Fuller v. First Franklin

Citation: Not availableDocket: C070452M

Court: California Court of Appeal; June 24, 2013; California; State Appellate Court

Original Court Document: View Document

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The Court of Appeal of California modified its nonpublished opinion regarding the case of Michael Fuller et al. v. First Franklin Financial Corporation et al., originally filed on May 1, 2013, and certified for publication on May 29, 2013. The opinion was amended to clarify that First Franklin's arguments against conspiracy liability, based on the absence of a duty to refrain from interference or to act in good faith, do not apply to allegations of conspiring with SMF, plaintiffs' broker, to deceive them. The court emphasized that there can be liability for conspiracy to commit an intentional tort, such as deceit, even without a pre-existing duty. It noted that the demurrer regarding deceit claims was rejected, allowing for First Franklin’s potential liability for SMF’s intentional tortious conduct. Additionally, the court clarified that, since it upheld the conspiracy theory for deceit, it did not need to address First Franklin's arguments about vicarious liability. The judgment of dismissal was reversed, directing the lower court to overrule the demurrers concerning deceit and violations of the Unfair Competition Law (UCL). The petition for rehearing by First Franklin and Bank of America was denied, with no change to the judgment. The order is certified for publication.

Michael Fuller and Karen Gehrig, married plaintiffs from Oroville, filed a lawsuit in November 2010 against First Franklin Financial Corporation, Bank of America, and Sacramento First Mortgage (SFM) related to the purchase of their home financed in June 2006. They claimed that First Franklin and SFM engaged in predatory lending practices, making material misrepresentations and concealing facts regarding the appraisal and loan terms, which they did not uncover until late 2009. Their allegations included deceit, negligence, unfair business practices, breach of fiduciary duty, and civil conspiracy. 

The trial court dismissed First Franklin’s case based on a statute of limitations ruling and sustained SFM’s demurrer without leave to amend. SFM later sought judgment on the pleadings for negligence, which the court granted due to lack of opposition. The plaintiffs appealed both dismissals, asserting they adequately alleged delayed discovery of facts intentionally withheld by the defendants to induce them into defaulted loans. The appellate court agreed with the plaintiffs, reversing the dismissals with directions to overrule the demurrers.

The factual allegations revealed that Dennis Graves, an unlicensed employee of SFM, acted as a mortgage broker under First Franklin's direction. The plaintiffs were solicited at a real estate seminar, leading them to apply for a 30-year fixed-rate mortgage. An appraiser, hired by the broker, used outdated home sales for valuation, resulting in a significantly inflated appraisal, which the defendants knowingly facilitated.

The broker informed the plaintiffs that they did not qualify for any loan better than the $435,000 offer, which included a first mortgage with a 30-year adjustable-rate amortization and a second mortgage with a 20-year amortization and a 9.5% fixed rate balloon payment. He failed to explain the implications of these loan terms and did not disclose that the plaintiffs were eligible for more favorable loans due to their credit scores, as he sought a hidden kickback from First Franklin. Consequently, the plaintiffs were unaware of their loan qualifications, the risks of foreclosure associated with their loan terms, and the true value of their home, largely due to their inexperience as first-time buyers. The defendants, presenting themselves as experts, induced the plaintiffs into the loan agreement, which they would not have entered if fully informed.

At the loan closing in June 2006, the broker was absent when the plaintiffs had questions about the loan details. In November 2009, facing a significant drop in business income, the plaintiffs sought loan modification and learned of the true loan terms. Initially, First Franklin refused to modify the loans, and despite believing they could refinance based on SFM's assurances, they found themselves without real equity in their home, hindering refinancing efforts. An appraisal in November 2009 confirmed their lack of equity, and attempts to negotiate with First Franklin for a short refinance failed. Eventually, First Franklin offered a temporary forbearance allowing reduced payments for six months, but the plaintiffs stopped all payments by fall 2010.

After consulting legal counsel, they discovered their original appraisal was inflated and learned of First Franklin's reputation for providing subprime loans to unqualified borrowers, as the company bypassed standard underwriting practices, increasing the risk of foreclosure. Procedurally, the defendants challenged the original complaint, but the record does not show rulings on those challenges. SFM filed a motion to strike and a demurrer, which led to the trial court striking claims for legal fees and punitive damages while allowing an amended complaint. The filing of this amended complaint appeared to moot First Franklin's demurrer, prompting SFM and First Franklin to file motions to strike claims for punitive damages and legal fees.

SFM's demurrer was based on reasons beyond the statute of limitations, with First Franklin incorporating that argument. The trial court overruled SFM’s demurrer for all causes of action except negligence. The court found sufficient claims against SFM for deceit, breach of fiduciary duty, and unfair business practices due to the overstatement of appraisal values, concealment of loan eligibility, and undisclosed kickbacks. However, it upheld First Franklin's demurrer based on the statute of limitations, concluding that plaintiffs failed to adequately demonstrate a reasonably delayed discovery of the relevant facts. The court did not assess the substantive merits of allegations against First Franklin. It granted SFM's motion to strike the request for legal fees but denied the motion regarding punitive damages. The trial court adopted its tentative decision without oral argument and did not explain its reasoning for applying the statute of limitations as a bar.

The legal review of sustaining a demurrer is conducted de novo, with a complaint being subject to demurrer if it shows on its face that the limitations period has expired. The discovery rule delays the accrual of a cause of action until the party discovers or should have discovered the cause. If a demurrer indicates a pleading is untimely, the burden shifts to the plaintiff to establish an exception, such as fraudulent concealment, which tolls the statute of limitations due to a defendant’s deceptive actions. A plaintiff must provide specific details regarding discovery and justification for delayed discovery. On appeal, plaintiffs must demonstrate how they could amend their complaint to alter its legal effect, with the presumption that the original pleading is as favorably stated as possible. At this procedural stage, the focus is solely on whether a hypothetical case has been stated, not on its potential for proof.

The statute of limitations for various causes of action under California law varies: four years for unfair competition claims (Bus. Prof. Code. 17200, 17208), three years for deceit (Code Civ. Proc., 338, subd. d.), and two years for negligence by real estate brokers (Code Civ. Proc., 339). Claims for breach of fiduciary duty, when based on deceit, also carry a three-year limitation (Krieger v. Nick Alexander Imports, Inc.). Allegations of conspiracy do not alter the limitations period for the underlying liability (Maheu v. CBS, Inc.).

In the context of the plaintiffs' home purchase in June 2006, SFM and First Franklin allegedly procured an inflated appraisal using outdated property sales, failing to disclose this to the plaintiffs. They misrepresented the loan's refinancing potential and concealed other more favorable loan options, while also failing to inform the plaintiffs about illegal kickbacks and the risks associated with the mortgage structure. The plaintiffs, being first-time home buyers, were not adequately informed of the implications, such as the risk of foreclosure or balloon payments. 

The plaintiffs sought relief in late 2009, leading to a complaint filed in 2010, well within the applicable limitations periods. SFM and First Franklin argued that the limitations period had lapsed, claiming the plaintiffs had inquiry notice of deceit based on a question about a prepayment penalty and receipt of the appraisal at closing. However, they did not provide the appraisal document as part of the pleadings to substantiate their claims.

Plaintiffs could have independently obtained an appraisal, as supported by case law (Nymark v. Heart Fed. Savings, Loan Assn.). Generally, parties are expected to be aware of contract provisions (Rosenthal v. Great Western Fin. Securities Corp.; Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn.), but plaintiffs’ claims focus on SFM's failure, as their mortgage broker, to inform them about the increased risk of foreclosure stemming from loan terms. The broker's duty extends beyond merely disclosing written terms to include counseling on unfavorable conditions such as interest rates and balloon payments (Wyatt v. Union Mortgage Co.). 

Plaintiffs being aware of the appraisal's content does not automatically imply they recognized its flaws, especially if the broker did not address these issues. Relying on a potentially fraudulent appraisal is not unreasonable when one lacks expertise and the other party holds superior knowledge (Arthur L. Sachs, Inc. v. City of Oceanside). Queries about unrelated loan aspects do not imply plaintiffs should have been suspicious of adjustable interest rates or other crucial loan conditions. Furthermore, SFM and First Franklin failed to disclose a hidden kickback in closing costs, which affected plaintiffs' payments, without justifying why plaintiffs should have uncovered this. Plaintiffs' lack of awareness regarding the loan conditions was not unreasonable under the circumstances.

SFM and First Franklin argued, without substantiation, that plaintiffs should have identified the true facts about their loan obligations sooner, citing that an attorney could do so quickly. However, the ability of a trained professional to discern facts does not reflect on the plaintiffs' reasonable reliance on their broker's assurances until financial issues prompted them to reassess their loans.

Defendants fail to identify any specific facts from June 2006 to late 2009 that would have alerted plaintiffs to potential issues regarding their home loan, such as overvaluation or unfavorable loan terms. The timeline indicates that plaintiffs engaged in unsuccessful negotiations with First Franklin and another lender, with a brief period in mid-2009 during which First Franklin allowed reduced payments. The court finds it reasonable for plaintiffs to have explored these options before seeking legal counsel. Although future evidence may reveal the plaintiffs' delayed discovery as untimely, the complaint sufficiently alleges nondisclosures and misrepresentations by the broker, acting as First Franklin's agent, without any facts triggering a reasonable inquiry by the plaintiffs.

First Franklin's alternative arguments for demurrer are also addressed. It contends that there are no specific allegations of deceit against it and that it was not in a fiduciary relationship with the plaintiffs, thus having no duty to disclose information. However, these arguments overlook the allegations that First Franklin conspired with the broker, SMF, which could implicate First Franklin for SMF's negligence and misrepresentations. Additionally, First Franklin argues against vicarious liability for UCL practices, asserting a lack of direct participation in any unlawful conduct. Plaintiffs counter this by highlighting allegations of a business strategy involving overvalued appraisals to facilitate risky loans for profit, thereby implicating First Franklin in the misconduct. The court ultimately rejects the demurrer based on these grounds.

First Franklin's alleged agreement to pay an undisclosed kickback to Sacramento First Mortgage (SMF) for securing a loan from funds received from the plaintiffs is upheld as a sufficiently detailed allegation, contrary to First Franklin's claims of needing specific pleading for UCL violations. The court rejects the basis for sustaining First Franklin's demurrer. The judgments of dismissal are reversed, directing the lower court to overrule the demurrers of First Franklin and SMF. Plaintiffs are entitled to recover costs on appeal. The opinion filed on May 1, 2013, is now certified for publication with no changes to the judgment.