In an action by a lender against a mortgage broker involving forged loan documents, the California Court of Appeals, Fourth District, recently ruled that the lower court improperly excluded evidence of title insurance procured by the mortgage broker, concluding that the evidence was relevant to the issue of the broker's liability on the lender's breach of fiduciary duty and negligence allegations, and the application of the "collateral source rule" to exclude the title insurance evidence was prejudicial to the mortgage broker and thus required a new trial.
The Court also ruled that the trial court properly declined to instruct the jury on superseding cause, as the forgery of the loan documents was foreseeable and the broker's own acts ultimately contributed to the harm suffered by the lender.
A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/D059976.PDF.
A business jointly owned real property with a medical practice (collectively, "Property Owners"). The business's office manager, who was a notary public ("Notary") contacted a mortgage broker ("Broker") and requested a loan on behalf of Property Owners for over $160,000. When Broker attempted to meet with Property Owners to obtain their signatures on the loan documents, Notary represented to Broker that one of the Property Owners was unavailable and proposed to have the loan documents signed by Property Owners and to notarize the signatures. Broker agreed, and the loan documents, including a promissory note and a deed of trust, were returned to Broker bearing signatures personally notarized by Notary. Notary obtained the loan by forging Property Owners' signatures.
About six months later, Notary essentially repeated the process in requesting a larger loan from Broker, this time for $480,000 but also secured by Property Owners' property. Broker procured the second loan through a couple of individual lenders ("Lenders"). Again, Notary forged all the signatures necessary to obtain the loan.
Upon learning of the fraud, Property Owners sued Broker, Lenders and others to cancel the fraudulently obtained trust deeds. Lenders filed a cross-complaint against Property Owners for equitable subrogation, and against Broker, alleging negligence and breach of fiduciary duty. The parties settled their claims, with the exception of Lenders' claims against Broker.
Lenders filed a motion in limine to exclude evidence relating to title insurance based on the "collateral source rule," arguing that such evidence was irrelevant to any issue to be tried. Broker opposed the motion, arguing that the evidence of title insurance it obtained on behalf of Lenders was relevant to defend itself against the breach of fiduciary duty allegations. Broker subsequently filed its own motion in limine to admit evidence of title insurance coverage, but the lower court denied the motion, reasoning in part that the title insurance evidence was not relevant to the case.
Moreover, as an affirmative defense, Broker alleged that any recovery against it was barred by Notary's superseding acts, requesting special jury instructions as to superseding cause. After a trial in which the jury found that Broker had breached fiduciary duties owed to Lenders and had acted with malice, fraud, or oppression, Lenders were awarded almost $600,000 in compensatory damages and over $62,000 in punitive damages. Broker appealed.
The Appellate Court reversed, concluding in part that the lower court improperly excluded evidence of title insurance.
As you may recall, as a rule of damages, the "collateral source rule" provides that if an injured party receives some compensation for injuries from a collateral source, such as insurance, that payment is not deducted from the damages that the plaintiff can otherwise collect from the tortfeasor. See, e.g., Helfend v. Southern Cal. Rapid Transit Dist., 2 Cal.3d 1, 6 (1970); Lund v. San Joaquin Valley Railroad, 31 Cal.4th 1, 8 (2003).
In addition, as a rule of evidence, the collateral source doctrine precludes the introduction of evidence of the plaintiff being compensated by a collateral source unless there is a "persuasive showing' that such evidence is of 'substantial probative value' for purposes other than reducing damages." See Arambula v. Wells, 72 Cal. App.4th 1006, 1015 (1999).
Noting that the narrow issue before the lower court was whether the jury should have been allowed to hear that the Lenders' harm was potentially covered by title insurance, the Appellate Court explained that there was no need for the lower court to decide whether the collateral source rule applied in order to rule on the admissibility of the title insurance evidence. In so doing, the Court pointed out that the existence of insurance may be introduced in a case if the evidence is otherwise admissible, in which case the court, under section 352 of the California Evidence Code, must determine whether the probative value of the other evidence outweighs the prejudicial effect of mentioning insurance.
Stressing that evidence of title insurance was relevant to Broker's liability as proof that Broker followed industry standards in obtaining title insurance covering fraud and forgery for the loan transaction, the Appellate Court concluded that the probative value of the title insurance evidence outweighed its prejudicial effect, because the risk of prejudice could have been eliminated through proper jury instructions. Applying this standard, the Court determined that the exclusion of the title insurance evidence was prejudicial to Broker in that it prevented Broker from proving in part that it took steps to mitigate the risk of fraud or forgery and from defending against the assertion that Broker acted with malice, fraud, or oppression.
With regard to Broker's affirmative defense of superseding cause, the Appellate Court, noting that in order to qualify as a superseding cause both the intervening act and the results of that act must not be foreseeable, pointed out that Notary's conduct overlapped with that of Broker and that forgery of the loan documents was foreseeable. Accordingly, the Court concluded that there was no factual issue on superseding cause for the jury to consider.
Thus, reversing the lower court's ruling on the admissibility of evidence on title insurance, the Appellate Court remanded for a new trial.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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