Opinion ID: 2278904
Heading Depth: 1
Heading Rank: 3

Heading: Reliance by PaineWebber and Wells Fargo

Text: The Konover defendants contend that no one associated with Wells Fargo ever reviewed or considered the Certificate of Borrower before purchasing the package of loans and that the borrower's certificates was not even part of the due diligence that PaineWebber made available for Wells Fargo's investors to review in determining whether to participate in the deal. On that premise, they argue that Diamond Point's representations could not possibly have affected the value that Wells Fargo ascribed to the Diamond Point loan or otherwise caused Wells Fargo any harm in these circumstances. We note initially that the defendants' statement that the borrower's certificates were not part of the due diligence that PaineWebber made available to Wells Fargo may be a stretch of the actual evidence. The source of that statement is the deposition testimony of Douglas Goldrick, who worked for ORIX Capital Markets, the servicing agent which administered the loan on behalf of Wells Fargo. Mr. Goldrick did not say that the borrower's certificates were not part of the due diligence done by PaineWebber. He simply stated that he did not see those certificates in a due diligence file prepared for ORIX. That aside, the Certificate of Borrower itself stated that (1) it was being delivered to the Lender to induce Lender to make the loan, (2) Diamond Point acknowledged that Lender shall rely upon this Certificate and the making of such representations, warranties and covenants, (3) [e]ach and every representation and warranty contained herein and which is within the Borrower's reasonable control, will remain materially true and correct at all times from the date hereof until the Loan is repaid in full in accordance with its terms, and (4) if any representation becomes untrue, in whole or in part, after the date hereof, Borrower will so advise Lender in writing immediately. The representations in the Certificate were made to the Lender (Pinnacle) and its successors, transferees, and assigns, and therefore ran as well to PaineWebber. The Circuit Court thus properly concluded that Diamond Point had a continuing duty . . . to notify Pinnacle and/or PaineWebber if any representation or warranty became untrue. There is no evidence that Diamond Point gave any notice to Pinnacle or PaineWebber regarding Sam's Club after the loan closing. The Konover defendants clearly understood that PaineWebber would likely sell the mortgage, separately or as part of a larger package. From essentially undisputed evidence, the Circuit Court found that those defendants were sophisticated in the business of commercial loans generally and conduit loans in particular, including the fact that conduit loans like the one being pursued in 2000, would be sold to institutional investors in a secondary market transaction. More particularly, in Paragraph 53 of the restated mortgage, Diamond Point expressly acknowledged that Pinnacle and its successors and assigns may, among other things, deposit, through one or a series of transactions, this Mortgage, the Note and Other Security Documents with a trust, which trust may sell certificates to investors, and it agreed to cooperate with the mortgagee in effecting any such Secondary Mortgage Transaction. It is certainly implicit that Diamond Point had more than good reason to expect that any secondary buyer, including a trustee in the position of Wells Fargo, would necessarily receive and rely on the loan documents, including the representations of material fact made in its borrower's certificates. Although Wells Fargo's claims for losses on the mortgage loan were breach of contract, rather than tort, actions, they were founded on an allegation of fraud or intentional misrepresentation, and, as a result, the principles set forth in §§ 531 through 533 of the Restatement (Second) of Torts are instructive. Section 531 states, as a general rule: One who makes a fraudulent misrepresentation is subject to liability to the persons or class of persons whom he intends or has reason to expect to act or to refrain from action in reliance upon the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the type of transaction in which he intends or has reason to expect their conduct to be influenced. Section 532, dealing more particularly with misrepresentations made in commercial documents, adds: One who embodies a fraudulent misrepresentation in an article of commerce, a muniment of title, a negotiable instrument or a similar commercial document, is subject to liability for pecuniary loss caused to another who deals with him or with a third person regarding the article or document in justifiable reliance upon the truth of the representation. (Emphasis added). Comment b. to § 532 characterizes the section as saying that the maker of a fraudulent misrepresentation incorporated in a document has reason to expect that it will reach and influence any person whom the document reaches. Consistently with that view, § 533 provides: The maker of a fraudulent misrepresentation is subject to liability for pecuniary loss to another who acts in justifiable reliance upon it if the misrepresentation, although not made directly to the other, is made to a third person and the maker intends or has reason to expect that its terms will be repeated or its substance communicated to the other, and that it will influence his conduct in the transaction or type of transaction involved. Under these principles, Diamond Point would be liable to Wells Fargo. It made a fraudulent misrepresentation in a commercial document, for the purpose of inducing Pinnacle and PaineWebber to extend a loan, aware that PaineWebber likely would sell that loan in the secondary market. Diamond Point would thus have reason to expect that the loan documents, including its borrower's certificates, would be presented to, would be considered by, and would influence the decision of prospective buyers in the secondary market. The mere fact that those certificates could not be immediately located in one due diligence file does not mean that they were not presented to, considered by, and influenced Wells Fargo in determining whether to purchase the Diamond Point mortgage. Liability is not defeated by the fact that Diamond Point's representations were not made directly to Wells Fargo. See Sempione v. Provident Bank of Maryland, 75 F.3d 951, 962-63 (4th Cir.1996); Superior Bank, F.S.B. v. Tandem Nat'l. Mortg., Inc., 197 F.Supp.2d 298 (D.Md.2000); Ernst & Young v. Pacific Mutual Life Insurance Co., 51 S.W.3d 573 (Tex.2001); Reisman v. KPMG Peat Marwick, 57 Mass.App.Ct. 100, 787 N.E.2d 1060 (2003); compare Walpert v. Katz, 361 Md. 645, 762 A.2d 582 (2000), an action founded solely in negligence.