Nymark v. Heart Fed. Savings & Loan Assn.

• Decision Date: 27 June 1991
• Citation: 231 Cal.App.3d 1089,283 Cal.Rptr. 53
• Court: California Court of Appeals Court of Appeals
• Parties: , 60 USLW 2120 Hans S. NYMARK, Plaintiff, Cross-Defendant and Appellant, v. HEART FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendant, Cross-Complainant and Respondent. Civ. C005999.

Page 53

283 Cal.Rptr. 53

231 Cal.App.3d 1089, 60 USLW 2120

Hans S. NYMARK, Plaintiff, Cross-Defendant and Appellant, v. HEART FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendant, Cross-Complainant and Respondent.

Civ. C005999.

Court of Appeal, Third District, California.

June 27, 1991.

Carr, Kennedy, Peterson & Frost, Robert M. Harding, Redding, for plaintiff, cross-defendant and appellant.

McKenna, Conner & Cuneo, Aaron M. Peck, Martin H. Kresse, and Linnie A. Freeman, San Francisco, for defendant, cross-complainant and respondent.

SCOTLAND, Associate Justice.

Plaintiff, Hans S. Nymark, appeals from the judgment entered in favor of defendant, Heart Federal Savings & Loan Association, after the trial court granted defendant's motion for summary judgment in this action to recover damages allegedly resulting from defendant's negligence in appraising plaintiff's property in connection with his application for a loan from defendant to refinance the purchase money mortgage on the property. We agree with the trial court that a financial institution acting within the scope of its conventional activities as a lender of money owes no duty of care to a borrower in preparing an appraisal of the security for a loan when the purpose of the appraisal simply is to protect the lender by satisfying it that the collateral provides adequate security for the loan. Accordingly, we shall affirm the judgment.

FACTS AND PROCEDURAL HISTORY

In 1981, plaintiff purchased a single family residence on five acres of land near Mt. Shasta. As part of the purchase agreement, he executed a promissory note in favor of the sellers in the principal sum of $129,000 secured by a deed of trust on the property.

Approximately two years later, plaintiff wanted to refinance the note and applied for a $100,000 loan from defendant. After defendant conducted an appraisal of plaintiff's property, the loan was approved. Plaintiff executed a promissory note in favor of defendant in the principal amount of $100,000, which was secured by a deed of trust on the property. The proceeds of the loan were used to pay the sellers the balance owed on the original note.

Plaintiff's cause of action against defendant centers on the appraisal. The complaint alleges that, as part of the loan transaction, defendant conducted the appraisal, which was paid for by plaintiff; the appraisal report represented that plaintiff's residence was of "A+ quality" and that the "roof, foundation, plumbing, mechanical, electrical all appear OK;" plaintiff relied upon these representations in agreeing to enter into the loan transaction; the representations were untrue; approximately four years after the appraisal was completed, an inspection performed by the County of Siskiyou revealed numerous construction defects and building code violations costing in excess of $50,000 to repair, resulting in the property being "red-tagged" as unsafe for habitation; defendant conducted its inspection of the premises in such a negligent manner that it failed to observe and disclose these defects; and "as a proximate result of defendant's breach of its fiduciary duty, ¹ plaintiff has been required to vacate his home and obtain another residence for his family and incur legal expenses." ² The complaint prayed for damages in an unspecified amount and for a preliminary and permanent injunction to enjoin defendant from foreclosing under its deed of trust.

Defendant answered and cross-complained for judicial foreclosure of its deed of trust and for indemnity against the person who prepared the appraisal in conjunction with defendant. With respect to the cause of action for judicial foreclosure, the cross-complaint alleges that plaintiff is in default on the promissory note, having failed to make any payments since May 1, 1987, and that "[a]s of May 1, 1988, the total of monthly payments thus defaulted by [plaintiff] is $11,599.24." The cross-complaint further alleges that defendant has elected, pursuant to the default provisions of its note, to declare the whole sum of principal and interest immediately due and payable. Defendant sought a deficiency judgment against plaintiff.

Defendant moved for summary judgment on its cross-complaint for judicial foreclosure. Plaintiff opposed the motion, asserting that his claims against defendant operate as a setoff against the indebtedness owed under the note, and arguing that triable issues of fact exist with respect to his entitlement to this setoff--i.e., whether defendant was negligent, and whether this resulted in damage to plaintiff. The trial court granted defendant's motion, finding that "no cause of action may be stated against defendant ... [because] [n]o duty existed as between defendant Heart and plaintiff regarding the appraisal for loan purposes."

Judgment was entered in favor of defendant on both the complaint and the cross-complaint for judicial foreclosure. The judgment accorded defendant the right to recover a deficiency judgment against plaintiff in the event the proceeds from the foreclosure sale are insufficient to satisfy the indebtedness owed to it by plaintiff. The foreclosure proceedings were stayed by the trial court pending this appeal.

DISCUSSION

I

"Summary judgment is properly granted only when the evidence in support of the moving party establishes that there is no issue of fact to be tried" and the moving party is entitled to judgment as a matter of law. (Lipson v. Superior Court (1982) 31 Cal.3d 362, 374, 182 Cal.Rptr. 629, 644 P.2d 822; Code Civ.Proc., § 437c, subd. (c).) Here, defendant does not occupy the typical position of a defendant moving for summary judgment. ³ By seeking summary judgment on its cross-complaint, defendant is in a position analogous to that of a plaintiff moving for summary judgment. Accordingly, in order to prevail, defendant must establish each element entitling it to judicial foreclosure and disprove all affirmative defenses asserted by plaintiff (cross-defendant), demonstrating the absence of any material issues of fact which would necessitate trial of the matter. (Hayward Union etc. School Dist. v. Madrid (1965) 234 Cal.App.2d 100, 120, 44 Cal.Rptr. 268.)

As previously noted, plaintiff argued setoff as a defense to the judicial foreclosure action. He contended that the claims alleged in his complaint operate as a setoff against the amount he owed to defendant under the promissory note and thus constitute a defense to the foreclosure action because "the damages proximately caused by [defendant] ... could possibly exceed the balance of [plaintiff's] indebtedness under the promissory note." Setoff is an appropriate defense to a foreclosure action under a deed of trust. (Hauger v. Gates (1954) 42 Cal.2d 752, 754-755, 269 P.2d 609; Phelan, Procedure: Cross Demands: Automatic Setoff (1954) 42 Cal.L.R. 897, 901-902.) The basis for this defense is Code of Civil Procedure section 431.70, which provides that cross-demands for money between two persons may be set off against each other and considered paid to the extent they balance in amount. ⁴ (American Nat. Bank v. Stanfill (1988) 205 Cal.App.3d 1089, 1097, 252 Cal.Rptr. 861; Hauger, supra, 42 Cal.2d at p. 755, 269 P.2d 609.)

It was defendant's burden as the moving party in the summary judgment motion to disprove this defense. (Hayward Union etc. School District v. Madrid, supra, 234 Cal.App.2d at p. 120, 44 Cal.Rptr. 268.) To do so, defendant had to negate an essential element of plaintiff's negligence claim which served as the basis for the setoff defense. (Ibid.) Defendant argued that plaintiff has no setoff against the indebtedness under the promissory note because his complaint fails to state a cause of action for negligence in that two essential elements are absent: a duty of care owed by defendant to plaintiff, and damages sustained by plaintiff as a result of defendant's alleged negligence.

II

The existence of a duty of care owed by a defendant to a plaintiff is a prerequisite to establishing a claim for negligence. (Beauchamp v. Los Gatos Golf Course (1969) 273 Cal.App.2d 20, 32, 77 Cal.Rptr. 914.) "Whether a legal duty exists in a given case is primarily a question of law." (Wylie v. Gresch (1987) 191 Cal.App.3d 412, 416, 236 Cal.Rptr. 552.) To the extent it presents solely an issue of law, the question of whether a duty exists may be resolved on a motion for summary judgment. (See Jones-Hamilton Co. v. Franchise Tax Bd. (1968) 268 Cal.App.2d 343, 347, 73 Cal.Rptr. 896.)

The parties have not identified, nor have we found, any California case specifically addressing whether a lender has a duty of care to a borrower in appraising the borrower's collateral to determine if it is adequate security for a loan. ⁵ However, as a general rule, a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money. (Wagner v. Benson (1980) 101 Cal.App.3d 27, 34-35, 161 Cal.Rptr. 516; Fox & Carskadon Financial Corp. v. San Francisco Fed. Sav. & Loan Assn. (1975) 52 Cal.App.3d 484, 488, 489, 125 Cal.Rptr. 549; Bradler v. Craig (1969) 274 Cal.App.2d 466, 473, 476, 79 Cal.Rptr. 401.) Thus, for example, a lender has no duty to disclose its knowledge that the borrower's intended use of the loan proceeds represents an unsafe investment. ( Wagner v. Benson, supra, 101 Cal.App.3d at pp. 33-35, 161 Cal.Rptr. 516.) "The success of the [borrower's] investment is not a benefit of the loan agreement which the [lender] is under a duty to protect [citation]." ( Id., at p. 34, 161 Cal.Rptr. 516.) ⁶ "Liability to a borrower for negligence arises only when the lender 'actively participates' in the financed enterprise 'beyond the domain of the usual money lender.' " ( Id., at p. 35, 161 Cal.Rptr. 516; quoting Connor v. Great Western Sav. & Loan Assn. (1968) 69 Cal.2d 850, 864, 73 Cal.Rptr. 369, 447 P.2d 609.)

Here, defendant performed the...