Lead Opinion
Opinion
We here determine whether a lender’s acquisition of security property by full credit bid at a nonjudicial foreclosure sale bars the lender as a matter of law from maintaining a fraud action against third party nonborrowers who fraudulently induced the lender to make the loans. The Courts of Appeal are in conflict on this issue. We granted review to resolve the conflict, and now conclude that such an action is not precluded. We therefore affirm the judgment of the Court of Appeal.
I. Facts and Procedural Background
This matter reaches us following plaintiff Alliance Mortgage Company’s (Alliance) successful appeal from a judgment on the pleadings dismissing all
From 1983 through 1985, defendant Laurie Samuel Rothwell (Rothwell), a real estate appraiser and broker, and other defendants including North American and Ticor, devised and implemented an elaborate scheme to fraudulently induce Alliance, then known as Charter Mortgage Company of Florida, 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 property: prepared false residential purchase agreements and loan applications in the names of fictitious borrowers, deliberately inflated “fair market value” property appraisals and invented “comparable” property values to support the inflated and fraudulent appraisals, falsified employment and deposit verifications, tax returns, credit histories, and W-2 wage/income statements, drafted inaccurate title reports that contained misleading descriptions of the properties, and falsely represented that the escrow instructions had been followed and the required cash deposits and disbursements made.
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 properties which falsely described them as being four-unit dwellings. In fact, they were one-unit residences.
Relying on defendants’ representations, and unaware of their fraudulent conduct, Alliance loaned the Rothwell group the funds to purchase the Haight Street and East Bay properties. The loans were secured by deeds of trust to the respective properties. Not surprisingly, the fictitious borrowers
Alliance “discovered, upon acquiring title to the properties, that the true market value of the properties was far less than the value represented to Alliance 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 constructed on the separate parcels of real property are not the type of improvements as assured in the title insurance policies. As a proximate result of defendants’ misconduct, described above, Alliance has been damaged in an amount to be determined.”
Prior to learning of the fraud, Alliance sold several loan obligations to secondary investors. In the case of three of these properties, regulations of the Federal Home Loan Mortgage Corporation (FHLMC) required Alliance to repurchase the loans it had earlier sold to the Federal National Mortgage Association (FNMA). “Each of those loans had gone into default and the properties were foreclosed upon before Alliance repurchased them.”
After foreclosure or repurchase of the loans from a secondary investor, Alliance was required to pay various costs and expenses through the time it resold the property, including property taxes, repairs to the property, correction of local housing code violations, maintenance of the property, applicable insurance, and costs associated with selling the property. In addition, after discovery of the fraud perpetrated by defendants, some of Alliance’s mortgage insurers denied coverage for Alliance’s losses.
Alliance alleged that these facts gave rise to claims for intentional misrepresentation, negligent misrepresentation, breach of contract against the escrow 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 and Corrupt Organization Act (18 U.S.C. §§ 1961-1968). It sought punitive damages on its intentional misrepresentation claim, and attorney fees, costs, and interest on its breach of contract 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 barred by Alliance’s full
Prior to trial, Alliance moved to amend the complaint to conform to proof that defendants’ fraud resulted in damage to Alliance’s goodwill, reputation, and net worth. At or about the same time, defendants filed motions in limine to exclude all evidence of impairment of security, damages for loss of goodwill, reputation, and net worth, and damages for postforeclosure costs. Ticor also filed separate motions in limine, some of which sought judgment on the pleadings, arguing that it had been improperly joined as a Doe defendant, that the statute of limitations had run, and that its title insurance policies were indemnification contracts that did not constitute representations regarding the property. The trial court granted defendants’ motions, denied 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. Savings & Loan Assn. v. Sawyer (1992)
We granted North American and Ticor’s petitions for review solely on the issue of whether a lender’s acquisition of security property by full credit bid at a nonjudicial foreclosure sale bars the lender from maintaining a fraud action to recover damages from nonborrower third parties who fraudulently induced the lender to make the loans. We now affirm.
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 fraud in the inducement of the underlying loan obligation. 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.
1. Mortgages and Deeds of Trust
A real property loan generally involves two documents, a promissory note and a security instrument. The security instrument secures the promissory note. This instrument “entitles the lender to reach some asset of the debtor if the note is not paid. In California, the security instrument is most commonly a deed of trust (with the debtor and creditor known as trustor and beneficiary and a neutral third party known as trustee). The security instrument may also be a mortgage (with mortgagor and mortgagee, as participants). In either case, the creditor is said to have a lien on the property given as security, which is also referred to as collateral.” (Bernhardt, Cal. Mortgage and Deed of Trust Practice (Cont.Ed.Bar 2d ed. 1990) § 1.3, p. 5, italics removed.)
A security interest cannot exist without an underlying obligation, and therefore a mortgage or deed of trust is generally extinguished by either payment or sale of the property in an amount which satisfies the lien. (Civ. Code, §§ 2909, 2910;
California has an elaborate and interrelated set of foreclosure and antideficiency statutes relating to the enforcement of obligations secured by interests in real property. Most of these statutes were enacted 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. L.Rev. 185, 187-188, fn. omitted.)
Pursuant to this statutory scheme, there is only “one form of action” for the recovery of any debt or the enforcement of any right secured by a mortgage or deed of trust. That action is foreclosure, which may be either judicial or nonjudicial. (Code Civ. Proc., §§ 725a, 726, subd. (a).) In a judicial foreclosure, if the property is sold for less than the amount of the outstanding indebtedness, the creditor may seek a deficiency judgment, or the difference between the amount of the indebtedness and the fair market value of the property, as determined by a court, at the time of the sale. (Roseleaf Corp. v. Chierighino (1963)
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 foreclosure is less expensive and more quickly concluded than judicial foreclosure, since there is no oversight by a court, “[n]either appraisal nor judicial determination of fair value is required,” and the debtor has no postsale right of redemption. (Sheneman, Cal. 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 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)
The price at a foreclosure sale is not deemed the equivalent of the property’s fair market value. As the United States Supreme Court recently
A bid at a trustee’s sale is deemed by statute to be an irrevocable offer by that bidder to purchase the property 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)
The antideficiency statutes have been broadly interpreted to protect the debtor. It is settled, however, and defendants here concede, that the antideficiency statutes do not preclude an action against a borrower for fraud in the inducement of a loan. (See, e.g., Guild Mortgage, supra,
3. Full Credit Bid Rule
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)
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 property was actually worth less than the bid. (See Cornelison v. Kornbluth, supra, 15 Cal.3d at pp. 606-607; Passanisi v. Merit-McBride Realtors, Inc., supra,
4. Fraud Claims
“The necessary elements of fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage.” (Molko v. Holy Spirit Assn. (1988)
Reliance exists when the misrepresentation or nondisclosure was an immediate cause of the plaintiff’s 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)
“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
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,
In fraud cases involving the “purchase, sale or exchange of property,” the Legislature has expressly provided that the “out-of-pocket” rather than the “benefit-of-the-bargain” measure of damages should apply. (§ 3343,
Punitive damages are recoverable in those fraud actions involving intentional, but not negligent, misrepresentations. (Wyatt v. Union Mortgage Co. (1979)
B. Cases Applying the Full Credit Bid Rule
The issue we confront here is whether a lender’s acquisition of security property 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. Cornelison v. Kornbluth,
Plaintiff then sued one of the subsequent purchasers in part for waste. (Cornelison v. Kornbluth, supra,
We first concluded that a lender’s claim for bad faith waste was not precluded by the antideficiency statutes. (Cornelison v. Kornbluth, supra,
In response to plaintiff’s “complain[t] that it is difficult to calculate precisely the amount of damages recoverable for waste so as to determine the proper amount which the beneficiary or mortgagee should bid at the foreclosure sale,” we stated: “Suffice 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 property 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 property at the foreclosure sale, he may then recover any provable damages for waste.” (Cornelison v. Kornbluth, supra,
Since Cornelison, the Courts of Appeal have approached the effect of a full credit bid on a lender’s fraud claim in various ways with irreconcilable results. Two Court of Appeal decisions directly address the issue at hand, and, as noted earlier, conflict with the Court of Appeal’s opinion in this case. (Western Fed. Savings & Loan Assn. v. Sawyer, supra,
In Western Fed. Savings & Loan Assn. v. Sawyer, supra,
The Smiths’ loan application was referred to Western through a mortgage broker. The bank reviewed the presale appraisal and agreed to fund the loan request for $92,000. (Western Fed. Savings & Loan Assn. v. Sawyer, supra,
The loan went into default, and Western purchased the property at a nonjudicial foreclosure sale after making a full credit bid. (Western Fed.
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,
In GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co., supra,
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. (GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co., supra, 21
Second, plaintiff contended that the full credit bid rule was inapplicable because, under the circumstances of the case, its damages were measured by the out-of-pocket rule, not the extent of the impairment of its security. (GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co., supra,
As noted above, the Court of Appeal here expressly disagreed with Western Federal and GN Mortgage, and held that a lender’s full credit bid at a nonjudicial 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 the value of the property for all purposes, but only for the purpose of foreclosure proceedings against a borrower,” and hence had no application to claims against third party tortfeasors. It concluded that “[t]he central error of Western Federal, supra, and GN Mortgage, supra, is the failure to appreciate 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 party tortfeasors from liability for fraudulent conduct, as was done below.”
The court also found that Western Federal and GN Mortgage erred in concluding that the measure of damages for fraud is the impairment of the security. Rather, the court concluded that damages for fraud by a fiduciary (which it concluded defendants were) are measured by sections 3333 and 1709, and in particular, the “benefit-of-the-bargain,” not the “out-of-pocket,” rule.
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,
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
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
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,
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,
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)
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
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,
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,
Defendants’ remaining arguments are unpersuasive. Ticor attempts to distinguish Brown v. Critchfleld, supra,
Citing BFP v. Resolution Trust Corp., supra,
Conclusion
We conclude that Alliance’s full credit bids do not as a matter of law bar its fraud claims against defendants. Accordingly, the entry of judgment on the pleadings was improper. (Cf. Molko v. Holy Spirit Assn., supra,
Mosk, J., Kennard, J., Baxter, J., and George, J., concurred.
Notes
The second amended complaint does not allege the amount of Alliance’s bids. 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.
The terms “deed of trust,” “trustor,” and “beneficiary” are used interchangeably in this opinion with “mortgage,” “mortgagor,” and “mortgagee.” (Bernhardt, Cal. Mortgage and Deed of Trust Practice, supra, § 1.3, p. 5.)
All statutory references contained herein are to the Civil Code unless otherwise indicated.
Here, Alliance’s fraud claims include allegations of intentional misrepresentation, negligent misrepresentation, and breach of fiduciary duty. (See §§ 1572, 1710; Bily v. Arthur Young & Co. (1992)
Section 3343, subdivision (a), provides, “One defrauded in the purchase, sale or exchange of property is entitled to recover the difference between the actuad value of that with which the defrauded person 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 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.)
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.”
Section 3333, the general tort damage measure provides: “For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”
As noted above, Alliance alleges that defendants were fiduciaries. We need not decide whether this contention is correct, or determine the precise relationship between the parties. Our holding is simply that to the extent defendants made fraudulent misrepresentations on which Alliance justifiably relied in making its full credit bid, they cannot assert the full credit bid rule as a defense to Alliance’s fraud claims.
We have required that a plaintiff’s reliance on a defendant’s fraudulent misrepresentations not be “manifestly unreasonable” for over 50 years. (Seeger v. Odell, supra,
Defendants argue that because Alliance had a contractual right to inspect the property, it should have “underbid” if it had any reason to believe that the security was inadequate to cover the secured obligation. While we need not reach this issue, we note that enforcement of a contractual right to inspect typically requires a cooperative borrower. “If a borrower refuses to allow a lender entry onto the property under an inspection provision .... a lender probably would not seek judicial enforcement of its inspection and entry rights (unless combined with a judicial foreclosure action) for fear that the proceeding would be construed as an ‘action’ for purposes of [Code of Civil Procedure section] 726.” (Ferguson et al., Assembly Bill 1735: New Rights for Lenders Holding Contaminated Real Property Security (Cont.Ed.Bar 1992) 15 Real Prop. L. Rep. 1, 6; see § 2929.5, subd. (d) [expressly providing that a court order authorizing a lender to enter and inspect secured property for hazardous substances “shall not constitute an action within the meaning of’ Code of Civil Procedure § 726, subdivision (a)].)
North American’s motion for judicial notice of 649 trustee’s deeds recorded in December 1994 is hereby denied. (Mangini v. R. J. Reynolds Tobacco Co. (1994)
Concurrence Opinion
I concur in the judgment. Judgment on the pleadings was improperly granted, because Alliance’s full credit bids do not preclude it from seeking damages from nonborrower third parties for fraudulently inducing Alliance to lend money to others. I write separately to discuss what I believe to be an unwarranted limitation, in the majority opinion, on the damages Alliance may recover if its bids were not made in justifiable reliance on defendant’s misrepresentations. In my view, Alliance can establish a cause of action for fraud by showing it justifiably relied on defendants’ misrepresentations in making the loans, regardless of whether it was also justified in later making full credit bids for the security properties. In such an action it may recover, at least, the amounts it is actually out of pocket as a result of making the loans.
In pleading its cause of action for intentional misrepresentation, Alliance alleged it “made the loans applied for” in justifiable reliance on, and as a proximate result of, defendants’ false representations. Alliance alleged several categories of damage suffered as a consequence of having made the loans: the receipt of security interests worth far less than the represented value; the failure of the borrowers, whose qualifications were misrepresented, to repay the loans; consequential costs and expenses of foreclosing on and reselling the security properties; and punitive damages attributable to defendants’ fraudulent, willful and malicious conduct in inducing the loans. Accepting as true the allegations of the complaint, Alliance suffered cognizable injury when it was fraudulently induced to make the loans. It put out
Alliance, of course, did repurchase the properties with full credit bids. This decision, if shown to be unreasonable, may affect the extent of Alliance’s recoverable damages. Like any injured party, Alliance may not recover damages caused by its own unreasonable behavior rather than by the defendants’ tortious acts. Stated another way, Alliance was obligated to take reasonable care to mitigate its damages. (See Valencia v. Shell Oil Co. (1944)
The majority goes beyond this undisputed principle to hold Alliance may not recover its full out-of-pocket damages if its decision to make full credit bids was manifestly unreasonable, regardless of whether making such bids actually increased Alliance’s damages. (Maj. opn., ante, atpp. 1247-1248.) It is this portion of the majority opinion with which I disagree.
A simple hypothetical illustrates the difference between the majority’s position and my own. Suppose nonborrower defendant fraudulently induces plaintiff to lend $400,000, on security falsely represented to be worth at least that amount but actually worth only $250,000, to a nonexistent or otherwise unqualified borrower. The borrower defaults without repaying any of the loan. Without conducting further inspections or appraisals, and without discovering the fraud, plaintiff purchases the security property at the trustee’s sale with a full credit bid for the outstanding debt, $400,000 (ignoring, for simplicity’s sake, outstanding interest and the costs of foreclosure). Shortly thereafter plaintiff resells the property for a fair market price of $250,000.
In plaintiff’s action against the defrauding third party, the trier of fact determines plaintiff justifiably relied on defendant’s misrepresentations in
Under the majority’s holding, however, plaintiff, by making the bid, would be barred from claiming the property was worth less than $400,000. Under this rule plaintiff would have no recoverable out-of pocket damages, since it expended $400,000 in loan funds and acquired a property deemed to be worth $400,000. Plaintiff could not, the majority explains, “recover the difference between its bid . . . and the actual value of the property.” (Maj. opn., ante, at p. 1247.) Since that increment—the difference between plaintiff’s $400,000 bid and the $250,000 value of the property—is all of plaintiff’s hypothetical out-of-pocket losses, plaintiff’s recovery would be zero. This result would obtain even though plaintiff would have suffered the same losses had it underbid; recovery would be denied, that is, even though all of plaintiff’s damages were proximately caused by the fraud.
There may be circumstances in which entry of a full credit bid does increase the plaintiff’s losses. Even in such a case, however, I believe the majority misstates the extent of allowable recovery. Consider a variation of the above hypothetical. Suppose the evidence at trial establishes that on the date of the trustee’s sale the fair market value of the property was $300,000 and that the trustee could have sold it for that price had plaintiff not entered a full credit bid of $400,000. Suppose further that, because of market changes after the trustee’s sale, plaintiff is able to resell the property for only $250,000.
Plaintiff, as in the original hypothetical, is out of pocket $150,000, but under these circumstances only $100,000 of the loss would have been
Under the majority’s rule, however, plaintiff would, as in the original hypothetical, recover no out-of-pocket damages, since it expended $400,000 in loan funds and received a property deemed, by virtue of its bid, to be worth $400,000. Thus the majority would deny plaintiff recovery of even the $100,000 that was proximately caused by its reliance, in making the loan, on defendant’s fraudulent misrepresentations.
I agree with the majority that the full credit bid rule, properly understood, precludes the lender, “for purposes of collecting its debt, from later claiming the property was actually worth less than the bid.” (Maj. opn., ante, at p. 1238, italics added.) I also agree the full credit bid rule was not intended, and should not be applied, “to immunize wrongdoers from the consequences of their fraudulent acts.” (Id. at p. 1246.) Here, however, Alliance’s action for fraud against these nonborrower third parties is not an attempt to collect its debt, and application of the full credit bid rule in fact would protect defendants from the consequences of their allegedly fraudulent acts. I would therefore hold the rule, properly understood, simply does not apply. To the extent Alliance acted unreasonably and to its own detriment in bidding as it did, it will be precluded from recovering any damages attributable to its actions under the ordinary rule barring recovery of losses not proximately caused by the fraud.
Lucas, C. J., concurred.
The majority’s emphasis on the bids as limiting damages may result from a misapprehension as to the nature of Alliance’s claim for damages. Alliance’s claim is not that it was injured when it “paid more for the properties than they were worth” (maj. opn., ante, at p. 1250), but that it was injured when it loaned money to unqualified borrowers on inadequate security.