Opinion
B223188 Los Angeles County Super. Ct. No. BC383217
08-23-2011
MICHAL JOHNSON, Plaintiff and Appellant, v. DEUTSCHE BANK NATIONAL TRUST COMPANY et al., Defendants and Respondents.
Irell & Manella, Gregory R. Smith, Jonathan H. Steinberg, Lucy M. Stark, Christopher Cowan, Bradley Mullins; Public Counsel, Patrick Dunlevy, Gregory H. Smity for Plaintiff and Appellant. Foley & Mansfield, Stephen S. Chuck, Tiffany M. Birkett; Grant & Zeko, Miles D. Grant, Mickey Walker for Defendants and Respondents.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
APPEAL from a judgment of the Superior Court of Los Angeles County. Malcolm H. Mackey, Judge. Reversed in part and affirmed in part.
Irell & Manella, Gregory R. Smith, Jonathan H. Steinberg, Lucy M. Stark, Christopher Cowan, Bradley Mullins; Public Counsel, Patrick Dunlevy, Gregory H. Smity for Plaintiff and Appellant.
Foley & Mansfield, Stephen S. Chuck, Tiffany M. Birkett; Grant & Zeko, Miles D. Grant, Mickey Walker for Defendants and Respondents.
Plaintiff sued various banks after his property was divested by alleged scam artists and used as collateral to obtain loans. The superior court sustained demurrers brought by two of the banks and denied leave to amend. On appeal, plaintiff argues that his claims for quiet title, cancellation, negligence, and violation of Business and Professions Code section 17200 were adequately pleaded. We find that plaintiff did adequately allege quiet title and cancellation claims as to one defendant, but his negligence and section 17200 claims against another defendant were legally insufficient. We therefore reverse in part and affirm in part.
FACTUAL AND PROCEDURAL BACKGROUND
Allegations
Plaintiff Michal Johnson owns, or at least owned, a property in Los Angeles where he and his family lived for over 30 years. In the spring of 2004, Johnson ran into financial difficulties and fell behind on his monthly mortgage payments. At the time, the total amount remaining on the mortgage was $164,000.
The allegations are taken from plaintiff's third amended complaint (TAC). We treat all properly pleaded facts as true. (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125.)
In July 2004, a man named Rodney Williams came to Johnson's house and told him that the property was in foreclosure. Williams told Johnson he worked for Buyers Market Realty Services Corp. (BMRS) and that the director of BMRS, Timothy Barnett, could help Johnson save the property. Unbeknownst to Johnson, Barnett was a convicted ex-felon who had spent years in prison for real estate fraud. Johnson met with Barnett, who claimed he could provide a refinance that would pay off the old mortgage and leave Johnson with a new mortgage with better terms.
Barnett told Johnson he could participate in a "business partnership," where Johnson would add BMRS to the title to the property and pay BMRS $1,200 a month in return for a refinance of the mortgage, with the property as collateral. Johnson believed Barnett was offering a refinance of the mortgage with BMRS as lender. Barnett assured him that no party other than Johnson would be able to borrow against or transfer the property, and Barnett stated that at the termination of the two-year "partnership period," Johnson would remain on the title as the sole owner of the property, with only the mortgage debt remaining. Barnett, however, stated that since Johnson's credit was poor, Johnson would have to be removed from the title for one month so BMRS could obtain a loan for the "business partnership." After Johnson made his first payment of $1,200 his name would be put back on the title.
Johnson signed numerous documents which Barnett described as necessary, not reading most of them. He also signed a deed of trust listing himself as borrower and BMRS as beneficiary and calling for Johnson to repay BMRS $15,000 (an amount Johnson never received in full). Further, Barnett recorded a grant deed on July 28, 2004, transferring the property from Johnson to BMRS. The grant deed reflected a sale price of $15,000 plus encumbrances.
No more than a few days after the original grant deed was recorded, a different company controlled by Barnett, Buyer's Market Real Estate Services Incorporated (BMRESI), purportedly transferred the property to a business associate of Barnett's, Sean Gallaher. On October 1, 2004, this grant deed was recorded, reflecting a sale price of $350,000.
Barnett, Gallaher, BMRS, and BMRESI were among the 15 defendants named in the TAC.
After Gallaher obtained title to the property, he used it as collateral to obtain various loans without Johnson's knowledge or authorization. The same day the grant deed reflecting transfer to Gallaher was recorded, two deeds of trust were recorded against the property, one securing a note for $280,000 and the other securing a second note for $52,500. The deeds of trust listed Gallaher as the borrower and defendant Provident Savings Bank, F.S.B. (Provident) as the lender.
In January 2006, Gallaher refinanced the Provident loans with Impac Funding Corp. (Impac), this time secured by a $384,000 deed of trust against the property. Impac sold the deed of trust and associated loan to IndyMac Bank, F.S.B. (IndyMac). The $384,000 loan was then acquired and securitized in a mortgage pool, for which defendant Deutsche Bank National Trust Company (Deutsche Bank) serves as trustee.
Throughout this time, Johnson and his family continued to live on the property. Johnson continued to make $1,200 monthly payments to BMRS, thinking that the payments were going toward paying off the BMRS refinance of the original mortgage. Johnson was unaware of and received none of the proceeds from the various loans obtained by Gallaher. Eventually, sometime in 2007, Johnson discovered the scheme initiated by Barnett, and stopped making payments to him.
Procedural History
Johnson filed the original complaint in this action in January 2008, with Provident named as one of nine defendants. After a substitution of attorneys, Johnson filed the first amended complaint and thereafter filed a second amended complaint, neither of which named Provident.
Apparently, Provident was served with the original complaint, but never responded to it.
Following a motion for leave to amend, Johnson filed the TAC on July 30, 2009. This complaint again named Provident as a defendant and for the first time named Deutsche Bank, in addition to a number of additional defendants. The TAC included claims against Provident for negligence and violation of Business and Professions Code section 17200, as well as for quiet title and cancellation of deeds. It included claims against Deutsche Bank for quiet title, cancellation of deeds, and negligence. The TAC stated that Johnson wished to quiet title against all parties who claim any interest in the property.
The quiet title and cancellation causes of action were both styled as declaratory relief claims.
Both Provident and Deutsche Bank brought demurrers. Johnson opposed, arguing that the TAC stated valid causes of action. The trial court sustained Provident's and Deutsche Bank's demurrers without granting leave to amend on January 4, 2010. Afterward, orders dismissing Provident and Deutsche Bank were entered by the court.
DISCUSSION
On appeal, Johnson asserts that the trial court erred in sustaining Deutsche Bank's demurrer on the quiet title and cancellation causes of action, and in sustaining Provident's demurrer on the negligence and violation of Business and Professions Code section 17200 causes of action.
Johnson does not appeal the trial court's ruling on the negligence claim against Deutsche Bank or the cancellation and quiet title claims against Provident.
An appellate court reviews the ruling sustaining a demurrer de novo, exercising independent judgment regarding whether the complaint states a cause of action as a matter of law. (Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1115.) We give the complaint a reasonable interpretation, treating the demurrer as admitting all material facts properly pleaded, but not assuming the truth of contentions, deductions or conclusions of law. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.) A demurrer tests the legal sufficiency of the complaint. (Hernandez v. City of Pomona (1996) 49 Cal.App.4th 1492, 1497.) As such, we are not concerned with the difficulties a plaintiff may have in proving the claims made in the complaint. (Desai, at p. 1115.) We are also unconcerned with the trial court's reasons for sustaining the demurrer, as it is the ruling, not the reasoning, that is reviewable. (Sackett v. Wyatt (1973) 32 Cal.App.3d 592, 598, fn. 2.)
I. The Deutsche Bank Demurrer
A. The Determination That Deutsche Bank Was a Good Faith Encumbrancer Was Improper on Demurrer
Deutsche Bank argued below that the TAC alleges facts that would make the original grant deed voidable, not void. In its demurrer, Deutsche Bank stated that it was a bona fide encumbrancer, and that since a voidable transaction is subordinate to the rights of a bona fide encumbrancer, Johnson had no potential claims against Deutsche Bank. The trial court agreed with this argument, concluding that Deutsche Bank was a bona fide encumbrancer and was not affected by a voidable instrument. It therefore sustained the demurrer without leave to amend.
We reverse. In ruling on a demurrer, a court is not permitted to make factual findings. (Mink v. Maccabee (2004) 121 Cal.App.4th 835, 839.) Given the allegations as pleaded, the issue of whether Deutsche Bank was a bona fide encumbrancer requires a factual determination. Deutsche Bank's demurrer as to the quiet title and cancellation causes of action should have been overruled.
"A deed is void if the grantor's signature is forged or if the grantor is unaware of the nature of what he or she is signing." (Schiavon v. Arnaudo Brothers (2000) 84 Cal.App.4th 374, 378.) Such a deed is void ab initio and cannot be made the foundation of a good title, even by a bona fide encumbrancer. (Bryce v. O'Brien (1936) 5 Cal.2d 615, 616; Wutzke v. Bill Reid Painting Service, Inc. (1984) 151 Cal.App.3d 36, 43.)
Since we find that Johnson sufficiently alleged facts to state claims on the basis that original grant deed was voidable, we need not examine whether Johnson's allegations would have been adequate solely under the theory that the original grant deed was void ab initio.
On the other hand, a deed obtained where the grantor is aware of what he or she is executing, but has been induced to do so by fraudulent misrepresentation or undue influence, is merely voidable. (Fallon v. Triangle Management Services, Inc. (1985) 169 Cal.App.3d 1103, 1106.) It can be relied upon by a bona fide encumbrancer. (Ibid.) "A good faith encumbrancer for value who first records takes its interest in the real property free and clear of unrecorded interests." (First Fidelity Thrift & Loan Assn. v. Alliance Bank (1998) 60 Cal.App.4th 1433, 1440 (First Fidelity).)
"[A] 'good faith' encumbrancer is one who acts without knowledge or notice of competing liens on the subject property." (Brock v. First South Savings Assn. (1992) 8 Cal.App.4th 661, 667 [original italics omitted].) The absence of notice is an essential requirement for deeming someone a bona fide encumbrancer; either actual or constructive notice can defeat bona fide status. (See 612 South LLC v. Laconic Limited Partnership (2010) 184 Cal.App.4th 1270, 1278.) "A person generally has 'notice' of a particular fact if that person has knowledge of circumstances which, upon reasonable inquiry, would lead to that particular fact." (First Fidelity, supra, 60 Cal.App.4th at p. 1443.)
Although recording creates a conclusive presumption of notice of the contents of the recorded document (Civ. Code, § 1213), notice may arise in other ways. A subsequent encumbrancer may not interpret ambiguities in the record in its own favor or "ignore reasonable warning signs that appear in the recorded documents." (Triple A Management Co. v. Frisone (1999) 69 Cal.App.4th 520, 531.) Further, an encumbrancer cannot ignore information that comes to it outside of the recorded chain of title if that information puts the encumbrancer "on notice of information that reasonably brings into question the state of title reflected in the recorded chain of title." (Ibid.)
In light of these multiple considerations, it follows that the determination of whether a party is a bona fide encumbrancer is generally a question of fact. (Triple A. Management Co. v. Frisone, supra, 69 Cal.App.4th at p. 536; Asisten v. Underwood (1960) 183 Cal.App.2d 304, 311; Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238, 1254.) The allegations of the TAC here are not the sort that would lead us to depart from this general rule, as they do not plainly reveal that Deutsche Bank was a bona fide encumbrancer. Rather, the TAC contains allegations that, depending on the evidence, could lead a trier of fact to reasonably conclude that Deutsche Bank had constructive notice of Johnson's interest in the property. Whether an encumbrancer "had sufficient information to prompt a reasonable person to make a further investigation and, thus, whether notice is to be implied, is a question of fact." (5 Miller & Starr, Cal. Real Estate (3d ed. 2009) § 11:81, pp. 11-245 to 11-246; Northwestern P. C. Co. v. Atlantic P. C. Co. (1917) 174 Cal. 308, 312 ["Whether a party has notice of 'circumstances sufficient to put a prudent man upon inquiry as to a particular fact,' and whether 'by prosecuting such inquiry, he might have learned such fact' (Civ. Code, sec. 19), are themselves questions of fact to be determined by the jury or the trial court"].)
Johnson has pleaded facts that show there may have been "warning signs" in the recorded documents sufficient to prompt a reasonable inquiry. Most prominent among these was the apparent discrepancy in the chain of title, which showed a grant deed from Johnson in favor of "Buyers Market Realty Services Corp." (BMRS), then shortly afterward showed a transfer from a different company, "Buyer's Market Real Estate Services Incorporated" (BMRESI), to Gallaher, with no transfer from BMRS to BMRESI in between. Deutsche Bank's argument that BMRS and BMRESI were alleged to be alter egos and therefore it did not matter what entity's name was on each deed misses the mark—the deeds themselves did not state that the companies were alter egos. And Deutsche Bank's further argument that the discrepancy may have been a mere clerical error implicates a factual question. Moreover, the rapid, multiple conveyances and potentially steep appreciation of the property's stated value also could weigh in favor of a finding that Deutsche Bank had constructive notice. (See Asisten v. Underwood, supra, 183 Cal.App.2d at pp. 309-310 [payment of $6,000 for property worth $14,000 and unusual haste required to close the sale were factors in finding that buyer was required to investigate or be subject to true owner's claim of fraud]; 5 Miller & Starr, Cal. Real Estate, supra, § 11:81, pp. 11-248 to 11-249 ["The fact that a buyer is purchasing, or that a prior party in the chain of title purchased, the property for a price considerably less than its value may be a factor that is sufficient to charge the buyer or encumbrancer with notice of claims or interests of third persons in the purchased property that would have been discovered by an investigation"].)
Johnson's continuous possession of the property may also factor into the determination of whether Deutsche Bank had constructive notice. Possession of property that is inconsistent with the record title generally is enough to put an encumbrancer on inquiry. (Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 366.) Deutsche Bank notes that a rider to the Impac deed of trust (attached as an exhibit to the TAC) deleted a requirement for Gallaher to live on the property, and argues that since Gallaher did not need to live on the property, possession by another person would not have been inconsistent with record title. This is a compelling argument that may be raised again as the case progresses. However, given the facts alleged, in which the record title may have contained substantial warning signs, Johnson's continuous possession of the property potentially could contribute to a finding that Deutsche Bank should have investigated the state of title. (See Gates Rubber Co., at p. 366 ["The circumstances of each case dictate whether an inquiry should be made, a determination which ordinarily involves a question of fact"]; Asisten v. Underwood, supra, 183 Cal.App.2d at p. 309 ["It is a general rule that possession of real property is constructive notice to any intending purchaser or encumbrancer of the property of all the rights and claims of the person in possession which would be disclosed by inquiry"].) Additionally, Johnson points out that the TAC alleges he recorded a lis pendens against the property in January 2008, which could also potentially weigh in favor of constructive notice, depending on when Deutsche Bank obtained the deed of trust. Thus, taking Johnson's allegations as true, they do not support the conclusion that Deutsche Bank was a good faith encumbrancer.
B. Deutsche Bank's Other Arguments for Affirmance Fail
Deutsche Bank's argument that Johnson's case merely alleges a partnership dispute with Barnett and does not potentially affect title to real property is not convincing. BGJAssociates v. Superior Court (1999) 75 Cal.App.4th 952, 970, the authority cited to by Deutsche Bank as support for this argument, is inapposite. That case involved a business arrangement gone wrong. The plaintiffs entered into a joint venture with the defendants to buy a specific parcel of real property, and the defendants wrongfully acquired the property in their own names. The court found that though plaintiffs were potentially entitled to a constructive trust, they were not entitled to a lis pendens on the property. (Ibid.)
In the instant case, it is alleged that the plaintiff owned and lived on the subject property, and that he lost title to the property through fraud. Barnett's statements that Johnson could enter into a business partnership were alleged to be part of the fraudulent scheme to divest Johnson of his property. These allegations comprehend conduct going far beyond a partnership dispute.
Deutsche Bank's further argument that Johnson had unclean hands falls outside the scope of the allegations, as it imposes an unpleaded, culpable state of mind on Johnson. Such an argument is not proper on demurrer. (See Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970 [unclean hands is a question of fact].) Nor is the lack of allegation of tender by Johnson fatal to his claim for cancellation. (Weger v. Rocha (1934) 138 Cal.App. 109, 116-117.)
In sum, reading the TAC as a whole and considering each of its allegations, we find that Johnson's claims against Deutsche Bank for quiet title and cancellation were sufficiently pleaded. We therefore reverse the trial court's order dismissing these causes of action against Deutsche Bank.
II. The Provident Demurrer
A. Negligence
Provident contends it cannot be liable under a negligence theory because it owes no duty to Johnson. The trial court agreed. On appeal, Johnson argues that the TAC's allegations that "documentation in Provident's loan file dated after the purported BMRS Grant Deed indicate[d] that Johnson is the owner of the Property," in combination with the allegations analyzed above, were sufficient to give rise to a duty of care running from Provident to Johnson. Johnson claims that Provident breached it duty by recording two encumbrances against the property and disbursing the equity to scam artists.
"The threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against unintentional invasion. [Citations.] Whether this essential prerequisite to a negligence cause of action has been satisfied in a particular case is a question of law to be resolved by the court." (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 397.) Courts invoke the concept of duty "to limit the otherwise potentially infinite liability which would follow every negligent act." (Dillon v. Legg (1968) 68 Cal.2d 728, 739.)
In support of his argument that Provident owed him a duty, Johnson relies primarily on Sun 'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671 (Sun 'n Sand). Sun 'n Sand dealt with the "recurring theme" of a plaintiff employer seeking to recover funds embezzled by its employee through the manipulation of company checks. (Id. at p. 678.) By trickery, the employee obtained authorized signatures on small-sum checks payable by the plaintiff in favor of the defendant bank. The employee then altered the checks by increasing the amount payable, and presented them to the bank. Although the bank was the named payee, it permitted the proceeds of the checks to be deposited in the employee's personal account at the bank. (Ibid.)
After discovering the fraudulent conduct, the plaintiff sued the bank for negligence and other claims. In reversing a sustained demurrer, the California Supreme Court noted that foreseeability of risk is the "chief element" in determining whether a duty is owed by the defendant to the plaintiff. (Sun 'n Sand, supra, 21 Cal.3d at p. 695.) The court found that the employee's successful requests for the bank to credit her with the proceeds of the checks written in favor of the bank were sufficiently suspicious to give rise to a duty. (Id. at pp. 694-695.)
This duty, however, was "narrowly circumscribed." (Sun 'n Sand, supra, 21 Cal.3d at p. 695.) "[I]t is activated only when checks, not insignificant in amount, are drawn payable to the order of a bank and are presented to the payee bank by a third party seeking to negotiate the checks for his own benefit. Moreover, the bank's obligation is minimal. We hold simply that the bank may not ignore the danger signals inherent in such an attempted negotiation. There must be objective indicia from which the bank could reasonably conclude that the party presenting the check is authorized to transact in the manner proposed. In the absence of such indicia the bank pays at its peril." (Id. at pp. 695-696.)
Johnson seeks to expand the holding of Sun 'n Sand to apply to the facts alleged here. We decline to do so, since such an expansion would conflict not only with the narrow holding of Sun 'n Sand, but also with the narrow application the opinion has received. For example, in Software Design & Application, Ltd. v. Hoefer & Arnett, Inc. (1996) 49 Cal.App.4th 472 (Software Design), the plaintiff sued banks and brokerage firms for losses he suffered after his financial advisor established brokerage accounts with the plaintiff's funds using falsified papers and a fictitious partnership, and then transferred the funds to bank accounts also set up under the fictitious partnership's name. The Court of Appeal affirmed the order sustaining the defendants' demurrers to the negligence claim, finding that the "primary flaw" in the plaintiff's negligence theory was that he was not a customer of the defendants. (Id. at p. 478.) The court noted how recent cases "held that absent extraordinary and specific facts, a bank does not owe a duty of care to a noncustomer." (Id. at p. 479.) Although Sun 'n Sand and like cases represented an exception to the general rule, the "danger signals triggered in these cases all stemmed from the particular circumstances of the checks, endorsements or depositors, where the person attempting to negotiate the check is not the payee." (Software Design, at pp. 480481.)
Rodriguez v. Bank of the West (2008) 162 Cal.App.4th 454 came to a similar conclusion as Software Design. In the case, a lawyer's office manager forged the lawyer's signature and opened bank accounts in the lawyer's name, then deposited client funds into the bank accounts and stole the money. The lawyer sued the office manager and the banks in which the accounts were opened. The banks demurred, arguing that the lawyer was not their customer and they did not owe him a duty of care. The trial court agreed, and the Court of Appeal affirmed. (Rodriguez, at p. 457.) The court found that the allegations at issue were substantively the same as those in Software Design, and held "[a]lthough the banks in both cases might upon further inquiry have discovered the fraudulent nature of the thieves' actions, the point is that in neither case did the bank owe a duty to a stranger—the fictitious partnership in Software Design or Rodriguez in our case—because the strangers had no contractual relationship with the banks." (Rodriguez, at p. 466.) Other California cases with allegations much more similar to those in Sun 'n Sand than the ones presented here have also found that duty was lacking. (See, e.g., Karen Kane, Inc. v. Bank of America (1998) 67 Cal.App.4th 1192; Burns v. Neiman Marcus Group, Inc. (2009) 173 Cal.App.4th 479.)
Arguing against the prevailing application of the law, Johnson cites to a federal district court case from Mississippi, Lott v. Garner (S.D. Miss. 2007) 2007 U.S. Dist. LEXIS 71701, in which the court denied a motion to dismiss brought by a mortgage company sued for wrongfully issuing a loan to a defendant who tricked the plaintiff into quit-claiming her home to him. In a short memorandum opinion, the court found that the plaintiffs alleged facts from which the court could infer a "special relationship" between the plaintiff and the mortgage company sufficient to create a duty to warn. (Id. at p. 4.) We are, of course, not bound by the federal court's ruling (Kirchmann v. Lake Elsinore Unified School Dist. (2000) 83 Cal.App.4th 1098, 1105) and, in any event, do not find it compelling. Although the case cites to Sun 'n Sand and Software Design, it contains no explanation of how the facts alleged fit within the narrow rule established by Sun 'n Sand and its progeny.
Johnson's allegations do not fall within Sun'n Sand's narrow rule. He does not allege that he was a customer of Provident. Nor does he allege that checks payable to Provident were presented by a third party seeking to negotiate the checks for his own benefit. (See Sun 'n Sand, supra, 21 Cal.3d at pp. 695-696.) Indeed, the TAC contains no allegations of any fraudulently presented checks.
Assuming that there could be circumstances in which the reasoning of Sun 'n Sand would apply to a bank's negligent facilitation of the stripping of equity by a third party bad actor, this is not one of them. Sun n' Sand emphasized the fact that the potential fraud was apparent on the face of the checks themselves, as the checks were not written by or in favor of the third party seeking to negotiate them for her own benefit. (Id. at p. 696 [the bank's agent "need only read what appears on the face of the check to be warned that a fraud may be in progress"]; see also Joffe v. United California Bank (1983) 141 Cal.App.3d 541, 556 [face of the check itself presented danger signals]; Burns v. Neiman Marcus Group, Inc., supra, 173 Cal.App.4th at p. 492 [distinguishing Sun 'n Sand, in which "there was no discernable reason for the bank's action in allowing checks, payable to the bank, to be deposited into the employee's personal account," from "Neiman Marcus's acceptance of [unauthorized] third party checks, payable to Neiman Marcus, in satisfaction of a customer's legitimate debt to the store for the purchase of goods"].) None of Johnson's allegations rises to that level of obvious impropriety. Gallaher was the apparent owner of the property when Provident made its loans and recorded the deeds of trust. Although Provident may have discovered suspicious circumstances by performing a deeper inquiry, Sun 'n Sand does not impose such an obligation. Accordingly, we affirm the trial court's order sustaining the demurrer to the negligence cause of action without leave to amend.
Johnson's cause of action for violation of Business and Professions Code section 17200 (section 17200) is similarly untenable. In his opening brief, Johnson states that a "reasonable investigation by Provident would have revealed that Gallaher held no valid title to Johnson's property, and that no loans issued to Gallaher should have been secured by the property." Johnson contends that Provident's encumbrance of the property in the face of affirmative indications of fraud is an unfair business practice under section 17200. For its part, Provident argues that Johnson's injury was caused by Johnson himself and Barnett, not Provident, and that Provident cannot be liable under section 17200 for failing to investigate the alleged signs of fraud committed by others. Based on the TAC's allegations, Provident has the better argument.
A section 17200 claim "is not an all-purpose substitute for a tort or contract action." (Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 173.) Instead, it is an equitable action intended to prevent unfair business practices and restore money or property to victims of such practices. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1150.) Section 17200 defines "unfair competition," in pertinent part, as "any unlawful, unfair or fraudulent business act or practice." The law encompasses a broad scope of conduct, covering business practices that are "unfair," even if technically not "fraudulent" or "unlawful." (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.) The scope of practices covered by section 17200, though, is not unlimited. (Cel-Tech, at p. 182.)
The type of business activity considered "unfair" in a consumer lawsuit has been the subject of some dispute. Camacho v. Automobile Club of Southern California (2006) 142 Cal.App.4th 1394 (Camacho), relying on section 5 of the Federal Trade Commission Act (15 U.S.C. § 45(n)), enunciated a definition of "unfair" followed in a number of cases and cited to by both parties here. Camacho stated that to find conduct "unfair," "(1) The consumer injury must be substantial; (2) the injury must not be outweighed by any countervailing benefits to consumers or competition; and (3) it must be an injury that consumers themselves could not reasonably have avoided." (Camacho, supra, at p. 1403.) Johnson argues that he pleaded facts that fit within this definition.
We find that he did not. Camacho noted that, in order to satisfy the first prong of substantial consumer injury, the injury must be caused by the allegedly unfair practice. (Camacho, supra, 142 Cal.App.4th at p. 1406.) As argued by Provident and as shown by the allegations in the TAC, Johnson's injury was caused by Barnett and his cohorts and arose from Johnson's unfortunate trust in Barnett. To the extent that Johnson's perilous situation was made even more difficult due to Provident's failure to investigate, this was not conduct that would support a section 17200 action.
Johnson does not allege that he had any personal dealings with Provident. Rather, Provident entered the picture only after the grant deed purporting to transfer the property to BMRS was recorded and the later grant deed purporting to transfer the property to Gallaher was recorded. A section 17200 claim cannot be predicated upon Provident's alleged careless facilitation of the latter stages of Barnett's scheme. "A defendant's liability must be based on his personal 'participation in the unlawful practices' and 'unbridled control' over the practices that are found to violate section 17200 or 17500." (Emery v. Visa Internat. Service Assn., (2002) 95 Cal.App. 4th 952, 960.) Although courts have held that section 17200 liability can be imposed against one who aids and abets a violation (see, e.g., People v. Toomey (1984) 157 Cal.App.3d 1, 15; Schulz v. Neovi Data Corp. (2007) 152 Cal.App.4th 86, 93), the defendant must have had actual knowledge of the specific primary wrong it substantially assisted. (Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1145.)
The TAC does not contain allegations that could support a section 17200 claim against Provident. Originating loans, recording encumbrances, and selling loans are not acts that, by themselves, are unfair. If Provident were to be liable, it would be through assisting Barnett and his accomplices, whose actions were the primary cause of Johnson's injury. But Provident did not knowingly participate in Barnett's scheme to divest Johnson of his property and then strip it of its equity. Johnson's case against Provident is premised on the assertion that Provident did not perform a reasonable investigation.Similar allegations have been found insufficient to state a section 17200 claim. (See Casey v. U.S. Bank Nat. Assn., supra, 127 Cal.App.4th at p. 1154 [allegations that banks allowed corporation's directors and officers to open accounts with invalid tax identification numbers and in names of sham entities, allowed obviously forged negotiable instruments to be paid, and allowed other highly suspicious activity were insufficient to state section 17200 claim]; Schulz v. Neovi Data Corp., supra, 152 Cal.App.4th at p. 97 [allegations that Paypal knew website was an illegal lottery but agreed to let site use its payment system were insufficient to show Paypal's knowledge or substantial assistance or encouragement].) Provident's alleged unfair activity was too remote from Johnson's injury to form the basis of a valid section 17200 claim.
Although the TAC contains a brief, unclear, and conclusory assertion that Provident sold or transferred a loan despite knowledge of its fraudulent nature, this bare contention is not sufficient to avoid demurrer. We do not consider contentions, deductions, or conclusions of fact or law in reviewing the sufficiency of a complaint. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
C. Amendment Is Not Warranted
There does not appear to be any reasonable possibility that Johnson can amend his complaint to satisfy the deficiencies in the causes of action asserted against Provident. In his appellate papers, Johnson suggested several ways in which his allegations against Deutsche Bank could be amended. As it turns out, these suggestions were unnecessary, since Johnson sufficiently pleaded the claims at issue. In contrast, Johnson has not suggested any manner in which he could cure the deficiencies in his pleading against Provident, and we do not discern such a possibility ourselves. We thus find that Johnson should not be given the opportunity to amend his claims against Provident. (See Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 711 [to be allowed opportunity to amend, plaintiff must show how complaint can be amended].)
Even if Johnson were granted leave to amend his section 17200 cause of action, he would face another hurdle. A glaring deficiency in Johnson's claim (which has gone unbriefed by the parties) is his asserted choice of remedies. The TAC does not request injunctive relief, but seeks damages and restitution. Damages may not be recovered under section 17200. (Korea Supply Co. v. Lockheed Martin Corp., supra, 29 Cal.4th at p. 1144.) Further, when it comes to restitution, "an individual may recover profits unfairly obtained to the extent that these profits represent monies given to the defendant or benefits in which the plaintiff has an ownership interest." (Id. at p. 1148.) "The object of restitution is to restore the status quo by returning to the plaintiff funds in which he or she has an ownership interest." (Id. at p. 1149.) The TAC does not contain any facts stating how Johnson has an ownership interest in the "fees, commissions, and other compensation" allegedly collected by Provident.
DISPOSITION
The order dismissing Deutsche Bank is reversed. The case is remanded for further proceedings on Johnson's causes of action against Deutsche Bank for quiet title and cancellation. The order dismissing Provident is affirmed. The parties are to bear their own costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
BOREN, P.J.
We concur:
DOI TODD, J.
CHAVEZ, J.