In this case, we are called on to decide the impact of the amount of a lender’s bid at a private foreclosure sale on its ability to obtain tort damages in the aftermath of the Supreme Court’s decision in Alliance Mortgage Co. v. Rothwell (1995)
Factual and Procedural Background
The Loan and Foreclosure
In 1991, respondent, a professional appraiser, appraised a building owned by Jack Edelman located on La Cienega Boulevard in West Los Angeles, giving it a value of $900,000.
In December of 1993, appellants sought and obtained leave of the bankruptcy court for relief from stay to allow them to foreclose on the property. In the motion for relief from stay, appellants argued, through their counsel, that the property was worth far less than their lien. According to an attached appraisal undertaken by a.new appraiser in November of 1993 on appellants’ behalf, the La Cienega property had a value of $375,000 and the adjacent vacant lot a value of $35,000. As legal support for the motion, the moving papers relied on section 362(d) of the Bankruptcy Code which requires the court to grant relief from stay with respect to a property if “the debtor does not have an equity in such property.” (11 U.S.C. § 362(d).) Dr. Schiffman
Proceedings Below
In September of 1994, appellants filed a complaint against respondent and others
Prior to trial, respondent submitted a trial brief in which he contended that appellants’ bid of $652,029 at the foreclosure sale established the market value of the property. Since appellants’ damages totaled less than that amount—according to respondent’s calculations—there were no recoverable damages. The trial court instructed appellants to present an offer of proof as to the existence of damages.
In their written offer of prоof, appellants set forth the following facts which they contended supported their claim of reliance on the misrepresentation: (1) Edelman had filed bankruptcy to protect what he believed to be a valuable property with substantial equity; (2) after Edelman filed for bankruptcy, Yossi Eichenbaum of Advanced Funding assured Dr. Schiffman that there was an “equity buffer” and that there had been a recent offer to purchase the property for $1 million; (3) appellants’ original bankruptcy attorney was recommended by Eichenbaum; (4) when the original attorney was unable to obtain a negotiated relief from stay within a reasonable period, appellants hired a different firm, Levine & Eisenberg, which obtained relief from stay in December of 1993.
Concerning the November 1993 appraisal used by Levine & Eisenberg in support of the motion for relief from stay, appellants stated: “In bidding in
In another section of the brief, appellants stated that they had incurred $200,000 in out-of-pocket losses, which they defined to include taxes, insurance, and attorney’s and foreclosure fees. Appellants further contended they were entitled not just to out-of-pocket losses, but to loss of the “benefit of the bargain” measured by the difference between the fair market value of the property and $900,000.
The Judgment of Nonsuit
The trial court entered a judgment of nonsuit, taking appellants’ offer of proof as “tantamount to their opening statement with regard to the facts and evidence they intend to offer on the issue of out of pocket loss attributable to their reliance upon the [respondent] appraisals.” The court concluded that “[a]s a matter of law, [aрpellants] did neither reasonably nor justifiably rely upon [respondent’s] appraised values when selecting the amount of their credit bid in July, 1994”; “as a matter of law, $652,029.81 represents the ‘value of what [appellants] received’ due to their alleged reliance upon the [respondent] appraisals”; “[appellants] neither claim nor intend to prove that their total monetary expenditures or losses (up through the date of foreclosure) exceeded $652,029.81”; “based upon the measure of damages set forth in Civil Code § 3343, . . . there is no triable issue of fact remaining”; and “as a matter of law, [appellants] can show no recoverable damages as to the [respondent].” This appeal followed.
I
The Negligence Claim
Preliminarily, we discuss which of appellants’ claims against respondent survive the Supreme Court’s decision in Bily v. Arthur Young & Co. (1992)
Appellants alleged in their complaint that although respondent was not in their employ, the 1992 recertification was prepared for their benefit in connection with the Edelman loan transaction. Thus, their misrepresentation claims survive, but there is no basis for the pure negligence claim. (Bily v. Arthur Young & Co., supra,
II
The Full Credit Bid Rule
Appellants contend that the trial court erred in ruling that their damages were barred by the full credit bid rule which they believe has no application to an action by a lender for fraud against the property’s appraiser after the Supreme Court’s decision in Alliance. To understand the proper application of the full credit bid rule, and why appellants are incorrect, some background is necessary.
First, we distinguish the full credit bid rule from the antideficiency rule. Under the antideficiency rule, “[n]o judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property ... in any case in which the real property . . . has been sold by the mortgagee or trustee under power of sale contained in the mortgage or
Notwithstanding the nonapplicability of the antideficiency rule to tort claims, lenders that obtain liened property through nonjudicial foreclosures are generally unable to pursue such claims against either borrowers or third parties. This is because, under the full credit bid rule, the market value of the property is said to be the price obtained at the foreclosure sale. Lenders often make a “full credit” bid on the property, that is a bid equal to the total indebtedness, including interest, late charges, and costs of foreclosure. The lender, having obtained property with a market value equal to the value of the debt and the expenses of collection, could not thereafter complain of being damaged. Thus, in Cornelison v. Kornbluth, supra,
The court in Comelison explained why this must be the case: “ ‘[T]he purpose of the trustee’s sale is to resolve the question of value and the question of potential forfeiture through сompetitive bidding . . . .’ (Hetland, Cal. Real Estate Secured Transactions (Cont. Ed. Bar 1970) p. 255.) In Smith v. Allen (1968)
The court went on to describe how the lender could avoid the impact of the full credit bid rule: “The beneficiаry 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,
The Supreme Court’s holding in Cornelison recognized the need to maintain a balance between the policy of protecting the lender from tortious injury and the policy of ensuring that private foreclosure sales are conducted in a fair manner. If there were no repercussions for making a full credit bid, lenders could manipulate the sale and discourage prospective purchasers who might have been willing to pay just under the value of the lien. In the aftermath of Cornelison, lenders that made full credit bids on liened properties at nonjudicial foreclosure sales were precluded from pursuing either the borrower or third parties on tort claims. (See, e.g., Sumitomo Bank v. Taurus Developers, Inc., supra, 185 Cal.App.3d at pp. 218-219 [“Since the Bank made a full credit bid at the private foreclosure sale, as a matter of law its security was not impaired. . . . [T]he purchase by plaintiff-vendor-beneficiary of the property covered by the purchase money deed of trust pursuant to a full credit bid made and accepted at the nonjudicial foreclosure sale resulted in a total satisfaction of the secured obligation.”]; Brown v. Critchfield (1980)
Ill
The Alliance Exception
Treating the full credit bid rule as a “bright line rule” ultimately led to an undesirable result. Lenders that relied on supposedly valid appraisals in initiating loans and purchasing properties at foreclosure were left without recourse—even in cases involving massive fraud—and the defrauding parties escaped free and clear, at least as far as civil damages were concerned. GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co. (1994)
In Alliance, the Supreme Court disapproved the holdings in GN Mortgage Corp. and Western Fed. Savings & Loan.Assn., and carved out a
The trial court limited the lender’s damage claims under the full credit bid rule based on then existing authority. The appellate court reversed, expressly disagreeing with GN Mortgage Corp. and Western Fed. Savings & Loan Assn. “The [appellate] 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 conduсt, as was done below.” (Alliance, supra,
The court began by discussing reliance: “As with any purchaser at a foreclosure sale, by making a successful full credit bid or bid in any аmount, the lender is making a generally irrevocable offer to purchase the property for that amount. [Citation.] 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[
The court recognized that the lender’s difficulty resulted from its overvalued bid at the foreclosure sale. Had it become aware of the true value of the property and bid only what it was worth, there would have been no barrier to a later suit against the defrauding parties. The court, therefore, held that in order to establish reliance, the lender needed to demonstrate “that its full credit bids were a proximate result of defendants’ fraud, and that in the absence of such fraud it would not, in all reasonable probability, have made the bids. [Citations.]” (10 Cal.4th at pp. 1246-1247, italics added.) “[T]o the extent [the lender’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, [the lender’s] bids cannot be deemed an admission of the properties’ value” and “the full credit bid rule would not apply.” (Id. at p. 1247, italics added.)
In light of that distinction, thе court described the appropriate damages: “The damages for such fraud are measured not by the outstanding indebtedness, but by either [the lender’s] out-of-pocket and consequential damages under section 3343 or under section 3333 [of the Civil Code], depending on whether defendants stand in a fiduciary relationship to [the lender]. ... We have previously held that a plaintiff is only entitled to its actual or ‘out-of-pocket’ losses suffered because of fiduciary’s negligent misrepresentation under section 3333. [Citations.] While the measure of damages under section 3333 might be greater for a fiduciary’s intentional misrepresentation, we need not address that issue here. [Citations.] The question before us is whether [the lender] stated a fraud claim that survives a motion for judgment on the pleadings. [The lender] alleges at least out-of-pocket damages when it alleges that it paid more for the properties than they were worth, and incurred certain consequential damages. [Citatiоn.] Accordingly, its full credit bids do not establish as a matter of law that it sustained no actual damages.” (Alliance, supra, 10 Cal.4th at pp. 1249-1250, original italics.)
IV
Appellants’ Reliance on the Appraisal
Appellants contend that they fit within the Alliance exception to the full credit bid rule. They mistakenly believe, however, that after Alliance “the full-credit bid rule has no application in an action for misrepresentation as to the value of the property against a non-borrower, such as an appraiser.” The court was clear in Alliance that the exception to the full credit bid rule would apply only “to the extent [the lender’s] full credit bids were proximately caused by defendants’ fraudulent misrepresentations, and this reliance without independent or additional inquiry was either appropriate given
In other words, in order to avoid the full credit bid rule, the lender must have been induced to enter into the loan by the false representation, and still be under the mistaken belief that the representation was true at the time it makes the full credit bid. Here appellants alleged the former—that they were induced to enter into the loan agreement with Edelman by respondent’s intentional or negligent misrepresentations—but not the latter. Their complaint does not contain an allegation that they were induced to make their $652,000 bid on the property in 1994 in reliance on respondent’s representations as to the value of the property in 1991 and 1992.
Moreover, as the trial court ruled, any reliance on the 1992 appraisal at the time of the foreclosure sale would have been manifestly unreasonable. Appellants obtained a reappraisal of the property, which placed its value at $375,000 ($410,000 if the adjacent vacant lot were to be included). To rely on an old appraisal when a recent one had been prepared expressly to resolve the issue of value at the time of foreclosure is manifestly unreasonable.
Appellants insist that, had the trial court pеrmitted them to go forward, they could have established that they had no actual knowledge of either the appraisal or the basis for the motion for relief from stay. They contend that the knowledge of their bankruptcy attorneys cannot be imputed to them to preclude reliance on respondent’s alleged actual fraud, citing cases in which courts held that claimants’ constructive knowledge of the contents of public records did not preclude reliance on defendants’ fraudulent representations. (See, e.g., Bishop Creek Lodge v. Scira (1996)
Whatever the merits of appellants’ argument as it relates to imputed knowledge, the information involved here was not buried in the county recorder’s office or in an attorney’s files. The appraisal report was submitted on appellants’ behalf to convince the bankruptcy court that there was no equity to protect on behalf of the debtor’s estate and to gain advantage for them in a court of law. We thus consider not merely imputed knowledge but also whether appellants should be estopped to deny knowledge of the report. The doctrine of judicial estoppel “ ‘precludes a party from asserting a position in a judicial proceeding which is inconsistent with a position previously successfully asserted by it in a prior proceeding,’ ” and “ ‘prevents] the use of intentional sеlf-contradiction as a means of obtaining unfair advantage in a forum provided for suitors seeking justice.’ [Citation.]” (Billmeyer v. Plaza Bank of Commerce (1995)
The doctrine has equal applicability here. Appellants cannot be permitted to, on the one hand, obtain the right to foreclose on a piece of property by assuring the bankruptcy court and the chapter 7 trustee that it is worth less than its liens, and then complain in a later suit that they were
V
Appellants’ Damages
Since the lack of justifiable reliance at the time of the foreclosure bid means that appellants cannot bring themselves within the Alliance exception, the full credit bid rule does apply. Appellants alternatively contend, however, that they did not make a full credit bid and are entitled to recover either out-of-pocket damages or benefit-of-the-bargain damages.
Turning first to the correct measure of damages, where the lender does not make a full credit bid at the nonjudicial sale, it is permitted to go forward with its tort claims. (See, e.g., Evans v. California Trailer Court, Inc., supra,
Appellants believe that the Supreme Court’s decision in Alliance limits the Comelison rule to waste claims and permits a greater recovery where the tort alleged is fraud. They point to the court’s discussion in Alliance of what would happen where the lender’s “full credit bids were not
Appellants also cite Foggy v. Ralph F. Clark & Associates, Inc. (1987)
We agree that these authorities indicate that damages for fraud should be calculated somewhat more expansively than damages for waste. However, wе do not read either Alliance or Foggy to mean that the benefit-of-the-bargain measure of damages is appropriate. As we have seen, in discussing the issue of damages, the court in Alliance said: “The damages for such fraud are measured not by the outstanding indebtedness, but by either Alliance’s
Reviewing the actual damages suffered by appellants, they state in their brief that “the amounts actually and reasonably expended include attorneys’ fees, foreclosure expenses, sums advanced to maintain the property and to maintain insurance and taxes, and other expenses . . . .” However, they do not state that the total expended for these categories of expenses when added to the $475,000 loan and the unpaid interest total more than their $652,000 bid at the foreclosure sale. As we have discussed, the winning bid at the private foreclosure sale is deemed to be the fair market value of the property.
The record does not provide any further illumination. The trial court asked appellants to provide a written offer of proof on damages. Appellants stated in their brief that their “actual out of pocket losses and expenditures exceeded $600,000, taking into account principal, interest, costs, attorney’s fees, taxes, etc.” and that “the out-of-pocket loss was in the range of $200,000,” but again did not explain how this $200,000 figure was calculated or whether their losses exceeded the $652,000 bid on the property.
Appellants complain the application of this damage rule to the present case is “incongruous” because “[appellants’] losses are virtually the same whether they purchase at foreclosure or not: they are simply mitigated by the $400,000 value of the property.” We repeat the response of the court in Pacific Inland Bank v. Ainsworth (1995)
VI
Expert Witness Fees
Appellants raise a subsidiary issue concerning whether the trial court properly awarded $8,100 for expert witness fees where the expert witness was designated and apparently consulted with defense counsel but was never
In the opposition to the motion to tax costs, respondent’s counsel explained that they retained an expert appraiser who billed his time at $200 per hour and prepared three different appraisal reports on the two properties to track their value at various times. The cost of the appraisal reports and an update was over $7,000 and the remaining time was for telephonic discussions regarding the trial schedule. There is no time associated with the appraisal reports, which appear to have been done for a flat fee.
Appellants argue that the fees were awarded in violation оf Code of Civil Procedure section 998, subdivision (h), which provides: “The costs for services of expert witnesses for trial under subdivisions (c) and (d) shall not exceed those specified in Section 68092.5 of the Government Code.” Section 68092.5, subdivision (a) of the Government Code is the provision under which a party seeking testimony of another party’s expert must pay “the reasonable and customary hourly or daily fee for the actual time consumed in the examination of that witness” which “shall not exceed the fee charged the party who retained the expert. . . .” In addition, “A daily fee shall only be charged for a full day of attendance at a deposition or where the expert was required by the deposing party to be available for a full day and the expert necessarily had to forego all business he or she would have otherwise conducted that day but for the request that he or she be available all day for the scheduled deposition.”
Appellants emphasize that the expert was designated to testify as to the value of the subject property but was never deposed or called to testify. It has been held that recovery of expert witness fees under Code of Civil Procedure section 998 is not limited to actual time consumed in examination. (Santantonio v. Westinghouse Broadcasting Co. (1994)
Appellants believe that the lack of itemization and the failure to express the costs of the appraisals in terms of hours expended should have resulted in denial of the request. We agree that section 68092.5 of the Government Code limits expert witness fees to reasonable and customary hourly rates, but believe the trial court had sufficient information to determine that the expert witness billings were within the statutory proscription. The trial court is charged with ensuring that parties are not charged more than a reasonable fee and must oftentimes work with less than perfect billing records. The declaration submitted in support of the fees charged explained the witness’s hourly fee and what he had done. Appellants were free to calculate the number of hours by dividing the total fee charged by the hourly rate and attempt to demonstrate that this represented an excessive number of hours for the task of appraising two different properties at three different times. They did not do so. The trial court did not abuse its discretion in awarding the fees. (See Marsh v. Mountain Zephyr, Inc. (1996)
Disposition
The judgment is affirmed.
Epstein, Acting P. J., and Hastings, J., concurred.
A petition for a rehearing was denied June 30, 1999, and appellants’ pеtition for review by the Supreme Court was denied September 22, 1999. Werdegar, J., was of the opinion that the petition should be granted.
Notes
Although the record does not specify whether Edelman or the loan broker hired respondent to perform the appraisal, he was not hired by appellants.
Other defendants included Advanced Funding Corporation, Inc., which had brokered the loan, and its sole shareholder, officer and director, Yossi Eichenbaum.
Additional claims of negligent and intentional infliction of emotional distress, based on respondent’s alleged participation in a scheme to defraud through causing appellants to make a loan on overvalued property, are not a subject of this appeal.
The lender had pled that all the defendants were fiduciaries.
The position espoused by appellants was urged by Justice Werdegar, joined by Justice Lucas, in a concurring opinion in which she said: “I write separately to discuss what I believe to be an unwarranted limitation, in the majority opinion, on the damages [the lender] may recover if its bids were not made in justifiable reliance on defendant’s misrepresentations. In my view, [the lender] 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.” (Alliance, supra,
Appellants do not explain how this would lead to revival of their negligence or negligent misrepresentation claims.
Civil Code section 3343 provides the measure of damаges for fraud “in the purchase, sale or exchange of property”; section 3333 is the measure of damages for torts in general.
Discussing fiduciary misrepresentations, the court stated: “While the measure of damages under section 3333 might be greater for a fiduciary’s intentional misrepresentation, we need not address that issue here. [Citations.] The question before us is whether [the lender] stated a fraud claim that survives a motion for judgment on the pleadings. [The lender] alleges at least out-of-pocket damages when it alleges that it paid more for the properties than they were worth, and incurred certain consequential damages. [Citation.]” (Alliance, supra,
In their motion for relief from stay, appellants had stated the total outstanding balance on the loan was $581,335.85, including $475,000 in principal, $87,578.10 in interest, $8,757.75 in late fees, and $10,000 in legal fees.
In his initial trial brief, respondent contended that appellants’ claimed out-of-pocket losses consisted of $475,000 in principal, $117,000 in interest, $11,000 in late chargеs, $28,000 for a “prepayment penalty,” and $2,500 for a preforeclosure appraisal report, for a total of $663,122. This was the figure set forth as the “amount of the unpaid debt together with costs” in the trustee’s deed upon sale, which also reported that “[t]he amount paid by the grantee at the trustee’s sale” was $652,029. Respondent believed a more accurate description of out-of-pocket losses would be $475,000 principal, $12,000 preforeclosure insurance, $10,000 attorneys’ fees, $2,500 reappraisal fee, $1,000 trustee’s fee, and $117,549 unpaid loan interest, for a total of $618,049. Since late charges and prepayment penalties are not