Free Appendix - District Court of California - California

Case 5:07-cv-04808-JF

Document 60-2

Filed 07/25/2008

Page 1 of 42

EXHIBIT 1

1219457.1

Case 5:07-cv-04808-JF

Document 60-2

Filed 07/25/2008

Page 2 of 42

900 P.2d 601 Page 1
W~la
po

10 Ca1.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825, 95 Daily Journal D.AR. 11,688

10 Ca1.4th 1226

ance. To do so, plaintiff had only to demonstrate

Alliance Mortg. Co. v. Rothwell
Cal. 1995.

that its full credit bids were a proximate result of
defendants' fraud, and in the absence of such fraud
it would not, in all reasonable probabilty have

ALLIANCE MORTGAGE COMPANY, Plaintiff and Appellant,
V.

made the bids. In such a case, the bids could not be
deemed an admission of the properties' value. Even

LAURIE SAMUEL ROTHWELL et aI., Defendants and Respondents.

if the full credit bids were not the proximate result
of defendants' fraudulent misrepresentations, or plaintiffs reliance was manifestly unreasonable, plaintiff could stil recover any other damages

No. 8043065.
Supreme Court of California Aug 28, 1995.
SUMMARY

flowing from defendants' fraud. Because such a factual evaluation could not be made on the pleadings alone, the trial cour erred in entering judgment on
the pleadings. The court also held that the judgment
on the pleadings could not be sustained on the

A real estate lender brought an action against a real estate appraiser and broker, a title insurer, and others, alleging that defendants fraudulently induced

ground plaintiff failed to allege actual damages. Although plaintiff did not allege that defendants im-

plaintiff to make loans to purchasers of real propert. The trial court granted motions to strike por-

paired its security or caused the value of the properties to decrease after the loans were made, it alleged

tions of the complaint, concluding that plaintiffs

that the intentional misrepresentations regarding the

full credit bids for the properties at the trstee's
sales barred claims for damages resulting from

properties' characteristics and value induced it to
make loans that far exceeded the properties' actual

fraudulent representations as to the adequacy of the

worth at the time the loans were made, and that as a
result of these misrepresentations it purchased the

security, and entered judgment on the pleadings for defendants. (Superior Court of the City and County
of San Francisco, No. 880354, Raymond 1. Arata, Jr., Judge.) The Court of Appeal, First Dist., Div. Two, No. A058972, reversed.

properties. The damages for such fraud are measured not by the outstanding indebtedness, extin-

guished by the full credit bid, but by plaintiffs outof-pocket or consequential damages under Civ.
Code, § 3343, or Civ. Code, § 3333, depending on

The Supreme Court affnned the judgment of the
Cour of Appeal with directions to remand the matter to the trial court for further proceedings. The

whether defendants stood in a fiduciary relationship

to plaintiff. (Opinion by Arabian, 1., with Mosk,
Kennard, Baxter, and George, J1., concurring. Separate concurring opinion by Werdegar, 1., with Lucas, C. 1., concurring.)

court held that the trial court erred in striking por-

tions of plaintiffs complaint on the ground that
plaintiffs full credit bids on the properties at nonjudicial foreclosure sales barred claims for damages resulting from fraudulent misrepresentations as to
the adequacy of the security, and granting defendants judgment on the pleadings. Accepting as tre

HEADNOTES

Classified to California Digest of Offcial Reports

the allegations of the complaint, the court held that plaintiffs full credit bids did not, as a matter of law, bar its fraud claims. The full credit bids did not preclude plaintiff from demonstrating justifiable reli-

(1) Deeds of Trust
26-- Remedies-- F oreclosure--J udicial Foreclosure.

In a judicial foreclosure on a deed of trst, if the

propert is sold for less than the amount of the out-

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

3

§

900 P.2d 601 Page 2
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 3 of 42
10 Cal.4th 1226,900 P.2d 601,44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.AR. 11,688
10 Ca1.4th 1226

standing indebtedness, the creditor may seek a deficiency judgment or the difference between the

amount of the indebtedness and the fair market value of the propert, as detennined by a court, at the time of sale. However, the debtor has a statutory right of redemption, or an opportnity to regain ownership of the propert by paying the fore-

to protect the debtor. However, they do not preclude an action against a borrower for fraud in the
inducement of a loan. There are several reasons for

this exception. First, a suit for fraud does not involve an attempt to recover on a debt or note. As

such, it stands separate and apart from any action

closure sale price, for a period of time after foreclosure.
(2) Deeds of Trust § 44--Sale Under Power-

which the antideficiency legislation seeks to preclude. Furhennore, the antideficiency laws were

not intended to immunize wrongdoers from the

consequences of their fraudulent acts. Finally, assuming the cour applies a proper measure of damages, fraud suits do not frustrate the antideficiency policies since there should be no double recovery for the beneficiary.
(5) Deeds of Trust § 38--Sale Under Power--Effect

-Deficiency--Nonjudicial Foreclosure-- Trustee's Sale.
In a nonjudicial foreclosure on a deed of trst, also

known as a "trstee's sale," the trustee exercises the
power of sale given by the deed of trust. Nonjudicial foreclosure is less expensive and more quickly

concluded than judicial foreclosure, since there is no oversight by a court, neither appraisal nor a judicial detennination of fair value is required, and the
debtor has no posts

of Sale--Full Credit Bid:Words, Phrases, and Maxims--Full Credit Bid.

A "full credit bid" by the lender at a nonjudicial

ale right of redemption.

However, the creditor may not seek a deficiency judgment. Thus, the antideficiency statutes in part
serve to prevent creditors at private sales from buy-

foreclosure sale is a bid in an amount equal to the
unpaid principal and interest of the mortgage debt,

ing in at deflated prices and realizing double recoveries by holding debtors for large deficiencies.
(3) Deeds of Trust § 36--Sale Under Power--Attack on Sale--Fraud. When there is no iregularity in a nonjudicial fore-

together with costs, fees and other expenses of the foreclosure. If the full credit bid is successful, i.e., results in the acquisition of the propert, the lender
pays the full outstanding balance of the debt and

costs of foreclosure to itself and takes title to the
propert, releasing the borrower from further oblig-

closure sale on a deed of trust and the purchaser is a bona fide purchaser for value, a great disparity
between the sales price and the value of the propert is not a suffcient ground for setting aside the

ations under the defaulted note. Under the "full credit bid rule," when a lender makes such a bid, it

is precluded, for purposes of collecting its debt,
from later claiming that the propert was actually

worth less than the bid. Thus, the lender is not entitled to insurance proceeds, payable for prepur-

sale. Although a bid at a trstee's sale is deemed by

statute to be an irevocable offer by the bidder to purchase the propert for that amount, it is the general rule that cours have power to vacate a foreclosure sale that is tainted by fraud. The doctrine of caveat emptor does not apply to nonjudicial foreclosure sales.
(4) Deeds of Trust § 44--Sale Under Power-

chase damage to the propert, prepurchase net rent proceeds, or damages for waste, since the lender's

only interest in the propert, the repayment of its debt, has been satisfied, and any fuher payment would result in a double recovery.
(6) Fraud and Deceit § 12--Actual Fraud- Reliance--General Principles.

- Deficiency-- Antideficiency Statutes-- Fraud. The antideficiency statutes applicable to nonjudicial foreclosure sales have been broadly interpreted

The reliance element of fraud exists when the misrepresentation or nondisclosure was an immediate

cause of the plaintiffs conduct which altered his or her legal relations, and without such misrepresenta-

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

4

900 P.2d 601 Page 3
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 4 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825, 95 Daily Journal D.AR. 11,688
10 Ca1.4th 1226
tion or nondisclosure, in all reasonable probability,

he or she would not have entered into the contract

(8) Fraud and
3 3 -- Actions-- Damages-- Measure
-Propert Transactions.

Deceit §
of Damages-

or other transaction. Except in a rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether reliance
is reasonable is a question of fact. Negligence on
the part of the plaintiff in failing to discover the

In fraud cases involving the purchase, sale, or exchange of propert, the "out-of-pocket" rather than

the "benefit-of-the-bargain" measure of damages
applies (Civ. Code, § 3343, subds. (a), (b)(l)). This

falsity of a statement is no defense when the misrepresentation was intentional rather than negligent;

section does not apply, however, when a victim is

nor is a plaintiff held to the standard of precaution or minimum knowledge of a hypothetical reasonable person. If the conduct of the plaintiff in the light of his or her own intelligence and infonnation
was manifestly unreasonable, he or she wil be

defrauded by fiduciaries. In this situation, the
broader measure of damages provided by Civ.
Code, §§ 1709, and 3333, applies.

(9) Fraud and
34-- Actions-- Damages-- Exemp lar Damages--Costs and Fees.

denied recovery. If the plaintiff and defendant are in a confidential relationship there is no duty of inquir until the relationship is repudiated. The nature

Deceit or Punitive
§

Punitive damages are recoverable in those fraud actions involving intentional, but not negligent, mis-

of the relationship is such as to cause the plaintiff
to rely on the fiduciary, and awareness of facts

representations. The jur also has discretion to
award prejudgment interest on the plaintiffs loss
from the time the plaintiff parted with the money or
propert on the basis of the defendant's fraud. A

which would ordinarily call for investigation does
not excite suspicion under these special circum-

stances.

plaintiff is not entitled, however, to attorney fees as

(See 5 Witkin, Summary of Cal. Law (9th ed.
1988) Torts, § 711.)

an element of damages in an action for fraud in
which the defendant is a fiduciar.

(7) Fraud and Deceit
33--Actions--Damages--Measure of

Damages.

§

Unless a plaintiff merely seeks to rescind a contract, it must suffer actual monetary loss to recover on a fraud claim. There are two measures of damages for fraud: out-of-pocket and benefit of the bargain. The "out-of-pocket" measure of damages is
directed to restoring the plaintiff to the financial

(lOa, lOb) Deeds of Trust § 38--Sale Under Power-Effect of Sale--Full Credit Bid by Lender--Fraud

Action Against Third Part Nonborrowers. In an action by a lender against third part nonborrowers alleging they fraudulently induced plaintiff to make certain loans, the trial court erred in strik-

position enjoyed by him or her prior to the fraudulent transaction, and thus rewards the difference in
actual value at the time of the transaction between

ing portions of plaintiffs complaint on the ground that plaintiffs full credit bids on the propert at
nonjudicial foreclosure sales barred claims for damages resulting from fraudulent misrepresentations

what the plaintiff gave and what he or she received. The "benefit-of-the-bargain" measure is concerned

as to the adequacy of the security, and granting de-

with satisfying the expectancy interest of the defrauded plaintiff by putting him or her in the position he or she would have enjoyed if the false representation relied on had been tre; it awards the
difference in value between what the plaintiff actually received and what he or she was fraudulently led to believe he or she would receive.

fendants judgment on the pleadings. Accepting as
tre the allegations of the complaint, plaintiffs full
credit bids did not, as a matter of law, bar its fraud
claims. The full credit bids did not preclude

plaintiff from demonstrating justifiable reliance. To do so, plaintiff had only to demonstrate that its full
credit bids were a proximate result of defendants'

fraud, and that, in the absence of such fraud, in all reasonable probability it would not have made the

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

5

900 P.2d 60 I Page 4
10 Cal.4th 1226, 900 P.2d 601, 44 Cal.Rptr.2d 352, 95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.AR. 11,688
10 Ca1.4th 1226

Case 5:07-cv-04808-JF

Document 60-2

Filed 07/25/2008

Page 5 of 42

bids. In such a case, the bids could not be deemed
an admission of the properties' value. Even if the

Morgenstein & Jubelirer, Jean L. Bertand and
Robert B. Mullen for Plaintiff and Appellant. Edward D. Benes, Terrance P. Huber, Landels, Ripley & Diamond, Bruce W. Hyman, Margaret P. Reidy, Evans, Latham, Haris & Campisi, Jamie O.

full credit bids were not the proximate result of defendants' fraudulent misrepresentations, or its reliance was manifestly unreasonable, plaintiff could
stil recover any other damages flowing from de-

fendants' fraud. Because such a factual evaluation could not be made on the pleadings alone, the trial
court erred in entering judgment on the pleadings.

Harris, Charles P. Wolff and Nancy M. Levin as
Amici Curiae on behalf of Plaintiff and Appellant.

(Disapproving Western Fed. Sav. & Loan Assn v. Sawyer (1992) 10 Cal.AppAth 1615 (13 Cal.Rptr.2d 639) and GN Mortgage Corp. V. Fidel-

Dinkelspiel, Donovan & Reder, Joel Zeldin, Leon M. Bloomfield, Leland, Parachini, Steinberg, Flinn, Matzger & Melnick, Paul 1. Matzger, Miler, Starr

& Regalia, Edmund L. Regalia, Daniel R. Miler
and Kenneth R. Styles for Defendants and Re-

ity Nat. Title Ins. Co. (1994) 21 Cal.AppAth 1802,
(27 Cal.Rptr.2d 47) to the extent they held that a

spondents.

ARABIAN, J.
We here detennine whether a lender's acquisition of

lender cannot state a cause of action for fraud against a third part for fraudulently inducing a
loan secured by real propert if the lender acquired

security propert by full credit bid at a nonjudicial

the propert after making a full credit bid.)

foreclosure sale bars the lender as a matter of law
from maintaining a fraud action against third par nonborrowers who fraudulently induced the lender
to make the loans. The Courts of Appeal are in con-

(See 3 Witkin, Summary of Cal. Law (9th ed.
1987) Security Transactions in Real Propert, §

155; 4 Miler & Starr, Cal. Real Estate (2d ed.
1989) § 9:158.)
(11) Deeds of Trust § 38--Sale Under Power-

flict on this issue. We granted review to resolve the

conflict, and now conclude that such an action is not precluded. We therefore affnn the judgment of
the Court of AppeaL.

-Effect ofSale--Actual Damages.

In an action by a lender against third par nonborrowers alleging they fraudulently induced plaintiff
to make certain loans, judgment on the pleadings

1. Facts and Procedural Background

could not be sustained on the ground plaintiff failed to allege actual damages. Although plaintiff did not allege that defendants impaired its security or caused the value of the properties to decrease after
the loans were made, it alleged that the intentional misrepresentations regarding the properties' charac-

teristics and value 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 mis-

This matter reaches us following plaintiff Alliance Mortgage Company's (Alliance) successful appeal from a judgment on the pleadings dismissing all *1232 of its causes of action against defendants Pioneer Title Company of California, now known as North American Title Company (North American),
and Ticor Title Insurance Company, Inc. of Califor-

representations it purchased the properties. The damages for such fraud are measured not by the
outstanding indebtedness, extinguished by the full
credit bid, but by plaintiffs out-of-pocket or con-

nia (Ticor). Accordingly, for purposes of this opinion, we treat the properly pleaded allegations of Alliance's complaint as tre, and also consider those

matters subject to judicial notice. (Sullivan v.
County of Los Angeles (1974) 12 Ca1.d 710,
714-715, fn. 3 (117 Cal.Rptr. 241, 527 P.2d 865);

sequential damages under Civ. Code, § 3343, or Civ. Code, § 3333, depending on whether defend-

Hunt v. County of Shasta (1990) 225 Cal.App.3d

ants stood in a fiduciary relationship to plaintiff.
COUNSEL

432, 440 (275 Cal.Rptr. 113); April Enterprises,
Inc. v. KTTV (1983) 147 Cal.App.3d 805, 815 (195 Cal.Rptr. 421). "Moreover, the allegations must be liberally construed with a view to attaining substan-

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

6

900 P.2d 601 Page 5
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 6 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.AR. 11,688
10 Ca1.4th 1226

tial justice among the parties." (Guild Mortgage
Co. v. Heller (1987) 193 Cal.App.3d 1505, 1508

were secured by deeds of trust to the respective
properties. Not surprisingly, the fictitious borrow-

(239 Cal.Rptr. 59) (Guild Mortgage).) "Our

primary task is to detennine whether the facts alleged provide the basis for a cause of action against defendants under any theory." (Ibid.)

ers *1233 defaulted. Allance purchased many of
the properties at nonjudicial foreclosure sales by
bidding the full credit value of the outstanding in-

debtedness on the notes, plus interest and costs. FN1

From 1983 through 1985, defendant Laurie Samuel

Rothwell (Rothwell), a real estate appraiser and
broker, and other defendants including North

FNl The second amended complaint does
not allege the amount of Alliance's bids.

American and Ticor, devised and implemented an
elaborate scheme to fraudulently induce Alliance, then known as Charter Mortgage Company of Flor-

The trial court took judicial notice of the amount of the bids from public records,
and here Alliance implicitly concedes that
it made full credit bids.

ida, to lend money for the purchase of nine Bay Area residences. In furtherance of this plan, two
fictitious, nonexistent companies, American Medical Laboratories and American International Savings and Loan, were created to falsely verify employment of and deposits by purported loan applicants. Defendants committed some or all of the following
fraudulent acts regarding each propert: prepared

Allance "discovered, upon acquiring title to the
properties, that the tre market value of the proper-

ties was far less than the value represented to Allance and, at the time of the foreclosures, remained

far less than the outstanding principal amount of the
loans together with all other expenditures. Alliance

has in some cases discovered that the physical improvements actually constrcted on the separate

false residential purchase agreements and loan applications in the names of fictitious borrowers, deliberately inflated "fair market value" propert appraisals and invented "comparable" propert values
to support the inflated and fraudulent appraisals,

parcels of real propert are not the type of improve-

ments as assured in the title insurance policies. As a
proximate result of defendants' misconduct, de-

falsified employment and deposit verifications, tax

scribed above, Alliance has been damaged in an
amount to be detennined."
Prior to learning of the fraud, Alliance sold several

returns, credit histories, and W-2 wage/income
statements, drafted inaccurate title reports that con-

tained misleading descriptions of the properties, and falsely represented that the escrow instrctions had been followed and the required cash deposits
and disbursements made.

loan obligations to secondary investors. In the case of three of these properties, regulations of the Federal Home Loan Mortgage Corporation (FHLMC)
required Allance to repurchase the loans it had

earlier sold to the Federal National Mortgage Asso-

Five of the properties were located on Haight Street in San Francisco; the other four were located in various East Bay communities. Ticor issued title insurance policies on three of the five Haight Street

ciation (FNMA). "Each of those loans had gone into default and the properties were foreclosed upon before Alliance repurchased them."

properties which falsely described them as being
four-unit dwellings. In fact, they were one-unit residences.

After foreclosure or repurchase of the loans from a secondary investor, Alliance was required to pay

Relying on defendants' representations, and unaware of their fraudulent conduct, Alliance loaned

various costs and expenses through the time it resold the propert, including propert taxes, repairs to the propert, correction of local housing

code violations, maintenance of the propert, ap-

the Rothwell group the funds to purchase the

Haight Street and East Bay properties. The loans

plicable insurance, and costs associated with selling

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

7

900 P.2d 601 Page 6
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 7 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.AR. 11,688
10 Ca1.4th 1226
the propert. In addition, after discovery of the

fraud perpetrated by defendants, some of Allance's
mortgage insurers denied coverage for Alliance's
losses.

Alliance's motion to amend, and entered judgment
in favor of defendants on all causes of action.

Alliance appealed, and the Court of Appeal reversed. Expressly disagreeing with Western Fed.

Allance alleged that these facts gave rise to claims for intentional misrepresentation, negligent misrepresentation, breach of contract against the escrow

Savings & Loan Assn. v. Sawyer (1992) 10

Cal.AppAth 1615 (13 Cal.Rptr.2d 639) and GN

defendants, including North American, breach of Ticor's title insurance contract, breach of fiduciary duty against the escrow defendants, breach of fiduciary duty against the title insurance defendants, and violation of the federal Racketeer Influenced

Mortgage Corp. v. Fidelity Nat. Title Ins. Co.
(1994) 21 Cal.AppAth 1802 (27 Cal.Rptr.2d 47), the Court of Appeal held that a lender can state a
cause of action for fraud against third parties for fraudulently inducing a loan secured by real propert despite the fact that the lender acquired the

and Corrpt Organization Act (18 U.S.C. §§
1961- 1 968). It sought punitive damages on its in-

propert after making a full credit bid. The Court of

Appeal further held that Alliance's action against
Ticor was not barred by the statute of limitations

tentional misrepresentation claim, and attorney
fees, costs, and interest on its breach of contract

because Alliance's pleadings did not establish that
Alliance had been aware of Ticor's involvement in Rothwell's scheme. The Court of Appeal also concluded that Allance had stated a cause of action
against Ticor for intentional and negligent misrep-

and breach of fiduciary duty claims.

North American and Ticor moved to strike portions
of the second amended complaint on the ground

that they were bared by Alliance's full *1234 credit

bids. In opposing the motions, Alliance argued that it was not seeking impainnent of security damages, and that its full credit bids did not bar an action for

resentation because, although a title insurance policy is an indemnification contract and not a

guarantee of title, Allance's reliance related not to
the condition of title but to the nature and descrip-

fraud committed by third parties. The trial court
granted the motions to strike, concluding that Alli-

tion of the propert securing the loans. Ticor's petition for rehearing was denied.

ance's full credit bids barred claims for damages
resulting from fraudulent representations as to the
adequacy of

We granted North American and Ticor's petitions
for review solely on the issue of whether a lender's

the security.

Prior to trial, Alliance moved to amend the complaint to confonn to proof that defendants' fraud
resulted in damage to Alliance's goodwil, reputa-

acquisition of security propert by full credit bid at
a nonjudicial foreclosure sale bars the lender from

tion, and net worth. At or about the same time, defendants fied motions in limine to exclude all evidence of impairent of security, damages for loss of
goodwil, reputation, and net worth, and damages
for postforeclosure costs. Ticor also fied separate

maintaining a fraud action to recover damages from non borrower third parties who fraudulently induced the lender to make the loans. We now affnn. *1235
I1. Discussion

motions in limine, some of which sought judgment
on the pleadings, arguing that it had been improp-

erly joined as a Doe defendant, that the statute of
limitations had run, and that its title insurance

A. Background Principles
The issue here is the effect of a lender's full credit
bid at a nonjudicial foreclosure sale on its claim of

policies were indemnification contracts that did not

constitute representations regarding the propert.
The trial court granted defendants' motions, denied

fraud in the inducement of the underlying loan ob-

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

8

900 P .2d 60 1 Page 7
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 8 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825, 95 Daily Journal D.AR. 11,688
10 Ca1.4th 1226

ligation. To understand the context in which this issue arises, and the competing legal and public

policy arguments, we first briefly review certain background principles regarding mortgages and
deed of trusts, the antideficiency statutes, the full credit bid rule, and fraud claims.

necessary for the protection of the buyer's rights that the lien be sustained. (Ralph C. Sutro Co. v. Paramount Plastering, Inc. (1963) 216 Cal.App.2d
433, 438 (31 Cal.Rptr. 174); see First American
Tile Ins. Co. v. Us. (9th Cir. 1988) 848 F.2d 969,

971, applying California law ("The theory is that

the mortgagee's lesser interest (the lien) has
'merged' into the greater interest (the fee)."). *1236
1. Mortgages and Deeds of

Trust

FN3 All statutory references contained
A real propert loan generally involves two docuherein are to the Civil Code unless other-

ments, a promissory note and a security instrument.
The security instrument secures the promissory

wise indicated.

note. This instrument "entitles the lender to reach some asset of the debtor if the note is not paid. In California, the security instrment is most commonly a deed of trust (with the debtor and creditor
known as trustor and beneficiary and a neutral third

2. Foreclosure and Antideficiency Statutes

California has an elaborate and interrelated set of
foreclosure and antideficiency statutes relating to

part known as trstee). The security instrment
may also be a mortgage (with mortgagor and mort-

the enforcement of obligations secured by interests
in real propert. Most of these statutes were en-

gagee, as participants). In either case, the creditor is
said to have a lien on the propert given as security, which is also referred to as collateraL." (Bernardt,

Cal. Mortgage and Deed of Trust Practice
(Cont.Ed.Bar 2d ed. 1990) § 1., p. 5, italics removed.) FN2

acted as the result of "the Great Depression and the corresponding legislative abhorrence of the all too common foreclosures and forfeitures (which occurred) during that era for reasons beyond the control of the debtors." (Hetland & Hansen, The

"Mixed Collateral" Amendments to California's Commercial Code-Covert Repeal of California's
Real Property Foreclosure and Antideficiency Provisions or Exercise in Futility?(1987) 75 Cal.

FN2 The tenns "deed of trust," "trstor,"
and "beneficiary" are used interchangeably

in this opinion with
"mortgage," "mortgagor," and
"mortgagee." (Bernhardt, Cal. Mortgage

L.Rev. 185, 187-188, fn. omitted.)

and Deed of Trust Practice, supra, § 1.3, p. 5.)

Pursuant to this statutory scheme, there is only "one fonn of action" for the recovery of any debt or the enforcement of any right secured by a mortgage or
deed of trst. That action is foreclosure, which may
be either judicial or nonjudiciaL. (Code Civ. Proc.,

A security interest cannot exist without an underly-

ing obligation, and therefore a mortgage or deed of
trst is generally extinguished by either payment or

§§ 725a, 726, subd. (a).) (1) In a judicial foreclos-

ure, if the propert is sold for less than the amount
of the outstanding indebtedness, the creditor may

sale of the propert in an amount which satisfies
the lien. (Civ. Code, §§ 2909, 2910; FN3 see Cor-

nelison v. Kornbluth (1975) 15 Cal.3d 590, 606
(125 Cal.Rptr. 557, 542 P.2d 981); Bernardt, Cal.

seek a deficiency judgment, or the difference between the amount of the indebtedness and the fair
market value of the propert, as detennined by a
court, at the time of the sale. (Roseleaf Corp. v.

Mortgage and Deed of Trust Practice, supra, §
1.0, p. 15; ¡d., § 6.16, p. 292.) In addition, merger

Chierighino (1963) 59 Cal.2d 35, 43-44 (27

of the lien and ownership of the propert in one person or entity extinguishes the lien, unless it is

Cal.Rptr. 873, 378 P.2d 97).) However, the debtor has a statutory right of redemption, or an opportn-

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

9

900 P.2d 601 Page 8
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 9 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352, 95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.AR. 11,688
10 Ca1.4th 1226

ity to regain ownership of the propert by paying the foreclosure sale price, for a period of time after
foreclosure. (Bernhardt, Cal. Mortgage and Deed of Trust Practice, supra, § 3.54, p. 143; id., § 3.76, p. 173; id., § 3.77, p. 174.)

the value of the propert is not a suffcient ground

for setting aside the sale." (Moeller v. Lien (1994) 25 Cal.AppAth 822, 832 (30 Cal.Rptr.2d 777); see
BFP V. Resolution Trust Corp., supra, 511 U.S. -

(128 L.Ed.2d at pp. 566-567, 114 S.Ct. at pp.
1763- 1 764) (So long as the state's requirements for

(2) In a nonjudicial foreclosure, also known as a "trustee's sale," the trustee exercises the power of
sale given by the deed of trust. (Bernhardt, Cal. Mortgage and Deed of Trust Practice, supra, §
1.28, p. 37; id., § 2.1, p. 51.) Nonjudicial foreclos-

conducting a foreclosure sale have been met, "mere

ure is less expensive and more quickly concluded

inadequacy of the foreclosure sale price is no basis for setting the sale aside, though it may be set aside ... if the price is so low as to 'shock the conscience or raise a presumption of fraud or unfairess.' ").)

than judicial foreclosure, since there is no oversight by a court, "(n)either appraisal nor judicial detennination of fair value is required," and the debtor has
no postsale right of redemption. (Sheneman, Cal.

A bid at a trustee's sale is deemed by statute to be
an irevocable offer by that bidder to purchase the

Foreclosure: Law and Practice (1994) § 6.01, p. 6-3.) However, the creditor may not seek a deficiency judgment. (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at pp. 43-44.) Thus, the antideficiency statutes in part "serve to prevent creditors in

propert for that amount. (§ 2924h, subd. (a).) However, "(i)t is the general rule that courts have power to vacate a foreclosure sale where ... the sale ... is tainted by fraud ...." (Bank of America etc.
Assn. v. Reidy (1940) 15 Cal.2d 243, 248 (101 P.2d
77); Karoutas v. HomeFed Bank (1991) 232

private sales from buying in at deflated prices and realizing double recoveries by holding debtors for
large deficiencies." (Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal.App.3d 508, 514 (259 Cal.Rptr. 425).

Cal.App.3d 767, 774-775 (283 Cal.Rptr. 809). The "doctrine of caveat emptor does not apply to nonju-

dicial foreclosure sales." (Karoutas v. HomeFed
Bank, supra, 232 Cal.App.3d at p. 774.)

(4) The antideficiency statutes have been broadly

The price at a foreclosure sale is not deemed the
equivalent of the propert's fair market value. As

interpreted to protect the debtor. It is settled,
however, and defendants here concede, that the an-

the United States Supreme Court recently *1237

observed, "An appraiser's reconstrction of 'fair market value' could show what similar propert would be worth if it did not have to be sold within the time and manner strictures of state-prescribed foreclosure. But propert that must be sold within those strictures is simply worth less. No one would
pay as much to own such propert as he would pay

tideficiency statutes do not preclude an action against a borrower for fraud in the inducement of a
loan. (See, e.g., Guild Mortgage, supra, 193
Cal.App.3d at p. 1511 (it has long been recognized
that anti

deficiency statutes do not preclude a fraud

suit); Manson v. Reed (1986) 186 Cal.App.3d 1493, 1501 (231 Cal.Rptr. 446) (recognized exception to
the antideficiency statute is a suit for fraud); Glendale Fed. Sav. & Loan Assn. v. Marina View Heights
Dev. Co. (1977) 66 Cal.App.3d 101, 138-139 (135

to own real estate that could be sold at leisure and
pursuant to nonnal marketing techniques." (BFP v.
Resolution Trust Corp. (1994) 511 U.S. - (128

Cal.Rptr. 802) (antideficiency statutes not available
to trustor as a defense to an action by beneficiary

L.Ed.2d 556, 565, 114 S.Ct. 1757, 1762), italics in

originaL.) (3) However, it is settled that "Where
there is no irregularity in a nonjudicial foreclosure

for fraud; action for fraud is not action for deficiency judgment); Fin. Code, §§ 779, 7460, 15102.)

There are several reasons for this exception. First,

sale and the purchaser is a bona fide purchaser for

value, a great disparity between the sales price and

"(a) suit for fraud obviously does not involve an attempt to recover on a debt or note. As such, it

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

i0

900 P.2d 601 Page 9
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 10 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352, 95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.A.R. 11,688
10 Ca1.4th 1226

stands separate *1238 and apart from any action which the antideficiency legislation seeks to preclude." (Guild Mortgage, supra, 193 Cal.App.3d at
p. l512;Manson v. Reed, supra, 186 Cal.App.3d at p. 1501 ("The distinction is that a suit for fraud is a
completely separate remedy than a suit on the

ducted (nonjudicial) foreclosure sale should constitute a final adjudication of the rights of the borrow-

er and the lender.").
Under the "full credit bid rule," when a lender

promissory note secured by the deed of trst. ").
"Furthennore, the antideficiency laws were not intended to immunize wrongdoers from the con-

makes such a bid, it is precluded for puroses of
collecting its debt from later claiming that the propert was actually worth less than the bid. (See Cor-

nelison v. Kornbluth, supra, 15 Cal.3d at pp.

sequences of their fraudulent acts. Finally, assuming that the court applies a proper measure of damages, fraud suits do not frstrate the antideficiency

606-607;Passanisi v. Merit-McBride Realtors, Inc., supra, 190 Cal.App.3d at p. 1503 (after full credit
bid, lender cannot pursue any other remedy regard-

policies because there should be no double recovery
for the beneficiary." (Sheneman, Cal. Foreclosure:

less of actual value of the propert on the date of
sale).) Thus, the lender is not entitled to insurance

Law and Practice, supra, § 6.18, p. 6-80, fn. omitted.)

proceeds payable for prepurchase damage to the
propert, prepurchase net rent proceeds, or dam-

ages for waste, because the lender's only interest in

the propert, the *1239 repayment of its debt, has
3. Full Credit Bid Rule

been satisfied, and any further payment would result in a double recovery. (See Cornelison v. Korn-

At a nonjudicial foreclosure sale, if the lender
chooses to bid, it does so in the capacity of a purchaser. (Passanisi v. Merit-McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1503 (236 Cal.Rptr.

bluth, supra, 15 Cal.3d at pp. 606-607.)

59). The only distinction between the lender and
any other bidder is that the lender is not required to

4. Fraud Claims

pay cash, but is entitled to make a credit bid up to
the amount of the outstanding indebtedness.

(Ibid. ;Cornelison v. Kornbluth, supra, 15 Cal.3d at p. 607.) The purpose of this entitlement is to avoid
the ineffciency of requiring the lender to tender

"The necessary elements of fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (Le., to induce reliance); (4)
justifiable reliance; and (5) resulting damage."
(Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1108 (252 Cal.Rptr. 122, 762 P.2d 46); see Seeger

cash which would only be immediately retued to

it. (Cornelison v. Kornbluth, supra, 15 Ca1.3d at p. 607.) (5)A "full credit bid" is a bid "in an amount equal to the unpaid principal and interest of the

v. Odell (1941) 18 Cal.2d 409, 414 (115 P.2d 977,

mortgage debt, together with the costs, fees and
other expenses of the foreclosure." (Cornelison,

136 A.L.R. 1291);§ 1709.) FN40nly the last two elements are at issue in this case.

supra, 15 Cal.3d at p. 606, fn. 10.) Ifthe full credit
bid is successful, i.e., results in the acquisition of

FN4 Here, Alliance's fraud claims include
allegations of intentional misrepresenta-

the propert, the lender pays the full outstanding

tion, negligent misrepresentation, and breach of fiduciary duty. (See §§ 1572,

balance of the debt and costs of foreclosure to itself and takes title to the security propert, releasing the borrower from further obligations under the defaulted note. (See Smith v. Allen (1968) 68 Cal.2d 93,

1710; Bily v. Arthur Young & Co. (1992) 3
Cal.4th 370, 407 (11 Cal.Rptr.2d 51, 834

P.2d 745), (negligent misrepresentation is
a species of the tort of deceit); Salahutdin

96 (65 Cal.Rptr. 153, 436 P.2d 65) ("(I)t is clear
that the Legislature intended that a properly con-

v. Valley of California, Inc. (1994) 24

Cal.AppAth 555, 563 (29 Cal.Rptr.2d 463)

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

II

900 P.2d 601 Page 10
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 11 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352, 95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.A.R. 11,688 10 Cal.4th 1226
(breach of a fiduciar duty usually consti-

tutes constructive fraud).) While we focus
on Alliance's intentional misrepresentation

*1240 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.

claim, justifiable reliance and actual damages are also essential elements of negligent misrepresentation and constructive fraud. (Home Budget Loans, Inc. v. Jacoby

& Meyers Law Offces (1989) 207
Cal.App.3d 1277, 1285 (255 Cal.Rptr.
483 ) (elements of negligent misrepresenta-

415.)"If the conduct of the plaintiff in the light of his own intelligence and infonnation was manifestly unreasonable, however, he wil 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 justi-

tion include justifiable reliance and resulting damage); 5 Witkin, Cal. Procedure (3d

ed. 1985) Pleading, § 666, p. 11 7; id., §
680, p. 131; id., § 681, p. 133.)
(6) Reliance exists when the misrepresentation or

fied in believing the representation in the light of his own knowledge and experience").) " 'If the
plaintiff and defendant are in a confidential rela-

tionship there is no duty of inquiry until the relationship is repudiated. The nature of the relation-

nondisclosure was an immediate cause of the plaintiffs conduct which altered his or her legal relations, and when without such misrepresentation or nondisclosure he or she would not, in all reasonable probability, have entered into the contract or other transaction. (Spinks v. Clark (1905) 147 Cal. 439, 444 (82 P. 45); 5 Witkin, Summary of Cal. Law
(9th ed. 1988) Torts, § 711, p. 810.) "Except in the rare case where the undisputed facts leave no room
for a reasonable difference of opinion, the question

ship 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. (1989) 210 Cal.App.3d

915,921 (259CaI.Rptr. 117).)

(7) In addition, unless the plaintiff merely seeks to rescind the contract, it must suffer actual monetary loss to recover on a fraud claim. (Molko v. Holy
Spirit Assn., supra, 46 Ca1.3d at p. 1108;Empire

of whether a plaintiffs reliance is reasonable is a question of fact." (Blankenheim v. E. F. Hutton &
Co. (1990) 217 Cal.App.3d 1463, 1475 (266

West v. Southern California Gas Co. (1974) 12
Ca1.d 805, 810, fn. 2 (117 Cal.Rptr. 423, 528 P.2d

Cal.Rptr. 593); Gray v. Don Miler & Associates,
Inc. (1984) 35 Ca1.d 498, 503 (198 Cal.Rptr. 551, 674 P.2d 253, 44 A.L.RAth 763) ("(w)hether reli-

31 ) (fraud without damage furnishes no ground for

action); Home Budget Loans, Inc. v. Jacoby &
Meyers Law Offces, supra, 207 Cal.App.3d at p.
1285.) There are two measures of damages for
fraud: out of pocket and benefit of the bargain.

ance is justified is a question of fact for the detenn-

ination of the trial court"); Guido v. Koopman
question of fact").) "However, whether a part's re-

(Stout v. Turney (1978) 22 Ca1.d 718, 725 (150

(1991) 1 Cal.AppAth 837, 843 (2 Cal.Rptr.2d 437) ("the reasonableness of the reliance is ordinarily a

Cal.Rptr. 637, 586 P.2d 1228). The
"out-of-pocket" measure of damages "is directed to

restoring the plaintiff to the financial position en-

liance was justified may be decided as a matter of law if reasonable minds can come to only one conclusion based on the facts." (Guido v. Koopman,

joyed by him prior to the fraudulent transaction,
and thus awards the difference in actual value at the

time of the transaction between what the plaintiff

supra, 1 Cal.AppAth at p. 843.)

gave and what he received. The 'benefitof-the-bargain' measure, on the other hand, is con-

"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

cerned with satisfying the expectancy interest of the defrauded plaintiff by putting him in the position he

would have enjoyed if the false representation re-

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

12

900 P.2d 601 Page 11
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 12 of 42
10 Cal.4th 1226,900 P.2d 601,44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825,95 Daily Journal D.AR. 11,688
10 Ca1.4th 1226

lied upon had been true; it awards the difference in

value between what the plaintiff actually received and what he was fraudulently led to believe he would receive." (Ibid. ;Salahutdin v. Valley of California, Inc., supra, 24 Cal.AppAth at p. 564;Overgaard v. Johnson (1977) 68 Cal.App.3d 821, 823
(137 CaL.Rptr. 412).) "In California, a defrauded part is ordinarily limited to recovering his 'out-

that section 3343 does not require that a
plaintiff show "out-of-pocket" loss in order
to be entitled to consequential or additional

damages of the type prescribed by the statute. (Stout V. Turney, supra, 22 Cal.3d at
pp.729-730.)

of-pocket' loss ...." (Kenly V. Ukegawa (1993) 16
Cal.AppAth 49,53 (19 Cal.Rptr.2d 771).
(8) In fraud cases involving the "purchase, sale or

FN6 Section 1709 provides: "One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he
thereby suffers."

exchange of propert," the Legislature has ex-

pressly provided that the "out-of-pocket" rather
than the "benefit-of-the-bargain" measure of dam-

FN7 Section 3333, the general tort damage
measure provides: "For the breach of an

ages should apply. (§ 3343, *1241 subds. (a),
(b)(1).) FN5 This section does not apply, however,

obligation not arising from contract, the
measure of damages, except where other-

when a victim is defrauded by its fiduciaries. In this

situation, the "broader" measure of damages
provided by sections 1709 FN6 and 3333 FN7 ap-

wise expressly provided by this code, is

plies. (Liodas v. Sahadi (1977) 19 Cal.3d 278,
283-284 (137 Cal.Rptr. 635, 562 P.2d 316); Gray v.

the amount which will compensate for all the detriment proximately caused thereby,
whether it could have been anticipated or not."

Don Miler & Associates, Inc., supra, 35 Cal.3d at p. 504 (plaintiffs damages suffered because of fiduciary's misrepresentation measured under section
3333); Stout v. Turney, supra, 22 Cal.3d at pp.

(9) Punitive damages are recoverable in those fraud
actions involving intentional, but not negligent,

misrepresentations. (Wyatt v. Union Mortgage Co.
(1979) 24 Cal.3d 773, 790 (157 CaL.Rptr. 392, 598

725-726 (A "clear exception" to section 3343 "has
emerged in cases involving fraudulent fiduciaries."

P.2d 45); Branch v. HomeFed Bank (1992) 6

(Italics in original.)); Ward v. Taggart (1959) 51 Cal.2d 736, 741 (336 P.2d 534) ("In the absence of a fiduciary relationship, recovery in a tort action for fraud is limited to the actual damages suffered by the plaintiff."); Salahutdin v. Valley of California,
Inc., supra, 24 Cal.AppAth at p. 565.)

Cal.AppAth 793, 799 (8 Cal.Rptr.2d 182) (no punitive damages recoverable for negligent misrepresentation); § 3294.) The jury also has discretion to

award prejudgment interest on the plaintiffs loss "from the time the plaintiff pared with the money
or propert on the basis of the defendant's fraud."

FN5 Section 3343, subdivision (a),
provides, "One defrauded in the purchase,

(Nordahl v. Dept. of Real Estate (1975) 48

Cal.App.3d 657, 665 (121 Cal.Rptr. 794); § 3288.)

sale or exchange of propert is entitled to recover the difference between the actual
value of that with which the defrauded per-

A plaintiff is not entitled, however, to attorney fees "as an element of damages in actions for fraud in

which the defendant is a fiduciar." (Gray v. Don
Miler & Associates, Inc., supra, 35 Cal.3d at p. 507.)
B. Cases Applying the Full Credit Bid Rule
The issue we confront here is whether a lender's ac-

son parted and the actual value of that
which he received, together with any additional damage arising from the particular
transaction, including" certain enumerated

damages such as lost profits. We have held

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

13

900 P.2d 601 Page 12
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 13 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825, 95 Daily Journal D.AR. 11,688 10 Cal.4th 1226

quisition of security propert by full credit bid at a nonjudicial foreclosure sale bars the lender from maintaining a fraud action to recover damages from third parties who fraudulently induced the lender to make the loans. *1242Cornelison v . Kornbluth, supra, 15 Cal.3d 590, was this court's first and last discussion of the effect of a full credit bid in a nonjudicial foreclosure sale. In Cornelison, the plaintiff
sold a single-family dwelling, taking back a

debt by entering a full credit bid establishes the
value of the security as being equal to the outstand-

ing indebtedness and ipso facto the nonexistence of

any impairment of the security." (Ibid.) We stated, "Where an indebtedness secured by a deed of trust

covering real propert has been satisfied by the
trstee's sale of the propert on foreclosure for the

promissory note secured by a first deed of trust on

the propert. (Id. at p. 594.)The propert was subsequently reconveyed, and ultimately condemned as unfit for human habitation. The original purchasers defaulted on the note, and plaintiff caused the propert to be sold at a trustee's sale. (Ibid.) She pur-

full amount of the underlying obligation owing to the beneficiar, the lien on the real propert is extinguished." (Ibid., citing Civ. Code, § 2910; Streif

v. Darlington (19(37)) 9 Cal.2d 42, 45 (68 P.2d
728); Duarte v. Lake Gregory Land and Water Co.
(1974) 39 Cal.App.3d 101, 104-105 (113 Cal.Rptr.
893). "In such event, the creditor cannot sub-

chased the propert at the sale by making a full
credit bid. (Id. at pp. 594, 606.)

sequently recover insurance proceeds payable for

damage to the propert (citations), net rent proceeds (citations), or damages for waste (citations)."
(Cornelison v. Kornbluth, supra, 15 CaL.3d at p.

Plaintiff then sued one of the subsequent purchasers
in part for waste. (Cornelison v. Kornbluth, supra,

606.) "If, however, (the lender) bids less than the
full amount of the obligation and thereby acquires

15 Cal.3d at p. 594.) "Waste" is a cause of action based on the recognition that "any person whose
propert is subject to a lien has a statutory duty to

the propert valued at less than the full amount, his security *1243 has been impaired and he may recover damages for waste in an amount not exceed-

refrain from acts which will 'substantially impair the mortgagee's security.' " (Sheneman, Cal. Foreclosure: Law and Practice, supra, § 6.16, p. 6-70.)

ing the difference between the amount of his bid
and the full amount of the outstanding indebtedness

"Waste" includes acts of commission and omission,
such as a failure to generally maintain and repair

imediately prior to the foreclosure sale." (Id. at p.
607.)

the propert. (Ibid.; see Cornelison v. Kornbluth,

supra, 15 Ca1.d at pp. 599, 603; § 2929.)

In response to plaintiffs "complain(t) that it is diffcult to calculate precisely the amount of damages
recoverable for waste so as to detennine the proper

We first concluded that a lender's claim for bad
faith waste was not precluded by the antideficiency statutes. (Cornelison v. Kornbluth, supra, 15 CaL.3d

at p. 605.) However, we "further concluded that even assuming that defendant is liable on such basis, nevertheless plaintiff canot recover since
she purchased the subject propert at the trustee's

amount which the beneficiary or mortgagee should bid at the foreclosure sale," we stated: "Suffce it to say that no complicated calculations are necessary.

The beneficiary or mortgagee need only enter a credit bid in an amount equal to what he assesses the fair market value of the propert to be in its
condition at the time of the foreclosure sale. If that amount is below the full amount of the outstanding indebtedness and he is successful in acquiring the
propert at the foreclosure sale, he may then recov-

sale by making a full credit bid." (Id. at p. 606, fn. omitted.) We explained, "the measure of damages for waste is the amount of the impairent of the security, that is the amount by which the value of the
security is less than the outstanding indebtedness

er any provable damages for waste." (Cornelison v.

Kornbluth, supra, 15 Cal.3d at p. 608.)

and is thereby rendered inadequate." (Ibid.) "(T)he
mortgagee's purchase of the propert securing the

Since Cornelison, the Courts of Appeal have ap-

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

14

900 P .2d 601 Page 13
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 14 of 42
10 Cal.4th 1226,900 P.2d 601, 44 Cal.Rptr.2d 352, 95 Cal. Daily Op. Servo 6825, 95 Daily Journal D.AR. 11,688
10 Ca1.4th 1226

proached the effect of a full credit bid on a lender's

fraud claim in various ways with ireconcilable res-

ults. Two Court of Appeal decisions directly address the issue at hand, and, as noted earlier, con-

A jury found that Sawyer was part of a conspiracy to fraudulently induce the bank to make the loan to
the Smiths. (Western Fed. Savings & Loan Assn. v.
Sawyer, supra, 10 CaL.AppAth at p. 1618.) The

flict with the Court of Appeal's opinion in this case.
(Western Fed. Savings & Loan Assn. V. Sawyer,

Cour of Appeal reversed, holding that the bank's full credit bid barred its causes of action for fraud
and misrepresentation. (Id. at pp. 1618-1619,
1623.)Relying on Cornelison, the court concluded

supra, 10 Cal.AppAth 1615;GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co., supra, 21 Cal.AppAth 1802; see also Evans v. California Trailer Court, Inc. (1994) 28 Cal.AppAth 540, 556 (33
Cal.Rptr.2d 646), ("Both fraud and conversion

that the bank's acquisition of the security propert
with a full credit bid at a nonjudicial foreclosure

sale extinguished the bank's lien on that propert.

claims are subject to the full credit bid rule ....").

Accordingly, the bank's security for the debt was
not impaired, and the bank had suffered no damage; hence it had no viable cause of action for fraud or
misrepresentation. (Id. at p. 1623.)Thus, Western

In Western Fed. Savings & Loan Assn. v. Sawer,
supra, 10 CaL.AppAth 1615, defendant Sandra

Sawyer, a lawyer involved in real estate transactions, opened an escrow to sell a parcel of residential propert she owned to the Smiths.(Id. at p.
1617. )According to the escrow instrctions and loan documents, the Smiths were to pay $115,000 for the propert and make a cash downpayment of

impliedly concluded that the measure of damages
for a fraudulent representation to a lender is the

impairent of its security. The court distinguished
cases such as Guild Mortgage, supra, where the

plaintiff was required by federal regulations to repurchase the propert, and "those cases allowing

$23,000. The loan application indicated the Smiths
intended to occupy the propert. Sawyer represen-

actions for rescission despite a full credit bid." (Id.
at p. 1622, fn. 3.)

ted, and a presale appraisal indicated, that the propert was a duplex. (Ibid.)

The Smiths' loan application was referred to Western through a mortgage broker. The bank reviewed

In GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co., supra, 21 Cal.AppAth 1802, 1803, the Court of Appeal similarly held that a full credit bid at a
nonjudicial foreclosure sale extinguished all claims of a lender against the third part participants in a

the presale appraisal and agreed to fund the loan request for $92,000. (Western Fed. Savings & Loan Assn. v. Sawyer, supra, 10 Cal.AppAth at p. 1617.)

tortious conspiracy to defraud the lender. In GN
Mortgage, the lender was fraudulently induced into

The loan went into default, and Western purchased
the propert at a nonjudicial foreclosure sale after

making a $449,600 loan for the fictitious purchase of propert at an inflated price after receiving
forged loan documents under the name of an indi-

making a full credit bid. (*1244Western Fed. Sav-

ings & Loan Assn. V. Sawyer, supra, 10

vidual who had not agreed to, and was unaware his
name was being used in, the transaction. After de-

Cal.AppAth at p. 1617.) Thereafter, the bank incurred additional expenses to maintain and renovate the residence in order to resell it on the open market. (Id. at p. 1618.)Following foreclosure, the bank discovered the propert was not a bona fide duplex.

fault, the lender purchased the propert by making
a full credit bid at a nonjudicial foreclosure sale

By this time the bank was also aware that the
Smiths never occupied the propert, and may not

and, after selling the propert at an approximately $200,000 loss, sued the various nonborrowers for fraud, conversion, negligence, and breach of contract. Summary judgment was entered on behalf of

have made the $23,000 cash downpayment required
by the escrow and loan agreements. The bank even-

Fidelity, the escrow agent for the transaction, and
American Equities Financial Corp. (Id. at p. 1804.)

tually sold the propert for $96,500.(Ibid.)

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

15

900 P.2d 601 Page 14
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 15 of 42
10 Cal.4th 1226,900 P.2d 601,44 Cal.Rptr.2d 352, 95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.AR. 11,688
10 Ca1.4th 1226

On appeal, the plaintiff first contended that the full
credit bid rule was inapplicable where claims are

asserted not against the purchaser but against third
parties. (*1245GN Mortgage Corp. V. Fidelity Nat.

Title Ins. Co., supra, 21 Cal.AppAth at p. 1803.) According to the plaintiff, "where the purchaser is not involved, the purposes of the antideficiency
statute, and the full credit bid rule stemming from

that because the full credit bid rule was conceived only to further the debtor protection purposes of the antideficiency statutes, it has no application in actions against parties not sued as debtors. The statement in GN Mortgage that the rule is simply 'concerned with damages and proximate causation' and

'is independent of the antideficiency statute'
(citation) is wrong. It is inconceivable the Supreme Court anticipated the rule it announced in Cornelison would be used to insulate third part tortfeasors from liability for fraudulent conduct, as was done
below."

it, are not implicated." (Id. at p. 1805.)The Court of Appeal rejected this argument, concluding that the
full credit bid rule applied to claims against third

parties, and stating that the "rule is concerned with

damages and proximate causation. It is independent of the antideficiency statute." (Ibid.)

Second, plaintiff contended that the full credit bid
rule was inapplicable because, under the circum-

The cour also found that Western Federal and GN Mortgage erred in concluding that the measure of damages for fraud is the impairent of the security.
Rather, the court concluded that damages for fraud
by a fiduciar (which it concluded defendants were)

stances of the case, its damages were measured by
the out-of-pocket rule, not the extent of the impair-

are measured by sections 3333 and 1709, and in
paricular, the "benefit-of-the-bargain," not the

ment of its security. (GN Mortgage Corp. v. Fidel-

ity Nat. Title Ins. Co., supra, 21 Cal.AppAth at p.

1807.) The cour described this argument as
"sophisticaL." (Ibid.) It stated, "because a foreclosure sale is designed to establish the value of the

"out-of-pocket," rule. *1246

propert sold, plaintiffs full credit bid set the value
of the propert at an amount sufficient to satisfy the
indebtedness and all accrued expenses. Therefore,

C. Effect of Allance's Full Credit Bids on Fraud Claims

defendants' tortious conduct did not cause any dam-

(10a) We now consider whether Alliance's full
credit bids as a matter of law bar its fraud claims

age. Any losses suffered thereafter resulted either
from a severe market downturn or from defendants'

against North American and Ticor. We conclude
that they do not. Accepting as tre the allegations

exercise of business judgment." (Id. at p. 1809.)
As noted above, the Court of Appeal here expressly

of the complaint, as we must, defendants "joined

with others in a conspiracy to perpetrate a deliberate fraud which could conceivably have caused injur even to a lender who had exercised reasonable

disagreed with Western Federal and GN Mortgage, and held that a lender's full credit bid at a nonjudi-

care in the conduct of its business affairs." (Guild

cial foreclosure sale did not bar its subsequent fraud claim against third parties who fraudulently induced the lender to make the loan. The court
reasoned that a "full credit bid does not establish

Mortgage, supra, 193 Cal.App.3d at p. 1515 (conc.
opn. of

Gates, 1.).)

the value of the propert for all purposes, but only
for the purpose of foreclosure proceedings against a

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.

borrower," and hence had no application to claims
against third part tortfeasors. It concluded that

"(t)he central error of Western Federal, supra, and GN Mortgage, supra, is the failure to appreciate

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 irevoc-

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

16

900 P.2d 601 Page 15
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 16 of 42
10 Cal.4th 1226,900 P.2d 601,44 Cal.Rptr.2d 352,95 Cal. Daily Op. Servo 6825, 95 Daily Joural D.AR. 11,688
10 Ca1.4th 1226

able offer to purchase the propert for that amount.
(§ 2924h, subd. (a).) The lender, perhaps more than
a third part purchaser with fewer resources with

which to gain insight into the propert's value, generally bears the burden and risk of making an informed bid.

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 in-

quir, 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

It does not follow, however, that being intentionally and materially misled by its own fiduciaries FN8 or

was intentional rather than negligent." (Seeger v.
Odell, supra, 18 Cal.2d at p. 414.) "Nor is a

agents as to the value of the propert prior to even making the loan is within the realm of that risk.
(See Brown v. Critclield (1980) 100 Cal.App.3d

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

858, 871 (161 Cal.Rptr. 342) (Risk inherent in secured land transactions is on the mortgagee, "but

in the light of his own intellgence and infonnation
was manifestly unreasonable, however, he wil be

that risk should not be expanded to include the assumption of damages resulting from a fiduciary's

denied a recovery." (Ibid.;Gray V. Don Miler &
Associates, Inc., supra, 35 Cal.3d at p. 503 ("the issue is whether the person who claims reliance was

negligence or fraud").) Most lenders, such as Alliance in this case, are corporate entities, and rely on

their agents to provide them material infonnation.

Here, Allance did obtain appraisals, and attempted

to make infonned loan decisions. It alleges,
however, that its appraiser, Rothwell, in conspiracy
with defendants, fraudulently misrepresented the

justified in believing the representation in the light of his own knowledge and experience"). " 'If the plaintiff and defendant are in a confidential rela-

tionship there is no duty of inquir until the relationship is repudiated. The nature of the relation-

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 proper-

ship 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

ties. The full credit bid rule was not intended to immunize wrongdoers from the consequences of their
fraudulent acts.

p.921.)
Thus, to the extent Alliance's full credit bids were proximately caused by defendants' fraudulent mis-

FN8 As noted above, Alliance alleges that defendants were fiduciaries. We need not
decide whether this contention is correct,

representations, and this reliance without independent or additional inquir was either appropriate given the context of the relationship or was not other-

or detennine the precise relationship
between the parties. Our holding is simply
that to the extent defendants made fraudu-

lent misrepresentations on which Alliance

justifiably relied in making its full credit bid, they cannot assert the full credit bid
rule as a defense to Allance's fraud claims.

wise 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 mort-

gagee to make a bid for the propert in the amount owing on the debt" when it cannot recover a deficiency). Hence, the full credit bid rule would not
apply.

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 *1247 reasonable probabilty, have made

In the alternative, to the extent Alliance's full credit
bids were not proximately caused by defendants'

iÇ 2008 Thomson Reuters/West. No Claim to Orig. U.S. Govt. Works.

17

900 P.2d 601 Page 16
Case 5:07-cv-04808-JF Document 60-2 Filed 07/25/2008 Page 17 of 42
10 Cal.4th 1226,900 P.2d