Phillips v. Crocker-Citizens Nat. Bank

• Decision Date: 30 April 1974
• Docket Number: CROCKER-CITIZENS
• Citation: 38 Cal.App.3d 901,113 Cal.Rptr. 688
• Parties: Kenneth PHILLIPS, Plaintiff and Appellant, v.NATIONAL BANK et al., Defendants and Respondents. Civ. 42427.
• Court: California Court of Appeals Court of Appeals

Page 688

113 Cal.Rptr. 688

38 Cal.App.3d 901

Kenneth PHILLIPS, Plaintiff and Appellant, v. CROCKER-CITIZENS NATIONAL BANK et al., Defendants and Respondents.

Civ. 42427.

Court of Appeal, Second District, Division 3, California.

April 30, 1974.

As Modified May 1, 1974.

Hearing Denied June 26, 1974.

Bodle, Fogel, Julber, Reinhardt & Rothschild and Joel N. Klevens and Simon, Sheridan, Murphy, Thornton & Hinerfeld and Richard C. Leonard, Los Angeles, for appellant.

Sheppard, Mullin, Richter & Hampton, William A. Masterson and Terence M. Murphy, Los Angeles, for respondent Crocker Nat. Bank.

Sandler & Rosen and Gerald G. Wolfson, Los Angeles, for respondent Weyerhaeuser Mortgage Co.

Loeb & Loeb, Howard I. Friedman and Andrew S. Clare, Los Angeles, for respondent Advance Mortgage Corp.

THE COURT:

Three named plaintiffs, on behalf of themselves and all others similarly situated, sued numerous named lending institutions in a class action, the complaint alleging breach of trust, fraudulent misrepresentation, negligent misrepresentation and breach of contract. After general and special demurrers of four of the named defendants were sustained, plaintiffs were given leave to amend. Thereafter, the names of two of the original named plaintiffs were omitted and plaintiff Kenneth Phillips filed a first amended complaint 'on behalf of himself and all other persons, corporations, partnerships, associations, and other entitles who hold or have held mortgages insured by the FHA with any of the named defendant mortgagees, or any member of the class of mortgagees they represent, during the applicable limitations period.' Plaintiff Phillips alleges that he 'has held an FHA mortgage with defendant Bank of America.' It is further alleged that the named defendants 'are approved mortgagees doing business within the State of California who have met the requirements of the FHA as specified in 24 C.F.R. §§ 203.1, 203.2, 203.3, 203.4, 203.6, 207.22, 221.528, 232.1(c), and 236.1, and who have acted as approved mortgagees and, who, pursuant to the provisions of the National Housing Act, have entered into mortgages with plaintiffs, which mortgages were insured by the FHA' for 'one-, two-, three-, and four-family residences, and for multi-family residences as well as for nursing homes and other project developments.' ¹

In alleging the grounds for bringing the action as a class action, plaintiff Phillips sets forth the following 'common questions of fact' which 'unite all plaintiffs and all defendants':

'20.1) All plaintiffs executed agreements with defendants, which agreements included mortgages, notes, mortgage applications, and other documents which contained substantially identical language concerning the payment of mortgage insurance premiums by the plaintiffs to the defendants.

'20.2) Each plaintiff agreed to pay to one of the defendants, in addition to the mortgage payments of principal and interest, an amount of money sufficient to pay the annual mortgage insurance premiums which the defendants owed to the FHA.

'20.3) Each defendant billed to, and collected from plaintiffs an amount of money which was greater than the amount needed by the defendants to pay the annual mortgage insurance premiums owed by the defendants to the FHA.

'20.4) Each member of the plaintiffs' class has sustained a legally unjustified loss by virtue of the facts herein set forth.

'20.5) Each member of the defendants' class has sustained an unlawful profit by reason of the facts set forth herein.

'20.6) Proof of a common or a single set of facts will establish the right of each member of the class to relief against the defendants.

'20.7) The method of calculating the amount of damages suffered by each of the plaintiffs nad caused by the defendants' wrongful retention of funds entrusted to them is identical for each member of the plaintiffs' class, as well as for each member of the defendants' class.

'20.8) The factual similarities listed in sub-paragraphs 20.1 through 20.7 are present regardless of the specific type of property involved in the mortgage transaction, whether it be single-family residential, multi-family housing (five or more family units), nursing homes, or other types of project developments, for which FHA insurance is available.'

In the first cause of action plaintiff Phillips alleges breach of a fiduciary relationship on defendants' part and retention of secret profits. Thus plaintiff alleges that '(t)he mortgage entered into between each of the plaintiffs and each of the defendants, provides that in addition to the principal and interest owing on the note secured by the mortgage, the plaintiff mortgagor must pay to the defendant mortgagee a certain sum of money equal to the annual yearly mortgage insurance premium owed by the mortgagee to the FHA.'

Plaintiff Phillips further alleges:

'Plaintiffs were billed by defendants for an amount equal to the annual mortgage insurance premium, and plaintiffs deposited with defendants, in trust, a sufficient sum to pay said mortgage insurance premiums.

'Defendants paid a portion of said mortgage insurance premiums to the FHA by means of FHA debentures, which were purchased by defendants on the open market at a discount from their par values and were returned to the FHA in payment of the annual mortgage insurance premiums at an amount equal to their par value plus accrued interest.

'Because defendants were able to pay the annual mortgage insurance premiums by means of FHA debentures, a substantial portion of the funds entrusted to defendants by plaintiffs, which were to be used to pay the mortgage insurance premiums, have been retained by the defendants, and no credit for such sums of money has been given by defendants to the plaintiffs.

'Defendant mortgagees have never disclosed to plaintiff mortgagors that they were regularly paying the FHA mortgage insurance premiums with less than the sum of money entrusted by plaintiff mortgagors to defendant mortgagees exclusively for that express purpose.'

It is alleged that as a result of defendants' breach of their fiduciary duties to plaintiffs, plaintiffs have suffered damage 'in an amount equal to the difference between the monies paid by plaintiffs to the defendants to be turned over to the FHA for mortgage insurance premiums, and the amount actually turned over to the FHA by defendants, after defendants have been reimbursed by the FHA for the debentures they have turned in.' And it is alleged that plaintiffs are entitled to punitive damages.

It is further alleged that plaintiff Phillips had no knowledge of the alleged illegal and fraudulent actions of defendant mortgagees, nor did he 'have knowledge of any of the facts which might have lead to the discovery of defendants' fraudulent and illegal actions until shortly prior to the filing of the original complaint in this action.' It is alleged that defendants employed 'deceptive practices' and 'techniques of secrecy' to 'avoid detection and to fraudulently conceal' their 'illegal and fraudulent actions.'

In second cause of action plaintiff Phillips, relying on the same facts, alleges that defendants are guilty of fraudulent misrepresentation in that pursuant to the terms of the mortgages entered into between plaintiffs and defendants, defendants collected moneys from plaintiffs representing that the amount collected equalled the mortgage insurance premiums 'owed and customarily paid by defendant mortgagees to the FHA,' whereas defendants at all times knew that the amounts collected from plaintiffs were in excess of the amounts necessary to pay the FHA for mortgage insurance premiums. Plaintiff Phillips alleges in the third cause of action, based on the same facts, that defendants are guilty of negligent misrepresentation. The fourth and final cause of action is for breach of contract, plaintiff alleging therein: 'Pursuant to the mortgages described above, plaintiffs were obligated to pay to the defendants an amount of money sufficient to pay the mortgage insurance premiums owed by the defendants to the FHA. ( ) . . . Defendants charged to, and collected from plaintiffs, sums of money in excess of the amount provided for in the mortgages, in direct contravention of plaintiffs' and defendants' agreements.'

Defendants Weyerhauser Mortgage Company, Advance Mortgage Corporation, Crocker National Bank and Bank of America National Trust and Savings Association each filed demurrers to plaintiff's first amended complaint. The trial court overruled the demurrers of defendant Bank of America and sustained the demurrers of defendants Weyerhauser, Advance and Crocker 'without leave to amend on the grounds that no cause of action is stated against these named Defendants.' An order of dismissal was thereafter entered as to defendants Weyerhauser, Advance and Crocker. Plaintiff Phillips appeals from the order of dismissal and states the question presented on this appeal as follows: '(W) hether the named plaintiff (Kenneth Phillips), a borrower from the Bank of America in connection with an FHA approved mortgage, can represent a class of all borrowers from FHA approved lenders who operated in the same manner as the Bank of America, even though his dealings were limited to the one defendant lender.'

In Payne v. United California Bank, 23 Cal.App.3d 850, 100 Cal.Rptr. 672, the plaintiffs brought an action, as individuals and as representatives of a class, against a manufacturer, Filter Queen, for having fraudulently induced plaintiffs to enter into installment contracts for the purchase and sale of vacuum cleaners, and against United California Bank. It was alleged that the bank participated in a dealer agreement with Filter Queen whereby the bank agreed to finance the contracts of sale under the Master Charge credit system. However, although it was alleged that the named plaintiffs purchased vacuum cleaners from Filter Queen on installment contracts, all of their contracts were signed at least four and...