Merritt
v. Mozilo
Filed
9/13/13 Merritt v.
Mozilo CA6
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opinion has not been certified for publication or ordered published for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 CALIFORNIA
SIXTH
APPELLATE DISTRICT
SALMA MERRITT et al.,
Plaintiffs and
Appellants,
v.
ANGELO MOZILO et al.,
Defendants and
Respondents.
H037414
(Santa Clara
County
Super. Ct.
No. CV159993)
Plaintiffs
Salma Merritt and David Merritt obtained two loans to purchase their home. After the Merritts were unable to repay the
loans, they filed an action against multiple defendants for alleged predatory
lending practices. The named defendants are
Angelo R. Mozilo, David Sambol, Michael Colyer, Countrywide Home Loans, Inc., and
Countrywide Financial Corporation (collectively Countrywide defendants),
Kenneth Lewis, and Bank of America Corporation (Bank of America), MERSCORP
Holding, Inc. (MERS), First American Title Company (First American), and Johnny
Chen.
action for conspiracy to commit the following:
fraud (first cause of action); breach
of fiduciary duty (second cause of action); unfair business practices
(third, fourth, and fifth causes of action);
cause of action); and intentional infliction of emotional distress (seventh
cause of action). The trial court overruled
Countrywide defendants’ demurrer to four causes of action and sustained their
demurrer without leave to amend to three causes of action. The trial court also sustained the demurrers
of First American, MERS, Lewis, and Bank of America without leave to amend to
all causes of action.
On appeal,
the Merritts contend that the trial court erred: (1) by failing to apply the elements of
conspiracy law; (2) by refusing the proffered amendment to the third amended
complaint and by failing to grant leave to amend; (3) by sustaining the
demurrers to the conspiracy to commit breach of fiduciary duty, conspiracy to
commit breach of title insurance contract, and conspiracy to inflict emotional
distress causes of action as to Lewis, Bank of America, MERS and First
American; and (4) by sustaining certain causes of action as to Countrywide
defendants.
We conclude
that this court lacks jurisdiction to consider the appeal as to Countrywide defendants
when it sustained the demurrers of First American and MERS. We also conclude that the trial court erred in
sustaining the demurrers of Bank of America and Lewis. Accordingly, the judgments in favor of First
American and MERS are affirmed and the judgments in favor of Bank of America
and Lewis are reversed.
In February
2006, the Merritts entered into an agreement to purchase a townhouse in Sunnyvale
for $729,000. The Merritts spoke to one lender
who offered to provide them with a loan with monthly payments of $4,600 per
month while another offered a loan with monthly payments of $4,800. The Merritts then contacted Colyer, who was
employed by Countrywide. Colyer told
them that he could arrange a loan with payments “maybe 40 percent lower†than
what the other lenders had quoted. The
Merritts provided Colyer with their financial information, which stated that David
Merritt’s gross income for 2006 would be $60,000 and Salma Merritt would
receive temporary disability payments of $5,200.
The disability payments would decrease
to $1,400 in September 2008.
On March 15, 2006, two days before the
deadline to remove the loan contingency from the purchase agreement, Colyer
gave the Merritts a good faith estimate based on a 30-year Federal Housing
Administration (FHA) loan for $729,000 with an interest rate between 1 and 3
percent. This written estimate indicated
that monthly payments would be between $1,800 and $2,200 for principal and
interest if the Merritts made a down payment of 5 percent of the purchase price. Relying on the estimate, the Merritts removed
the loan contingency on their purchase agreement.
On March 20, 2006, Colyer informed the
Merritts that his underwriters were reluctant to approve their loan. About five days later, he informed the
Merritts that he was able to work out a loan with monthly payments of
$5,200. When the Merritts told him that
they could not afford this loan, he told them that they would be subject to a
lawsuit if they did not close escrow. The
Merritts then contacted the two lenders from whom they had previously obtained
estimates, and they were told that there was not enough time to underwrite the
loan prior to the close of escrow.
On March 26, 2006, Colyer called the
Merritts and told them that he was able to secure “ ‘the best loan possible.’ †This new loan was actually two loans or a “ ‘Combo loan’ †that consisted of a 30-year adjustable rate mortgage for
$591,200 (first loan) and a home equity line of credit (HELOC) for
$147,800. The interest-only payments on
the first loan were $3,202.33 per month and the interest rate was 6.5 percent
for the first five years. The interest
rate on the HELOC was 7.5 percent the first month and adjusted periodically
thereafter. The Merritts would
eventually be required to pay $6,693 per month on the first loan and an
additional $2,400 per month in interest on the HELOC.
On March 26, 2006, Financial Title
Company (FTC) provided Javani Wyatt, its escrow agent, with two sets of
documents that were partially filled out with financial information. FTC also “instructed her to do whatever she
could to convince [the Merritts] to sign their set of documents, leave [them]
with the second mostly blank documents and return them to her supervisor.†When David Merritt began reading the
documents, Wyatt stated that she did not have time for him to read them and
that she would provide the Merritts with a copy of every document so they could
read them later. The Merritts signed the
documents. When David Merritt began
making copies of the signed documents, Wyatt told him that they would be able
to get signed copies from Countrywide.
On March 29, 2006, Colyer filled in the
blank portions of the documents that the Merritts had signed and returned them
to First American. Does 91-95 of First
American recorded the deeds of trust and the notes, and transmitted the deeds
of trust to Bear Stearns and the notes to MERS.
MERS transmitted the notes to Wells Fargo. The deeds of trust for the first loan and the
HELOC, which were recorded on March
30, 2006, stated that the borrowers were the Merritts, the lender was
Countrywide Home Loans, Inc., the trustee was Recontrust Company, N.A., and
MERS was the nominee for the lender.
Between October
2006 and October 2008, the Merritts contacted Countrywide defendants, Lewis, Chief
Executive Officer (CEO) of Bank of America, and Wells Fargo, and requested
their signed loan documents. The
documents were not provided. The
Merritts also asked that their loans be replaced with an FHA loan “or other
traditional loan that they could afford to repay.â€
Between May
2006 and October 2008, Countrywide defendants, Lewis, and Bank of America
charged the Merritts four to seven interest rate points above the amount set
forth in the HELOC agreement. On January 20, 2009, Bank of America
provided the Merritts with copies of their loan documents, but “these documents
were different, specifically the HELOC Agreement and Note than what [the
Merritts] recall[ed].â€
In February
2009, Does 71-80 of Bank of America “produced a modification of original loans
on orders of Wells Fargo†pursuant to its agreement with Bear Stearns “in order
to cover up . . . March 2006 fraudulent acts†and “the 2006 to 2008
overcharges.†The loan modification “was
a continuation of predatory lending practices of Countrywide.†Though the new loan provided a temporary 4.5
percent interest rate, Does 71-80 “continued to mislead [the Merritts] b[]y
representing that they only needed to pay the interest and was in fact designed
to not pay down the principle.†They also
failed to disclose that the payments did not include the HELOC payments,
payment of property taxes, homeowners insurance, and other fees.
Conspiracy
1. Background
Beginning
in January 1993, James Cayne, CEO of Bear Stearns, directed brokers to
encourage private investors to place their funds into mortgage-backed security
pools, which would be lent to individuals seeking residential loans. Cayne then began implementing a plan in which
Bear Stearns would identify real estate brokers “who would agree to represent
to borrowers that they were purchasing loans that were traditional loans – i.e.
fixed 30 year loan[s] – and conceal
the fact that the loans were not conventional loans at all[.]â€
2. First American and MERS
In January
1995, Does 2-30 of Bear Stearns first met with Kennedy, CEO of First American,
and R.K. Arnold, CEO of MERS. Additional
meetings were held in February and March 1995, in which Does 2-30 of Bear
Stearns explained how they wished to work with Kennedy, Arnold, and Wells Fargo
“to make enormous amounts of money from residential mortgage borrowers.†Does 2-30 informed them that “they were going
to solicit billions in private dollars to fund mortgages for borrowers and
needed to employ brokers willing to craft loans designed to strip equity from
Americans, increase likelihood of loan defaults and to give Investors the
opportunity to foreclose and resell properties to make more profit. . . . Bear Stearns with Does 2-30 stated that in
order to conceal their identities from public record they would need Loan
Brokers, Escrow and Title agents, to not record Investors names with local
County Clerk Recorders, but to falsify local County Recorder Records by naming
some entity in their place who would be bound to not divulge their identities
publicly.â€
On February 15, 1995, Arnold
informed Bear Stearns that he would form MERS, which would record its name with
county recorders in place of Bear Stearns, and thus conceal Bear Stearns’
identity from borrowers. Between
January 2000 and December 2010, Arnold
instructed MERS members not to disclose to borrowers, including the Merritts,
that MERS was acting as a front man for Bear Stearns.
In February
1995, Kennedy presented the Bear Stearns proposal to the First American Board
of Directors. The board of directors
then approved the agreement with Bear Stearns that called for First American
“to instruct and train its Escrow and Title Insurance staff to falsify county
records and not report title defects to borrowers or the public.â€
In early
2000, MERS agreed to enroll Countrywide as a member if Mozilo would agree to
“lead Countrywide into falsifying loan documents and county records, as well as
keeping secret the fraudulent nature of [MERS], its activities and purposes.â€
Between
January 2000 and March 2006, First American entered into agreements with
various title companies to produce escrow and title search functions that First
American could underwrite. Between
January 2006 and March 2006, First American also required these companies to
ignore title defects.
On March 20, 2006, First American
directed its agent FTC to conduct a title search of the subject property. The subject property “was recorded as
belonging to MERS,†the “Note was separated from deed of trust,†and there were
“multiple breaks in the title, possibly more than a dozen holders in due course
claiming rights to Property and no way to validate a clean title.†First American directed its FTC agent to
ignore the title defects, to issue a preliminary title report, and to withhold
certain documents from the Merritts so that they would not learn of the title
defects.
On March 27,
2006, Does 91-95 of First American instructed Wyatt, pursuant to its agreement
with Bear Stearns, to take two sets of documents, which consisted of two notes
and two deeds of trust, to the Merritts’ home for their signatures. Does 91-95, acting on instructions from
Colyer, did not include material terms of the loan in the set of documents that
were to be given to the Merritts, such as the amount of payments and the
interest rates. These documents,
however, stated that the amount of the first loan was $591,200 and that of the
HELOC was $147,800, and that MERS was a beneficiary.
3. Bank of
Between
January and May 2000, Does 2-30 of Bear Stearns held talks with Lewis, CEO of
Bank of America, and Mozilo, CEO of Countrywide, “about lending money to
mortgage borrowers which they wished to hire Countrywide to broker for Bear
Stearns.†During these discussions, Lewis
informed Countrywide that Bank of America wanted to lend subprime loans to
achieve greater profits, but “they did not wish to lend predatory loans
directly . . . and wished to use Countrywide to broker their funds with certain
types of borrowers.â€
On April
15, 2000, Does 2-30 of Bear Stearns and Lewis explained to Mozilo and other Countrywide
officers that Bear Stearns and Bank of America “would provide Countrywide with the
loan contract agreements†that they “needed Countrywide to get borrowers to
sign, and such contracts required Mozilo to design loans in a way which would strip
borrowers savings, income and property equity before leading to default and
foreclosure after statute of limitations had run out on breach of contract, fraud
and other civil limitations.†A month
later, Does 2-30 of Bear Stearns and Lewis told Mozilo that Countrywide would
have to conceal that it was acting as a broker for Bear Stearns or Bank of
America. If Mozilo agreed to the terms
discussed during the meetings, Bear Stearns would lend funds to borrowers for
whom Mozilo brokered loans. Bear Stearns
provided Mozilo with a “Master Repurchase Agreement†which committed
Countrywide to broker loans for Bear Stearns and Bear Stearns would fund such
loans as long as the terms of the loans met the specifications that Bank of
America and Bear Stearns required. The
Countrywide Board of Directors then authorized Mozilo and others to enter into
agreements with Bear Stearns, Bank of America, Wells Fargo, MERS, and First
American.
Between
March 2000 and March 2006, Does 2-30 of Bear Stearns and Lewis, on behalf of Bank
of America, entered into agreements that committed them to providing funds for
Countrywide “to find borrowers who could be induced into buying subprime and
later HELCO/Pay Option ARM ‘Combo’ loans.â€
Between
March and December 2000, Mozilo, Lewis, Does 2-30, and Wells Fargo spoke with
each other monthly regarding Mozilo’s “efforts to move Countrywide to broker
subprime loans for them.†In June 2000, Bear
Stearns and Lewis asked Mozilo to “disregard California
laws regarding his real estate broker fiduciary duties, and to manage
Countrywide in a way which publicly presented Countrywide as the actual lender
of the funds being loaned out.†Mozilo
agreed to do so.
Between
July and September 2000, Sambol, president of marketing for Countrywide,
instructed Does 31-50 of Countrywide to prepare training programs for brokers,
such as Colyer, on how to conceal from borrowers Countrywide’s predatory
lending practices. Between January 2001
and March 2006, Sambol also worked with others to design loans “with payments
that increased over time to take 75, 90 and more than 100% of borrowers income
so they could ensure that borrower would default and be subjected to
foreclosure.†These loans were designed
pursuant to agreements Mozilo made with Bear Stearns and Bank of America.
Between 2003
and 2007, “approximately 50% of the loans produced by Countrywide were loans
brokered for†Bear Stearns and Bank of America.
Lewis spoke with Mozilo between January 2006 and December 2007. Mozilo told Lewis that he would sell
Countrywide “at a very cheap price†to Bank of America if Lewis “would do
whatever he could to cover up Mozilo et al deeds in the event their fraud became
known and they were prosecuted.†Lewis
presented this proposal to the Bank of America Board of Directors in December
2007. The board of directors authorized
Lewis “to enter into this and other details of agreement with Mozilo and his
team.â€
Between
December 2007 and July 2008, Lewis and Mozilo negotiated the terms of the sale
of Countrywide to Bank of America. Lewis
assured Mozilo that he “would cover up the predatory loan practices and other
frauds committed by Mozilo, Sambol and others.â€
After an audit of Countrywide was conducted, Lewis learned that “most of
the Countrywide loans which they had sold, including [the Merritts’ loan] were
predatory loans . . . and that Countrywide was intentionally falsifying monthly
charges to borrowers,†including the Merritts.
After Lewis lobbied the board of directors to view this as “a good
opportunity†for Bank of America, the board of directors accepted Lewis’
assessment and his agreement with Mozilo to cover up Countrywide’s fraud. The board of directors also “agreed that
since they were generating hundreds of millions of dollars in additional
profits by falsely overcharging borrowers, that they would not stop
overcharging borrowers, including [the Merritts], unless borrowers
complained.†Between July 2008 and March
2009, Bank of America sent the Merritts monthly billing statements which
overcharged them.
In December
2009, the Merritts filed a complaint against Countrywide defendants, Lewis, Bank
of America, Wells Fargo, Chen, and John Stumpf for restitution, injunctive
relief, rescission, and civil penalties.
The complaint alleged causes of action for conspiracy to commit fraud, misleading
statements, unfair business practices, violation of Civil Code section 1920,
race discrimination in housing, and conspiracy.
After Bank of America filed a demurrer to the complaint, the trial court
sustained the demurrers with leave to amend to five causes of action and
overruled the demurrers to the conspiracy cause of action.
In August
2010, prior to the deadline for First American to file its response to the
initial complaint, the Merritts filed a first amended complaint pursuant to
Code of Civil Procedure section 472 against Countrywide defendants, Lewis, Bank
of America, Chen, John Benson, MERS, and First American. The causes of action alleged in the first
amended complaint included fraud, conspiracy, breach of fiduciary duty, unfair
business practices, breach of contract, breach of title insurance contract, and
intentional infliction of emotional distress. Following demurrers to the first amended
complaint, the trial court sustained the demurrers of Countrywide defendants, Lewis,
Bank of America, and MERS with leave to amend. However, the trial court sustained Wells
Fargo’s demurrer without leave to amend.
The Merritts filed an appeal from the order sustaining the demurrer of
Wells Fargo without leave to amend.
Before the
hearing on First American’s demurrer to the first amended complaint in December
2010, the Merritts filed a second amended complaint against the same defendants
with the exception of Wells Fargo. The
second amended complaint alleged causes of action for
breach of fiduciary duty, unfair business practices, breach of contract, breach
of title insurance contract, and intentional infliction of emotional distress. The trial court then sustained demurrers to
the second amended complaint with leave to amend.
In April
2011, the Merritts filed their third amended complaint. The third amended complaint alleged causes of
action for conspiracy to commit the following: fraud, breach of fiduciary duty, unfair
business practices, breach of title insurance contract, intentional infliction
of emotional distress. In July 2011, the
Merritts filed an amendment to their third amended complaint. Following a hearing in August 2011 on the
demurrers to the third amended complaint, the trial court issued an order
striking the amendment to the third amended complaint. The trial court also sustained the demurrers
of First American, MERS, Lewis, and Bank of America without leave to amend to
all causes of action. However, the trial
court overruled Countrywide defendants’ demurrer to four causes of action and
sustained their demurrer without leave to amend to three causes of action.
In October
2011, the Merritts filed a notice of appeal.
In December
2011, this court reversed the judgment
in Merritt v. Wells Fargo Bank, N.A.
(Dec. 19, 2011, H036259) [nonpub. opn.] and directed the trial court to enter a
new order sustaining Wells Fargo’s demurrer to the first and second causes of
action with leave to amend to state a single cause of action for conspiracy to
defraud.
procedural claims and concluded that they had waived their claims of error
regarding their causes of action for unfair business practices, breach of
fiduciary duty, breach of contract, breach of the title insurance contract, and
intentional infliction of emotional distress.
Countrywide
defendants contend that this court lacks jurisdiction to consider the appeal as
to them. They point out that the trial
court overruled their demurrer to the first, third, fourth, and fifth causes of
action.
“In
general, the right to an appeal is entirely statutory; unless specified by
statute no judgment or order is appealable.â€
(Garau v. Torrance Unified School
Dist. (2006) 137 Cal.App.4th 192, 198.)
Code of Civil Procedure section 904.1, subdivision (a) provides that
only final judgments are appealable. “Judgments
that leave nothing to be decided between one or more parties and their
adversaries . . . have the finality required by section 904.1, subdivision
(a).†(Morehart v. County of Santa Barbara (1994) 7 Cal.4th 725, 741.) Here, as the Merritts
concede, a final judgment has not been entered against Countrywide defendants. Thus, this court lacks jurisdiction to
consider the appeal as to them.
The
Merritts’ reliance on Kuperman v. Great
Republic Life Ins. Co. (1987) 195 Cal.App.3d 943 (Kuperman) is misplaced. In
that case, the trial court struck the plaintiffs’ third amended complaint in
its entirety, thereby leaving no issues to be determined between the plaintiffs
and one of the defendants. (
appealable as a final judgment. In
contrast to Kuperman, here, issues
remain to be determined between the Merritts and Countrywide defendants.
The
Merritts also argue that policy reasons support treating the trial court’s
order as an appealable order.
statute, and Code of Civil Procedure section 904.1 does
not grant us jurisdiction on this basis.
The
Merritts alternatively request that we treat their appeal as a petition for a
writ of mandate. “ ‘A petition to treat a nonappealable order as a writ should
only be granted under [the most] extraordinary circumstances, “ ‘compelling enough to indicate the
propriety of a petition for writ . . . in the first instance . . . .’ [Citation.]â€
’ †(Wells Properties v. Popkin (1992) 9 Cal.App.4th 1053, 1055.) Since the circumstances before us are neither extraordinary
nor compelling, we decline to treat the present appeal as to Countrywide defendants
as a petition for a writ of mandate.
We next consider the issue of our
jurisdiction as to the other defendants.
Though the record contains a judgment of dismissal in favor of First
American and thus is appealable under Code of Civil Procedure section 904.1,
there is no judgment of dismissal in favor of Lewis, Bank of America or
MERS. “The general rule of appealability
is this: ‘An order sustaining a demurrer
without leave to amend is not appealable, and an appeal is proper only after
entry of a dismissal on such an order.’
[Citation.] But ‘when the trial
court has sustained a demurrer to all of the complaint’s causes of action,
appellate courts may deem the order to incorporate a judgment of dismissal,
since all that is left to make the order appealable is the formality of the
entry of a dismissal order or judgment.’ †(Melton
v. Boustred (2010) 183 Cal.App.4th 521, 528, fn. 1.) Thus, we will treat the order sustaining the
demurrers of Lewis, Bank of America, and MERS as appealable.
We first
consider whether the Merritts have failed to substantively address their
conspiracy to commit fraud cause of action (first) and conspiracy to commit
unfair business practices causes of action (third, fourth, and fifth), and thus
have waived any argument of error by the trial court in sustaining the demurrer
without leave to amend to these causes of action.
We
the judgment
is correct
and the appellant has the burden of overcoming this presumption by
affirmatively showing error. (
1140-1141.) “When an appellant fails to
raise a point, or asserts it but fails to support it with reasoned argument and
citations to authority, we treat the point as
[Citations.]†(Badie
v. Bank of America (1998) 67 Cal.App.4th 779, 784-785.)
In
challenging the trial court’s ruling on the conspiracy to commit fraud and the
conspiracy to commit unfair business practices causes of action, the Merritts
rely on the legal principles on conspiracy and fraud as set forth in
conspiracy to commit fraud cause of action.
However, there was no discussion in that case regarding the conspiracy
to commit unfair business practices. In
the present appeal, the Merritts have failed to present any reasoned argument
with citations to authority as to the underlying tort of unfair business
practices. They do not set forth the
elements of unfair business practices and how their third, fourth, and fifth
causes of action survive the demurrers.
Merely summarizing the allegations in the third amended complaint and
claiming that the trial court did not understand the elements of conspiracy law
is insufficient.
title="">[5] Though we conclude that they have not waived
the issue of whether the trial court erred in sustaining the demurrer to the
first cause of action for conspiracy to commit fraud, the Merritts have waived
any further claim of error on appeal with regard to the third, fourth, and
fifth causes of action.
2.
Standard of
Review
“In
determining whether plaintiffs properly stated a claim for relief, our standard
of review is clear: ‘ “We treat the
demurrer as admitting all material facts properly pleaded, but not contentions,
deductions or conclusions of fact or law. [Citation.] We also consider matters which may be
judicially noticed.†[Citation.] Further, we give the complaint a reasonable
interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine
whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to
amend, we decide whether there is a reasonable possibility that the defect can
be cured by amendment: if it can be, the
trial court has abused its discretion and we reverse; if not, there has been no
abuse of discretion and we affirm. [Citations.]
reasonable possibility is squarely on the plaintiff.’ [Citations.]â€
(Zelig v. County of Los Angeles
(2002) 27 Cal.4th 1112, 1126.)
3.
Conspiracy
Since each
cause of action alleges a conspiracy to commit a specified tort, we summarize
the general principles regarding conspiracy.
“Conspiracy is not a cause of action, but a legal doctrine that imposes
liability on persons who, although not actually committing a tort themselves,
share with the immediate tortfeasors a common plan or design in its
perpetration. [Citation.] By participation in a civil conspiracy, a
coconspirator effectively adopts as his or her own the torts of other
coconspirators within the ambit of the conspiracy. [Citation.] In this way, a coconspirator incurs tort
liability co-equal with the immediate tortfeasors.†(Applied
Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-511 (Applied
Equipment).) However, “[b]y its
nature, tort liability arising from conspiracy presupposes that the
coconspirator is legally capable of committing the tort, i.e., that he or she
owes a duty to plaintiff recognized by law and is potentially subject to
liability for breach of that duty.†(
are ‘(1) the formation and operation of the conspiracy; (2) the wrongful act or
acts done pursuant thereto; and (3) the damage resulting. [Citations.]’
†(Mosier v. Southern Cal. Physicians Ins. Exchange (1998) 63
Cal.App.4th 1022, 1048.) Because civil
conspiracy is easy to allege, “plaintiffs have a weighty burden to prove it. [Citation.] They must show that each member of the
conspiracy acted in concert and came to a mutual understanding to accomplish a
common and unlawful plan, and that one or more of them committed an overt act
to further it. [Citation.] It is not enough that the conspiring officers
knew of an intended wrongful act, they had to agree—expressly or tacitly—to
achieve it. Unless there is such a
meeting of the minds, ‘ “the
independent acts of two or more wrongdoers do not amount to a conspiracy.†’ â€
(Choate v. County of Orange
(2000) 86 Cal.App.4th 312, 333.)
plaintiff is entitled to damages from those defendants who concurred in the
tortious scheme with knowledge of its unlawful purpose. [Citation.] Furthermore, the requisite concurrence and
knowledge ‘ “ ‘may be inferred from
the nature of the acts done, the relation of the parties, the interests of the
alleged conspirators, and other circumstances.’
†’ [Citation.] Tacit consent as well as express approval will
suffice to hold a person liable as a coconspirator.†(Wyatt
v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784-785.)
a.
First Cause
of Action – Conspiracy to Commit Fraud
The
Merritts contend that “the CEO’s with Boards of Directors of Bear Stearns,
Wells Fargo, MERS[], [First American, Bank of America] and Countrywide . . . entered
into agreements as early as 2000 and onward, to help Bear Ste[a]rns defraud
borrowers.â€
“The
elements of fraud
are: (1) a misrepresentation (false
representation, concealment, or nondisclosure); (2) knowledge of falsity (or
scienter); (3) intent to defraud, i.e., to induce reliance; (4) justifiable
reliance; and (5) resulting damage.†(
(2004) 34 Cal.4th 979, 990.) “ ‘Promissory fraud’ is a subspecies
of the action for fraud and deceit. A
promise to do something necessarily implies the intention to perform; hence,
where a promise is made without such intention, there is an implied
misrepresentation of fact that may be actionable fraud. [Citations.]
[¶] An action for promissory
fraud may lie where a defendant fraudulently induces the plaintiff to enter
into a contract. [Citations.]†(Lazar
v. Superior Court (1996) 12 Cal.4th 631, 638 (Lazar).)
“In
California, fraud must be pled specifically; general and conclusory allegations
do not suffice. [Citations.] ‘. . . [¶] This
particularity requirement necessitates pleading facts which “show how,
when, where, to whom, and by what means the representations were tendered.†’ [Citation.] A plaintiff’s burden in asserting a fraud
claim against a corporate employer is even greater. In such a case, the plaintiff must ‘allege the
names of the persons who made the allegedly fraudulent representations, their
authority to speak, to whom they spoke, what they said or wrote, and when it
was said or written.’ [Citation.]†(Lazar,
supra, 12 Cal.4th at p. 645.)
In the
present case, the third amended complaint alleges that, executives of Bear
Stearns, Bank of America, and Countrywide held talks to discuss lending money
to mortgage borrowers beginning in 2000.
Lewis informed Countrywide that Bank of America wanted to lend subprime
loans to achieve greater profits, it did not want to be publicly identified
with predatory lending, and it wanted Countrywide to target certain borrowers. Bank of America would also provide
Countrywide with contracts for borrowers to sign that would be designed “so
borrowers would not be able to pay off loans,†thereby leading to default and
foreclosure. Between March and December
2000, executives of Countrywide, Bank of America, and Wells Fargo spoke monthly
regarding Mozilo’s “efforts to move Countrywide to broker subprime loans for
them.†Lewis also asked Mozilo to “disregard
California laws regarding his Real Estate Broker fiduciary duties†which Mozilo
agreed to do. Pursuant to this plan,
Countrywide began a training program for its brokers on predatory lending practices
as well as a deceptive marketing campaign.
Between 2003 and 2007, approximately 50 percent of the loans produced by
Countrywide were funded by Bear Stearns and Bank of America. Beginning in January 2006, Lewis and Mozilo
discussed Bank of America’s purchase of Countrywide “at a very cheap price†if
Bank of America agreed to cover up Countrywide’s fraudulent conduct. In December 2007, the Bank of America Board
of Directors authorized Lewis to enter into the agreement with Countrywide, and
Bank of America purchased Countrywide in July 2008. Bank of America then learned that “most of
Countrywide’s loans which they had sold, including [the Merritts], were
predatory loans†and that “Countrywide was intentionally falsifying monthly
charges to borrowers†including the Merritts.
Between July 2008 and March 2009, Bank of America continued
Countrywide’s practice of overcharging the Merritts. In 2009, the Merritts signed a loan
modification agreement with Bank of America, which “was a continuation of
predatory lending practices of Countrywide,†and Bank of America misled them as
to the terms of the agreement.
Here, there
are no allegations that Bank of America had any interest in the Merritts’ first
loan or the HELOC or that they funded these loans, thus distinguishing it from
Wells Fargo’s participation in the conspiracy to defraud the Merritts. However, Lewis, on behalf of Bank of America,
agreed before the Merritts obtained their loans from Countrywide to supply
Countrywide with funds if Countrywide would sell subprime loans for Bank of
America. Bank of America also specified
the terms of the loans that Countrywide would offer to borrowers. Thus, Lewis and Bank of America participated
in the formation of the conspiracy with Countrywide and came to a mutual
understanding of how to accomplish their unlawful goal. After Countrywide implemented the plan, Lewis
and Bank of America agreed to cover up Countrywide’s fraudulent conduct, continued
Countrywide’s practice of overcharging the Merritts, and misled them as to the
terms of the loan modification agreement.
Thus, these allegations were sufficient to state a cause of action against
Bank of America and Lewis for conspiracy to commit fraud.
As to First
American and MERS, the first cause of action alleges that Kennedy and Arnold
met with Bear Stearns and agreed to conceal Bear Stearns’ identity from
borrowers. First American and Arnold
would ignore “title defects.†These
title defects consisted of: (1) deeds of
trust showing MERS as the beneficiary, and (2) the “separation†of deeds of
trusts and the underlying notes resulting from loan securitization.
“As case
law explains, ‘MERS
is a private corporation that administers the MERS System, a national electronic
registry that tracks the transfer of ownership interests and servicing rights
in mortgage loans. Through the
the mortgagee of record for participating members through assignment of the
members’ interests to MERS. MERS
is listed as the grantee in the official records maintained at county register
of deeds offices. The lenders retain the
promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to
investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to
participating MERS
members.’ [Citation.]†(Gomes v. Countrywide Home Loans, Inc.
(2011) 192 Cal.App.4th 1149, 1151 (Gomes).) Under California law, MERS has authority to
act as the beneficiary under a deed of trust.
(Gomes, at pp. 1155-1156 [MERS
authorized to initiate foreclosure as deed of trust beneficiary];
(2011) 198 Cal.App.4th 256, 270-271 [MERS has the authority to act as nominee
for the lender] (Fontenot).) Here, the deeds of trust state that MERS was
“the beneficiary.†However, the deeds of
trust also specifically restrict MERS’ interest to that of a “ ‘nominee’ †for the lender. “A
‘nominee’ is a person or entity designated to act for another in a limited
role—in effect, an agent.†(
unable to make their payments or negotiate a modification of their loans
because they did not know who the lender was.
Thus, the Merritt’s contention that MERS is not a proper beneficiary
under the deed of trust cannot support their claim that First American and MERS
engaged in any fraudulent conduct by recording MERS as a beneficiary.
Similarly,
the Merritts’ allegations that securitization of the loans constituted a title
defect do not state a claim of conspiracy to commit fraud against First
American and MERS. Securitization does not
affect the validity of a loan. A secured
promissory note that is traded on the secondary market remains secured because
the mortgage or deed of trust follows the note.
(Civ. Code, § 2936 [“The assignment of a debt secured by mortgage
carries with it the security.â€].) Thus,
a lender or trustee does not lose its interest in the loan when it “was
packaged and resold in the secondary market, where it was put into a trust pool
and securitized.†(Lane v. Vitek Real Estate Industries Group (E.D.Cal. 2010) 713
F.Supp.2d 1092, 1099; Hafiz v. Greenpoint
Mortgage Funding, Inc. (N.D.Cal. 2009) 652 F.Supp.2d 1039, 1043 [rejecting
the plaintiff’s theory that “defendants lost their power of sale pursuant to
the deed of trust when the original promissory note was assigned to a trust
poolâ€].)
The
Merritts also alleged that First American was liable for misrepresentation and
concealment of material facts because it was an agent of the other defendants. However, conclusory agency or secondary
liability allegations are insufficient to state a cause of action. (Moore
v. Regents of University of California (1990) 51 Cal.3d 120, 133-134, fn.
12 (Moore).) The Merritts further alleged that Wyatt, who
was an agent of First American, gave the Merritts documents which “were partially
filled out with financial information.†These
allegations are also insufficient to state a claim that First American
participated in a conspiracy to defraud the Merritts. First American was the escrow agent in the
transaction, and its only duty was to comply with the written instructions of
the parties to the escrow. (
Continental Lawyers Title Co. (2002) 27 Cal.4th 705, 711 (
arranging, brokering, processing, underwriting, or making the loans to the
Merritts.
In sum, the
Merritts stated a cause of action for conspiracy to commit fraud against Bank
of America and Lewis. However, the trial
court properly found that it failed to state a cause of action against First
American and MERS.
“In order
to plead a cause of action for breach of fiduciary duty, there must be shown
the existence of a fiduciary relationship, its breach, and damage proximately
caused by that breach.†(
1093, 1101, superseded by statute on another ground as stated in
Cal.App.4th 382, 396.) To state a cause
of action for conspiracy to breach a fiduciary duty, a plaintiff must establish
that each of the coconspirators owed a fiduciary duty to him or her and are
potentially subject to liability for breach of that duty. (Applied
Equipment, supra, 7 Cal.4th at p.
511.)
It is not
clear what the Merritts’ arguments are as to this cause of action. They begin by summarizing the allegations in
the third amended complaint and assert that these facts “support fiduciary
claim.†They then rely on
not a Company’s name or how a Company is registered, or even mostly conducts
business with most borrowers, but how they actually behave on a case-by-case
basis. That is what determines whether a
registered mortgage broker forms a fiduciary relationship or not.â€
broker has a fiduciary duty to a borrower. A mortgage lender does not.†(Smith,
supra, 192 Cal.App.4th at p.
1332.) In Smith, the defendant funded most of its loans to borrowers and
brokered other loans to third party lenders.
(Ibid.) One of the defendant’s loan officers told the
plaintiff that he was a mortgage broker and that he could “ ‘shop the loan’ †for her. (
repeatedly told the plaintiff that the loan would not have a prepayment
penalty, a prepayment penalty was included in a rider to the promissory note. (Id.
at p. 1334.) Smith held that there was substantial evidence that the defendant
and its loan officer acted as mortgage brokers and breached their fiduciary
duties to the plaintiff. (
Here, the Merritts have not
alleged any facts that Bank of America and Lewis acted as mortgage
brokers. Since they acted as lenders,
they owed no fiduciary duty to the Merritts.
We next
consider the nature of the duty owed by First American and MERS to the
Merritts. First American owed a
fiduciary duty to the parties to the escrow.
(Summit, supra, 27 Cal.4th at p. 711.)
However, as previously stated, First American’s duty was to comply with
the written escrow instructions. (
an escrow holder’s obligations are limited to compliance with the parties’
instructions.†[Citations.]†(Ibid.)
Here, the Merritts did not allege that
First American breached any escrow instructions. They appear to be arguing that First American
breached its fiduciary duty by recording MERS as the beneficiary under the deed
of trust, thereby falsifying records and failing to inform the Merritts of title
defects. As previously discussed,
neither First American nor MERS engaged in any fraudulent conduct. Moreover, the Merritts cite no authority for
the proposition that MERS owed a fiduciary duty to them.
The
Merritts also contend that though they titled the cause of action as conspiracy
to breach title insurance contract, “the allegations show[] . . . [First
American] and its agent FTC, was hired by the Merritts with its promise to
perform fraud-free Title Search, fraud-free Title Report and fraud-free Close
of Escrow.â€
In this
cause of action, the Merritts alleged that First American issued a policy of
title insurance to them, breached the policy by recording MERS as the beneficiary
and refused to indemnify them for their losses pursuant to the terms of the
policy. The Merritts also alleged that Countrywide
defendants, Bear Stearns, Wells Fargo, MERS, and First American “conspired and
agreed among themselves to breach the Title Insurance purchased†by the
Merritts.
However,
the Merritts cannot state a claim for conspiracy to breach a title insurance
contract, because no such cause of action exists. “Conspiracy is not a cause of action, but a
legal doctrine that imposes liability on persons who, although not actually
committing a tort themselves,
tortfeasors a common plan or design in its perpetration. [Citation.]â€
(Applied Equipment,
conspiracy to breach a title insurance contract, the trial court properly
sustained the demurrer to the sixth cause of action as to Bank of America,
Lewis, MERS, and First American.
Moreover, to
the extent that the Merritts are now contending that First American breached
its contract with them, their contention fails.
First, as previously discussed, recordation of the deeds of trust which
designated MERS as the beneficiary is not actionable under California law. Second, schedule B of the policy, which was
attached to the third amended complaint, states that “this Policy does not
insure against loss, costs, attorneys’ fees, and expenses resulting from . . . [¶]
. . . [¶] [the] Deed of Trust . . . .â€
Third, the Merritts’ claim that First American breached the title policy
by refusing to deliver copies of the loan documents, failing to close escrow at
the title company, discouraging them from reading the loan documents, not
preparing the appropriate number of copies of the loan documents, failing to
deliver a notice of their right to rescind the loans with filled in dates, not
delivering Truth in Lending disclosures filled in, and refusing to allow David
Merritt to make copies of their signed loan documents has no merit. “Title
insurance is a contract by which the title insurer agrees to indemnify its
insured against losses caused by defects in or encumbrances on the title not
excepted from coverage. [Citation.]â€
(Vournas v. Fidelity Nat. Title
Ins. Co. (1999) 73 Cal.App.4th 668, 675.)
The Merritts’ allegations are not covered under the policy and thus
cannot constitute a breach of the title policy.
d.
Seventh
Cause of Action – Conspiracy to Commit
Intentional Infliction of Emotional Distress
The
Merritts next contend that Countrywide defendants, First American, MERS, Lewis,
Bank of America, and Bear Stearns conspired to intentionally inflict emotional
distress on them. They argue that they were
promised “one 30-year fixed loan with payments between $1,800 and $2,200; but
were given at the very last moment two loans totaling $5,000 and set to balloon
into $10,000 monthly installments†and were overcharged on their loans.
The
an intentional
infliction
of emotional
distress
claim are (1) the defendant’s conduct was extreme and outrageous; (2) the defendant
intended to cause emotional distress or recklessly disregarded the probability
of causing emotional distress; (3) the plaintiff suffered severe emotional
distress; and (4) the defendant’s outrageous conduct was the cause of the
severe emotional distress. (
32 Cal.3d 197, 209 (Davidson).)
38 Cal.3d 892 (Sanchez-Corea) provides
an example of outrageous conduct by a lender.
In Sanchez-Corea, McGowen, a
vice-president with the defendant bank, handled the account for the plaintiffs’
company and used bank funds to cover overdrafts on this account without the
bank’s knowledge. (Id. at pp. 896-897.) The
bank also provided a loan of $70,000 to the plaintiffs. (Id.
at p. 897.) After the bank discovered
that McGowen had embezzled funds, including $240,000 that was allegedly
credited to the plaintiffs’ account, the bank demanded $240,000 from the
plaintiffs and refused to extend additional credit. (Ibid.) The plaintiffs disagreed with the bank as to
the amount of money that they owed and eventually brought suit against the bank. (Ibid.) The California Supreme Court concluded that
there was sufficient evidence to support the award of damages to the plaintiffs
for intentional infliction of emotional distress, and summarized the evidence
as follows: “There is evidence from
which the jury could have determined that the Bank acted outrageously in
reaction to the plight in which the Sanchez-Coreas found themselves as a result
of vice president McGowen’s conduct. Testimony
indicated that Bank officers Jones and Timerman failed to advise plaintiffs
that the Bank had determined not to give [the plaintiffs’ company] any further
loans. According to Sanchez-Corea, the
Bank’s office misrepresented to him that further financial assistance would be
forthcoming
assigned all their past, present and future accounts receivable to the Bank. A day after the plaintiffs made such an
assignment, the Bank refused the further loan. There was evidence that the Bank forced the
Sanchez-Coreas to execute excessive guarantees and security agreements. In addition to [the plaintiffs’ company’s]
pledge of over $262,000 of accounts receivable for a $70,000 note, Mrs.
Sanchez-Corea executed a $50,000 guaranty for a $30,000 note, and Mr.
Sanchez-Corea was directed to purchase a life insurance policy in the amount of
$40,000 naming the Bank as beneficiary. Furthermore,
there was extensive testimony about an incident at the San Franciscan Hotel in
San Francisco. According to the
testimony, Bank officials publicly ridiculed Mr. and Mrs. Sanchez-Corea, using
profanities in their statements. A
friend who was with the Sanchez-Coreas testified that Bank employees were pointing
at the Sanchez-Coreas and the employees were laughing about the financial
plight of [the plaintiffs’ company].†(
In contrast
to Sanchez-Corea, here, as a matter
of law, none of the conduct alleged by the Merritts was “ ‘so extreme as to exceed all bounds of that usually tolerated
in a civilized community. [Citations.]’ â€
(Davidson,
sustaining the demurrer to the seventh cause of action for intentional infliction
of emotional distress as to Bank of America, Lewis, MERS, and First American.
Relying on Bird v. Saenz (2002) 28 Cal.4th 910 (Bird), the Merritts contend that “when a plaintiff witnesses a
third-party victim being inflicted with harm, a cause of action exist[s] for
the party who witnessed infliction.â€
Thus, they claim that they have stated a cause of action for negligent
infliction of emotional distress under the bystander theory since they
“witnessed each other going through certain damage as a result of the
continuous fraud over an initial 3 year period; after they tried fruitlessly to
rescind their loans; loss thousands, faced financial ruin and
homelessness.†There is no merit to this
contention.
Bird
stated the elements of a cause of action for negligent infliction of emotional
distress under a bystander theory: “ ‘a plaintiff may recover damages for
caused by observing the negligently inflicted injury of a third person if, but
only if, said plaintiff: (1) is
closely related to the injury victim; (2) is present at the scene of the
injury-producing event at the time it occurs and is then aware that it is
causing injury to the victim; and (3) as a result suffers serious
reaction beyond that which would be anticipated in a disinterested witness and
which is not an abnormal response to the circumstances.’ [Citation.]â€
(Bird, supra, 28 Cal.4th at p. 915.) Bird
held that the plaintiffs could not state a negligent infliction of emotional
distress cause of action because they were not present in the operating room
when their relative’s artery was transected and they did not know that the care
she was receiving was inadequate. (
loan documents were signed by the Merritts and they were unaware that it was
causing injury. Accordingly, they cannot
state a cause of action under this theory.
C.
Amendment to
Third Amended Complaint
The
Merritts argue that the trial court erred by striking the amendment to their
third amended complaint. We disagree.
The trial
court found that the Merritts “filed . . . a document purported to be an
Amendment to the Third Amended Complaint.
This document was filed without leave of court and was objected to by
the moving Defendants. As such, the
Court finds that it was filed improperly and strikes this filing.â€
Code of
Civil Procedure section 472 provides in relevant part: “Any pleading may be amended once by the
party of course, and without costs, at any time before the answer or demurrer
is filed, or after demurrer and before the trial of the issue of law thereon,
by filing the same as amended and serving a copy on the adverse party . . . .†“ ‘[A]
litigant does not have a positive right to amend his pleading after a demurrer
thereto has been sustained. “His leave
to amend afterward is always of grace, not of right. [Citation.]†[Citation.]’ . . . After expiration of the time in which a
pleading can be amended as a matter of course, the pleading can only be amended
by obtaining the permission of the court. [Citations.]â€
(Leader v. Health Industries of
America, Inc. (2001) 89 Cal.App.4th 603, 612-613.)
Here,
demurrers had been filed, and thus the Merritts no longer had a right to amend
as a matter of course. Instead, they
were required to obtain the trial court’s permission to file the amendment to
the third amended complaint. Since the
Merritts failed to follow the proper procedure, the trial court did not err by
striking the amendment to the third amended complaint.
We next
consider whether the Merritts have failed to carry their burden that they could
amend their complaint to cure any defects. “To satisfy that burden on appeal, a plaintiff
‘must show in what manner he can amend his complaint and how that amendment
will change the legal effect of his pleading.’ [Citation.] The assertion of an abstract right to amend
does not satisfy this burden. [Citation.] The plaintiff must clearly and specifically
set forth the ‘applicable substantive law’ [citation] and the legal basis for
amendment, i.e., the elements of the cause of action and authority for it. Further, the plaintiff must set forth factual
allegations that sufficiently state all required elements of that cause of
action. [Citations.] Allegations must be factual and specific, not
vague or conclusionary. [Citation.]â€
(Rakestraw v. California
Physicians’ Service (2000) 81 Cal.App.4th 39, 43-44.)
Here, the
Merrits request that this court review the amendment to the third amended complaint.
This amendment adds allegations
primarily against the Countrywide defendants and causes of action for negligent
torts. However, the Merritts have failed
to state how this amendment will cure the defects in their third amended
complaint. They have not set forth the
applicable law and specific factual allegations that satisfy the elements of a
cause of action. Accordingly, we
conclude that the Merritts have failed to carry their burden on appeal.
The
judgments in favor of First American and MERS are affirmed and the judgments in
favor of Bank of America and Lewis are reversed. Costs are awarded to First American and
MERS. Bank of America, Lewis, and the
Merritts are to bear their own costs.
_______________________________
Mihara,
J.
WE CONCUR:
______________________________
Elia, Acting P. J.
______________________________
Márquez, J.
Merritt et al. v. Mozilo et al.
H037414
name="_ftn1" title="">[1]
Johnny Chen is not a party
to this appeal.
name="_ftn2" title="">[2]
The Merritts are representing
themselves. The statement of facts is
based on the allegations in the 100-page third amended complaint. This court has augmented the record on appeal
to include 279 pages of exhibits that were attached to the third amended
complaint. We “ ‘accept as true both facts alleged in the text of the
complaint and facts appearing in exhibits attached to it. If the facts appearing in the attached exhibit
contradict those expressly pleaded, those in the exhibit are given precedence. [Citations.]’
†(Sarale v. Pacific Gas & Electric Co. (2010) 189 Cal.App.4th
225, 245.)
