.2d 981.) The property was subsequently resold and ultimately condemned as unfit for human habitation. The original purchasers defaulted on the note, and plaintiff caused the property to be sold at a trustee's sale. (Ibid.) She purchased the property at the sale by making a full credit bid. (Id. at pp. 594, 606, 125 Cal.Rptr. 557, 542 P.2d 981.)

Plaintiff then sued one of the subsequent purchasers, inter alia, for waste. (Cornelison v. Kornbluth, supra, 15 Cal.3d at p. 594, 125 Cal.Rptr. 557, 542 P.2d 981.) Cornelison first concluded that a lender's claim for bad faith waste was not precluded by the antideficiency statutes. (Id. at p. 605, 125 Cal.Rptr. 557, 542 P.2d 981.) However, Cornelison "further concluded that even assuming that defendant is liable on such basis, nevertheless plaintiff cannot recover since she purchased the subject property at the trustee's sale by making a full credit bid." (Id. at p. 606, 125 Cal. Rptr. 557, 542 P.2d 981, fn. omitted.) Cornelison explained, "the measure of damages for waste is the amount of the impairment of the security, that is the amount by which the value of the security is less than the outstanding indebtedness and is thereby rendered inadequate. [Citation.]" (Ibid.) "[T]he mortgagee's purchase of the property securing the debt by entering a full credit bid establishes the value of the security as being equal to the outstanding...