Filed 4/17/14 Mastantuono v. Creedside Financial CA2/6

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

PASQUALE MASTANTUONO et al.,
Plaintiffs, Cross-defendants and Respondents,

v. CREEKSIDE FINANCIAL, INC. et al., Defendants, Cross-complainants and Appellants. 2d Civil No. B244966 (Super. Ct. No. CV098199) (San Luis Obispo County)

Plaintiffs invested in a constr uction loan that was arranged and administered by a real estate broker. The loan went into default. Plaintiffs foreclosed and invested additional money to complete the project. Plai ntiffs sued the broker for breach of fiduciary duty and other causes of action. Third parties claiming to be additional investors in the proj ect cross-complained to quiet title to an interest in the land. The trial court, sitting without a jury, found the defendant broker committed numerous breaches of fiduciary duties owed to plaintiffs and awarded damages. The court also found plaintiffs were the only investors, and quieted title in plaintiffs against cross-complainants. We affirm.2 FACTS Hubert La Prade is a licensed real es tate broker and the sole shareholder and employee of Creekside Financial, Inc. (Creekside), a licensed real estate broker corporation. La Prade spoke to Pasquale and Karen Mastantuono about investing in a trust deed. La Prade told them he was coll ecting funds to finance the construction of a house on a parcel of property in Templeton. David Graves would be the homebuilder. La Prade represented that the pr operty would be worth over a million dollars when the house was completed. La Prade asked the Mastantuonos to invest $300,000. Pasquale Mastantuono asked La Prade if $500,000 "w ould do the whole thing." La Prade said it woul d. The loan was to be for the construction of the house, not for the purchase of the property. Th e Mastantuonos belie ved Graves already owned the property. The Mastantuonos gave La Prade a check fo r $500,000 made out to Creekside. La Prade prepared a note and deed of trust for $700,000 in favor of the Mastantuonos and Creekside. The deed of trust showed the Mastantuonos holding a 71.429 percent interest and Creekside holding a 28.571 percent interest. The Mastantuonos thought th e loan was for $500,000, not $ 700,000. La Prade did not tell them that the loan was not full y funded or that he intended to bring in other investors. The note bore interest at 12.5 percen t. La Prade told the Mastantuonos that they would receive 12 pe rcent interest. La Prade te stified that the extra half percent was his loan servicing fee. Loan disclosure documents st ated there would be no loan servicing fee. A disclosure statement lists Graves 's monthly income at $20,900 per month. Under expenses it states "N/A." The statement discloses no debt. La Prade testified he assumed Graves's income wa s $20,900 per month based on what other contractors were making. La Prade testif ied he was unaware of any debts owed by Graves. The evidence showed Graves had liabilities of $7 million. The loan escrow clos ed with the Mastantuonos' $500,000 as the only funding for the $700,000 lo an. Business and Professions Code section 10238,3 subdivision (h)(4)(B) requires a construction loan to be fully f unded prior to the recording of a deed of trust. Unknown to the Mastantuonos, a si multaneous escrow had been opened to purchase the land. The purchase escrow was funded entirely with the proceeds of the Mastantuonos' loan. Afte r the close of escrow, only $95,851 was available to complete the construction of the home. The estimated cost of completion was $612,000. La Prade claims that after close of escrow he obtained other investors for the remaining $200,000 principal balance of the loan. He produced no credible documentary evidence to support the claim. The trial court found the $500,000 invested by the Mastantuonos were th e only funds invested in the loan. The Mastantuonos received a few payments on the note. But La Prade made the payments out of the Mastantuonos ' own funds. La Prade failed to notify them that the source of the payments was ot her than the maker of the note as required by Business and Professions Code section 10238, subdivision (k)(2). La Prade had no formal system for disbursement of the draws under the construction loans. (Bus. & Prof. Code, § 10238, subd. (h)(4)(C).) He did not use a neutral third party escrow for disbursements ( id. at subd. (h)(4)(A)); nor did he have the completed work independently verified prior to a disbursement ( id. at subd. (h)(4)(D)). Without notifying the Mastantuono s, La Prade disbursed all the construction loan funds to Graves before th e project was complete. La Prade made the final disbursement so that Graves could ap ply the funds to a different project. La Prade trusted that Graves would return to the Mastantuonos' project once the other project was complete. When all the funds had been di sbursed, the Mastantuonos stopped receiving payments on the note. Pasquale Mastantuono began an investigation. He travelled from his home in Idaho to Templeton. He discovered that the home construction was not complete, most of his in vestment had been used to purchase the4 land, all the construction funds had been disbursed, and that there were others claiming to be investors in the trust deed. After Pasquale Mastantuono bega n his investigation, La Prade quitclaimed Creekside's interest in the trust deed to third parties who he claimed were additional investors. The Mastantuonos unilaterally for eclosed on the trust deed. They prevailed at the foreclosure sale wi th a full credit bid of $820,312.60. The Mastantuonos completed constr uction of the house with their own funds at a cost of $141,089. They listed th e property for sale at $729,000. They sold it for $650,000, realizing net proceeds of $6 00,619.68. The proceeds were placed in a trust account pending the out come of this action. The Mastantuonos sued La Prade, Creekside and the parties who claimed to be additional investors. Among the causes of action were breach of fiduciary duty and quiet title. The defendants cross-co mplained for conversion, partition and declaratory relief. The trial court found for the Mastan tuonos on the complaint and crosscomplaint. The court found the Mastantuonos were the on ly investors in the trust deed, and had a 100 percent interest in it. The court also found La Prade breached fiduciary duties he owed to the Mastantuonos. The co urt found the Mastantuonos would not have invested had La Prade disclosed the facts. The court awarded the Mastantuonos damages against La Prade and Creekside in the amount of $765,506.47, based on the benefit-of-the-bargain. The court found that La Prade's mi sconduct would support an award of punitive damages. But the Ma stantuonos did not introduce any evidence of La Prade's financial condition. Withou t such evidence, the court could not award punitive damages. The court quieted title in the Mast antuonos against the other alleged investors.5 DISCUSSION I. La Prade contends the evidence was insufficient to support the judgment. La Prade's contention is based on a vi ew of the evidence most favorable to him. But we take a different view of the evidence. In view ing the evidence, we look only to the ev idence supporting the prevailing party. ( GHK Associates v. Mayer Group, Inc. (1990) 224 Cal.App.3d 856, 872.) We discard evidence unfavorable to the prevailing party as not having sufficient veri ty to be accepted by the trier of fact. ( Ibid. ) Where the trial court or jury has drawn reasonable inferences from the evidence, we have no power to draw diffe rent inferences, even though different inferences may also be reasonable. (9 W itkin, Cal. Procedure (5 th ed. 2008) Appeal, § 376, pp. 434-435.) The trier of fact is not required to believe even uncontradicted testimony. ( Sprague v. Equifax, Inc. (1985) 166 Cal.App.3d 1012, 1028.) Here the trial court based its judgme nt on breach of fiduciary duties. La Prade does not contest he was the Mastantuonos' fiduciary. A real estate broker's fiduciary du ty to his clients requires the highest good faith and undivided service and loyalty. ( Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18 , 25.) He is hired for his knowledge and skill. ( Ibid. ) He has a duty to disclose all material facts that would affect his principal's decision to enter into the transaction. ( Ibid. ) His duty to disclose mate rial facts includes a duty to research and investigate in order to learn those facts. ( Ibid. ) His duty is not limited to simply disclosing facts; he also has a duty to counsel and advise his principal regarding the propriety and rami fications of the decision. ( Ibid. ) La Prade's argument assumes the burden of proof was on the Mastantuonos. But once a fiduciary relationshi p is established, the burden shifts to the agent to show that he acted with the utmost good faith and that he made a full disclosure of all the material f acts prior to the transaction. ( Jorgensen v. Beach "N' Bay Realty (1981) 125 Cal.App.3d 155, 162.)6 Here every phase of the transaction wa s tainted by La Prade's breach of a fiduciary duty. Naming a few wi ll suffice. La Prade failed to disclose that: the loan would not be fully funded; ov er 80 percent of the loan funds would be used to purchase the land; the remaining balance wo uld be far from adequate to complete construction; Creekside would be receiving a half percent ad ministrative fee in spite of La Prade's representation there would be no such fee; interest pa yments received by the Mastantuonos were from th eir own money; there would be no formal system for draws; and that money wo uld be disbursed from the construction loan fund to complete a different project in whic h the Mastantuonos had no interest. In addition, La Prade failed to inves tigate and disclose Graves's financial condition; conveyed an interest in the loan adve rse to the Mastantuonos; and committed multiple violations of th e Business and Professions Code. La Prade points to do cuments he provided to the Mastantuonos. The documents include a preliminary title repor t showing the land was owned by a person other than Graves and loan documents showin g the principal to be $700,000. La Prade neglects to mention that the documents were provided after the Mast antuonos invested. He also neglects to mention misleading do cuments such as the crucial document that misrepresented Graves's financial condition. What is clear is that the Mastant uonos did not understand the transaction until after default, when Pasquale Mastantuono undertook an investig ation on his own. La Prade fails to cite any credible ev idence that he ever discussed with the Mastantuonos the true nature of the transac tion or the risks they were undertaking. It is true the trial court found th at the Mastantuonos should have been more diligent in reading the documents. But where there is a fiduciary relationship, failure of a client to read documents does not excuse a breach of duty. (See Mazuran v. Stefanich (1928) 95 Cal.App. 327, 331-332 [client's failu re to read retainer agreement prepared by hi s attorney excused].) La Prade argues the trial court failed to consider that this was a high-risk "hard money" loan. Certainly, every construc tion loan bears a higher risk to the lender7 than a conventional purchase money loan. But this is not the typical construction loan. The same factors cited above showing a breach of fiduciary duty, show that the failure of this loan was a near cer tainty. No reasonable investor who was adequately informed of the facts would ha ve invested in this loan. La Prade argues that the Mastantuon os failed to prove there were no other investors. But as a fiduciary, th e burden of proof is on La Prade. ( Jorgensen v. Beach 'N' Bay Realty , supra , 125 Cal.App.3d at p. 162.) The court found that the Mastantuonos fully documented their investment . But for other alleged investors there are no copies of checks, no evidence of ch ecks paid to lenders , no fully executed escrow documents, no settlement statemen ts, and no assignments of Creekside's alleged interest in the note and deed of trus t. La Prade argues that the evidence of other investors was uncontradicted. But La Prade confuses uncontradicted with credible. The trier of fact can reject even uncontradicted evidence as not credible. ( Sprague v. Equifax, Inc. , supra , 166 Cal.App.3d at p. 128 .) Here the court found there was no credible evidence that anyone other than the Mastantuonos invested in the loan. La Prade argues the Mastantuonos' losses were caused by a downturn in the real estate market, not by any fault of his. But La Prade cites no authority that requires the trial court to accept his view of ca usation. In any even t, even if a market downturn could be considered an independ ent superseding cause, a superseding cause will not relieve a defendant from liab ility if it was foreseeable. (See Akins v. County of Sonoma (1967) 67 Cal.2d 185, 199.) Market downturns occur too frequently to be deemed unforeseeable. Moreover, after loan funds were expended to purchase the land, only $95,851 remained to complete a project with an estimated cost of $612,000; La Prade failed to properly supervise c onstruction draws; he made interest payments to the Mastantuonos with their own money; he even disbursed construction loan funds so that Graves could apply them to a different pr oject. The trial court could reasonably conclude the loan was bound to fail ev en in a good real estate market.8 II. La Prade contends the Mastantuonos ' full credit bid at the foreclosure sale prevents any award of damages. A full credit bid will not preclude an action for fraud against a fiduciary if the plaintiffs can demonstrate that th eir full credit bid was a proximate result of defendant's fraud, and that in the absen ce of such fraud they would not, in all reasonable probability, have made the bid. ( Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1246-1247.) Here La Prade did not raise the de fense of the full credit bid in his pleadings or at trial. He raised it for the fi rst time in his motion for a new trial. That the trustees deed was introduced in evidence at trial is not sufficient to raise the issue. The Mastantuonos were deprived of the oppo rtunity to show relian ce at trial. Under the circumstances, La Prade ha s waived the issue. (See Richmond v. Dart Industries,
Inc. (1987) 196 Cal.App.3d 869, 879.) III. La Prade contends the trial court erre d in awarding damages. He claims the proper measure of damages is the diffe rence between "the actual value of the property at the time of the representation co mpared to the value as represented by [La Prade]." (Citing 6 Witkin, Su mmary of Cal. Law (10th ed. 2005) Torts, § 1710, p. 1238.) The measure of damages for breach of fiduciary duty is all loss proximately caused by the br each, including loss of the benefit-of-the-bargain. ( Fragale v. Faulkner (2003) 110 Cal.App.4th 229, 238. ) In this case, damages measured by the difference between the proper ty as represented and the actual value would not be adequate to co mpensate the Mastantuonos fo r their losses. The trial court property determined their losses to be the principal amount of the loan plus interest, plus their costs for comp leting the home and foreclosing. La Prade complains that the trial court made no findings on evidence that the house could have been completed for appr oximately half of what the Mastantuonos9 spent and in less time. But it is obvious that the trial court simply did not find that evidence credible. La Prade also complain s that the trial court made no finding on the Mastantuonos' decision to foreclose nonjud icially, thus precluding a deficiency judgment as mitigation of damages. Bu t Graves was insolvent. He filed for bankruptcy with net liabilities of $7 million. Pursuing a judicial foreclosure and a deficiency judgment would have been a waste of money here with no reasonable possibility of mitigating damages. The judgment is affirmed. Cost s are awarded to the Mastantuonos. NOT TO BE PUBLISHED.

GILBERT, P. J.

We concur:

YEGAN, J.

PERREN, J.Dodie A. Hartman, Judge Superior Court County of San Luis Obispo

________________ ______________

Christian E. Iversen for Defendants, Cross-complainants and Appellants. John F. Hodges, Conley Wyatt Ande rson for Plaintiffs, Cross-defendants and Respondents.