Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-56309/USCOURTS-ca9-13-56309-0/pdf.json

Parties Involved:
DM Residential Fund II, LLC
Appellant
First Tennessee Bank National Association
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

DM RESIDENTIAL FUND II, LLC,

Plaintiff-Appellant,

v.

FIRST TENNESSEE BANK NATIONAL

ASSOCIATION,

Defendant-Appellee.

No. 13-56309

D.C. No.

2:12-cv-02707-

MWF-FMO

OPINION

Appeal from the United States District Court

for the Central District of California

Michael W. Fitzgerald, District Judge, Presiding

Argued and Submitted

October 22, 2015—Pasadena, California

Filed December 30, 2015

Before: Alex Kozinski, Sandra S. Ikuta,

and John B. Owens, Circuit Judges.

Opinion by Judge Ikuta;

Dissent by Judge Kozinski

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2 DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK

SUMMARY*

Rescission

The panel affirmed the district court’s grant of summary

judgment in favor of First Tennessee Bank National

Association (FTB) in an action brought by DM Residential

Fund II, LLC, seeking to rescind its purchase of real property

on the basis that the seller failed to disclose a defect.

FTB initiated a nonjudicial foreclosure on residential real

property and sold the property at a foreclosure sale to DM. 

The property lacked a utilities easement to provide electrical

services to the new home and also lacked a certificate of

occupancy. DM discovered the utilities easement issue

shortly after buying the property, but did not bring this

diversity action until two years later, seeking to rescind the

purchase.

The panel held that there was a genuine issue of material

fact as to whether DM could have discovered the defect prior

to the foreclosure. The panel also held nevertheless that the

district court did not err in concluding on summary judgment

that DM was not entitled to the equitable remedy ofrescission

because a party seeking rescission must do so “promptly upon

discovering the facts upon discovering the facts which entitle

him to rescind.” Cal. Civ. Code § 1691. The panel also held

that there was no genuine issue of material fact that DM was

put on inquiry of wrongdoing at the time it discovered the

lack of electricity at the residence shortly after the purchase,

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK 3

and therefore it was deemed to know all facts that could be

discovered from a reasonable investigation. The panel further

held that DM, instead of investigating and pursuing its

claims, took actions inconsistent with unwinding the contract,

and by taking those actions and waiting two years before

suing FTB, DM affirmed the transaction and lost its right to

rescind.

The panel concluded that FTB was entitled to summary

judgment because there was no genuine issue of material fact

that DM’s two-year delay in bringing suit deprived it of the

equitable remedy of rescission under California law.

Dissenting, Judge Kozinski would hold that DM raised a

genuine issue of material fact regarding whether it was

wronged by FTB, and FTB was not entitled to prevail on its

defenses and not entitled to summary judgment. He would

certify the issue for consideration by the California Supreme

Court.

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4 DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK

COUNSEL

Harris L. Cohen, (argued) Harris L. Cohen, A Professional

Corporation, Encino, California; Elkanah J. Burns, Alan D.

Wilner, A Professional Corporation, Burbank, California, for

Plaintiff-Appellant.

Keith A. Attlesey (argued) and Suzanne S. Storm, Attlesey

Storm, LLP, Tustin, California, for Defendant-Appellee.

OPINION

IKUTA, Circuit Judge:

DM Residential Fund II, LLC, (DM) appeals the district

court’s grant of summary judgment in favor of First

Tennessee Bank National Association (FTB). We have

jurisdiction under 28 U.S.C. § 1291, and we affirm.

FTB initiated a nonjudicial foreclosure on residential real

property and sold the property at a foreclosure sale to DM. 

The property lacked a utilities easement needed to provide

electrical service to the new home that had been constructed

on the property and also lacked a certificate of occupancy. 

DM discovered the utilities easement issue shortly after

buying the property and brought this diversity action two

years later, seeking to rescind the transaction on the basis of

FTB’s failure to disclose the defect.

A jury could have reasonably concluded that DM could

not have discovered the utility easement issue prior to the

foreclosure sale based on evidence in the record that:

(1) DM’s pre-foreclosure due diligence exceeded industry

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DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK 5

standards; and (2) it was reasonable for DM not to seek the

certificate of occupancy for this property because

construction of the residence appeared to be completed in

2007 and the City of Whittier did not require certificates of

occupancy for residences built before 2010. Therefore, there

was a genuine issue of material fact as to whether DM could

have discovered the defect prior to the foreclosure sale, which

is the relevant inquiry under Karoutas v. HomeFed Bank,

232 Cal. App. 3d 767, 771 (1991).

Nevertheless, the district court did not err in concluding

on summary judgment that DM is not entitled to the equitable

remedy of rescission. A party seeking rescission must do so

“promptly upon discovering the facts which entitle him to

rescind.” Cal. Civ. Code § 1691.1It is undisputed that DM

paid over $624,000 for a residence and shortly thereafter

discovered that it did not have electricity and could not obtain

it (absent the purchase of an additional easement). Under

these circumstances, a reasonable person would be put on

inquiry as to whether there had been some wrongdoing in the

sale of the residence, at which point a duty to investigate the

wrongdoing arises. See Bancroft v. Woodward, 183 Cal. 99,

108 (1920); see also Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103,

1112 (1988) (granting summary judgment). FTB’s status as

a foreclosing lender does not alter this conclusion, because a

foreclosing lender has the same duties of disclosure regarding

the property as any other seller. See Karoutas, 232 Cal. App.

3d at 771. There is thus no genuine issue of material fact that

DM was put on inquiry of wrongdoing at the time it

1 Contrary to the dissent’s argument, Dis. op. at 7–8, the phrase

“promptly upon discovering the facts which entitled him to rescind” in

section 1691 of the California Civil Code remained unchanged when the

statute was amended in 1961.

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6 DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK

discovered the lack of electricity, and therefore is deemed to

know all facts that could be discovered from a reasonable

investigation. Fox v. Ethicon Endo-Surgery, Inc., 35 Cal. 4th

797, 808–09 (2005). FTB presented evidence that when DM

contacted Cynthia Huerta, she informed DM that FTB knew

of the material defect at the time of the foreclosure sale. As

DM presented no evidence that would allow a trier of fact to

conclude that it would not have been able to discover the

facts supporting its right to rescind at the time it discovered

the defect in the residence, there is no question of material

fact on this issue. Id.

Instead of investigating and pursuing its claims, DM took

actions inconsistent with unwinding the contract, including

encumbering the property, building improvements, and

attempting to sell it. By taking those actions and waiting two

years before suing FTB, DM affirmed the transaction, and its

“right to rescind it is gone.” Bancroft, 183 Cal. at 111; see

also Neet v. Holmes, 25 Cal. 2d 447, 458 (1944). Because

there is no genuine issue of material fact as to whether DM’s

two-year delay deprived it of the equitable remedy of

rescission, FTB is entitled to summary judgment on that

issue.2

AFFIRMED.

2 DM does not pursue its theories for recovery of damages on appeal,

and so we do not address them here.

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DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK 7

KOZINSKI, Circuit Judge, dissenting:

I agree with the majority that DM was entitled to go to the

jury with its claim that it couldn’t have discovered the hidden

defect prior to buying the property. Maj. at 4–5. Moreover,

as the majority correctly notes, FTB was bound to disclose

the hidden defect of which it was aware at the time of the sale

“because a foreclosing lender has the same duties of

disclosure regarding the property as any other seller.” Id. at

5 (citing Karoutas v. HomeFed Bank, 232 Cal. App. 3d 767,

771 (1991)). Nor is there any doubt that DM brought the

lawsuit well within both the three-year statute of limitations

for its fraud claims, see Cal. Civ. Proc. Code § 338(d), and

the four-year statute of limitations for its rescission claim,

see id. § 337(3). DM thus was entitled to sue FTB, unless it

relinquished those rights. The majority concludes it did, but

does so by misreading California law and ignoring key facts.

1. The majority relies on section 1691 of the California

Civil Code, which it construes as depriving DM of its claim

for rescission because it failed to investigate and notify FTB

of that claim in a timely fashion. Maj. at 5. But section 1691

only requires prompt notice after a party is “aware of his right

to rescind,” Cal. Civil Code § 1691; it imposes no duty to

investigate on the wronged party.

The majority goes astray by relying on a case from the era

of flivvers and flappers that interpreted an earlier version of

section 1691. Maj. at 5 (citing Bancroft v. Woodward,

183 Cal. 99, 108 (1920)). At that time, section 1691 required

the party seeking rescission to “use . . . reasonable diligence,” 

Cal. Civil Code § 1691 (1915), but in 1961, California

lawmakers removed the “reasonable diligence” requirement. 

The current version of the statute contains no diligence

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8 DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK

requirement and says nothing at all about the period before

the rescinding party discovers its ground for rescinding. See

Cal. Civil Code § 1691 (2015). Thus, “reasonable diligence

or promptness on the part of the party seeking rescission is no

longer a prerequisite for the remedy.” Wilke v. Coinway,

Inc., 257 Cal. App. 2d 126, 140 (1967). The majority is

applying California law that was repealed when Pat Brown

was governor.

The majority also cites Jolly v. Eli Lilly & Co., 44 Cal. 3d

1103, 1112 (1988), and Fox v. Ethicon Endo-Surgery, Inc.,

35 Cal. 4th 797, 808–09 (2005), but those are statute of

limitations cases. See Maj. at 5. The statute of limitations

hadn’t run when DM brought suit, so those cases are

irrelevant to the question presented to us.

2. Even assuming that lack of diligence could be fatal to

DM, where’s the lack of diligence here? DM bought the

property from FTB at a foreclosure sale and soon discovered

the defect. Had this been an ordinary sale, DM would have

had reason to suspect the seller was aware of the defect. A

propertyowner generallyoccupies and improves the property,

and is likely to be familiar with its physical condition. But

this was a foreclosure sale. The seller bank didn’t occupy the

property or have any other physical dealings with it; the

property was an asset on the bank’s books securing a

defaulted loan. And, as the majority recognizes, maj. at 4–5,

the defect was not one that a reasonable investigation would

have turned up; it was only when DM tried to develop the

property that it discovered the problem.

The prior owner, Huerta, would likely have known about

the defect, but she would have had no reason to disclose it to

the bank. I don’t understand why DM had a duty to track

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DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK 9

down Huerta and ask her whether she told the bank about the

hidden defect. Absent some evidence that such a

communication between Huerta and the bank had taken

place—of which there was none here—a reasonable buyer

wouldn’t have bothered looking for Huerta and asking her

what she’d told the bank.

But there’s an even wider gap in the majority’s reasoning: 

Assuming DM did have a duty to find Huerta and interrogate

her about whether she disclosed the defect to the bank, there’s

no proof DM could have done so. We know that Huerta was

reachable on December 29, 2011, because DM’s agents

talked to her around that time. But the record shows nothing

about her whereabouts between February 4, 2010, the date of

the sale, and December 29, 2011, when she talked to DM. 

Was she easily found? Was she hospitalized in a coma? Was

she in Zanzibar hunting snark? The record does not say.

The majority errs by assuming that Huerta was reachable

by DM in 2010 because she talked to its agents in December

2011. Maj. at 6. We have no evidence that this was the case,

and it is FTB’s duty, as the party moving for summary

judgment, to fill any such gaps in the record. See Anderson

v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986).

FTB ultimately leaves too much to speculation. First, it

doesn’t explain why DM would have had reason to chase

down Huerta and ask her whether she told the bank about the

hidden defect. Nothing in the relationship of defaulting

borrower and foreclosing bank naturally suggests that she

would have done so. And, second, we are left to speculate

about where Huerta was all this time and whether DM could

have gotten a hold of her. All of these are facts—facts that

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10 DM RESIDENTIAL FUND V. FIRST TENNESSEE BANK

are necessary for FTB to prevail on summary judgment, and

facts that are absent from this record.

3. The majority disregards the fact that DM also sought

damages on theories of negligent and intentional

misrepresentation. Section 1691 certainly doesn’t apply to

those claims and, as noted, they aren’t barred by the statute of

limitations. The district court had no basis for concluding

that DM waived those claims because a party doesn’t waive

its right to sue for fraud just by engaging in conduct allegedly

inconsistent with an intent to sue after discovering the

misrepresentation. See Smith v. Roach, 53 Cal. App. 3d 893,

898–99 (1975). Plaintiffs in Smith rented out units in a

building they owned after finding out they relied on a

misrepresentation in purchasing it. Id. at 899. The Smith

court refused to find waiver because “a plaintiff waives his

right to seek damages for fraud only if, after he discovers the

fraud, he makes a new agreement or engagement with the

other party to the original contract” that results in an

“adjustment of the plaintiff’s rights under the original

contract.” Id. at 898–99 (internal quotation marks omitted). 

Here, DM did not discover the fraud until 2012, and at no

point entered into any subsequent agreement with FTB.

* * *

DM raised a genuine issue of material fact regarding

whether it was wronged by FTB. FTB was not entitled to

prevail on its defenses, and certainly not on summary

judgment. I can’t imagine the result would be the same if this

case were decided by the California courts. At the very least,

the matter is highly debatable, and we should certify it for

consideration by the California Supreme Court. See Cal. R.

Ct. 8.548(a).

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