## Facts

- A residential lender funded nine purchase-money loans on Bay Area homes after receiving appraisals, title/escrow documents, and other loan materials represented as accurate.
- The lender alleged a coordinated scheme led by an appraiser/broker and aided by title/escrow personnel to induce the loans through false borrower identities, fabricated income and deposit verifications, and inflated appraisals.
- The lender alleged title-related documents misdescribed certain properties (including representing them as multi-unit dwellings when they were not) and misrepresented that escrow requirements and cash deposits/disbursements had been completed.
- The lender relied on these representations and funded the loans at inflated values; all loans later defaulted.
- For loans it still held, the lender conducted nonjudicial foreclosures and made full credit bids (bidding the entire unpaid loan balances) to acquire the properties.
- After foreclosure, the lender discovered the properties were worth significantly less than represented and sued nonborrower participants (including title companies) for intentional and negligent misrepresentation and related fraud-based claims.

## Issues

1. Whether a lender’s full credit bid at a nonjudicial foreclosure sale categorically bars fraud claims against nonborrower third parties who allegedly induced the lender to make the loans and the full credit bids.
2. Whether the full credit bid rule, associated with anti-deficiency policies, can be used by alleged independent tortfeasors to defeat fraud liability at the pleading stage.
3. Whether alleged lender negligence and the act of making full credit bids negate justifiable reliance, causation, or damages as a matter of law.

## Decision

- The California Supreme Court affirmed the Court of Appeal and held that a lender’s acquisition of the security property by full credit bid does not, as a matter of law, preclude fraud actions against nonborrower third parties who allegedly induced the loans.
- The Court ruled that the trial court erred in granting judgment on the pleadings for the title-company defendants based on the full credit bid rule.
- The Court held that justifiable reliance, causation (including whether the fraud caused the full credit bids), and the existence and amount of loss generally present factual questions not resolvable on the pleadings.

## Legal Principles

- The full credit bid rule deems the secured debt satisfied as between lender and borrower for foreclosure/deficiency purposes, but it does not automatically eliminate tort damages caused by third-party fraud.
- Anti-deficiency and full-credit-bid policies governing borrower–lender relations are not intended to shield independent wrongdoers from liability for fraudulent conduct.
- In an intentional misrepresentation action, a plaintiff’s negligence in failing to discover falsity is not a complete defense; justifiable reliance is typically a fact issue.
- A lender may plead and prove that misrepresentations about value, condition, or title caused overfunding at origination and also caused the lender to make full credit bids, supporting causation and damages.
- Fraud damages are measured by actual loss under the out-of-pocket rule, focusing on what the plaintiff gave versus what it received at the time of the transaction, not solely on later foreclosure mechanics.

## Conclusion

A lender’s full credit bid at a nonjudicial foreclosure sale does not categorically bar fraud claims against nonborrower third parties whose misrepresentations induced the loan and allegedly influenced the bidding decision; reliance, causation, and out-of-pocket loss ordinarily must be resolved on the facts rather than on the pleadings.


Alliance Mortg. Co. v. Rothwell, 10 Cal. 4th 1226 (Cal. 1995)