Arlington Investment Co. v. Tarcher

ARLINGTON INVESTMENT COMPANY, Appellant v. BENJAMIN D. TARCHER et al., Respondents C.A. 1st, No. A075357, Div. 2 S065752 California Supreme Court Filed January 28, 1998         Petition for review GRANTED.


[Editor's Note - For your convenience we reprint below the Daily Journal's Ruling Column brief which summarized the earlier decision of the lower court.]

BANKING

Lender Isn't Prohibited From Maintaining Negligent Misrepresentation Action Against Third Party Non-Borrower Who Induced Loan.         The C.A. 1st has decided that a lender's acquisition of secured property by full credit bid at a nonjudicial foreclosure sale did not bar the lender from maintaining a negligent misrepresentation action against a third party nonborrower who fraudulently induced the lender to make the loan.
        In 1989, Benjamin Tarcher applied for a loan from Arlington Investment Co. offering as security three unimproved lots in Oakland. Arlington hired Glenn Graham to appraise the value of the land. Based on Graham's appraisals, $96,500 the first year and $204,000 the following year, Arlington loaned Tarcher a total of $102,000, secured by a deed of trust on the three lots. When Tarcher defaulted on the loan, Arlington foreclosed on the lien, acquiring all three lots at a nonjudicial foreclosure sale through a full credit bid of approximately $110,000. Arlington then learned that the three lots could not be developed and their actual value was $5,000. Arlington brought an action against Graham for negligent misrepresentation, alleging that Graham had made the appraisals knowing they were false and that Arlington would rely on them. Graham contended that Arlington's full credit bid extinguished its claim that there was inadequate security. Relying on Pacific Inland Bank v. Ainsworth, the trial court granted summary judgment for Graham.
        The C.A. 1st reversed. "Alliance Mortgage Co. v. Rothwell . . . holds that a lender's acquisition of secured property by full credit bid at a nonjudicial foreclosure sale does not bar the lender as a matter of law from maintaining a fraud action against third party non-borrowers who fraudulently induced the lender to make the loans." The rationale of Alliance strongly suggests that full credit bids also do not as a matter of law bar any other tort claims against third parties who are not persons whose interests are subject to the lien of a mortgage. Everything Alliance said about fraud could also be said about negligence. "A suit for negligence is as separate a remedy from a suit on a promissory note secured by a deed of trust as a suit for fraud." The antideficiency statutes were equally designed to protect parties from liability for negligence as they were to protect them from the consequences of fraud. Like suits for fraud, negligence suits against non-debtors do not frustrate the antideficiency polices because they do not result in double recovery for the creditor. The trial court's reliance on Pacific Island was misplaced. That case could not be reconciled with Alliance and other pertinent cases. Pacific Island erroneously imputes that the bar of the full credit bid rule is to relieve third parties of the consequences of tortious conduct.
        Arlington Investment Co. v. Tarcher, C.A. 1st, No. A075357, filed October 2, 1997, by Kline, J,
        The full text of this case appears in 97 Daily Journal DAR page 12597, October 6, 1997.