Alliance Mortgage Co. v. Rothwell, A058972

CourtCalifornia Court of Appeals
Citation27 Cal.App.4th 218,32 Cal.Rptr.2d 592
Decision Date02 August 1994
Docket NumberNo. A058972,A058972
PartiesPreviously published at 27 Cal.App.4th 218 27 Cal.App.4th 218 ALLIANCE MORTGAGE COMPANY, Plaintiff and Appellant, v. Laurie Samuel ROTHWELL et al., Defendants and Respondents.

Page 592

32 Cal.Rptr.2d 592
Previously published at 27 Cal.App.4th 218
27 Cal.App.4th 218
ALLIANCE MORTGAGE COMPANY, Plaintiff and Appellant,
Laurie Samuel ROTHWELL et al., Defendants and Respondents.
No. A058972.
Court of Appeal, First District, Division 2, California.
Aug. 2, 1994.
Rehearing Granted Aug. 31, 1994.

Page 593

[27 Cal.App.4th 221] Jean L. Bertrand, Robert B. Mullen, Morgenstein & Jubelirer, San Francisco, for plaintiff and appellant Alliance Mortg. Co.

[27 Cal.App.4th 222] Joel Zeldin, Leon M. Bloomfield, Dinkelspiel, Donovan & Reder, San Francisco, for defendant and respondent Ticor Title Ins. Co.

Paul J. Matzger, Leland, Parachini, Steinberg, Flinn, Matzger & Melnick, San Francisco, for defendant and respondent Pioneer Title Co.

KLINE, Presiding Justice.

This case presents the question whether a secured lender's purchase of property by full credit bid at a nonjudicial foreclosure sale bars the lender from maintaining a fraud action to recover damages for actual loss from third parties who fraudulently induced the lender to make the loans. We shall hold that it does not.


Plaintiff Alliance Mortgage Company (Alliance) appeals from a judgment on the pleadings dismissing all causes of action against defendants Pioneer Title Company of California (Pioneer) and Ticor Title Insurance Company (Ticor). 1

In reviewing the sufficiency of the complaint on such an appeal, we treat the properly pleaded allegations as true and also consider matters which may be judicially noticed. (See 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.)

The complaint asserts, and it is for present purposes undisputed, that defendant Laurie Samuel Rothwell masterminded an elaborate scheme to fraudulently induce plaintiff Alliance to lend money for the purchase of nine Bay Area residences.

From 1983 through 1985, Rothwell, an appraiser and real estate broker, aided by others, including Pioneer escrow officers Pearl Grace and Hosetta Cole, fraudulently obtained purchase money loans from Alliance for nine properties by submitting false documents. Defendants prepared false purchase agreements and loan applications in the names of fictitious borrowers including Tin Sing Woo, Yu Sek Wong and Din Yi Sung; deliberately inflated property appraisals; falsified employment and deposit verifications

Page 594

and W-2 wage/income statements; drafted inaccurate title reports and title insurance policies which contained misleading descriptions of the properties; falsely represented that the escrow instructions had been followed and that the required cash deposits and disbursements had been made.

[27 Cal.App.4th 223] Five of the properties were located on Haight Street in San Francisco, the other four were located in East Bay communities. Defendant Ticor issued title insurance policies on three of the five Haight Street properties which falsely described them as being four-unit dwellings, when in fact two were one-unit residences and the third was a duplex.

Unaware of defendants' fraudulent conduct, Alliance loaned the Rothwell group about $1.7 million to purchase the five Haight Street properties and $370,000 to buy the four East Bay properties. The fictitious borrowers quickly defaulted on these loans. Alliance later purchased the properties at a nonjudicial foreclosure sale pursuant to the deeds of trust, by bidding the full credit value of the outstanding indebtedness on the notes, plus interest and costs. Alliance claimed that in the case of three of these properties, regulations of the Federal Home Loan Mortgage Corporation (FHLMC) required it to make full credit bids, take title to the properties, and as to two of these properties, to repurchase the loans it had earlier sold to FHLMC. The complaint declares that the market value of the properties at the time the loans were made was substantially less than the outstanding indebtedness on the loans, for which it purchased the properties at the trustee's sale. As a result, Alliance claimed it suffered losses of over $1.6 million when it resold the properties.

Alliance sued, ultimately alleging fraud; negligent misrepresentation; breach of Pioneer's escrow contract; 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 a federal RICO violation (18 U.S.C., §§ 1961-1968). 2


The first amended complaint, 3 which identified only the five Haight Street properties, sought damages on the ground that "the security interest Alliance believed it had at the time the loans were funded is less than the security interest Alliance actually held. Alliance has been forced to commence foreclosure proceedings against many properties and has discovered, upon acquiring title to the properties, that the true market value of the properties is far less than the outstanding principal amount of the loans."

Pioneer and Ticor moved for a judgment on the pleadings, on the ground that damage claims for impairment of plaintiff's security were barred by its [27 Cal.App.4th 224] full credit bid at the foreclosure sale under Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981, and subsequent cases.

Superior Court Judge Alex Saldamando granted the motion, permitting Alliance 20 days to amend its complaint. He explained his ruling as follows: "Causes of action relate to damages which impaired plaintiff's security. A full credit bid at foreclosure (which the parties have impliedly agreed were made) conclusively establish [sic ] that the security has not been impaired. Leave to amend is granted to see if Plaintiff can allege damages that are not related to impairment of security. Court relies on Brown v. Critchfield [ (1980) 100 Cal.App.3d 858, 161 Cal.Rptr. 342] and Sumitomo Bank v. Taurus Developers, Inc. [ (1986) 185 Cal.App.3d 211, 229 Cal.Rptr. 719]."


On August 12, 1991, Alliance filed its second amended complaint, adding the four East Bay properties and also alleging damages from post-foreclosure expenses. In all other respects the damages sought by the

Page 595

amended complaint were essentially the same as those previously alleged.

For example, in the first cause of action for fraud the complaint alleged damages, in an amount to be determined, "because Alliance funded the loans with the justifiable belief that it received its expected security interest in the properties when, in fact, the security interests Alliance received in the properties were worth far less than what was represented by defendants, and each of them. Since funding the loans, the security interests have remained at all relevant times worth less than the amount of Alliances's total expenditures, with respect to each property herein." The complaint further asserted that the loans were made with the "justifiable belief" the borrower "had financial capabilities and stability sufficient to meet the obligations of the loan when, in fact, the borrower did not have such financial capabilities or stability, and consequently Alliance has not been paid the sum or sums due it under various loans." These and related allegations were incorporated by reference in the succeeding causes of action, as were allegations that Alliance incurred other damages after foreclosure and prior to resale for unpaid property taxes, repairs to the property, correction of local housing code violations, maintenance costs, insurance costs and costs of sale.

Pioneer and Ticor moved to strike those portions of the second amended complaint which realleged damages resulting from fraud on the ground that they suffered from the same defect identified by Judge Saldamando.

Alliance opposed the motions contending: (1) it was not seeking impairment damages, which are typically caused by subsequent physical injury to [27 Cal.App.4th 225] the property or by waste, but rather damages arising from the inadequate security that existed at the time the loans were made, and (2) the full credit bid rule does not protect against fraud committed by third parties.

In granting the motions to strike, Judge Lucy Kelly McCabe ruled that the full credit bids barred the claims for damages resulting from the fraudulent representations as to the adequacy of the security.


Immediately prior to trial, Alliance again argued that the damage claims were not barred by the full credit bid and filed a motion to amend the complaint to conform to proof to include allegations that: (1) defendants' fraud caused it to make other bad loans to Rothwell on unrelated properties; and (2) as a proximate cause of these fraudulent loans, it suffered damage to its reputation, goodwill and net worth. In response, defendants filed motions in limine to exclude from trial all evidence of impairment of security; evidence of loss of goodwill and net worth and reputation damages; and post-foreclosure damages. Ticor made separate motions in limine, some of which were framed as motions for judgment on the pleadings, on the grounds it was improperly joined as a Doe defendant, the statute of limitations had run against it, and there was no cause of action for misrepresentation since the title insurance policies are indemnification contracts and do not constitute representations of the property.

Judge Raymond J. Arata, Jr. granted all defendants' motions, denied Alliance's motion to amend, and entered what essentially became judgments on the pleadings in favor of defendants.


The view of the law advanced by respondents and accepted by the trial court was adopted in two cases decided after the rulings below, which hold that a lender cannot state a cause of action for fraud or misrepresentation in inducing a loan secured by property where the lender acquired the property after making a full credit bid. (Western Fed. Savings & Loan v. Sawyer (1992) 10...

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