Western Fed. Savings & Loan Assn. v. Sawyer

• Decision Date: 18 November 1992
• Docket Number: No. B060505,B060505
• Court: California Court of Appeals Court of Appeals
• Parties: WESTERN FEDERAL SAVINGS & LOAN ASSOCIATION, Plaintiff and Respondent, v. Sandra SAWYER, et al., Defendant and Appellant.

Page 639

13 Cal.Rptr.2d 639

10 Cal.App.4th 1615

WESTERN FEDERAL SAVINGS & LOAN ASSOCIATION, Plaintiff and Respondent, v. Sandra SAWYER, et al., Defendant and Appellant.

No. B060505.

Court of Appeal, Second District, Division 7, California.

Nov. 18, 1992.

Review Denied March 2, 1993.

Lewis James Runchey, Escondido, and John Guerin, Huntington Beach, for defendant and appellant.

Peter J. Sullivan and Dennis Larson, Marina Del Ray, for plaintiff and respondent.

JOHNSON, Associate Justice.

Defendant, Sandra Sawyer, appeals from a judgment entered after a jury trial in favor of plaintiff and respondent, Western Federal Savings & Loan Association. The jury found Sawyer was part of a civil conspiracy to fraudulently induce Western Federal to make a residential loan and gave judgment for the bank. Because we find the trial court erroneously applied the law concerning the legal effect of a full credit bid by the secured lender at a nonjudicial foreclosure sale, we reverse the judgment.

FACTS AND PROCEEDINGS BELOW

Defendant and appellant, Sandra Sawyer, is an attorney who is very involved in real estate transactions. At the time of trial she had made between 20 to 50 real estate purchases.

On February 1, 1983, Sawyer purchased a parcel of residential property located at 2315 Moss Avenue, Los Angeles.

In May 1983, Sawyer opened an escrow to sell the property to Mrs. and Mr. Steven R. Smith (Smith). According to escrow instructions and loan documents, Smith was to pay $115,000 for the property and make a cash down payment of $23,000. The loan application indicated Smith intended to occupy the property. Sawyer represented, and a pre-sale appraisal indicated, the property was a duplex.

Smith's loan application was referred to Western Federal Savings & Loan Association (Western Federal or the bank) through a mortgage broker. The bank reviewed the pre-sale appraisal report and agreed to fund the loan request for $92,000.

The Sawyer/Smith escrow closed on September 1, 1983. Thirty days prior to this date, Sawyer gave a notice to quit to the one tenant who occupied the larger unit. According to Sawyer, Smith later notified her he was having marital problems and would not be moving into the residence. Smith, on the other hand, claimed because he never read the loan application documents The loan went into default after three payments were made on the $92,000 loan. On November 1, 1983, Smith sold their interests in the property.

or escrow instructions, he never knew he was supposed to reside at the property. In any event, the tenants remained on the property and continued to pay rent. Sawyer apparently collected these rents until sometime in Spring 1984.

A trustee's sale of the Moss Avenue property was held in 1985 after numerous delays occasioned by the bankruptcy of one of Smith's successors in interest. The bank acquired the property in this nonjudicial foreclosure sale after making a full credit bid consisting of the unpaid principal and interest of the mortgage, costs, fees and other foreclosure expenses.

Thereafter, the bank incurred additional expenses to maintain and renovate the residence in order to resell it on the open market. In conducting a post foreclosure sale appraisal of the property, the bank discovered the residence was not a bona fide duplex but one large living unit and a smaller unit consisting of a bedroom/living room and a bath room. By this time the bank was aware Smith never occupied the property and may not have made the cash down payment of $23,000 as the escrow and loan agreements required. The bank eventually sold the property in 1986 for $96,500.

In September 1986 Western Federal brought suit against Smith, Sawyer and others based on the alleged misrepresentations in Smith's loan application and the property appraisal report. Although the trial court dismissed or gave a directed verdict in favor of Sawyer on the causes of action for unjust enrichment, declaratory relief, conversion and constructive trust on the loan proceeds, the court denied Sawyer's motions for summary judgment or directed verdict on the fraud and misrepresentation causes of action.

Trial was to a jury which found Sawyer was part of a conspiracy to fraudulently induce the bank to make the loan to Smith. ¹ The trial court denied Sawyer's motions for new trial and for judgment notwithstanding the verdict and this appeal followed.

DISCUSSION

THE BANK'S CAUSES OF ACTION FOR FRAUD AND MISREPRESENTATION WERE DESTROYED BY ITS FULL CREDIT BID AT THE NONJUDICIAL FORECLOSURE SALE WHICH CONCLUSIVELY ESTABLISHED ITS SECURITY WAS NOT IMPAIRED AND IT WAS THEREFORE NOT DAMAGED BY THE ALLEGED MISREPRESENTATIONS IN PROCURING THE LOAN.

First, it is important to note what this case is not about. Both sides agree the anti-deficiency statutes do not directly apply to the present action. (Code Civ.Proc., §§ 726, 580a, 580b, 580d; Glendale Fed. Sav. & Loan Ass'n v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 138-139, 135 Cal.Rptr. 802.) Second, both sides agree the anti-deficiency statutes do not preclude a separate action for fraud committed in a loan application transaction. (Fin.Code, §§ 779, 7459, 7460, 15102.) Where the litigants part company, however, is over the effect of a full credit bid by the secured lender at a nonjudicial foreclosure sale of the property securing the loan in default.

Sawyer contends Western Federal's full credit bid at the nonjudicial foreclosure sale conclusively established its security for the debt obligation was not impaired, and consequently, as a matter of law, it was not damaged by any alleged misrepresentations in the loan transaction. Sawyer further contends because the bank could not establish it suffered any damage from the misrepresentations, the bank failed to state a cause of action for either fraud or misrepresentation and these causes of action should have been dismissed. We agree. ²

In Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981 one of the issues presented for resolution was whether anti-deficiency judgment legislation precluded separate actions for waste. After analyzing the relationship between actions for waste and the anti-deficiency judgment statutes, the Supreme Court held actions for waste could not be In applying its holding to the particular facts in that case, the court stated: "While our foregoing conclusion may expose defendant to liability on the basis of having committed 'bad faith' waste, the question need not be resolved. We have further concluded that even assuming that defendant is liable on such basis, nevertheless plaintiff cannot recover since she purchased the subject property at the trustee's sale by making a full credit bid. As stated previously, the measure of damages for waste is the amount of the impairment of the security, that is the amount by which the value of the security is less than the outstanding indebtedness and is thereby rendered inadequate. [citation.] The point of defendant's argument is that the mortgagee's purchase of the property securing the debt by entering a full credit bid establishes the value of the security as being equal to the outstanding indebtedness and ipso facto the nonexistence of any impairment of the security. As applied to the factual context of the instant case, the argument is that the purchase by plaintiff-vendor-beneficiary of the property covered by the purchase money deed of trust pursuant to a full credit bid made and accepted at the nonjudicial foreclosure sale resulted in a total satisfaction of the secured obligation. We agree.

maintained if the waste occurred as a result of a downturn in economic conditions. On the other hand, the court held a lender should not go remediless if the waste was due to reckless, intentional or malicious acts as these acts did not involve the type of risk intended to be borne by a lender in promoting the objective of the anti-deficiency legislation.

"Where an indebtedness secured by a deed of trust covering real property has been satisfied by the trustee's sale of the property on foreclosure for the full amount of the underlying obligation owing to the beneficiary, the lien on the real property is extinguished. [citations.] In such event, the creditor cannot subsequently recover insurance proceeds payable for damage to the property [citations], net rent proceeds [citation], or damages for waste. '[T]he purpose of the trustee's sale is to resolve the question of value and the question of potential forfeiture through competitive bidding....' [citation.] 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.

"At the nonjudicial foreclosure sale, the beneficiary is entitled to make a credit bid up to the amount of his indebtedness, since it would be useless to require him to tender cash which would only be immediately returned to him. [citation.] However, the mortgagee is not required to open the bidding with a full credit bid, but may bid whatever amount he thinks the property worth. Indeed 'many creditors continually enter low credit bids ... to provide access to additional security or additional funds.' It has been said that this is what the creditor should do: ' "Of course, the situation would have been different if the loss-payable mortgagee, Rosenbaum had bid less for the property as was her right. In such case, a deficiency balance of the debt would have remained for which she would have had an entitlement out of the insurance policy. The extinguishment of the mortgage or deed of trust by the foreclosure would not have affected her right to be paid the remainder of the debt under the policy. [p] However, this was not done. Presumably, Rosenbaum bid what she thought the security property to be worth in its condition at the time of her bid. To bid more than the property was then...