The California Court of Appeal, Sixth Appellate District, recently affirmed the dismissal of a complaint alleging fraudulent statements relating to the value of the house securing the mortgage loan at issue, in supposed violation of California’s unfair competition law under Bus. & Prof. Code § 17200 (“UCL”), holding that forecasts of future events are not actionable in fraud.
A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/H038713.PDF
In 2000, the borrowers (“Borrowers”) obtained a $280,000 mortgage loan on their home. In 2002, the Borrowers refinanced the loan, this time borrowing $386,000. In 2005, the Borrowers refinanced again and borrowed $496,000 under a negative amortization loan.
According to the Borrowers, they relied on a $620,000 appraisal of the property in connection with the 2005 loan. However, they later discovered that their home was valued between $350,000 and $400,000 when they were seeking another refinance in 2010. After defaulting on loan payments, the Borrowers sued their lender (“Bank”) for fraud and UCL violations, alleging that Bank personnel made two false representations:
1. “The current market value of the real property was $620,000 and appreciating;” and
2. “By refinancing with the ARM loan being offered to [Borrowers], [Borrowers] could bring the early monthly payments down, obtain several years of appreciation to the value of the home, and sell or refinance the home at an appreciated value before having to pay the then due principal of $620,00 and before having to pay the much higher monthly payments.”
The trial court sustained Bank’s demurrer without leave to amend, concluding that the fraud and UCL claims were untimely and inadequately pled.
On appeal, the Appellate Court first considered whether forecasts of future events may be actionable as misrepresentations.
The Borrowers cited Bily Arthur Young & Co. (1992) 3 Cal.4th 370, 408, which recognized that in certain circumstances a representation made by someone possessing superior knowledge or expertise may be regarded as fact. Bily involved a fraud claim rooted in an opinion paragraph in an accounting firm’s audit report, and the appellate court in Bily held that the statements referred to a discrete period covered by the audit; it was making no prediction of the business’s future performance. In contrast, the Bank’s alleged statements here were predictions of future events.
The Appellate Court also considered Finch v. McKee (1936) 18 Cal.App.2d 90, which rejected as inactionable a vendor’s statements that a building was constructed “earthquake proof.” The court in Finch reasoned that it is impossible to predict destructive forces of nature and such statements were pure speculations upon which no purchaser had a right to rely. Agreeing with the reasoning in Finch, the Appellate Court held that the Bank’s alleged statements of future events were not actionable in fraud as a matter of law.
The Court then considered whether the fair market appraisal representations were sufficient to maintain a cause of action for fraud. Because the Borrowers failed to allege with specificity or provide any documents to support their allegations, such as a copy of the appraisal, the allegations failed to meet the heightened pleading requirements necessary to maintain a claim for fraudulent concealment.
Moreover, the Appellate Court agreed that the claim is time barred. As you may recall, the statute of limitations for fraud is three years. CCP § 338(d). However, the limitations period may be tolled until a plaintiff discovers or has reason to discover the fraud. Id.
Borrowers alleged that the misrepresentations on which their fraud claim was based occurred in July 2005. They filed their lawsuit six years later in July 2011. Borrowers merely alleged that the fraud was not discovered until 2010, but the Court noted that they did not explain how they made their discovery or how they determined that the 2005 appraisal was a misrepresentation. Thus, even if the Borrowers had pled their claim for fraud with specificity, the claim is still deficient because the claim is untimely.
Similarly, the Appellate Court also held that Borrowers’ allegations were also insufficient to maintain a claim under the UCL. As you may recall, California’s unfair competition law prohibits “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” Bus. & Prof. Code § 17200.
The Borrowers alleged that Bank violated the UCL in three ways: (1) the two misrepresentations regarding the value of the home and ability to refinance in the future; (2) colluding with others in the housing industry to inflate the value of real estate to entice borrowers into “top loaded” loans and later refusing to refinancing based on the true value of the homes; and (3) misstating that the Borrowers will pay 1% interest on the loan documents.
The Appellate Court held that the allegations regarding the value of the home and ability to refinance in the future failed to state a claim due to lack of specificity, in the same way the fraud claim based on the same misrepresentations were deficient.
The allegations of supposed collusion with others in the housing industry to inflate the value of real estate to entice borrowers into “top loaded” loans, and later refusing to refinancing based on the true value of the homes, also failed because judicially noticed loan documents contradict Borrowers’ allegations. The Borrowers did not borrow money to purchase their home, but instead they took out an additional $216,000 over two refinances.
Lastly, as to the alleged misstatement in the loan documents that the Borrowers will pay 1% interest, the Borrowers admitted they were aware of the negative amortization terms of their loan and accepted those terms in reliance on representations that their home would continue to appreciate. Thus, their alleged injury did not result from the face of the loan document.
As another point, the Court noted that the UCL claim is time barred. The statute of limitations for a UCL violation is four years. See Bus. & Prof. Code § 17208. The Appellate Court held that the Borrowers failed to plead facts to toll the limitations period, and like the fraud claim, the UCL claim based on events at loan origination fails as untimely.
Accordingly, the Appellate Court affirmed the judgment of dismissal.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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