Soderberg v. McKinney

• Decision Date: 03 May 1996
• Docket Number: No. B085773,B085773
• Citation: 52 Cal.Rptr.2d 635,44 Cal.App.4th 1760
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 3173, 96 Daily Journal D.A.R. 5189 Alan D. SODERBERG, as Trustee, etc., et al., Plaintiffs and Appellants, v. Gary McKINNEY, Defendant and Respondent.

Page 635

52 Cal.Rptr.2d 635

44 Cal.App.4th 1760, 96 Cal. Daily Op. Serv. 3173,

96 Daily Journal D.A.R. 5189

Alan D. SODERBERG, as Trustee, etc., et al., Plaintiffs and Appellants, v. Gary McKINNEY, Defendant and Respondent.

No. B085773.

Court of Appeal, Second District, Division 1, California.

May 3, 1996.

Review Denied Aug. 14, 1996.

Law Offices of Thomas B. McCullough, Jr., Thomas B. McCullough, Jr., Marina Del Rey, and Lauriann C. Wright, for Plaintiffs and Appellants.

Callahan, McCune & Willis, Edward L. Schumann, Tustin, and John J. Tasker, W. Los Angeles, for Defendant and Respondent.

MASTERSON, Associate Justice.

In Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745, the Supreme Court held that an auditor may be liable to a third party--someone other than a client--who relies on an audit report containing negligent misrepresentations, provided the auditor intended that the third party use the report. In this case, we address whether such liability extends to a real

estate appraiser who, although retained by a mortgage broker, knows that his report will be used by potential investors in the brokered loan. We hold that it does.

BACKGROUND

For several years, Alan Soderberg, in his capacity as the trustee for A.D.S. Planning, Inc., Profit Sharing Plan Trust (the "Trust"), has invested pension money in loans secured by first and second deeds of trust. The Trust employs certain criteria in deciding whether to purchase a particular trust deed. The main factor is loan-to-value ratio, i.e., the difference between the total outstanding loans and the appraised value of the property. If a loan under consideration (together with any existing loans) exceeds 70 percent of the property's value, the Trust will not make the investment. The value of the property is established by a licensed appraiser.

In 1990, National Home Loans, Inc. ("Home Loans"), a mortgage broker, contacted Soderberg about investing $75,000 in a second deed of trust on residential property located in Redondo Beach, California. He was told that the appraised value of the property was $670,000 and that the balance due on the first deed of trust was $341,000. Because this information met the Trust's criteria for making a loan, Soderberg verbally committed to invest $50,000 pending receipt of the pertinent documents, including the appraisal report.

After receiving the appraisal, prepared by Gary McKinney, a certified real estate appraiser, Soderberg confirmed that McKinney had valued the property at $670,000. Relying on that figure, Soderberg sent Home Loans a check for $50,000. He also contacted Roosevelt and Leola Ragland about this investment, and they contributed the remaining $25,000 of the loan. In exchange for these funds, Soderberg received a second trust deed.

The borrowers defaulted on both the first and the second deeds of trust. Soderberg then learned for the first time that the true value of the property was between $450,000 and $500,000, leaving virtually no equity to protect the Trust's and the Raglands' investments. As a result, the Trust foreclosed on the second deed of trust, reinstated the first trust deed, and made monthly payments on the first trust deed. However, the Trust eventually stopped making those payments, and the holder of the first trust deed foreclosed on the property. Neither the Trust nor the Raglands would have invested in the loan had they known the true value of the property.

In July 1991, the Trust and the Raglands filed this action against McKinney and Home Loans, alleging causes of action for fraud, negligent misrepresentation, suppression of fact, and breach of contract. ¹ In October 1993, McKinney moved for summary judgment or, in the alternative, for summary adjudication on each cause of action. As to the negligent misrepresentation claim, McKinney argued that he owed no duty to plaintiffs. ² On the contract claim, he asserted that there was no contract between plaintiffs and himself. The trial court (Commissioner Bruce Mitchell, presiding) granted summary adjudication on the claims for negligent misrepresentation and breach of contract but denied the motion as to the other claims.

Thereafter, plaintiffs dismissed the remaining causes of action (for fraud and suppression of fact) without prejudice as to McKinney only. ³ Home Loans agreed to pay plaintiffs $250,000, and plaintiffs, in turn, agreed to the entry of judgment. In June 1994, the trial court (Judge William Beverly, presiding) entered judgment decreeing that plaintiffs recover $250,000 from Home Loans and that judgment be entered against plaintiffs as to McKinney. Plaintiffs filed a timely appeal from the judgment, challenging the

trial court's summary adjudication ruling in McKinney's favor.

DISCUSSION

In reviewing a summary adjudication ruling, the moving party's evidence is strictly construed while that of the opposing party is liberally construed. (Hanooka v. Pivko (1994) 22 Cal.App.4th 1553, 1558, 28 Cal.Rptr.2d 70.) We accept as undisputed facts only those portions of the moving party's evidence that are not contradicted by the opposing party's evidence. (Kelleher v. Empresa Hondurena de Vapores, S.A. (1976) 57 Cal.App.3d 52, 56, 129 Cal.Rptr. 32.) In other words, the facts alleged in the evidence of the party opposing summary adjudication must be accepted as true. (Zeilman v. County of Kern (1985) 168 Cal.App.3d 1174, 1179, fn. 3, 214 Cal.Rptr. 746.)

Summary adjudication is appropriate if all the papers submitted show that a cause of action lacks merit as a matter of law. (Code Civ. Proc., § 437c, subd. (f).) "A defendant seeking summary [adjudication] has met the burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action cannot be established [or that there is a complete defense to that cause of action].... Once the defendant's burden is met, the burden shifts to the plaintiff to show that a triable issue of fact exists as to that cause of action.... In reviewing the propriety of a summary [adjudication], the appellate court independently reviews the record that was before the trial court.... We must determine whether the facts as shown by the parties give rise to a triable issue of material fact." (Hanooka v. Pivko, supra, 22 Cal.App.4th at p. 1558, 28 Cal.Rptr.2d 70, citations omitted; see also Code Civ. Proc., § 437c, subd. (o )(2).) We construe the evidence most favorably to the party opposing summary adjudication and resolve any doubts against the granting of the motion. (Jackson v. Ryder Truck Rental, Inc. (1993) 16 Cal.App.4th 1830, 1835-1837, 20 Cal.Rptr.2d 913.) ⁴

A. Negligent Misrepresentation Claim

In their complaint, plaintiffs alleged that McKinney negligently misrepresented the value of the property, that he had no reasonable grounds for believing the stated valued to be correct, that he prepared the appraisal report with the intent to induce plaintiffs to invest in the second trust deed, and that they relied on his appraisal to their detriment.

Plaintiffs contend that Bily v. Arthur Young & Co., supra, 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745 (hereafter Bily ) precluded summary adjudication of their negligent misrepresentation claim. In Bily, the Supreme Court addressed the question of "whether and to what extent an accountant's duty of care in the preparation of an independent audit of a client's financial statements extends to persons other than the client." (Id. at p. 375, 11 Cal.Rptr.2d 51, 834 P.2d 745.) There, a company's auditor had issued an unqualified or "clean" audit opinion on the company's financial statements. In reliance on the auditor's opinion, several third parties invested in the company. The investments went sour, and the investors sued the auditor for negligence, negligent misrepresentation, and fraud. A jury found for the investors on the general negligence claim only, and the Court of Appeal affirmed that portion of the verdict.

The Supreme Court reversed, holding that "an auditor's liability for general negligence in the conduct of an audit of its [client's] financial statements is confined to the client With respect to negligent misrepresentation claims, the court adopted the analysis of the Restatement Second of Torts, explaining as follows: "Section 552 of the Restatement Second of Torts covers 'Information Negligently Supplied for the Guidance of Others.' It states a general principle that one who negligently supplies false information 'for the guidance of others in their business transactions' is liable for economic loss suffered by the recipients in justifiable reliance on the information. ( [Rest.2d Torts, § 552], subd. (1).) But the liability created by the general principle is expressly limited to loss suffered: '(a) [B]y the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.' (Id., subd. (2).) To paraphrase, a supplier of information is liable for negligence to a third party only if he or she intends to supply the information for the benefit of one or more third parties in a specific transaction or type of transaction identified to the supplier." (Bily, supra, 3 Cal.4th at p. 392, 11 Cal.Rptr.2d 51, 834 P.2d 745, italics added.)

                i.e., the person who contracts for or engages the audit services.  Other persons may not recover on a pure negligence theory."  (Bily, supra, 3 Cal.4th at p. 406, 11 Cal.Rptr.2d 51, 834 P.2d 745.)   However, the court approved a negligent misrepresentation claim by third parties, stating:  "There is, however, a further narrow class of persons who, although not clients, may reasonably come to receive and rely on an audit report and whose existence

...