GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co.

• Decision Date: 14 January 1994
• Docket Number: No. C015168,C015168
• Court: California Court of Appeals Court of Appeals
• Parties: GN MORTGAGE CORPORATION, Plaintiff and Appellant, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY et al., Defendants and Respondents.

Page 47

27 Cal.Rptr.2d 47

21 Cal.App.4th 1802

GN MORTGAGE CORPORATION, Plaintiff and Appellant, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY et al., Defendants and Respondents.

No. C015168.

Court of Appeal, Third District, California.

Jan. 14, 1994.

As Modified Jan. 27, and

Feb. 10, 1994.

Review Denied May 12, 1994.

Samuel E. Bramhall, Hill, Wynn, Troop & Meisinger, Los Angeles, for plaintiff and appellant.

Marion Anna Aaron, Walnut Creek, and Timothy J. Stock, Sacramento, for defendants and respondents.

PUGLIA, Associate Justice.

In this appeal we consider whether a full credit bid at a nonjudicial foreclosure sale extinguishes all claims of a lender against the participants in a tortious conspiracy to defraud the lender, none of whom is the buyer. We shall conclude it does. The trial court also concluded it did and entered summary judgment for the defendant conspirators. Plaintiff lender contends its claims were not extinguished because defendants were not parties to the original loan transaction and because the damages suffered are measured by out-of-pocket losses, not the extent of impairment of the security. We shall affirm.

I

Because the only issue raised in the trial court was the effect of the full credit bid on plaintiff's damages, we shall accept as true for purposes of this appeal those allegations of the complaint relating to tortious misconduct.

Defendants and others conspired fraudulently to induce plaintiff to finance a fictitious sale of property at an inflated price. A co-conspirator purchased the property for $359,000 on or about May 25, 1990, and thereafter purportedly sold it to Jacinto Rodriguez for $562,000. Rodriguez never agreed to purchase and in fact never did purchase the property and did not know his name was being used by the conspirators as purchaser.

Defendant Fidelity National Title Insurance Company (Fidelity) acted as escrow agent for the transaction and issued a policy of title insurance. Defendant American Equities Financial Corporation (American Equities) submitted to plaintiff a forged loan application accompanied by other false documentation. Relying on these false documents, plaintiff loaned $449,600, ostensibly to Rodriguez, for the purchase and received from defendants a promissory note in that amount secured by a deed of trust on the property both of which bore the forged signature of Rodriguez. Portions of the loan proceeds were disbursed to various conspirators.

The note eventually went into default and plaintiff initiated nonjudicial foreclosure. At the foreclosure sale, plaintiff acquired the property by entering a full credit bid of $485,162.74, being the full amount of unpaid principal and interest plus fees and expenses of foreclosure. Plaintiff later sold the property, receiving net proceeds of $294,767.82.

Plaintiff initiated this action against the various conspirators alleging fraud, conversion, negligence, and breach of contract. ¹ Fidelity moved for summary judgment based on the full credit bid and the trial court granted the motion. Thereafter, in order to facilitate appeal, plaintiff dismissed the complaint without prejudice as to the individual conspirators and stipulated to joinder of American Equities in Fidelity's summary judgment motion. The trial court amended its order to grant summary judgment also to American Equities nunc pro tunc.

II

The seminal case on the effect of a full credit bid in nonjudicial foreclosure is Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981 (hereafter Cornelison ). In that case, the plaintiff sold a residence to defendant taking back a promissory note and deed of trust. After default on the note, the plaintiff caused the property to be sold at a trustee's sale and purchased it by a full credit bid. The plaintiffs then filed an action for breach of contract and waste.

The court held the contract claim was barred by the antideficiency statute. ² Regarding the waste claim, the court held the antideficiency statute also bars any recovery for losses associated with a market downturn. Where, for example, waste is caused by the purchaser's inability to make needed maintenance or repairs because of poor economic conditions, it would frustrate the purpose of the antideficiency statute to permit foreclosure and recovery of waste damages. However, since waste claims based on the purchaser's bad faith conduct would not implicate the purposes of the antideficiency statute, they would not be precluded. (15 Cal.3d at pp. 603-604, 125 Cal.Rptr. 557, 542 P.2d 981.)

Nevertheless, the court held the full credit bid precluded recovery for bad faith waste. Because the measure of damages for waste is the amount of impairment of the security, and because the full credit bid established the value of the property at the remaining indebtedness plus costs, there was no impairment and hence no damages. (15 Cal.3d at p. 606, 125 Cal.Rptr. 557, 542 P.2d 981.)

Plaintiff contends the full credit bid rule enunciated in Cornelison is inapplicable where claims are asserted not against the purchaser but against third parties. According to plaintiff, where the purchaser is not involved, the purposes of the antideficiency statute, and the full credit bid rule stemming from it, are not implicated.

Plaintiff misconceives the holding in Cornelison. The full credit bid rule is concerned with damages and proximate causation. It is independent of the antideficiency statute. In Cornelison, the court invoked the rule despite first finding the antideficiency statute did not bar recovery for bad faith waste. According to the court, the full credit bid extinguished the claim not because the antideficiency statute was inapplicable but because the measure of damages for waste is the diminution in value of the security, and the full credit bid set the value at the outstanding indebtedness. Hence, the plaintiff had not been damaged. As explained by the court: " '[T]he purpose of the trustee's sale is to resolve the question of value and the question of potential forfeiture through competitive bidding....' In Smith v. Allen (1968) 68 Cal.2d 93, 95-96 [65 Cal.Rptr. 153, 436 P.2d 65], this court held that a nonjudicial foreclosure sale, if regularly held, finally fixes the value of the property therein sold." (15 Cal.3d at pp. 606-607, 125 Cal.Rptr. 557, 542 P.2d 981.)

In Brown v. Critchfield (1980) 100 Cal.App.3d 858, 161 Cal.Rptr. 342, the court applied the full credit bid rule to an action by the seller/lender against a real estate broker and attorney hired to represent his interests in connection with the sale of a 101-acre tract. Several years after the sale, a portion of the property was sold to the government in condemnation proceedings. This sale left the remaining property less valuable. After the purchasers became delinquent in the payment of property taxes, a portion of the property was released from the lien and sold. The purchasers ultimately defaulted and the seller purchased the remaining acreage by a full credit bid at foreclosure.

The seller claimed the defendants failed to advise him of his right to seek severance damages for impairment of the remaining security at the time a portion was sold in condemnation. The seller also claimed the defendants permitted a surface water easement to be created on the property. The court held damages for these claims were measured by the impairment of security and thus the claims were extinguished by the full credit bid. (Supra, at pp. 864-869, 161 Cal.Rptr. 342.) ³

Western Fed. Savings & Loan Assn. v. Sawyer (1992) 10 Cal.App.4th 1615, 13 Cal.Rptr.2d 639 is virtually identical to the present case. The defendant owned property and entered into an agreement to sell it for $115,000 of which the buyers were to pay $23,000 down and finance the balance of $92,000. The loan application was referred to the plaintiff through a mortgage broker and the plaintiff agreed to fund the loan. The loan went into default after three payments. Plaintiff obtained the property in a nonjudicial foreclosure by a full credit bid. Thereafter, plaintiff incurred expenses in maintaining and preparing the premises for resale. Plaintiff ultimately sold the property for $96,500. Plaintiff sued defendant and the buyers alleging they conspired fraudulently to induce plaintiff to make the loan. The jury gave judgment for plaintiff finding defendant was part of a conspiracy to defraud plaintiff.

Relying on Cornelison, the appellate court reversed, holding the plaintiff's claim against defendant, who was not the buyer in the fraudulent loan transaction, was precluded by the full credit bid. According to the court: "The analysis in Cornelison concerning full credit bids has been consistently applied in various contexts to determine whether a lender's security has been impaired and therefore whether the lender has been damaged. Thus, ... the full credit bid rule applies whether the loan is for commercial or residential property, or whether the loan is for construction or is a purchase money loan. This is true whether damages are sought from the borrower, seller or any of their respective successors or predecessors in interest or other third parties." (10 Cal.App.4th at pp. 1620-1621, 13 Cal.Rptr.2d 639, emphasis added.)

Plaintiff contends Western Fed. was wrongly decided and is not supported by the authorities cited therein or out-of-state decisions. We are unpersuaded. None of the cases upon which plaintiff relies stands for the proposition the rule with respect to full credit bids is inapplicable to claims against third parties. (See, e.g., Brown v. Critchfield, supra, 100 Cal.App.3d 858, 161 Cal.Rptr. 342; Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal.App.3d 508, 259 Cal.Rptr. 425; Guild Mortgage Co. v. Heller (1987) 193 Cal.App.3d 1505, 239 Cal.Rptr. 59.)

Nor are we persuaded by the out-of-state authorities cited by plaintiff. Although the court in Glenham v. Palzer (1990...