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Court of Appeal, First District, Division 2, California.

ALLIANCE MORTGAGE COMPANY, Plaintiff and Appellant, v. Laurie Samuel ROTHWELL et al., Defendants and Respondents.

No. A058972.

Decided: August 02, 1994

Jean L. Bertrand, Robert B. Mullen, Morgenstein & Jubelirer, San Francisco, for plaintiff and appellant Alliance Mortg. Co. Joel Zeldin, Leon M. Bloomfield, Dinkelspiel, Donovan & Reder, San Francisco, for defendant and respondent Ticor Title Ins. Co. Paul J. Matzger, Leland, Parachini, Steinberg, Flinn, Matzger & Melnick, San Francisco, for defendant and respondent Pioneer Title Co.

This case presents the question whether a secured lender's purchase of property by full credit bid at a nonjudicial foreclosure sale bars the lender from maintaining a fraud action to recover damages for actual loss from third parties who fraudulently induced the lender to make the loans.   We shall hold that it does not.


Plaintiff Alliance Mortgage Company (Alliance) appeals from a judgment on the pleadings dismissing all causes of action against defendants Pioneer Title Company of California (Pioneer) and Ticor Title Insurance Company (Ticor).1

In reviewing the sufficiency of the complaint on such an appeal, we treat the properly pleaded allegations as true and also consider matters which may be judicially noticed.  (See Hunt v. County of Shasta (1990) 225 Cal.App.3d 432, 440, 275 Cal.Rptr. 113;  April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 815, 195 Cal.Rptr. 421.)

The complaint asserts, and it is for present purposes undisputed, that defendant Laurie Samuel Rothwell masterminded an elaborate scheme to fraudulently induce plaintiff Alliance to lend money for the purchase of nine Bay Area residences.

From 1983 through 1985, Rothwell, an appraiser and real estate broker, aided by others, including Pioneer escrow officers Pearl Grace and Hosetta Cole, fraudulently obtained purchase money loans from Alliance for nine properties by submitting false documents.   Defendants prepared false purchase agreements and loan applications in the names of fictitious borrowers including Tin Sing Woo, Yu Sek Wong and Din Yi Sung;  deliberately inflated property appraisals;  falsified employment and deposit verifications and W–2 wage/income statements;  drafted inaccurate title reports and title insurance policies which contained misleading descriptions of the properties;  falsely represented that the escrow instructions had been followed and that the required cash deposits and disbursements had been made.

Five of the properties were located on Haight Street in San Francisco, the other four were located in East Bay communities.   Defendant Ticor issued title insurance policies on three of the five Haight Street properties which falsely described them as being four-unit dwellings, when in fact two were one-unit residences and the third was a duplex.

Unaware of defendants' fraudulent conduct, Alliance loaned the Rothwell group about $1.7 million to purchase the five Haight Street properties and $370,000 to buy the four East Bay properties.   The fictitious borrowers quickly defaulted on these loans.   Alliance later purchased the properties at a nonjudicial foreclosure sale pursuant to the deeds of trust, by bidding the full credit value of the outstanding indebtedness on the notes, plus interest and costs.   Alliance claimed that in the case of three of these properties, regulations of the Federal Home Loan Mortgage Corporation (FHLMC) required it to make full credit bids, take title to the properties, and as to two of these properties, to repurchase the loans it had earlier sold to FHLMC.   The complaint declares that the market value of the properties at the time the loans were made was substantially less than the outstanding indebtedness on the loans, for which it purchased the properties at the trustee's sale.   As a result, Alliance claimed it suffered losses of over $1.6 million when it resold the properties.

Alliance sued, ultimately alleging fraud;  negligent misrepresentation;  breach of Pioneer's escrow contract;  breach of Ticor's title insurance contract;  breach of fiduciary duty against the escrow defendants;  breach of fiduciary duty against the title insurance defendants;  and a federal RICO violation (18 U.S.C., §§ 1961–1968).2


The first amended complaint,3 which identified only the five Haight Street properties, sought damages on the ground that “the security interest Alliance believed it had at the time the loans were funded is less than the security interest Alliance actually held.   Alliance has been forced to commence foreclosure proceedings against many properties and has discovered, upon acquiring title to the properties, that the true market value of the properties is far less than the outstanding principal amount of the loans.”

Pioneer and Ticor moved for a judgment on the pleadings, on the ground that damage claims for impairment of plaintiff's security were barred by its full credit bid at the foreclosure sale under Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981, and subsequent cases.

Superior Court Judge Alex Saldamando granted the motion, permitting Alliance 20 days to amend its complaint.   He explained his ruling as follows:  “Causes of action relate to damages which impaired plaintiff's security.   A full credit bid at foreclosure (which the parties have impliedly agreed were made) conclusively establish [sic ] that the security has not been impaired.   Leave to amend is granted to see if Plaintiff can allege damages that are not related to impairment of security.   Court relies on Brown v. Critchfield [ (1980) 100 Cal.App.3d 858, 161 Cal.Rptr. 342] and Sumitomo Bank v. Taurus Developers, Inc. [ (1986) 185 Cal.App.3d 211, 229 Cal.Rptr. 719].”


On August 12, 1991, Alliance filed its second amended complaint, adding the four East Bay properties and also alleging damages from post-foreclosure expenses.   In all other respects the damages sought by the amended complaint were essentially the same as those previously alleged.

For example, in the first cause of action for fraud the complaint alleged damages, in an amount to be determined, “because Alliance funded the loans with the justifiable belief that it received its expected security interest in the properties when, in fact, the security interests Alliance received in the properties were worth far less than what was represented by defendants, and each of them.   Since funding the loans, the security interests have remained at all relevant times worth less than the amount of Alliances's total expenditures, with respect to each property herein.”   The complaint further asserted that the loans were made with the “justifiable belief” the borrower “had financial capabilities and stability sufficient to meet the obligations of the loan when, in fact, the borrower did not have such financial capabilities or stability, and consequently Alliance has not been paid the sum or sums due it under various loans.”   These and related allegations were incorporated by reference in the succeeding causes of action, as were allegations that Alliance incurred other damages after foreclosure and prior to resale for unpaid property taxes, repairs to the property, correction of local housing code violations, maintenance costs, insurance costs and costs of sale.

Pioneer and Ticor moved to strike those portions of the second amended complaint which realleged damages resulting from fraud on the ground that they suffered from the same defect identified by Judge Saldamando.

Alliance opposed the motions contending:  (1) it was not seeking impairment damages, which are typically caused by subsequent physical injury to the property or by waste, but rather damages arising from the inadequate security that existed at the time the loans were made, and (2) the full credit bid rule does not protect against fraud committed by third parties.

In granting the motions to strike, Judge Lucy Kelly McCabe ruled that the full credit bids barred the claims for damages resulting from the fraudulent representations as to the adequacy of the security.


Immediately prior to trial, Alliance again argued that the damage claims were not barred by the full credit bid and filed a motion to amend the complaint to conform to proof to include allegations that:  (1) defendants' fraud caused it to make other bad loans to Rothwell on unrelated properties;  and (2) as a proximate cause of these fraudulent loans, it suffered damage to its reputation, goodwill and net worth.   In response, defendants filed motions in limine to exclude from trial all evidence of impairment of security;  evidence of loss of goodwill and net worth and reputation damages;  and post-foreclosure damages.   Ticor made separate motions in limine, some of which were framed as motions for judgment on the pleadings, on the grounds it was improperly joined as a Doe defendant, the statute of limitations had run against it, and there was no cause of action for misrepresentation since the title insurance policies are indemnification contracts and do not constitute representations of the property.

Judge Raymond J. Arata, Jr. granted all defendants' motions, denied Alliance's motion to amend, and entered what essentially became judgments on the pleadings in favor of defendants.


 The view of the law advanced by respondents and accepted by the trial court was adopted in two cases decided after the rulings below, which hold that a lender cannot state a cause of action for fraud or misrepresentation in inducing a loan secured by property where the lender acquired the property after making a full credit bid.  (Western Fed. Savings & Loan v. Sawyer (1992) 10 Cal.App.4th 1615, 13 Cal.Rptr.2d 639 [“Western Federal ”];  GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co. (1994) 21 Cal.App.4th 1802, 27 Cal.Rptr.2d 47.)   These cases reason that the full credit bid extinguished the lien (Civ.Code, § 2910) and, as a result, the lender's security for the debt obligation was unimpaired and it suffered no damage.  Western Federal and GN Mortgage conclude that, because the lender could not prove it was damaged by the alleged misrepresentations, it had no viable action for fraud or misrepresentation in the loan transaction, and the trial court properly dismissed the action.  (Western Federal, supra, 10 Cal.App.4th at pp. 1620–1621, 13 Cal.Rptr.2d 639;  GN Mortgage Corp., supra, 21 Cal.App.4th at pp. 1807–1809, 27 Cal.Rptr.2d 47.)

We believe Western Federal and GN Mortgage were wrongly decided.   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.   There is no basis in law or policy upon which to permit a rule designed to protect debtors from the untoward effects of an economic downturn to be extended to insulate non-debtor tortfeasors, particularly fiduciaries, from liability.

As courts and commentators have pointed out, California's body of law regulating the right of a mortgagee or trust deed beneficiary (lenders) to obtain a personal judgment against the mortgagor or trustor (borrowers) in addition to the amount realized from the sale of the security is “in a somewhat confused state.”  (In re Franklin (9th Cir.1991) 922 F.2d 536, 542;  Bernhardt, Cal. Mortgage & Deed of Trust Practice (2d ed. 1990) § 4.1, p. 185 [“confusion is high and predictability is low in this area”];  Sheneman, California Foreclosure:  Law and Practice (1994) § 6.01, p. 6–2 [“the results at times defy commercial realities and the parties' expectations”].)   The opinions in Western Federal and GN Mortgage are the product of that confusion, which they materially exacerbate.   Previously, no California court ever held that the full credit bid rule applied in actions that are not on the note for damages not caused by breach of the loan agreement from persons who are not borrowers or otherwise party to that agreement or the successor in interest of such a person.   Use of the rule to bar such actions, which is unjust and would destabilize secured real estate transactions in this state, cannot be squared with the better reasoned cases that bear on the issue, including some notable decisions of our own court.  (See Foggy v. Ralph F. Clark & Associates, Inc. (1987) 192 Cal.App.3d 1204, 238 Cal.Rptr. 130 and Brown v. Critchfield (1980) 100 Cal.App.3d 858, 161 Cal.Rptr. 342, which are later discussed.) 4


The first mention of the full credit bid rule by any California court was in Cornelison v. Kornbluth, supra, 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981, which remains the only case in which that court has discussed the rule.   Cornelison was an action for damages by the lender against a successor in interest of the borrower alleging breach of covenants in the trust deed and waste caused by the defendant's alleged failure to properly care for the property securing the deed.   The plaintiff lender regained possession of the property by purchasing it by a full credit bid at a trustee's sale.   The Supreme Court affirmed the grant of summary judgment for the defendant.   In material part, the court held that an action for waste following a foreclosure sale under a purchase money trust deed is barred by Code of Civil Procedure section 580b 5 if the acts of the defaulting borrower that give rise to the claim of waste were in fact caused by a downturn in land values.   If, however, the waste was caused by “bad faith,” an action for waste will lie.   The court additionally held that section 580d, which prohibits a deficiency judgment after foreclosure by private sale, also bars recovery for waste against the borrower if the waste results from depressed real estate values but not if the waste is caused by “bad faith” acts.   The court rejected the plaintiff's contention that such rules were inapplicable to a successor in interest of the borrower.

Pointing out that “the measure of damages for waste is the amount of the impairment of the security” (id., at p. 606, 125 Cal.Rptr. 557, 542 P.2d 981), the court agreed “that the mortgagee's purchase of the property securing the debt by entering a full credit bid establishes the value of the security as being equal to the outstanding indebtedness and ipso facto the nonexistence of any impairment of the security.”  (Ibid.)  In other words, as applied to the facts of Cornelison, “the 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.”  (Ibid.)

The full credit bid rule is discussed in Cornelison solely in connection with the claim of waste, which is among a relatively small species of actions the damages for which are limited to those for impairment of security.6  By statute, the tort of waste can only be committed by a “person whose interest is subject to the lien of a mortgage.”  (Civ.Code, § 2929.)   Thus, insofar as it involves protection for the security interest of mortgagees, the cause of action for waste “is limited to protection against harm committed by persons in possession of the property subject to the lien.”   (Cornelison, supra, 15 Cal.3d at p. 598, fn. 3, 125 Cal.Rptr. 557, 542 P.2d 981.)   Moreover, “[t]he measure of damages is limited to the amount of injury to the value of the mortgage security, not to the injury to the property itself.”  (Sheneman,California Foreclosure, supra, § 6.16, p. 6–71.)   The cases suggest that a lender cannot sue a borrower for damages for waste prior to foreclosure without first commencing an action to compel a judicial foreclosure sale under section 726.  (Ibid., citing American Sav. & Loan Assn. v. Leeds (1968) 68 Cal.2d 611, 68 Cal.Rptr. 453, 440 P.2d 933 and Krone v. Goff (1975) 53 Cal.App.3d 191, 127 Cal.Rptr. 390.)   In short, the remedies available to a lender claiming waste against the borrower are constrained by the debtor protection policies reflected in the antideficiency laws.   It is only in the limited context of those policies that the full credit bid rule makes sense.   As applied to waste, the rule provides debtors protection against the same evil sought to be prevented by the antideficiency statutes.  “Damages for waste would burden the defaulting purchaser with both loss of land and personal liability and the acts giving rise to that liability would have been caused in many cases by the economic downturn itself.   For example, a purchaser caught in such circumstances may be compelled in the normal course of events to forego the general maintenance and repair of the property in order to keep up his payments on the mortgage debt.”   (Cornelison, supra, at p. 603, 125 Cal.Rptr. 557, 542 P.2d 981.)

The Cornelison court was very much aware of an important difference between waste and other actions that may be brought to protect a lender's security interest.   After noting that waste is limited to protection against harm committed by persons in possession of the property and subject to the lien, the court observed that “it is equally clear that a mortgagee's security interest can be impaired by harm to the property committed by third persons not in possession and that a mortgagee can recover damages in tort for such impairment of his security interest.  [Citations.]  This recovery against third parties involves different considerations and rules because the person sued is not the debtor-mortgagor, who is afforded a variety of legislative and judicial protections.  [Citations.]”  (Cornelison, supra, 15 Cal.3d at pp. 598–599, fn. 3, 125 Cal.Rptr. 557, 542 P.2d 981, italics added.)   Among the authorities cited in Cornelison for this proposition was U.S. Financial v. Sullivan (1974) 37 Cal.App.3d 5, 112 Cal.Rptr. 18, where the court found “nothing in principle or public policy” which militates against the imposition of liability for negligent acts “to a mortgagee or beneficiary of a deed of trust when negligent conduct has resulted in the impairment of the mortgagee's or beneficiary's security interest.”  (Id., at p. 13, 112 Cal.Rptr. 18.)   As noted in U.S. Financial, the cases support “the general proposition that a [lender] may maintain an action against a third party tortfeasor for conduct which has impaired his security.”  (Id., at p. 15, 112 Cal.Rptr. 18.)

In short, neither Cornelison nor any other California case prior to Western Federal suggests that a full credit bid establishes the value of the property for any purpose other than a determination whether the borrower subject to the lien has satisfied the secured obligation.   To say, as the Cornelison court did, that a lender's full credit bid extinguishes the lien and therefore bars a claim against the borrower for waste (seeking damages that are identical to and cannot exceed those recoverable for impairment of security) is completely different from saying that such a bid also deprives a lender of claims against others who were never subject to the lien nor otherwise protected by the antideficiency statutes (for compensatory damages that, as will be seen, are measured differently, and for punitive damages).   As stated in Cale v. Transamerica Title Insurance (1990) 225 Cal.App.3d 422, 275 Cal.Rptr. 107, Cornelison holds only that “a nonjudicial foreclosure sale under the statute is determinative of the value of the property as between the lender and borrower under a deed of trust.  [Citation.]”  (Id., at p. 428, 275 Cal.Rptr. 107, fn. 1, italics added.)   Moreover, there is no reason to think Cornelison requires application of the full credit bid rule even to protect a borrower against a waste action if the former acted in bad faith.   Bad faith waste is not caused by an economic downturn and application of the rule to that situation would not further any purpose of the anti-deficiency statutes.

 The 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” (21 Cal.App.4th at p. 1805, 27 Cal.Rptr.2d 47) is wrong.   It is inconceivable the Supreme Court anticipated the rule it announced in Cornelison would be used to insulate third party tortfeasors from liability for fraudulent conduct, as was done below.


 The antideficiency statutes do not bar fraud actions.   Lenders may sue borrowers for fraud even though the trust deed was a purchase money obligation subject to section 580b (see, e.g., Bell v. Roy (1986) 187 Cal.App.3d 694, 232 Cal.Rptr. 83;  Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 135 Cal.Rptr. 802), or had previously been foreclosed by power of sale, which would ordinarily prohibit a deficiency judgment under section 580d.  (See, e.g., Guild Mortgage Co. v. Heller (1987) 193 Cal.App.3d 1505, 239 Cal.Rptr. 59;  Kass v. Weber (1968) 261 Cal.App.2d 417, 67 Cal.Rptr. 876.)   Fraud actions against third parties, typically brokers or attorneys who induced the loan, are clearly not subject to the antideficiency statutes.  (See, e.g., Brown v. Critchfield, supra, 100 Cal.App.3d 858, 870–871, 161 Cal.Rptr. 342.)

There are three reasons for the fraud exception.   First, “recovery of damages for fraud is not a deficiency judgment on the note or debt secured by real property and therefore prohibited by statutory language of sections 580b, 580d, or 726.   Furthermore, the antideficiency laws were not intended to immunize wrongdoers from the consequences of their fraudulent acts.   Finally, assuming that the court applies a proper measure of damages, fraud suits do not frustrate the antideficiency policies because there should be no double recovery for the beneficiary.”  (Sheneman, California Foreclosure, supra, § 6.18, pp. 6.79 to 6.80, fns. omitted.)

The interplay between the antideficiency statutes and the full credit bid rule, and the reason the fraud exception applies as well to the latter rule, was explained by this court in Brown v. Critchfield, supra, 100 Cal.App.3d 858, 161 Cal.Rptr. 342.  Critchfield was an action by a property owner alleging negligence and fraud by two fiduciaries, an attorney and a real estate broker, hired by the plaintiff to negotiate a sale of his property and represent his interests until the conclusion of an installment sale.   The trial court granted the defendants' motion for summary judgment on the ground that the plaintiff had alleged no legally recognizable damages and had therefore failed to state a cause of action.   As in the present case, the court reasoned that the suit sought damages for impairment of security but there were no such damages because the plaintiff's full credit bid extinguished the lien and the security interest.   We rejected that analysis and reversed the judgment.

After reviewing the purpose of the antideficiency statutes, we said, “it is clear that, as between a mortgagee and mortgagor, the mortgagee's interests are defined by statute and by the terms of the deed of trust.   The benefit of his bargain is the interest on the note.   The sole remedy in the case of the mortgagor's default is the sale of the secured property;  and the limit of any recovery, whether from the sale of the property, an action for bad faith waste or for an apportionment of a damage award, is the amount of the obligation still owing.”  (Id., at p. 870, 161 Cal.Rptr. 342, italics added.)   We concluded that neither the antideficiency statutes nor the policies motivating their enactment “indicate that they should bar recovery of damages caused by a fiduciary's wrongdoing merely because the transaction involved real property.   Plaintiff is not seeking to recover on a debt, nor is this a situation where there are conflicting claims by a mortgagor and mortgagee to the same funds.   If the plaintiff is allowed to prosecute his claim, and be compensated for his damages, a downward spiral of land values will not be encouraged;  mortgagors will not be liable for double recovery;  and overvaluation of security will not prevail.   The risk inherent in secured land transactions will remain on the mortgagee, but that risk should not be expanded to include the assumption of damages resulting from a fiduciary's negligence or fraud.”  (Id., at pp. 870–871, 161 Cal.Rptr. 342, italics added.)

Because fraud claims do not compromise any of the policies reflected in the antideficiency statutes, we held in Critchfield that such claims were also not barred by the full credit bid rule.  (Critchfield, supra, at p. 871, 161 Cal.Rptr. 342.)   The relevance of this case to Critchfield lies in the distinction we there made between the damages the lender seeks from the defaulting borrower in a suit on the note and those the lender seeks from a third party tortfeasor.   In response to the defendants' contention that the plaintiff's full credit bid in effect gave him the benefit of his bargain, we observed that the plaintiff had entered into two bargains and the defendants were looking at the wrong one.  “It is true that, under the bargain with the [borrowers] plaintiff received all that was contracted for.   Under the bargain with his fiduciaries, however, he did not receive the full benefit, namely, fulfillment of the duty of highest good faith and of full disclosure.   [Citation.]”  (Id., at p. 871, 161 Cal.Rptr. 342.)7

Critchfield was relied upon in Guild Mortgage Co. v. Heller, supra, 193 Cal.App.3d 1505, 239 Cal.Rptr. 59, where the court declared it “obvious that the public policies served by the antideficiency statutes are in no way frustrated by permitting a lender to pursue a separate action against a borrower for fraud.   The statutes essentially allow an action for fraud in those situations where a creditor-mortgagee would have been able to obtain a deficiency judgment following a judicial foreclosure.   The damages recoverable in such actions remain a matter of proof and will be limited to the extent a lender can establish it was harmed by the fraudulent misrepresentation.   The mortgagor, therefore, retains the protection of the antideficiency statutes in all instances except those involving fraud.”   (Id., at pp. 1513–1514, 239 Cal.Rptr. 59, italics added.)   Significantly, the court in Guild Mortgage deemed it irrelevant that the defrauded creditor repurchased the property after a full credit bid by the FHLMC, because the repurchase was allegedly necessitated by the defendants' fraud and the loan would not have been made in the absence of the purported misrepresentations.   These claims, comparable to those made in the present case, were deemed sufficient to establish the necessary causal connection between the fraudulent conduct alleged and the damages sustained despite the full credit bid.8

Critchfield was also relied upon in Sumitomo Bank v. Taurus Developers, Inc., supra, 185 Cal.App.3d 211, 229 Cal.Rptr. 719.   There, the defendant, who was both a borrower and a developer, was sued by the lender for, among other things, negligence in construction.   One of the issues in the case was “whether a negligent construction action is merely an impairment of security action by another name, and to allow the Bank to proceed would circumvent the full credit bid rule.”  (Id., at p. 225, 229 Cal.Rptr. 719.)   Aware that in Critchfield we distinguished between a suit against a mortgagor sued as such and against a party sued in another capacity, such as a fiduciary (id., at pp. 220–221, fn. 4, 229 Cal.Rptr. 719), the court found that the full credit bid rule was not a bar.  “Applying negligence principles, there is nothing in the nature of the foreclosure sale which would operate to cut off liability of the builder towards a purchaser as a matter of law.”  (Id., at p. 224, 229 Cal.Rptr. 719.)9

There is even less reason here than there was in Guild Mortgage and Sumitomo to raise the bar of the full credit bid rule, because the fraud or negligence actions permitted in those cases were against tortfeasors who were also borrowers and could therefore advance a more colorable claim to the protections of the antideficiency statutes than can respondents in this case.


 Western Federal Savings & Loan, supra, and GN Mortgage, supra, erred not only in failing to recognize the relationship between the full credit bid rule and the antideficiency statutes, but in failing to comprehend the significance of the difference between the measure of damages for impairment of security and that applicable in fraud actions.   Unlike the measure of damages for waste, the measure of damages for fraud is not limited by the extent to which a security interest has been impaired.   The fiction that a full credit bid extinguishes the lien therefore does not provide even a theoretical basis upon which to bar damages for fraud.  GN Mortgage dismisses this point as “sophistical.”  (21 Cal.App.4th at p. 1807, 27 Cal.Rptr.2d 47.)   Western Federal pretends the difference does not exist.   As Miller and Starr point out, Western Federal “impliedly found that the measure of damages for a fraudulent representation to a lender is the difference between the balance of the loan and the value of the property and since the value of the property is conclusively determined by the amount bid at the sale, the full credit bid conclusively establishes that there were no damages resulting from the fraud.”  (4 Miller & Starr, California Real Estate 2d § 9.158, 1993 Supp., p. 78.)   This implied finding is clearly erroneous.  (See, e.g., Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 29 Cal.Rptr.2d 463;  9 Miller & Starr, supra, § 30.45, pp. 401–406.)

In Foggy v. Ralph F. Clark & Associates, Inc., supra, 192 Cal.App.3d 1204, 238 Cal.Rptr. 130, we explained that an action for fraud in the inducement of a loan does not seek damages equivalent to those recoverable for the impairment of a security interest.  Foggy was a tort action against a real estate appraiser for negligently or fraudulently overvaluing property accepted as security for a loan.   The trial court granted defendants' motion for judgment notwithstanding the verdict because there was no substantial evidence of the value of the property at the time of the foreclosure.   Among the reasons we reversed this determination was the trial court's reliance on cases which “involved title insurance companies whose negligence caused the plaintiffs to lose their security for loans already made.”  (Id., at p. 1214, 238 Cal.Rptr. 130, italics added.)   We emphasized that such cases, like Cornelison, are “inapposite,” since they “involve[ ] the impairment of security.   In contrast, the instant action is one in tort where plaintiffs allege that defendants' negligence or fraud caused them to enter into a loan agreement.”  (Ibid., italics added.)

Foggy explains that the measure of damages for fraud in the inducement of a loan is the general tort damages prescribed by Civil Code sections 3333 and 1709,10 not the “out-of-pocket loss” prescribed by Civil Code section 3343.11  (Foggy, supra, at p. 1214, 238 Cal.Rptr. 130.)   In other words, the defrauded lender is entitled to compensatory damages for the actual loss, as well as punitive damages, if the fraud consisted of an intentional misrepresentation, deceit, or concealment of a material fact.  (Civ.Code, § 3294.)   The damages that may be recovered in a fraud action are therefore considerably broader than those recoverable for the impairment of security.12

The complaint in the present case, as amended, adequately alleges a cause of action for intentional fraud and deceit and on that basis seeks to recover not only compensatory but punitive damages.   Appellant's actual loss due to fraud consisted of losses from the sale of the foreclosed properties for less than the amount due on the loans and foreclosure expenses.   By its fraud action, appellant does not seek, and in any case could not recover, damages for losses due to decreased real estate values.   Permitting appellant to recover damages for fraud and deceit therefore would not allow any double recovery.   Appellant's full credit bid can be seen as simply mitigating damages vis-a-vis third parties also responsible for the injury it suffered.

If the full credit bid rule is extended to bar fraud actions against third parties, appellant will be precluded from proving its actual loss due to the fiction the rule indulges that the lender sustained no actual loss.   If there is no such loss, there is no action for fraud and therefore no right to the punitive damages that might otherwise lie.  (See Sumitomo Bank v. Taurus Developers, Inc., supra, 185 Cal.App.3d at p. 221, fn. 4, 229 Cal.Rptr. 719.)   Such an inequitable result cannot persuasively be rationalized.


As earlier explained, the fiction created by the full credit bid rule is justified in the context of foreclosure proceedings, where its effect is simply to render a debt fully satisfied.   The very different effect it achieves when employed to bar fraud actions is not only unjustified by the policies reflected in the antideficiency statutes but inimical to the desire to penalize fraud in real estate financings which the Legislature has elsewhere expressed.   As pointed out in Guild Mortgage, the history of statutes authorizing actions for compensatory and punitive damages against a borrower based on fraud in the inducement of a real estate loan (Fin.Code, §§ 779, 7459, 7460, and 15102) “makes clear the Legislature's disapproval of the judicial use of the antideficiency statutes to insulate mortgagors from liability in fraudulently induced loan transactions.” 13  (Id., 193 Cal.App.3d at p. 1513, 239 Cal.Rptr. 59.)

Use of the full credit bid rule to protect fraud is inconsistent not only with case law and the antideficiency statutes, from which the rule derives, but with the views of leading authorities on California real estate law.   They urge that where, as is ordinarily true with respect to fraud, “the beneficiary has a cause of action against the trustor or some other third person which is based on the out-of-pocket loss rule [or, a fortiori, a more generous measure of compensatory damages that may apply, such as that of actual loss], and the cause of action survives the trustee's sale, the policies of both the anti-deficiency statutes and the full credit bid rule are served by permitting the beneficiary to prosecute his action regardless of the amount bid at the sale.   Certainly, the true value of the property is a relevant consideration in an action based on the ‘out-of-pocket loss' rule since the beneficiary cannot have a double recovery.   However, in the action to establish damages the beneficiary should be able to prove the actual value of the property for establishing loss, just as the trustor should be able to prove that the property is actually worth more than was bid by the beneficiary.”  (4 Miller & Starr, California Real Estate 2d, § 9.158, at p. 545.)   These authorities would permit the fraud action to proceed even if the lender is deemed to have been negligent in making a full credit bid.14  (See, Western Federal Sav. & Loan Assn. v. Sawyer, supra, 10 Cal.App.4th at p. 1623, fn. 4, 13 Cal.Rptr.2d 639.)  “The policy of the law to punish fraud should override the policy of the full credit bid in the same manner that fraud is excepted from the anti-deficiency limitations and, therefore, the negligence of the beneficiary should not be a defense to the intentional fraud of the trustor.”  (4 Miller & Starr, supra, § 9:158, p. 546, italics added.)

Appellant's full credit bids unquestionably limit its rights against a borrower in a suit on the note, but those bids do not in any way limit its rights against parties not sued as borrowers in actions that are not on the note;  least of all does the rule bar actions against third parties, like Pioneer and Ticor, whose duties to the lender are those of a fiduciary.

For the foregoing reasons, the judgment on the pleadings cannot be sustained on the ground that the lender purchased the property through a full credit bid at the foreclosure sale.


 Alliance also challenges other grounds upon which the trial court entered judgments on the pleadings.   The court found that:  (1) Ticor was improperly added as a Doe defendant to the first amended complaint after the statute of limitations had expired, and (2) the complaint did not state a cause of action against Ticor for negligent or intentional misrepresentations.   Alliance contends the trial court could not properly have reached these conclusions based only on the allegations contained in the complaint.   We agree.


Alliance's first amended complaint named Ticor as Doe 101, and substantially repeated the allegations contained in the original complaint;  i.e., all the defendants knew that the documents submitted and representations made to Alliance were false;  and all defendants knew that the misrepresentations were made with the intent to defraud Alliance into making the loans.   Where appropriate, the allegations were supplemented with references to the receipt of Ticor's title insurance policy endorsements containing the inaccurate property descriptions.

In addition, the first amended complaint alleged a fourth cause of action for breach of the title insurance policy against Ticor, alleging that it breached its agreement to insure Alliance for any loss resulting from an inaccurate description of the property as contained in the endorsements.   A copy of one of these endorsements was incorporated by reference.

A sixth cause of action was added, alleging breach of fiduciary duty, based on Ticor's failure to inspect the insured premises and its preparation of title insurance policies which inaccurately described the number of units on the properties.

Ticor filed a demurrer and motion to strike the first amended complaint claiming Alliance improperly joined Ticor as a Doe defendant under section 474, because it knew Ticor's identity, and the facts supporting the causes of action were known almost one year before the original complaint was filed.   Judge Brown overruled the demurrer and denied the motion.

During this time Ticor and Pioneer also made motions for judgment on the pleadings, claiming the full credit bid rule prevented Alliance from stating a cause of action for damages.   Judge Saldamando granted the motions, permitting Alliance leave to amend “to see if Plaintiff can allege damages that are not related to impairment of security.”


The second amended complaint, filed on August 12, 1991, was substantially similar to the first amended complaint, except that, in an attempt to comply with the trial court's order, Alliance revised several damage claims in ways not relevant to any issue raised in this appeal.

Judge McCabe granted defendant Ticor's and Pioneer's demurrer and motion to strike certain damage allegations, and ordered all or portions of such claims stricken.   The matter was assigned to Judge Arata for jury trial.

Prior to trial, Ticor renewed its motion to dismiss because of untimely joinder of Ticor as a Doe defendant and the bar of the statute of limitations that assertedly resulted.   Concurrently, Ticor file a motion for judgment on the pleadings asserting that Alliance cannot state a cause of action for intentional and negligent misrepresentation.   Judge Arata granted these motions without leave to amend.   Apparently, the parties resolved the remaining allegations and judgment was entered in favor of Pioneer and Ticor and against Alliance on all causes of action.


 For the purpose of the statute of limitations, a party properly sued by a fictitious name in the original complaint, pursuant to section 474, is deemed a party from the commencement of the litigation.  (See Austin v. Massachusetts Bonding & Insurance Co. (1961) 56 Cal.2d 596, 599, 15 Cal.Rptr. 817, 364 P.2d 681;  Garrett v. Crown Coach Corp. (1968) 259 Cal.App.2d 647, 649–650, 66 Cal.Rptr. 590.)   Section 474 permits a plaintiff to amend the complaint to allege the true identity of a fictitious defendant where plaintiff was “ignorant of the name of a defendant.”   This phrase has been broadly interpreted to mean not only ignorance of the defendant's identity, but also ignorance of facts giving rise to a cause of action against that defendant.  (See Miller v. Thomas (1981) 121 Cal.App.3d 440, 445, 175 Cal.Rptr. 327;   Wallis v. Southern Pac. Transportation Co. (1976) 61 Cal.App.3d 782, 786, 132 Cal.Rptr. 631.)   Plaintiff's ignorance at the time of commencement of the suit must be real and not feigned, but the plaintiff is not required to use reasonable diligence to investigate the defendant's identity.  (Munoz v. Purdy (1979) 91 Cal.App.3d 942, 947, 154 Cal.Rptr. 472;  Snoke v. Bolen (1991) 235 Cal.App.3d 1427, 1431–1432, 1 Cal.Rptr.2d 492.)

 Since the challenged orders were made following motions for judgments on the pleadings, the only facts before the trial court and this court are those contained in the allegations of the second amended complaint.   A motion for judgment on the pleadings, as with a demurrer, admits all facts alleged in the complaint and those for which judicial notice is proper.  (See Hunt v. County of Shasta, supra, 225 Cal.App.3d at p. 440, 275 Cal.Rptr. 113.)   Unless the facts alleged by Alliance show as a matter of law that it was not truly ignorant of Ticor's relationship to the alleged fraud at the time of its original complaint, then the judgment on the pleadings must be reversed.  (See Garrett v. Crown Coach Corp., supra, 259 Cal.App.2d at pp. 651–652, 66 Cal.Rptr. 590 [no allegations contained in complaint proved that plaintiff knew identity of fictitious defendant at time of original complaint];  Hunt v. County of Shasta, supra, 225 Cal.App.3d at pp. 440–441, 275 Cal.Rptr. 113 [face of pleading must allege facts showing bar of statute of limitations].)

The pleadings before us, which we must accept as true, do not establish Alliance's prior knowledge that Ticor was allegedly part of the fraudulent scheme outlined in the pleadings.   Alliance alleged that “defendants sued herein as Does Nos. 1–200 are individuals, corporations, or other business entities sued by fictitious names because Alliance does not now know the true names or capacities of such defendants.   Alliance is informed, believes and thereon alleges the fictitiously named defendants participated in the fraudulent and wrongful conduct alleged herein and are responsible for plaintiff's damage to the same extent as the defendants named by their real names herein.”

Unless this allegation is contradicted by other factual allegations, it is sufficient to survive a motion for judgment on the pleadings.   Section 474 requires only that the plaintiff state he is ignorant of the name of the defendant.  (See Dieckmann v. Superior Court (1985) 175 Cal.App.3d 345, 352, 362–364, 220 Cal.Rptr. 602.)   Alliance has indisputably done so.   A plaintiff is not required to allege when and how it became aware of facts giving rise to the cause of action.  (See Union Carbide Corp. v. Superior Court (1984) 36 Cal.3d 15, 25, 201 Cal.Rptr. 580, 679 P.2d 14 [dates are not essential to the cause of action].)   Whether plaintiff was negligent in failing to discover Ticor's role prior to filing the complaint is now immaterial.   (See Munoz v. Purdy, supra, 91 Cal.App.3d at p. 947, 154 Cal.Rptr. 472.)   Such a factual determination is more properly the subject of a motion for summary judgment.  (See, e.g., Snoke v. Bolen, supra, 235 Cal.App.3d at p. 1432, 1 Cal.Rptr.2d 492;  Miller v. Thomas, supra, 121 Cal.App.3d at p. 443, 175 Cal.Rptr. 327.)

Ticor argued successfully below that an allegation of the second amended complaint—that on or about October 2, 1986, Alliance made a claim against Ticor for damages caused by the improper property descriptions contained in the title policy documents—proves Alliance had prior notice.   We disagree.   This allegation shows only that, prior to filing the complaint, Alliance knew Ticor inaccurately described the insured properties.   It does not establish Alliance had contemporaneous knowledge of facts indicating Ticor was involved in the fraudulent scheme that included the loans.

 We note that Ticor attached a copy of a deposition of one of Alliance's employees, Robert A. Shelvin, in which he stated that Alliance had not discovered anything about Ticor's involvement in the loan transactions after it learned the properties were improperly described in the endorsements to the title insurance policies.   Such evidence was not properly before the court either in the motion for judgment on the pleadings or in the identical motion to dismiss.   Any factual determination outside the face of the complaint must be raised in the appropriate proceeding, such as a motion for summary judgment.   Accordingly, we reverse the judgment on the pleadings which determined that plaintiff's action against Ticor was barred by the statute of limitations because of improper designation as Doe 101.


 Finally, Alliance challenges the ruling, also a basis for the judgment on the pleadings, that it could not state a valid cause of action against Ticor for intentional or negligent misrepresentation as a matter of law.   Ticor argued below that Alliance's “misrepresentation claims against Ticor Title are based entirely on Ticor Title's issuance of these [inaccurate] policies.”   Relying on Lawrence v. Chicago Title Ins. Co. (1987) 192 Cal.App.3d 70, 75, 237 Cal.Rptr. 264, Ticor claimed that since title insurance policies are not representations of the condition of the property, Ticor cannot be liable for any misrepresentations.   Ticor alternatively contended Alliance did not, in fact, rely on the policies, which Alliance assertedly did not receive until after it made the loans.

Lawrence, supra, held that lenders could not state a cause of action for negligence or negligent misrepresentation against a title insurer based on the title policy alone.  (Id., 192 Cal.App.3d at pp. 74–75, 237 Cal.Rptr. 264.)   As the court explained, the typical title insurance policy is not an abstract of title and does not guarantee that the title is as set forth therein.   Rather, the title insurance policy only indemnifies the insured for any losses resulting from a cloud on the insured's title as contained in the policy provisions.  (Ibid.)  Lawrence is inapposite here for several reasons.

It was factually established in Lawrence that the appellants had not relied upon the title documents prior to making the loan.  (Id., at p. 77, 237 Cal.Rptr. 264.)   Alliance alleges such reliance, not only on the policy but also on a specific endorsement, a copy of which was incorporated by reference into the complaint.   Moreover, the claimed reliance related not to the condition (fact) of title but to the nature and description of the property that secured the loan.   The policy and endorsement here amount to a guarantee, not merely a promise to indemnify, as in the conventional title policy described in Lawrence.   In material part, the endorsement reads:  “The Company assures the insured that at the date of this policy there is located on said land 4–unit Residence known as 447 Haight Street, # 1, 2, 3, 4, San Francisco, California 94117.  [¶] The Company hereby insures the insured against loss which said Insured shall sustain in the event that the assurance herein shall prove to be incorrect.”   The specificity of this false description of the property, and the guarantee, together with the alleged reliance thereon, differentiates this case from the routine situation discussed in Lawrence.  Lawrence is not inconsistent with our conclusion that Alliance's causes of action for intentional and negligent representation are not barred as a matter of law.

Ticor's alternative claim—that Alliance had not received and therefore could not have relied on the title insurance policies when it funded the loans—is refuted by the complaint.   The copy of the policy incorporated in the complaint shows it issued on October 31, 1984.   However, the copies of the escrow instructions, also incorporated by reference, show that the loan was not funded until escrow closed, sometime after November 7, 1984.   Alliance could thus have relied on the representations contained in the title policy prior to making the loans.

Further, the complaint also asserts that all defendants were aware of the oral and written fraudulent representations made by each other to obtain the loans.   Alliance claims, in effect, that Ticor was aware of and participated in the larger conspiracy to defraud it.   Its misrepresentation claims against Ticor do not rest solely on its issuance of the title insurance policies and endorsements.

Constrained as we are by the allegations contained in the pleading, and considering the strong policy of this state to liberally interpret pleadings to allow resolution of actions on the merits (see Dieckmann, supra, 175 Cal.App.3d at p. 352, 220 Cal.Rptr. 602), we conclude Alliance alleged valid causes of actions for intentional and negligent misrepresentation, and hereby reverse the judgment on the pleadings entered on these grounds.


The judgments on the pleadings ruling that plaintiff Alliance could not state a valid cause of action for fraud against defendants Pioneer and Ticor, and the judgments on the pleadings concluding that the statute of limitations barred the suit against Ticor as Doe 101, and that Ticor was not liable for the alleged misrepresentations as a matter of law, are reversed.


1.   The judgments on the pleadings entered below all were nonstatutory motions filed before the enactment of Code of Civil Procedure section 438.  (Stats.1993, ch. 456, § 5.)

2.   Plaintiff does not appeal the dismissal of its RICO claim.

3.   For the first time Ticor was sued by name as Doe 101.   Causes of action for breach of contract and breach of fiduciary duty were also alleged against Ticor.

4.   Moreover, courts in at least two other states have explicitly held that the full credit bid rule is inapplicable to fraud actions such as this.   In Glenham v. Palzer (1990) 58 Wash.App. 294, 792 P.2d 551, the plaintiffs alleged that the defendants had fraudulently induced them to invest in real estate loans that were inadequately secured.   As in the present case, the trial court granted judgment for the defendants on the ground that the borrowers' obligations were all satisfied by plaintiffs' full credit bids at the foreclosure sale.   The Washington Court of Appeals reversed on the ground that the full credit bid rule does not apply to third parties.   In Willis v. Realty Country, Inc. (1991) 121 Idaho 312, 824 P.2d 887, the Idaho Court of Appeals reached a similar result, expressly determining that Cornelison v. Kornbluth, supra, 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981 applies only to suits against borrowers.  (824 P.2d at p. 892.)   These two cases illustrate that the purpose of the full credit bid rule is limited to that of the antideficiency statutes.

5.   All statutory references are to the Code of Civil Procedure unless otherwise specified.

6.   The right of a lienholder to share in so-called severance damages awarded as a result of condemnation of a portion of property constituting security for a debt is also limited to the extent the security has been impaired.  (§ 1265.225;  Brown v. Critchfield, supra, 100 Cal.App.3d at pp. 864–865, 161 Cal.Rptr. 342;  People ex rel. Dept. of Transportation v. Redwood Baseline, Ltd. (1978) 84 Cal.App.3d 662, 670–672, 149 Cal.Rptr. 11.)

7.   So too are respondents here looking at the wrong bargain.   Their repeated citation to Critchfield is devoted to language in that opinion relevant to the lender's bargain with the defendants as borrowers, the benefit of which was the interest on the note.   Respondents assiduously ignore the central point of Critchfield, which relates to the other bargain with defendants as fiduciaries, the bargain analogous to that which is the basis of the fraud action here.

8.   The court in GN Mortgage attempts to distinguish Guild Mortgage because the full credit bid there was made by the FHLMC, not the lender.  (21 Cal.App.4th at p. 1808, fn. 4, 27 Cal.Rptr.2d 47.)   While the situation in Guild Mortgage may have been “unique,” this unusual feature makes no difference.   The important facts were that a full credit bid was made, the damages suffered by the plaintiff lender related to the adequacy of the security and the amount of damages was unaffected by the fact that the regulatory agency purchased the property at the foreclosure sale rather than the lender.   Whether the bid was made by lender or in its behalf by the regulatory agency, its effect was to extinguish the lien and insulate the defendant, as a borrower, from liability for impairment of security.   The point of Guild Mortgage is that the protection thus afforded a borrower by the full credit bid rule does not extend to a suit against a tortfeasor even though the injury and damages relate to the adequacy of security for a loan.

9.   Sumitomo also held that the lender's cause of action for fraud in the inducement of the loan was barred by the full credit bid rule, because the court believed that the facts upon which that cause of action was based “arise from the lender-borrower transaction.”  (Id., 185 Cal.App.3d at p. 217, 229 Cal.Rptr. 719.)   As indicated, we do not share the view that a cause of action for fraud in the inducement of a loan is based on the note or otherwise arises out of the loan transaction;  for this reason (and because the barring of fraud claims furthers no policy reflected in the antideficiency laws), we do not think the full credit bid rule applies to such actions.   In any case, this portion of Sumitomo does not help respondents here, who, unlike the defendant in Sumitomo, were not parties to the loan agreement.

10.   Civil Code section 3333 states that:  “For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”Civil Code section 1709 states:  “One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.”

11.   Subdivision (a) of section 3343 provides in material part the “[o]ne defrauded in the purchase, sale or exchange of property is entitled to recover the difference between the actual value of that with which the defrauded person parted and the actual value of that which he received, together with any additional damage arising from the particular transaction․”

12.   This is particularly true where, as here, one or more of the defendants is a fiduciary, because the measure of damages applicable to actions for fraud by a fiduciary is even more generous than the “out-of-pocket rule.”   As we recently explained in Salahutdin v. Valley of California, Inc., supra, 24 Cal.App.4th 555, 29 Cal.Rptr.2d 463, the “out-of-pocket rule relates to the situation in which the defrauded party and the fraudulent party are dealing at arm's length and there is no fiduciary or confidential relationship between the parties.   However, where, as in the present case, the fraudulent party has a fiduciary or confidential relationship with the party who has been defrauded, damages are measured by the benefit-of-the-bargain rule.”  (Id., at pp. 566–568, 29 Cal.Rptr.2d 463;  accord, 9 Miller and Starr, California Real Estate 2d, § 30:45, p. 405.)

13.   The provisions of the Financial Code referred to in Guild Mortgage, at p. 1512, 239 Cal.Rptr. 59 were enacted to vitiate the holding in First Fed. Sav. & Loan Assn. v. Lehman (1984) 159 Cal.App.3d 537, 205 Cal.Rptr. 600 that the bar of the antideficiency statutes (§ 580d) can be avoided by a fraud action only if there have been misrepresentations regarding or adversely affecting the value of the real property security (as there have been in the case before us).   The fraud action in First Federal was deemed barred by section 580d because the misrepresentations in that case related instead to the amount of the secondary financing and whether the residential property would be owner occupied.

14.   Appellant contests respondents' assertion that it was negligent in making the full credit bids at issue in this case on the grounds that regulations promulgated by the Federal National Mortgage Association require bids to be in the full amount of the indebtedness.   It is unnecessary for us to address this question.   Because this case comes to us from a judgment on the pleadings, we must treat the allegations of the amended complaint as true and cannot indulge respondents contrary assertions.  (See Hunt v. County of Shasta, supra, 225 Cal.App.3d at p. 440, 275 Cal.Rptr. 113.)

KLINE, Presiding Justice.

SMITH and PHELAN, JJ., concur.

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