Opinion ID: 1158283
Heading Depth: 3
Heading Rank: 3

Heading: Effect of Alliance's Full Credit Bids on Fraud Claims

Text: (10a) We now consider whether Alliance's full credit bids as a matter of law bar its fraud claims against North American and Ticor. We conclude that they do not. Accepting as true the allegations of the complaint, as we must, defendants joined with others in a conspiracy to perpetrate a deliberate fraud which could conceivably have caused injury even to a lender who had exercised reasonable care in the conduct of its business affairs. ( Guild Mortgage, supra, 193 Cal. App.3d at p. 1515 (conc. opn. of Gates, J.).) Defendants essentially argue that as a result of its full credit bids, Alliance could demonstrate neither justifiable reliance nor actual damages. We consider these arguments in turn. As with any purchaser at a foreclosure sale, by making a successful full credit bid or bid in any amount, the lender is making a generally irrevocable offer to purchase the property for that amount. (§ 2924h, subd. (a).) The lender, perhaps more than a third party purchaser with fewer resources with which to gain insight into the property's value, generally bears the burden and risk of making an informed bid. It does not follow, however, that being intentionally and materially misled by its own fiduciaries [8] or agents as to the value of the property prior to even making the loan is within the realm of that risk. (See Brown v. Critchfield (1980) 100 Cal. App.3d 858, 871 [161 Cal. Rptr. 342] [Risk inherent in secured land transactions is on the mortgagee, but that risk should not be expanded to include the assumption of damages resulting from a fiduciary's negligence or fraud].) Most lenders, such as Alliance in this case, are corporate entities, and rely on their agents to provide them material information. Here, Alliance did obtain appraisals, and attempted to make informed loan decisions. It alleges, however, that its appraiser, Rothwell, in conspiracy with defendants, fraudulently misrepresented the nature of the properties and the existence and qualifications of the buyers, and that it did not discover the fraud until after it acquired title to the properties. The full credit bid rule was not intended to immunize wrongdoers from the consequences of their fraudulent acts. We conclude therefore that in order to establish reliance, Alliance need only demonstrate that its full credit bids were a proximate result of defendants' fraud, and that in the absence of such fraud it would not, in all reasonable probability, have made the bids. ( Spinks v. Clark, supra, 147 Cal. 439, 444; 5 Witkin, Summary of Cal. Law, supra, Torts, § 711, p. 810.) As for the question of whether this reliance was justifiable, a generally fact-based inquiry, we reiterate that Negligence on the part of the plaintiff in failing to discover the falsity of a statement is no defense when the misrepresentation was intentional rather than negligent. ( Seeger v. Odell, supra, 18 Cal.2d at p. 414.) Nor is a plaintiff held to the standard of precaution or of minimum knowledge of a hypothetical, reasonable man. ( Id. at p. 415.) If the conduct of the plaintiff in the light of his own intelligence and information was manifestly unreasonable, however, he will be denied a recovery. ( Ibid.; Gray v. Don Miller & Associates, Inc., supra, 35 Cal.3d at p. 503 [the issue is whether the person who claims reliance was justified in believing the representation in the light of his own knowledge and experience].) `If the plaintiff and defendant are in a confidential relationship there is no duty of inquiry until the relationship is repudiated. The nature of the relationship is such as to cause the plaintiff to rely on the fiduciary, and awareness of facts which would ordinarily call for investigation does not excite suspicion under these special circumstances.' ( Lee v. Escrow Consultants, Inc., supra, 210 Cal. App.3d at p. 921.) Thus, to the extent Alliance's full credit bids were proximately caused by defendants' fraudulent misrepresentations, and this reliance without independent or additional inquiry was either appropriate given the context of the relationship or was not otherwise manifestly unreasonable, Alliance's bids cannot be deemed an admission of the properties' value. (See Bank of America etc. Assn. v. Reidy, supra, 15 Cal.2d at p. 248 [not unusual for a mortgagee to make a bid for the property in the amount owing on the debt when it cannot recover a deficiency].) Hence, the full credit bid rule would not apply. In the alternative, to the extent Alliance's full credit bids were not proximately caused by defendants' fraudulent misrepresentations, or its reliance without independent or additional inquiry was either inappropriate given the context of the relationship or was otherwise manifestly unreasonable, the full credit bid rule applies, and Alliance's bid would then constitute an irrevocable offer to purchase the property for that amount. (§ 2924h, subd. (a).) Hence, under these circumstances, Alliance would not be entitled to recover the difference between its bid, which by definition is an amount equal to the unpaid principal and interest of the mortgage debt, together with the costs, fees and other expenses of the foreclosure, and the actual value of the property. ( Cornelison v. Kornbluth, supra, 15 Cal.3d at p. 606, fn. 10.) It would, however, still be able to recover any other damages flowing from the defendants' fraud. Because such a factual evaluation cannot be made on the pleadings alone, the trial court erred in entering judgment on the pleadings. [9] We note that in its brief in this court, Alliance does not claim that it was induced to make full credit bids, but rather that it was fraudulently induced to make loans. Obviously, as we have stated above, to the extent Alliance claims that its decision to acquire the properties was independent of defendants' misrepresentations, there is no causal connection between the defendants' fraudulent misrepresentations and Alliance's damages resulting from the full credit bids. (See Mirkin v. Wasserman (1993) 5 Cal.4th 1082, 1092 [23 Cal. Rptr.2d 101, 858 P.2d 568]; Kruse v. Bank of America (1988) 202 Cal. App.3d 38, 60 [248 Cal. Rptr. 217].) It appears, however, that Alliance sought to establish such a connection in the trial court by seeking to introduce evidence that It is the custom and practice in the [lending] industry to make full credit bids without knowledge of the property's actual value, because only after the mortgagor obtains title and access to the property does it obtain the means to value the property. [10] Moreover, at oral argument Alliance clarified that it simply meant by this statement that there were no additional or subsequent statements by defendants on which it was relying, not that there was no causal connection between the misrepresentations and the full credit bids. We therefore are reluctant to deny Alliance the opportunity to present such evidence based on this single representation. Alliance also alleges that for three of the properties it was compelled by FHLMC regulations to repurchase loans it had earlier sold to secondary investors before it learned of the fraud. Again, to the extent Alliance justifiably relied on defendants' misrepresentations in selling the loans, its damages resulting from any compelled repurchase were incurred as a direct consequence of the fraud. (See Guild Mortgage, supra, 193 Cal. App.3d at pp. 1508-1509; id. at p. 1514 [Allegations that federal regulations compelled repurchase of properties resulting in plaintiff's damage, repurchase necessitated by fraud, and loan would not have been made in the absence of purported misrepresentations sufficient to establish a clear causal connection between defendants' alleged fraudulent conduct and the damages sustained.].) Accordingly, for these claims in particular, we perceive no basis on which such a repurchase, or any full credit bid by the FNMA, would even arguably preclude Alliance from pursuing a fraud claim against defendants. (11) We next consider defendants' argument that Alliance has failed to allege actual damages. This argument is dependent on defendants' assumption that the measure of damages for fraudulent inducement of a loan is the impairment of the lender's security or the balance of the outstanding indebtedness. Not so. Alliance does not allege here that defendants impaired its security or caused the value of the properties to decrease after the loans were made. Rather, it alleges that defendants' intentional misrepresentations regarding the properties' characteristics and values induced it to make loans that far exceeded the properties' actual worth at the time the loans were made, and that as a result of these misrepresentations Alliance purchased the properties. In other words, defendants did not damage or impair Alliance's security interest; rather they deceived Alliance at the outset as to what that security was. This is a wholly different claim from that which we considered in Cornelison. Once again, just as a suit for fraud against a borrower is a completely separate remedy than a suit on the promissory note secured by the deed of trust, and hence not barred by the antideficiency statutes ( Manson v. Reed, supra, 186 Cal. App.3d at page 1501), a lender's suit against its fiduciaries or agents for fraudulently inducing it to make loans and purchase property is a completely separate cause of action from a suit for impairment of its security. The damages for such fraud are measured not by the outstanding indebtedness, but by either Alliance's out-of-pocket and consequential damages under section 3343 or under section 3333, depending on whether defendants stand in a fiduciary relationship to Alliance. The Court of Appeal here, relying on its earlier opinion in Salahutdin v. Valley of California, Inc., supra, 24 Cal. App.4th at pages 564-568, concluded that the appropriate measure of damages for fraud by a fiduciary under section 3333 was the benefit-of-the-bargain rule. Salahutdin, however, involved the measure of damages for a fiduciary's negligent misrepresentation. ( Salahutdin v. Valley of California, Inc., supra, 24 Cal. App.4th at p. 560.) We have previously held that a plaintiff is only entitled to its actual or out-of-pocket losses suffered because of fiduciary's negligent misrepresentation under section 3333. ( Gray v. Don Miller & Associates, Inc., supra, 35 Cal.3d at pp. 502, 504, citing Gagne v. Bertran (1954) 43 Cal.2d 481, 490 [275 P.2d 15].) While the measure of damages under section 3333 might be greater for a fiduciary's intentional misrepresentation, we need not address that issue here. (See Salahutdin v. Valley of California, Inc., supra, 24 Cal. App.4th at pp. 565-566 [discussing commentators' suggestion that a benefit-of-the-bargain measure of damages is appropriate when the fiduciary's misrepresentation is intentional, and an out-of-pocket measure of damages is applicable when the misrepresentation is negligent]; Cal. Attorney's Damages Guide (Cont.Ed.Bar Supp. May 1995) § 2.33A, pp. 85-86.) The question before us is whether Alliance stated a fraud claim that survives a motion for judgment on the pleadings. Alliance alleges at least out-of-pocket damages when it alleges that it paid more for the properties than they were worth, and incurred certain consequential damages. (See Gagne v. Bertran, supra, 43 Cal.2d at p. 490, fn. 6.) Accordingly, its full credit bids do not establish as a matter of law that it sustained no actual damages. Defendants' remaining arguments are unpersuasive. Ticor attempts to distinguish Brown v. Critchfield, supra, 100 Cal. App.3d at page 873, which allowed the plaintiff to recover certain damages for breach of fiduciary duty despite the plaintiff's full credit bid, by asserting the damages in that case were not premised on any decrease in the value of the remaining security, whereas Alliance only suffered impairment of security damages here. As we have explained, however, Alliance alleges that the securities in this case have never been worth the value represented to it by defendants. Thus, Alliance does not allege, and does not seek damages for, the impairment of that security caused by events which decreased the value of the property after it made the loans. Citing BFP v. Resolution Trust Corp., supra, 511 U.S. ___ [128 L.Ed.2d 556, 114 S.Ct. 1757], North American argues that courts should not go behind the creditor's successful bid at a foreclosure sale to impeach the value established by that bid. However, the issue in BFP was whether the consideration received from a noncollusive, real estate mortgage foreclosure sale conducted in conformance with applicable state law conclusively satisfies the Bankruptcy Code's requirement that transfers of property by insolvent debtors within one year prior to the filing of a bankruptcy petition be in exchange for `a reasonably equivalent value.' ( Id. at p. ___ [128 L.Ed.2d at p. 561, 114 S.Ct. at p. 1759].) The court concluded that a `reasonably equivalent value,' for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State's foreclosure law have been complied with. ( Id. at p. ___ [128 L.Ed.2d 569, 114 S.Ct. at p. 1765].) Nothing in this conclusion negates the well-established fraud exception in California to the finality of a foreclosure, or indeed any, property sale. (See Bank of America etc. Assn. v. Reidy, supra, 15 Cal.2d at p. 248 [It is the general rule that courts have power to vacate a foreclosure sale where ... the sale ... is tainted by fraud....].)