Craig v. Private Financial CA2/6 ( 2022 )

Filed 12/6/22 Craig v. Private Financial CA2/6
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
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has not been certified for publication or ordered published for purposes of rule 8.1115.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
SECOND APPELLATE DISTRICT
DIVISION SIX
PATRICK SHAWN CRAIG, 2d Civil No. B315663
(Super. Ct. No. 20CV02916)
Plaintiff and Appellant, (Santa Barbara County)
v.
PRIVATE FINANCIAL, INC., et
al.,
Defendants and Respondents.
Patrick Shawn Craig appeals from the judgment
entered after the trial court sustained without leave to amend the
demurrer of respondents Private Financial, Inc. and Jeralyn
Sommers to Craig’s second amended complaint. The complaint
attempted to allege causes of action for abuse of a dependent
adult, breach of fiduciary duty and rescission arising out of a loan
appellant’s now-deceased mother obtained from respondents.
Appellant contends the trial court erred because it sustained the
demurrer on grounds not raised by respondents and because it
failed to address his claims for rescission and dependent adult
abuse. We affirm.
Facts and Procedural History
Appellant’s now-deceased mother, Roswitha Craig 1
was the trustee of the William Craig and Roswitha Craig Living
Trust (the Trust), which owned a 60-acre property in Solvang
that was improved with a residence, vineyard, winery and wine
tasting room (the property). Respondent Private Financial is a
real estate broker and loan originator. Respondent Jeralyn
Sommers is the owner of Private Financial, as well as a real
estate broker and mortgage loan originator.
In November 2016, Roswitha, as trustee of the Trust,
applied to respondents for a loan of $250,000, secured by a second
deed of trust on the property. Respondents Private Financial and
Sommers arranged the loan. A third party, FC Lender Services,
funded the loan.
In March 2018, FC Lender Services contacted
Roswitha and offered to lend her more money. Roswitha
contacted Sommers. Sommers proposed a different arrangement:
Private Financial and one of Sommers’ clients would loan the
Trust $410,000, repaying and replacing the $250,000 loan from
FC Lender Services. The Trust would pay interest only on the
new loan for 10 years at 10 percent. Roswitha agreed. The new
second deed of trust was recorded in April 2018.
Appellant alleges that, when Roswitha applied for
both loans, she suffered from alcoholism, liver failure and
Wernike Syndrome, “which limited her ability to learn new
information, her ability to remember recent events and created
1We refer to Ms. Craig by her first name for clarity,
intending no disrespect.
2
long-term memory gaps and other memory difficulties.” Because
of these conditions, appellant alleges, Roswitha was a dependent
adult within the meaning of Welfare & Institutions Code, section
15610.23, subd. (a). Appellant further alleges that respondents
were aware of Roswitha’s disabilities and relied on them to take
financial advantage of her.
Roswitha died in February 2019. Appellant informed
respondents of the death, became the successor trustee of the
Trust and made payments on the loan until February 2020. In
May 2020, respondents began a foreclosure by recording a notice
of default and election to sell. Appellant alleges the notice of
default was defective in various ways. Appellant ultimately
avoided foreclosure by selling the property for $4.2 million,
netting about $2 million. Appellant alleges that respondents’
payoff demand included about $70,000 in “excessive” interest and
fees that he was required to pay before respondents would release
their lien.
The second amended complaint includes three causes
of action for “abuse of dependent adult,” breach of fiduciary duty
and rescission. The cause of action for abuse of a dependent
adult does not allege that Roswitha lacked capacity to consent to
either loan. Instead, appellant conclusionally alleges that
respondents were aware of Roswitha’s “physical and mental
deficiencies” and relied on those “deficiencies” to “take financial
advantage of her . . . .” In addition, respondents recorded a
defective notice of default and charged “excessive” interest, fees
and other costs to release their lien when appellant sold the
property. Both of those events occurred after Roswitha’s death.
Appellant alleges that Roswitha “trusted and relied
on” respondents in agreeing to both loans because respondents
3
represented that they were acting as fiduciaries in her best
interests. Respondents caused appellant damage by charging
10% interest and “origination fees” of about $100,000, requiring
appellant to incur costs and attorney’s fees to delay the
foreclosure sale, and charging excessive fees and costs to release
their lien.
The second cause of action, for breach of fiduciary
duty, alleges that respondents told Roswitha they were acting in
her best interests as her fiduciaries in arranging the loans.
Respondents breached their fiduciary duty by failing to explain
the “negative” terms of the loan including the high interest rate
and prepayment penalty.2 In addition, respondents “sought to
take advantage of Roswitha’s mental and physical deficiencies by
foreclosing when there was a pending sale for well over the
amounts owed by the Trust to further their own vested interests
rather than working with [appellant] and by claiming excessive
fees as a condition to re-conveying the second trust deed.”
Roswitha was damaged by the breach of fiduciary duty, “in that
she paid a higher than required interest rate, [and] incurred late
charges and fees” of about $60,000.
Appellant’s third cause of action for rescission alleges
that the trust is entitled to rescind the $410,000 loan due to the
“fraud and misconduct” of respondents and their “blatant breach
of fiduciary duty . . . .” The second amended complaint includes
no allegations of fraud other than the factual allegations we have
already summarized.
Respondents’ demurrer argued that the second
amended complaint failed to state a cause of action on any
2There is no allegation that respondents demanded, or that
the Trust actually paid any pre-payment penalty.
4
theory. They argued that their notice of default complied with
Civil Code section 29243 and that their pay off demand did not
violate section 2923.1 because this is not a residential mortgage
to which the statute applies. They contended that appellant
failed to allege facts stating a cause of action for dependent adult
abuse because appellant did not allege that respondents took any
of the dependent adult’s property to a wrongful use. Respondents
contended that appellant did not allege a cause of action for
breach of fiduciary duty because they adequately disclosed the
material terms of the loan and their representation of both the
borrower and the lenders. Finally, respondents contended
appellant’s cause of action for rescission failed because the claim
was based on fraud and appellant failed to allege any facts
supporting a fraud claim.
The trial court sustained respondents’ demurrer
without leave to amend, reasoning that respondents sufficiently
disclosed their dual representation of borrower and lenders. The
court further noted that appellant’s “conduct in acknowledging
the loan and paying off the loan, either through escrow or
otherwise, indicates [appellant] was aware” of the dual agency.
The trial court’s order does not mention the dependent adult
abuse claim or the claim for rescission.
Standard of Review
On review of a judgment entered after the trial court
sustains a demurrer without leave to amend, we determine, de
novo, whether the complaint states facts sufficient to constitute a
cause of action. (Doe No. 1 v. Uber Technologies, Inc. (2022) 79
Cal.App.5th 410, 419; Blank v. Kirwan (1985) 39 Cal.3d 311,
3All further statutory references are to the Civil Code
unless otherwise noted.
5
318.) “The function of a demurrer is to test whether, as a matter
of law, the facts alleged in the complaint state a cause of action
under any legal theory. [Citation.] We assume the truth of all
facts properly pleaded, as well as facts of which the trial court
properly took judicial notice. [Citation.] But we do not assume
the truth of contentions, deductions, or conclusions of law.”
(Cardenas v. Horizon Senior Living, Inc. (2022) 78 Cal.App.5th
1065, 1069.)
Our “consideration of facts includes those evidentiary
facts found in recitals of exhibits attached to a complaint.
[Citation.]” (Satten v. Webb (2002) 99 Cal.App.4th 365, 375.) “If
the allegations in the complaint conflict with the exhibits, we rely
on and accept as true the contents of the exhibits. However, in
doing so, if the exhibits are ambiguous and can be construed in
the manner suggested by plaintiff, then we must accept the
construction offered by plaintiff.” (SC Manufactured Homes, Inc.
v. Liebert (2008) 162 Cal.App.4th 68, 83 (SC Manufactured
Homes).)
We review for abuse of discretion the trial court’s
refusal to grant leave to amend. In this context, the trial court
abuses it discretion if there is a reasonable possibility appellant
could cure the defect by amending the pleading to state a cause of
action. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074,
1081 (Schifando).) Appellant has the burden of proving that an
amendment would cure the defect. (Ibid.)
Discussion
The trial court sustained respondents’ demurrer to
the second amended complaint without leave to amend after
concluding respondents sufficiently disclosed their “dual agency”
in making the loan and that appellant acknowledged he was
6
aware of the dual agency by paying off the loan. Appellant
contends the trial court erred because paying off the loan did not
waive his claims against respondents. We agree. The trial
court’s reasoning was incorrect. Paying off the loan, by itself, did
not waive claims appellant may have had against respondents.
(See, e.g., McKell v. Washington Mutual, Inc. (2006) 142
Cal.App.4th 1457 [borrowers did not waive claims against lenders
by paying inflated closing costs].)
But we are not bound by the trial court’s reasoning.
Our task is to independently determine whether the second
amended complaint alleges facts sufficient to state a cause of
action. (Curcini v. County of Alameda (2008) 164 Cal.App.4th
629, 637–638 [order sustaining demurrer affirmed if correct on
any theory, “‘even one not mentioned by the court, and even if the
court made its ruling for the wrong reason . . .’”].)
1. Abuse of Dependent Adult. Appellant’s first cause
of action for “Abuse of Dependent Adult,” alleges that
respondents relied on Roswitha’s “physical and mental
deficiencies” when they offered to make the $410,000 loan at a
high interest rate with a high origination fee. He does not,
however, allege that Roswitha was incompetent, as a result of her
“deficiencies,” to accept the loan and sign the deed of trust. When
appellant defaulted, respondents served their notice of default on
Roswitha in her capacity as trustee of the Trust, despite their
knowledge that she had died 15 months earlier. Appellant
alleges the notice itself was defective because it failed to specify
the nature of the default and improperly accelerated the loan by
demanding payment of the full balance. Although respondents
postponed the foreclosure sale while the property was for sale,
7
they also demanded excessive interest, costs and fees to release
their lien.
Respondents contend the complaint fails to state a
cause of action for dependent adult abuse because the complaint
does not allege facts establishing a “wrongful taking” of
Roswitha’s property. They further contend that the notice of
default complied with section 2924 and the interest, costs and
fees charged were not excessive. We agree.
Welfare & Institutions Code section 15610.30
provides that financial abuse of a dependent adult occurs when a
person or entity takes “real or personal property” of the
dependent adult “for a wrongful use or with intent to defraud, or
both.” (Id., subd. (a)(1).) To state a cause of action for abuse of a
dependent adult, the plaintiff must allege facts demonstrating
that the dependent person’s property was taken through a
“breach of the contract, or other improper conduct.” (Paslay v.
State Farm General Ins. Co. (2016) 248 Cal.App.4th 639, 657.)
“‘It is simply not tortious for a commercial lender to lend money,
take collateral, or to foreclose on collateral when a debt is not
paid . . . . [A] commercial lender is privileged to pursue its own
economic interests and may properly assert its contractual
rights.’” (Stebley v. Litton Loan Servicing, LLP (2011) 202
Cal.App.4th 522, 528 (Stebley), quoting Sierra-Bay Fed. Land
Bank Assn. v. Superior Court (1991) 227 Cal.App.3d 318, 334-
335.)
Here, the second amended complaint does not allege
facts establishing a “wrongful taking” of Roswitha’s property. It
therefore fails to state a cause of action for abuse of a dependent
adult. Appellant has not alleged that Roswitha was incompetent
to agree to the loan, its interest rate or its origination fee.
8
Respondents’ conduct in recording the notice of default cannot
constitute a wrongful taking because appellant admits the loan
was in default and a lender’s assertion of its contract rights is not
tortious. (Stebley, supra, 202 Cal.App.4th at p. 528.)
Appellant contends respondents engaged in abusive
tactics when they recorded the notice of default because the
notice does not specify the nature of the default and because it
improperly demands payment of the full balance of the loan. We
disagree. Section 2924 requires a notice of default to include, “A
statement setting forth the nature of each breach actually known
to the beneficiary and of the beneficiary’s election to sell or cause
to be sold the property to satisfy that obligation and any other
obligation secured by the deed of trust or mortgage that is in
default.” (Id., subd. (a)(1)(C).) A notice of default complies with
the statute if it contains a correct statement of at least one
breach that is substantial enough to authorize the trustee to
declare a default. (Knapp v. Doherty (2004) 123 Cal.App.4th 76,
99 (Knapp).)
Here, the notice of default identified the deed of trust
at issue and stated, “a breach of and default in the obligations for
which said deed of trust, as security has occurred in that
payment has not been made of principal and interest accruing as
of April 30, 2020, plus interest, plus late charges, plus real
property taxes and assessments, plus attorney’s fees and
trustee’s expenses and all advances to protect the security for the
obligations secured thereby.” The notice of default further
informed appellant that he may have the “legal right to bring
your account in good standing by paying all of your past due
payments, plus permitted costs and expenses . . . . [¶] The
amount is $433,703.35 as of April 30, 2020, and will increase
9
until your account becomes current.” These statements comply
with section 2924 as a matter of law because they describe a
breach of the deed of trust. (Knapp, supra, 123 Cal.App.4th at p.
99.)
Appellant contends the notice of default was defective
because it improperly demanded repayment of the entire balance
of the loan. He is incorrect. The deed of trust provides, “Upon an
Even of Default under this instrument Beneficiary (Lender) may
declare the entire Indebtedness secured by this Deed of Trust
immediately due and payable . . . .” Respondents’ assertion of
their contractual rights is not abuse of a dependent adult.
(Stebley, supra, 202 Cal.App.4th at p. 528.)
Appellant’s final contention is that respondents
engaged in abusive conduct when they demanded payment of
“excessive” interest, fees and costs to release their lien. The
complaint does not specify how these charges were “excessive.”
There are no factual allegations, for example, that respondents
miscalculated the amounts due or demanded payments in excess
of those permitted by the deed of trust.
Civil Code section 2924c, subdivisions (c) and (d)
“‘provide the maximum sums which may be claimed as expenses
of foreclosing on the property. But aside from the expenses of
foreclosure, there are other costs, including legal fees, which may
be incurred by a creditor in protecting the security. . . .’” (Caruso
v. Great Western Savings (1991) 229 Cal.App.3d 667, 676.) These
costs and fees are not limited by section 2924c. (Jones v. Union
Bank of California (2005) 127 Cal.App.4th 542, 548.) The
complaint does not allege that respondents demanded payment of
costs in excess of those incurred to protect their security. It
10
therefore fails to state a cause of action relating to the collection
of excessive interest, fees and other costs.
2. Breach of Fiduciary Duty. The complaint alleges
that, in making the loan, setting the interest rate and charging
an origination fee, respondents breached their fiduciary duties to
Roswitha because they “did not place the economic interest of the
borrower ahead of [their] economic interest.” Appellant further
alleges that respondents failed to explain the “negative” terms of
the loan, including its “higher than normal interest rate,” and
pre-payment penalty. In addition, respondents tried to take
advantage of Roswitha by foreclosing when there was a sale
pending and by claiming excessive fees. Appellant alleges this
conduct was a breach of the covenant of good faith and fair
dealing, a breach of fiduciary duty and constructive fraud.
Respondents contend they did not breach any
fiduciary duty to the Trust because they disclosed that they were
acting as agents for both the Trust as borrower and themselves
as lender. We agree.
“Common sense and ancient wisdom join the law in
teaching that an agent is not permitted to simultaneously serve
two principals whose interests conflict about the matter served –
at least, not without full disclosure and consent from both.”
(Brown v. FSR Brokerage, Inc. (1998) 62 Cal.App.4th 766, 768-
769 (Brown).) While the Civil Code codifies duties of disclosure
for both residential and commercial real estate transactions,
these statutory duties do not apply where, as here, the
transaction at issue is a loan. (§§ 2079.13, subd. (k), 2079.14,
2079.16.)4 A common law duty of disclosure exists, however,
4The Civil Code requires that a disclosure form as
described in section 2079.16 must be provided to the buyer and
11
mandating that the agent obtain the consent of both principals
after full disclosure of the dual agency. (Brown, supra, 62
Cal.App.4th at pp. 768-769; L. Byron Culver & Associates v.
Jaoudi Industrial & Trading Corp. (1991) 1 Cal.App.4th 300,
304-305.)
In addition to the duty to disclose a dual agency
arrangement, a mortgage loan broker has a fiduciary duty to act
“‘in the highest good faith toward his principal’” and to avoid
obtaining “‘any advantage over the principal . . . .’” (Wyatt v.
Union Mortgage Co. (1979) 24 Cal.3d 773, 782.) This duty
obligates brokers to “make a full and accurate disclosure of the
terms of a loan to borrowers and to act always in the utmost good
faith toward their principals.” (Ibid.)
Respondents provided Roswitha with a “Plain
English” disclosure document that identified the interest rate,
payment terms and pre-payment penalty. They also provided an
“Agency Disclosure” that identified the Trust as the “Borrower”
and respondent Private Financial and IRA Services Trust
Company as the Lender. Private Financial also identified itself
as a real estate broker engaged by the Trust as the Trust’s agent
“to make or arrange a loan to be secured by real property owned
or to be acquired by” the Trust. Paragraph 7 of the Agency
Disclosure states that Private Financial “is acting as the agent
and fiduciary of the borrower only for the proposed mortgage loan
transaction.” Paragraph 8 provides that Private Financial, “is
acting as the agent and fiduciary of both the borrower and the
lender only for the proposed mortgage loan transaction.”
seller “in a real property transaction.” (§ 2079.14, subd. (a).) The
term real property transaction does not include a loan.
(§ 2079.13, subd. (k).)
12
These documents disclosed to Roswitha the material
terms of the loan and the fact that respondents were acting as
mortgage brokers for both themselves, as lender, and the Trust,
as borrower. Their content contradicts appellant’s allegation that
respondents breached their fiduciary duties by failing to disclose
these facts. We conclude the complaint fails to state a cause of
action for breach of fiduciary duty because the loan documents
establish that the required disclosures were made. (See, e.g., SC
Manufactured Homes, supra, 162 Cal.App.4th at p. 83 [where
allegations in complaint conflict with exhibits, “we rely on and
accept as true the contents of the exhibits”].)
Appellant contends the Agency Disclosure is
ambiguous because it states Private Financial “is acting as the
agent and fiduciary of the borrower only for the proposed
mortgage loan transaction,” and this phrase could mean that
Private Financial was acting as the agent for the Trust to the
exclusion of other parties. We disagree.
A demurrer admits not only the content of a contract
attached to the complaint, “but also any pleaded meaning to
which the instrument is reasonably susceptible.” (Aragon-Haas
v. Family Security Ins. Services, Inc. (1991) 231 Cal.App.3d 232,
239.) The question of whether the contract is “reasonably
susceptible” to a proposed interpretation is “a question of
law subject to our independent review on appeal.” (Joseph v. City
of Atwater (2022) 74 Cal.App.5th 974, 982.)
Reading the Agency Disclosure as a whole, we
conclude it is not ambiguous and cannot reasonably be
understood to mean that Private Financial represented the Trust
to the exclusion of other parties. The Agency Disclosure
identifies Private Financial both as an agent of the Trust and as
13
a lender. It then states that Private Financial is “acting as the
agent and fiduciary of both the borrower and the lender . . . .”
This adequately discloses respondents’ dual agency in the
transaction.
3. Rescission. Section 1689 provides that a contract
may be rescinded, “If the consent of the party rescinding . . . was
given by mistake, or obtained through duress, menace, fraud, or
undue influence, exercised by or with the connivance of the party
as to whom he rescinds . . . .” (Id., subd. (b)(1).) Here, appellant
alleges that he is entitled to rescind the loan agreement based on
respondents’ “fraud and misconduct,” and their “blatant breach of
fiduciary duty.”
But the complaint fails to allege fraud with specificity
and therefore fails to allege fraud as a basis for rescinding the
loan agreement. (Lazar v. Superior Court (1996) 12 Cal.4th 631,
645; Citizens of Humanity, LLC v. Costco Wholesale Corp. (2009)
171 Cal.App.4th 1, 20, disapproved on other grounds, Kwikset
Corp. v. Superior Court (2021) 51 Cal.4th 310, 337.) We have
already concluded that the complaint also fails to allege a breach
of fiduciary duty. Consequently the allegation that respondents
breached their fiduciary duties cannot form the basis for
rescinding the loan agreement.
4. Leave to Amend. Appellant contends the trial
court erred when it denied him leave to amend the operative
second amended complaint. We review the trial court’s decision
to deny leave to amend for abuse of discretion. This requires
appellant to demonstrate there is a reasonable possibility the
defect could be cured by amending the pleading. (Schifando,
supra, 31 Cal.4th at p. 1081.) Appellant fails to meet this burden
because he has not suggested how he would amend his complaint
14
to address the defects identified in the demurrer and “‘how that
amendment will change the legal effect of his pleading.’” (Lebrun
v. CBS Television Studios, Inc. (2021) 68 Cal.App.5th 199, 207,
quoting Cooper v. Leslie Salt Co. (1969) 70 Cal.2d 627, 636.)
Conclusion
The judgment is affirmed. Respondents shall recover
their costs on appeal.
NOT TO BE PUBLISHED.
YEGAN, J.
We concur:
GILBERT, P. J.
BALTODANO, J.
15
Timothy J. Staffel, Judge
Superior Court County of Santa Barbara
______________________________
Richard I. Wideman, for Plaintiff and Appellant.
Wright, Finlay & Zak and T. Robert Finlay, Olivier J.
Labarre, for Defendants and Respondents.