Alliance Mortgage Co. v. Rothwell

Citation10 Cal.4th 1226,44 Cal.Rptr.2d 352,900 P.2d 601
Decision Date28 August 1995
Docket NumberNo. S043065,S043065
CourtUnited States State Supreme Court (California)
Parties, 900 P.2d 601, 95 Cal. Daily Op. Serv. 6825, 95 Daily Journal D.A.R. 11,688 ALLIANCE MORTGAGE COMPANY, Plaintiff and Appellant, v. Laurie Samuel ROTHWELL et al., Defendants and Respondents.

Page 352

44 Cal.Rptr.2d 352
10 Cal.4th 1226, 900 P.2d 601, 95 Cal. Daily Op. Serv. 6825,
95 Daily Journal D.A.R. 11,688
ALLIANCE MORTGAGE COMPANY, Plaintiff and Appellant,
Laurie Samuel ROTHWELL et al., Defendants and Respondents.
No. S043065.
Supreme Court of California,
In Bank.
Aug. 28, 1995.

Page 354

[10 Cal.4th 1231] Morgenstein & Jubelirer, Jean L. Bertrand and Robert B. Mullen, San Francisco, for Plaintiff and Appellant.

Edward D. Benes, Los Angeles, Terrance P. Huber, Los Angeles, Landels, Ripley & Diamond, Bruce W. Hyman, Margaret P. Reidy, San Francisco, Evans, Latham, Harris & Campisi, Jamie O. Harris, Charles P. Wolff and Nancy M. Levin, San Francisco, as Amici Curiae on behalf of Plaintiff and Appellant.

Dinkelspiel, Donovan & Reder, Joel Zeldin, Leon M. Bloomfield, San Francisco, Leland, Parachini, Steinberg, Flinn, Matzger & Melnick, Paul J. Matzger, San Francisco, Miller, Starr & Regalia, Edmund L. Regalia, Daniel R. Miller and Kenneth R. Styles, San Francisco, for Defendants and Respondents.

ARABIAN, Justice.

We here determine whether a lender's acquisition of security property by full credit bid at a nonjudicial foreclosure sale bars the lender as a matter of law from maintaining a fraud action against third party nonborrowers who fraudulently induced the lender to make the loans. The Courts of Appeal are in conflict on this issue. We granted review to resolve the conflict, and now conclude that such an action is not precluded. We therefore affirm the judgment of the Court of Appeal.


This matter reaches us following plaintiff Alliance Mortgage Company's (Alliance) successful appeal from a judgment on the pleadings dismissing all [10 Cal.4th 1232] of its causes of action against defendants Pioneer Title Company of California, now known as North American

Page 355

Title Company (North American), and Ticor Title Insurance Company, Inc. of California (Ticor). Accordingly, for purposes of this opinion, we treat the properly pleaded allegations of Alliance's complaint as true, and also consider those matters subject to judicial notice. (Sullivan v. County of Los Angeles (1974) 12 Cal.3d 710, 714-715, fn. 3, 117 Cal.Rptr. 241, 527 P.2d 865; Hunt v. County of Shasta (1990) 225 Cal.App.3d 432, 440, 275 Cal.Rptr. 113; April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 815, 195 Cal.Rptr. 421.) "Moreover, the allegations must be liberally construed with a view to attaining substantial justice among the parties." (Guild Mortgage Co. v. Heller (1987) 193 Cal.App.3d 1505, 1508, 239 Cal.Rptr. 59 (Guild Mortgage ).) "Our primary task is to determine whether the facts alleged provide the basis for a cause of action against defendants under any theory." (Ibid.)

From 1983 through 1985, defendant Laurie Samuel Rothwell (Rothwell), a real estate appraiser and broker, and other defendants including North American and Ticor, devised and implemented an elaborate scheme to fraudulently induce Alliance, then known as Charter Mortgage Company of Florida, to lend money for the purchase of nine Bay Area residences. In furtherance of this plan, two fictitious, nonexistent companies, American Medical Laboratories and American International Savings and Loan, were created to falsely verify employment of and deposits by purported loan applicants. Defendants committed some or all of the following fraudulent acts regarding each property: prepared false residential purchase agreements and loan applications in the names of fictitious borrowers, deliberately inflated "fair market value" property appraisals and invented "comparable" property values to support the inflated and fraudulent appraisals, falsified employment and deposit verifications, tax returns, credit histories, and W-2 wage/income statements, drafted inaccurate title reports that contained misleading descriptions of the properties, and falsely represented that the escrow instructions had been followed and the required cash deposits and disbursements made.

Five of the properties were located on Haight Street in San Francisco; the other four were located in various East Bay communities. Ticor issued title insurance policies on three of the five Haight Street properties which falsely described them as being four-unit dwellings. In fact, they were one-unit residences and the third was a duplex.

Relying on defendants' representations, and unaware of their fraudulent conduct, Alliance loaned the Rothwell group the funds to purchase the Haight Street and East Bay properties. The loans were secured by deeds of trust to the respective properties. Not surprisingly, the fictitious borrowers [10 Cal.4th 1233] defaulted. Alliance purchased many of the properties at nonjudicial foreclosure sales by bidding the full credit value of the outstanding indebtedness on the notes, plus interest and costs. 1

Alliance "discovered, upon acquiring title to the properties, that the true market value of the properties was far less than the value represented to Alliance and, at the time of the foreclosures, remained far less than the outstanding principal amount of the loans together with all other expenditures. Alliance has in some cases discovered that the physical improvements actually constructed on the separate parcels of real property are not the type of improvements as assured in the title insurance policies. As a proximate result of defendants' misconduct, described above, Alliance has been damaged in an amount to be determined."

Prior to learning of the fraud, Alliance sold several loan obligations to secondary investors. In the case of three of these properties, regulations of the Federal Home Loan Mortgage Corporation (FHLMC) required Alliance to repurchase the loans it had earlier sold to the Federal National Mortgage Association MA. "Each of those loans had gone into default and the properties were foreclosed upon before Alliance repurchased them."

Page 356

After foreclosure or repurchase of the loans from a secondary investor, Alliance was required to pay various costs and expenses through the time it resold the property, including property taxes, repairs to the property, correction of local housing code violations, maintenance of the property, applicable insurance, and costs associated with selling the property. In addition, after discovery of the fraud perpetrated by defendants, some of Alliance's mortgage insurers denied coverage for Alliance's losses.

Alliance alleged that these facts gave rise to claims for intentional misrepresentation, negligent misrepresentation, breach of contract against the escrow defendants, including North American, breach of Ticor's title insurance contract, breach of fiduciary duty against the escrow defendants, breach of fiduciary duty against the title insurance defendants, and violation of the federal Racketeer Influenced and Corrupt Organization Act (18 U.S.C. §§ 1961-1968). It sought punitive damages on its intentional misrepresentation claim, and attorneys' fees, costs, and interest on its breach of contract and breach of fiduciary duty claims.

North American and Ticor moved to strike portions of the second amended complaint on the ground that they were barred by Alliance's full [10 Cal.4th 1234] credit bids. In opposing the motions, Alliance argued that it was not seeking impairment of security damages, and that its full credit bids did not bar an action for fraud committed by third parties. The trial court granted the motions to strike, concluding that Alliance's full credit bids barred claims for damages resulting from fraudulent representations as to the adequacy of the security.

Prior to trial, Alliance moved to amend the complaint to conform to proof that defendants' fraud resulted in damage to Alliance's goodwill, reputation, and net worth. At or about the same time, defendants filed motions in limine to exclude all evidence of impairment of security, damages for loss of goodwill, reputation, and net worth, and damages for post-foreclosure costs. Ticor also filed separate motions in limine, some of which sought judgment on the pleadings, arguing that it had been improperly joined as a Doe defendant, that the statute of limitations had run, and that its title insurance policies were indemnification contracts that did not constitute representations regarding the property. The trial court granted defendants' motions, denied Alliance's motion to amend, and entered judgment in favor of defendants on all causes of action.

Alliance appealed, and the Court of Appeal reversed. Expressly disagreeing with Western Fed. Savings & Loan Assn. v. Sawyer (1992) 10 Cal.App.4th 1615, 13 Cal.Rptr.2d 639 and GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co. (1994) 21 Cal.App.4th 1802, 27 Cal.Rptr.2d 47, the Court of Appeal held that a lender can state a cause of action for fraud against third parties for fraudulently inducing a loan secured by real property despite the fact that the lender acquired the property after making a full credit bid. The Court of Appeal further held that Alliance's action against Ticor was not barred by the statute of limitations because Alliance's pleadings did not establish that Alliance had been aware of Ticor's involvement in Rothwell's scheme. The Court of Appeal also concluded that Alliance had stated a cause of action against Ticor for intentional and negligent misrepresentation because, although a title insurance policy is an indemnification contract and not a guarantee of title, Alliance's reliance related not to the condition of title but to the nature and description of the property securing the loans. Ticor's petition for rehearing was denied.

We granted North American and Ticor's petitions for review solely on the issue of whether a lender's acquisition of security property by full credit bid at a nonjudicial foreclosure sale bars the lender from maintaining a fraud action to recover damages from nonborrower third parties who fraudulently...

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