Alliance Mortgage Co. v. Rothwell

WERDEGAR, J.

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 *1252 considerable sums, which it has not fully recovered either through repayment or foreclosure. Even if limited to the “out-of-pocket” measure of damages under Civil Code section 3343, subdivision (a) (see maj. opn., ante, at pp. 1239-1241), Alliance suffered compensable damages as a result of loans induced by defendants’ fraudulent misrepresentations. It is also, therefore, potentially entitled to punitive damages for defendants’ intentional misrepresentations. (Civ. Code, § 3294, subd. (b)(3).)

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) 23 Cal.2d 840, 846-847 [ 147 P.2d 558 ] [“The essence of the rule denying recovery for losses which could have been prevented by the reasonable efforts and expenditures of plaintiff is that his conduct rather than that of defendants proximately caused such losses.”].) If the proof at trial shows that Alliance acted unreasonably in purchasing the security properties by full credit bid without reinspecting or reappraising them, and that its unreasonable failure to take such protective measures enhanced its damages, Alliance should not recover any such increased damages.

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 *1253 making the loan, but that it was manifestly unreasonable of plaintiff to make a full credit bid at the trustee’s sale without reinspecting or reappraising the property. I believe plaintiff, under these circumstances, would be entitled to recover at least its out-of-pocket losses: the amount loaned ($400,000) minus the amount recovered from resale of the property ($250,000), or $150,000. While plaintiff, by hypothesis, acted unreasonably in making a full credit bid, it did not thereby increase its damages. That is, even if plaintiff had acquired the property for a credit bid of less than $400,000, it could not have resold the property for more than the fair market price of $250,000, and its out-of-pocket damages would still have been $150,000. Since the amount of the credit bid did not affect the amount of plaintiff’s out-of-pocket losses, plaintiff’s recoverable damages should not be reduced even if its bid was an unreasonable one.

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. 1

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 *1254 proximately caused by reliance on defendant’s fraud. Had plaintiff not unreasonably preempted the bidding, the trustee could have sold the property for $300,000, and plaintiff’s losses would have been only $100,000. Plaintiff’s recovery would therefore be limited to $100,000, the additional $50,000 being the proximate result of plaintiff’s own manifestly unreasonable action.

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.