Fuller v. First
Filed 5/1/13 Fuller v. First Franklin Financial CA3
NOT TO BE PUBLISHED
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF
THIRD APPELLATE DISTRICT
(Butte
----
MICHAEL FULLER et al.,
Plaintiffs and Appellants,
v.
FIRST FRANKLIN
FINANCIAL CORPORATION et al.,
Defendants and Respondents.
C070452
(Super. Ct. No. 152324)
Plaintiffs
Michael Fuller and Karen Gehrig, a married couple living in Oroville, initiated
this action in November 2010 against First Franklin Financial Corporation
(First Franklin), Bank of America, and Sacramento First Mortgage (SFM).
Franklin was the original lender funding the purchase of their home in
June 2006, and Bank of America is First Franklin’s successor in interest on the
loan.
action, under direction from the trial court “to provide further allegations of
late discovery of the [actionable] facts,†plaintiffs alleged defendants First
Franklin and SFM, pursuant to a scheme of predatory lending, made
concealments of circumstances in the appraisal of the residence and in
the terms of the loan in order to maximize their profit, which the plaintiffs
did not discover until late 2009.
Plaintiffs listed several counts (inexactly denominated “causes of actionâ€
(see Cullen v. Corwin (2012)
206 Cal.App.4th 1074, 1076, fn. 1)) that included theories of deceit,
negligence, unfair business practices, and SFM’s breach of its fiduciary duty
to them, and civil conspiracy
(which is not an independent cause of action in any event but only a theory for
establishing vicarious liability (3 Witkin, Cal. Procedure (5th ed. 2008)
Actions, § 557(1), p. 706 (Witkin)).
First
Franklin and SFM separately demurred.
Basing its January 2012 rulings on the
issued an order of dismissal in favor of First Franklin, and an order
sustaining SFM’s demurrer as to all
causes of action without leave to amend.
Plaintiffs
filed notices of appeal from the two orders.
SFM subsequently moved for judgment on the pleadings on the count of
negligence.
title="">[3] The trial court granted the motion for lack
of opposition, and entered a judgment of dismissal as to SFM in June 2012. We deem the premature notice of appeal from
the trial court’s order sustaining SFM’s demurrer to have been filed
immediately after the subsequently entered judgment for SFM. (Cal. Rules of
Court, rule 8.308(c); see In re Gray
(2009) 179 Cal.App.4th 1189, 1197 [this court discusses equities in favor
of deeming notice to be “premature†once record prepared and briefing completed
after entry of judgment].)
Plaintiffs
argue that they had sufficiently alleged delayed discovery of facts that
defendants had purposely withheld from them in order to induce them to enter
into the now defaulted loans. We
agree. We shall thus reverse the
judgments of dismissal with directions to overrule the demurrers.
FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND
A. The Pleading
at Issue
In an
appeal from a judgment resulting from the sustaining of a demurrer without
leave to amend, we assume the truth of well-pleaded factual allegations in the
subject pleading, shorn of any legal conclusions. (Fogarty
v. City of Chico
(2007) 148 Cal.App.4th 537, 540 (Fogarty).)
Dennis
Graves was an employee of SFM and purported to be a mortgage broker, but was in
fact not licensed as a broker in California. SFM and its broker (Graves)
were both agents of First Franklin, which comprehensively directed their
conduct. First Franklin and SFM
solicited the business of plaintiffs, who met with the ostensible broker at a
real estate seminar. This resulted in
plaintiffs applying for a residential home loan with SFM. They wanted a 30-year fixed-rate
mortgage.
The
broker hired an appraiser to value the property that plaintiffs wanted to
buy. Pursuant to a common scheme with
First Franklin and SFM, the appraiser chose outdated sales of homes that were
not truly comparable in value (having greater square footage, more rooms, and
other added amenities), resulting in a significantly inflated appraisal
of the subject property of which defendants were aware.
The
broker told plaintiffs that they did not qualify for any loan with better terms
than the one he then offered them. He
did not discuss that the terms of the $435,000 loan included a first mortgage
(carrying a 30-year amortization) with an adjustable interest rate and with
payments limited to interest for the first three years, and a second mortgage
(carrying a 20-year amortization and a balloon payment) with a fixed rate of
9.5 percent. He did not explain any
consequences of the terms of the loans.
In truth,
plaintiffs had credit scores that qualified them for more favorable loans, but
the broker did not inform them of this in order to receive a hidden kickback
from First Franklin as part of the closing costs of the loan. As a result, plaintiffs were unaware of their
qualification for more favorable loans, the actual terms of the loan into which
they entered in June 2006 (and the risk of foreclosure that the terms caused),
or the actual value of their home. This
stemmed from their status as first-time buyers who were not experienced in real
estate transactions, and defendants were aware of their naïveté. Because defendants presented themselves as
experts, plaintiffs relied on them. SFM
and First Franklin concealed the specified information in order to induce
plaintiffs to enter into the First Franklin loan, and plaintiffs would not have
done so if they had been aware of the true facts. At the June 2006 closing, they “had a few
questions about the prepayment penalty and other [unspecified] details,†but
the broker was not present and the notary did not have any answers for them.
In
November 2009, the business plaintiffs owned was experiencing a “massiveâ€
diminution in earnings, so they sought to discuss a modification of their loans
with First Franklin. This is when they
first learned of the actual terms of the two loans. First Franklin initially refused to consider
any modification. Plaintiffs had
believed that they would be able to refinance the mortgage if they had
difficulties with payments—based on a representation from SFM to this effect,
in accordance with First Franklin’s directives—but the absence of any real equity
in the home precluded them from doing so.
They were also unable to negotiate a refinancing with another bank,
which had their home appraised in November 2009, and then sought a “shortâ€
refinance (i.e., a reduction in the principal amount of the loan to reflect the
present value of the property) with First Franklin, which failed to
cooperate. First Franklin eventually
agreed to grant a forbearance under which plaintiffs could make reduced
payments of 50 percent for six months in mid-2010. After the end of that payment holiday, both
plaintiffs eventually ceased making any payments on the loans in the fall
of 2010.
Plaintiffs
consulted with counsel at that point, and first learned (in an unspecified
manner) of the inflated nature of their original appraisal (which is somewhat
at odds with their allegation that the November 2009 appraisal had revealed
their lack of equity in the home). They
also first learned of the reputation of First Franklin as the largest provider
of loans to unqualified borrowers, and marketer of these subprime loans to
investors. Pursuant to its business
scheme, First Franklin ignored standard underwriting protocols—creating a high
risk that plaintiffs and many others would face foreclosure under the loans and
inflated home appraisals—in order to maximize its market share of loans,
deflecting any risk to itself by selling off these so-called subprime mortgages
to investors.
B. Procedural
Route to Dismissal
Defendants
filed challenges to the original complaint.
The record does not contain any rulings on them (First Franklin
asserting in its briefing that the filing of an amended pleading “moot[ed]â€
them). SFM filed a motion to strike and
a demurrer (on grounds other than the limitations period). The trial court struck prayers for legal fees
and punitive damages and sustained the demurrer with leave to amend. Plaintiffs filed an amended pleading before
the hearing on First Franklin’s demurrer, apparently mooting it.
In
response to the filing of this pleading, SFM and First Franklin both filed
motions to strike prayers for punitive damages and legal fees. SFM apparently demurred on grounds other than
the statute of limitations; First
Franklin included that as a basis. The
trial court issued a lengthy order. It
overruled SFM’s demurrer to all causes of action (which did not include the
count of negligence). The court found
that the overstatement of the appraisal value, the concealment of plaintiffs’
eligibility for more favorable loans, and the hidden kickbacks paid to SFM
stated a claim against SFM for deceit, that this conduct (along with the
failure to explain the terms of the loans to plaintiffs) stated a claim against
SFM for breach of fiduciary duty, and
that this conduct also stated a claim against SFM for unfair business
practices. However, the court sustained
First Franklin’s demurrer on the ground of the statute of limitations, finding
plaintiffs had failed to establish with adequate specificity their assertion of
reasonably delayed discovery of the facts supporting their claims against the
financial institutions. (The trial court
thus did not discuss the substantive sufficiency of the allegations against
First Franklin.) It granted SMF’s motion
to strike the prayer for legal fees, but denied it as to the prayer for
punitive damages.
In
sustaining the demurrers to the present pleading that asserted the expiration
of the limitations period (First Franklin also asserting other grounds),
the trial court adopted its tentative decision in the absence of a request
for oral argument. The court did not
elaborate on its underlying reasoning in ruling that the statute of limitations
was a bar.
DISCUSSION
I. General Principles
We review
an order sustaining a demurrer de novo.
(Fogarty, supra, 148 Cal.App.4th at p. 542.) A complaint disclosing on its face that the
limitations period has expired in connection with one or more counts is subject
to demurrer. (ABF Capital Corp. v. Berglass (2005) 130 Cal.App.4th 825,
833.) Under the discovery rule, which
delays accrual of a cause of action until a party discovers or has reason to
discover the cause of action (Aryeh v.
Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1192 (
facts that would put a reasonable person on inquiry, or has the reasonable
opportunity to obtain information from sources open to investigation, the
limitations period begins to run (Community
Cause v. Boatwright (1981) 124 Cal.App.3d 888, 902 (
untimely on its face, it becomes the plaintiff’s burden “even at the pleading
stage†to establish an exception to the limitations period. (Aryeh,
supra, 55 Cal.4th at
p. 1197.) One of these is the
doctrine of fraudulent concealment, which tolls the statute of limitations if a
defendant’s deceptive conduct “has caused a claim to grow stale.†(Id.
at p. 1192; Regents of University of
California v. Superior Court (1999) 20 Cal.4th 509, 533.)
support of this doctrine, a plaintiff must allege the supporting
facts—i.e., the date of discovery, the manner of discovery, and the
justification for the failure to discover the fraud earlier—with the same
particularity as with a cause of action for fraud. (Boatwright,
supra, 124 Cal.App.3d at
pp. 900-902.)
It is the
plaintiff’s burden on appeal to show in what manner it would be possible to
amend a complaint to change the legal effect of the pleading; we otherwise
presume the pleading has stated its allegations as favorably as possible. (Boatwright,
Proc., § 472c.
title="">[4]) At this stage in the proceedings, we are
concerned only with whether a plaintiff has stated a hypothetical case; whether
or not it can be proven is beyond our review.
(Aryeh, supra, 55 Cal.4th at p. 1202 [plaintiff is “master†of
complaint, and court must accept allegations “at face valueâ€];
1262, 1267.)
The
limitations period for a cause of action under the unfair competition law (UCL)
is four years. (Bus. & Prof. Code,
§§ 17200, 17208; see Burger v.
Kuimelis (N.D. Cal. 2004) 325 F.Supp.2d 1026, 1045.)
cause of action for deceit (§ 338, subd. (d); Krieger v. Nick Alexander Imports, Inc. (1991) 234 Cal.App.3d
205, 219), as it is for a cause of action for breach of fiduciary duty where
the gravamen of the claim is deceit, rather than the catchall four-year
limitations period that would otherwise apply (Thomson v. Canyon (2011) 198 Cal.App.4th 594, 606-607).
the form of a failure to meet a standard of reasonable care on the part of a
real estate broker is two years.
(198 Cal.App.4th at p. 606; § 339.) The allegation of a conspiracy in a civil
action does not affect the limitations period for the substantive theory of
liability involved. (
201 Cal.App.3d 662, 673.)
II. Statute of Limitations
To
recap: In connection with plaintiffs’
purchase of their home in June 2006, SFM, acting at the direction of First
Franklin, procured an artificially inflated appraisal that used stale sales of
properties that were not truly comparable.
Neither SFM nor First Franklin disclosed this fact to plaintiffs. Although plaintiffs thus lacked any true
equity in their home even at the time of purchase, SFM represented that
plaintiffs would be able to refinance their mortgage terms if they had
difficulties making payments in the future, which would not in fact be true
unless the actual value of the residence increased enough to exceed the
outstanding principal on the mortgage.
SMF also falsely represented to plaintiffs that the loans it offered to
them were the only ones for which they could qualify, and falsely concealed
other more favorable loans for which plaintiffs in fact qualified. Neither SFM nor First Franklin disclosed
these true facts to plaintiffs. SMF and
First Franklin also failed to disclose that the closing costs of the mortgage
chargeable to plaintiffs included an illegal kickback from First Franklin to
SMF for its securing plaintiffs as First Franklin’s customers on the
unfavorable terms of the First Franklin loans.
SMF and First Franklin were aware that plaintiffs were unsophisticated
first-time home buyers, but failed to explain the structure of the combined
loans or the risk to plaintiffs of foreclosure that these terms posed (e.g.,
the risk of increased payments from an adjustable rate, the failure to acquire
any equity as a result of interest-only payments, the risk in facing a balloon
payment) in their dealings as real estate professionals with plaintiffs. Only in late 2009, when a severe reduction in
their income first impelled them to seek relief from First Franklin, were
plaintiffs put on the path leading them to file their complaint a year later
(well within any of the pertinent limitations periods) for the
misrepresentations that induced them to enter into the unfavorable loans and
left them at risk of foreclosure.
Noting
that all of these misrepresentations and concealments predated the June 2006
purchase (the point at which plaintiffs began to incur damages as a
result), SFM and First Franklin assert
even the longest of the pertinent limitations periods had expired as of the
filing of the November 2010 original pleading.
Based merely on the plaintiffs’ allegation that they had a question
about a provision for a prepayment penalty at closing, defendants argue this
question was enough to indicate plaintiffs had inquiry (if not actual) notice
of the web of deceit enveloping the transaction. SMF separately argues that plaintiffs’
receipt of a copy of the appraisal at closing was sufficient to put them on
notice of the misrepresentations contained in it because “the appraisal details
all this information†(an assertion made necessarily in abstract about a
document that is neither appended to the pleading nor incorporated in it by
reference), and also asserts plaintiffs could have obtained their own appraisal
at the time (see Nymark v. Heart Fed.
Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1099 (
Although
ordinarily a party to a contract cannot justifiably claim unawareness of the
express provisions of the contract (Rosenthal
v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 423-424;
see Riverisland Cold Storage, Inc. v.
Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169,
1183-1184, fn. 11), this is not the basis of plaintiffs’ causes of action. It is the failure of SMF, a mortgage broker
which owed them a fiduciary duty, to explain the possibility that the terms of
the loans might increase the risk of foreclosure. (Wyatt
v. Union Mortgage Co. (1979) 24 Cal.3d 773, 783-784 [duty can extend beyond
mere disclosure of written terms, requiring mortgage broker to counsel about
true rate of interest, penalties, and swollen size of balloon payment that were
all unfavorable terms]; Paper Savers,
Inc. v. Nacsa (1996) 51 Cal.App.4th 1090, 1103-1104 [issue of
reasonability of reliance on agent is “complex†and ordinarily must be
determined as question of fact on particular circumstances].) The same is true of the appraisal. That plaintiffs were aware of the contents of
the appraisal does not of itself provide any notice to first-time buyers that
the appraisal’s bases were improper (or alert them to the right or need to
conduct their own appraisal) where their broker does not discuss these issues
with them. (Arthur L. Sachs, Inc. v. City
of Oceanside (1984) 151 Cal.App.3d 315, 323-324 [not unreasonable as
matter of law to rely on fraudulent appraisal where party does not have
expertise, other party has superior knowledge, and nothing facially alerts
party to need for independent evaluation].)
That plaintiffs had questions about the unrelated prepayment penalty
provision (which may have been a function of their particular interest in the
availability of refinancing) or other unspecified questions does not
establish—at least in the context of a demurrer—that they actually or should
have had suspicions regarding the adjustable nature of the interest rate (or
the rate itself), the amortization period, the balloon payment, the
interest-only payments, their ability to refinance the loan, or the transaction
as a whole.
Nor, for
that matter, do defendants explain how an inexperienced buyer should have been
aware of the relationship between a credit score and the terms of loans
absent disclosures from the broker to this effect, or been able to
investigate on their own exactly what
loans terms were available to
them with their score, given the representation from their broker that the loan
presented to them had the best terms available.
Finally, SMF and First Franklin simply overlook the failure to disclose
a hidden kickback in the closing costs that increased plaintiffs’ payment, let
alone explain why it was unreasonable as a matter of law for plaintiffs to fail
to uncover this extraction from them. In
short, nothing in the circumstances surrounding the closing of the loan makes
plaintiffs’ unawareness of the true circumstances unreasonable.
Alternately,
SFM and First Franklin make the conclusory assertion that even if plaintiffs
had been reasonable in relying on information from a mortgage broker at the
outset, they have failed to allege a reasonable basis for performing their
obligations under the loans for over three years rather than earlier
discovering the true facts about the transaction, because their attorney was
able to discern the remainder of the true facts promptly after they consulted
with him. First Franklin adds a
conclusory argument that the delay from November 2009 until the commencement of
this action in November 2010 was unreasonable.
The fact
that their attorney (a trained
professional), rather than the inexperienced plaintiffs, was able to determine
the true circumstances of the loan in short order does not have any bearing on
the failure of plaintiffs to have had
any qualms about the loans until financial ill winds first made the loans an
issue of importance for them, impelling them to revisit the loans in the course
of seeking a reduction in payments.
Defendants do not point to any fact alleged in the complaint occurring
between June 2006 and late 2009 representing any sort of “red flag†as a matter
of law putting plaintiffs on notice that their home was overvalued for the
amount of indebtedness, that their “best†loan was in fact more unfavorable
than it needed to be, that their broker had siphoned off part of their closing
costs, that they would not be able to seek to reduce their payments through
refinancing, and that they would face foreclosure as a result. As for the delay between late 2009 and the
commencement of this action, the pleading does not provide an exact timeline,
but it does reveal unsuccessful negotiations with First Franklin, negotiations
with a different lender with which First Franklin refused to cooperate, and
then a period in mid-2009 during which First Franklin briefly accommodated
plaintiffs by allowing reduced payments.
We do not believe it was unreasonable as a matter of law for them
to have initially explored these alternatives before seeking out an attorney
for purposes of litigation.
As we
emphasized at the outset, it may be that evidentiary facts will ultimately
demonstrate the untimeliness of plaintiffs’ delayed discovery, once plaintiffs’
actual knowledge and expertise (and defendants’ actual representations) come to
light. But the allegations establish
with adequate specificity nondisclosures and misrepresentations from a broker
(acting as First Franklin’s agent in this respect), and the absence of any
circumstances to trigger plaintiffs’ reasonable inquiry into
nature of the loans. We therefore
conclude defendants have failed to establish the expiration of the limitations
period on the face of the pleading, and we cannot sustain the demurrer on this
basis as a result.
III. Other First
Franklin Claims
First
Franklin also renews alternative grounds it had raised in the trial court as
bases for its demurrer. (
933, 939 [must determine if any grounds asserted in demurrer will support
ruling other than those on which trial court relied]; B & P Development Corp. v. City of Saratoga (1986)
185 Cal.App.3d 949, 959 [because demurrer raises only pure question of
law, may consider even new theories on appeal].)
First
Franklin contends “There are no specific allegations of any deceitful conduct
by [First Franklin]. Rather, the only
specific conduct alleged . . . was done by . . . an
employee of [SFM].†It also asserts that
it cannot be responsible for any nondisclosures to plaintiffs because it was
not in a fiduciary relationship with them and did not have any obligation to
disclose facts to them as a result. (
116 Cal.App.4th 868, 874-875 [absent fiduciary relationship, there must be
active prevention of the plaintiff’s discovery, not mere nondisclosure of
facts]; Nymark, supra, 231 Cal.App.3d at p. 1093, fn. 1 [
with borrower].) In this vein, First
Franklin claims it did not have any duty to plaintiffs on which they may
premise negligence because it did not actively participate in the loan transaction
beyond its role as a lender. All three
of these arguments entirely disregard the allegations that First Franklin
broker—and that SMF was acting as First Franklin’s agent in procuring the
loans. Under either theory, First
Franklin can be liable for SMF’s negligence, misrepresentations, and
nondisclosures. We therefore reject
these grounds for sustaining the demurrer.
First
Franklin also argues it cannot be vicariously liable for any UCL practices in
which it did not directly participate (Emery
v. Visa Internat. Service Assn. (2002) 95 Cal.App.4th 952, 960),
asserting the pleading does not contain allegations of any unfair, unlawful, or
fraudulent conduct on First Franklin’s part.
As plaintiffs point out in response, this disregards the allegations that
First Franklin acted pursuant to a business plan under which it obtained
overvalued appraisals to make loans to otherwise unqualified borrowers in order
to maximize the volume of loans available for sale to investors who would bear
the resulting high risk of foreclosure (along with the borrowers). It also disregards the allegation that First
Franklin agreed to remit an undisclosed kickback to SMF for securing the loan
out of proceeds First Franklin received from plaintiffs. These also, contrary to First Franklin’s
conclusory invocation of the principle of specific pleading of UCL violations (
(1993) 14 Cal.App.4th 612, 619), are sufficiently detailed
allegations. We thus reject this ground
for sustaining the demurrer as well.
DISPOSITION
The
judgments of dismissal are reversed with directions to enter orders overruling
the demurrers of First Franklin and SFM.
Plaintiffs shall recover their costs
on appeal. (Cal. Rules of Court,
rule 8.278(a)(1), (2).)
BUTZ , J.
We concur:
ROBIE , Acting P. J.
DUARTE , J.
name="_ftn1" title="">[1] Another original defendant, Mortgage
Electronic Registration Systems, Inc., is not a party to the action any
longer.
name="_ftn2" title="">[2] The allegations assert that Bank of America
is named as a defendant (including its status as a coconspirator with the other
two defendants) not on the basis of any conduct of its own but strictly on the
basis of its status as First Franklin’s successor in interest. We thus will not expressly refer to Bank of
America in this opinion.
