Revision changes critical words in comment
Daily Development for Tuesday, September 28,
Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
Thanks to Paul Carey of Pircher, Nichols for
MORTGAGES; FORECLOSURE; TORTIOUS INTERFERENCE
WITH CONTRACT: Despite general rule
that a party cannot be liable for conspiring to interfere with its own contract,
a borrower that uses a controlled entity to acquire a senior lien against its
own property, and then uses that entity to foreclose on the property and thus
eliminate junior liens, may be guilty, of tortious conspiracy with the entity to
interfere with its loan agreement with the junior lender.
Webber v. Inland Empire Investments, 1999 WL
682081 (Cal. App. 1999)
This fascinating but complex case resulted in
a verdict of $1.25 million in damages, another $100,000 in punitive damages, and
$83,000 in attorney's fees, all resulting from an attempt to eliminate a junior
lien through a controlled foreclosure.
Forecast, a corporation wholly owned by one
Prevetti, acquired certain property from Hyatt. It borrowed some of the purchase
money on a first lien basis from Sanwa Bank, but Hyatt took back a seller's
purchase money lien for a portion of the balance of the purchase price. Hyatt
recorded its lien second, and the court assumes that this resulted in junior
lien priority for Hyatt (although good practice probably would have included a
clear contractual agreement as to priority here.)
Webber ultimately acquired the Hyatt note and
deed of trust.
Three years after acquisition of the
property, although Forecast had the financial resources to pay the first lien
note, it elected to embark on a course of action to eliminate the junior lien
held by Webber without paying it. Forecast transferred the mortgaged property to
a corporation controlled by Preveti. Then it caused still another company
controlled by Preveti to acquire the note and deed of trust from Sanwa Bank.
Then the new owner of the note and deed of trust foreclosed, wiping out the deed
of trust owned by Webber. Because the Webber note was a purchase money mortgage,
Forecast argued that it was barred from collecting a deficiency following the
foreclosure of its deed of trust, so effectively Webber was wiped out
Ultimately, when all of this was uncovered,
Webber sued for restoration of his note and deed of trust against the property
and for damages. The court concluded that the controlled corporation that
acquired the note had acted as the alter ego of Forecast's owner. Further, this
same owner controlled the title holder. Consequently, the foreclosure action was
a "sham foreclosure," in the words of the court, and it issued a
declaratory ruling that the foreclosure be reversed as to Webber.
In another cause of action, Webber sued for
tortious conspiracy to interfere with contract. Here, the jury awarded Webber
the amount of the note as damages. The
jury found, however, that the conduct of some of the corporate defendants was
not wrongful, and the judgment was entered only against Preveti and two of the
corporations. Several of the corporations, in fact were able to recover
attorney's fees of over $83,000 as a consequence of the finding of non-liability
here. In light of this damages award, the court required Webber to elect for damages or for the
mortgage reestablished as described above, and he elected for the damages.
This appeal followed.
Forecast and its related corporate defendants
argued that if the two corporations were really "alter egos" of Mr.
Preveti, then they couldn't be liable for conspiring together, as one of them,
Forecast, was the contracting party with Weber, and there is a doctrine that a
party cannot be liable for conspiring to violate its own contract. Rather, the
appropriate remedy is breach of contract rather than tortious interference.
The court disagreed. It noted authority
holding that owners, managers and advisors of corporations can be found liable
in tort as third parties in tortious interference cases when they were not
acting to protect the interest of the contracting party. But here, the court
goes further, and concludes that it does not have to inquire whether Preveti was
acting in the interest of the contracting party, Forecast. Rather, the court
holds that all that must be shown is the fact of the common ownership and
control relationship and "that an inequitable result will follow if the
acts are treated as those of the corporation alone."
Forecast then argued that the corporate owner
of the note did not violate any contract expectation on the part of Webber when
it did only what it was legally entitled to do - that is to acquire a note and
foreclose on the related deed of trust. Indeed, there is authority in some
jurisdictions that there cannot be tortious interference in contract when the
alleged interference consists only of the performance of perfectly legal acts.
But the argument did not work with the California court here. Although one would
think that the issue was a matter of law, the court simply concluded that the
question of wrongfulness is a jury questioned resolved here by the verdict.
One case where the argument did work was the
case of Sanwa, which may have had some knowledge of the conspiracy when it sold
the note to Preveti's controlled corporation. But because it had every right to
capitalize upon its ownership of the note and get it paid, Sanwa was held not
liable for tortioius interference carried out by others.
Forecast's next argument was that Webber was
barred by the antidefiency laws from recovery a judgment in the amount of the
note in light of the fact that Webber's note was a purchase money mortgage,
which is absolutely barred from deficiencies under Cal Civ. Code 580b. They
proceeded from this to argue that there could be no tortiouis interference
because Webber had no contract expectation. The
court actually agreed with Forecast that the antideficiency bar applied here,
and did not apply the "special circumstances" exception of Spangler v.
Memel that one might think would apply. But the court stated that the policies
behind the antideficiency schemes do not bar a suit based upon fraud.
Although the court doesn't really explain why
the particular fraud claims here would appropriately be separate from the
antideficiency policies, it concludes that the policies do not bar the claims.
Finally, Forecast argued that the property
lacked sufficient value over the first lien to support a damages award of $1.25
million. The court, however, pointed to a stipulation at the outset of the case
that Forecast had the resources to pay the senior note when this all happened.
Had it done so, of course, the second mortgage would have had first lien status,
and there would have been plenty of value to cover it. Although the court finds
that the "causation and value issues" are not completely clear, there
was sufficient evidence to support the juries conclusion that, but for the
tortious interference, Webber would have acquired the $1.25 million value of its
Comment 1: The use of the tort remedy gave
the plaintiff enormously more clout here. But was it appropriate? There were
certainly warranties in the junior mortgage that prohibited the mortgagor from
interfering with the lien of that mortgage. Wouldn't these warranties have been breached by the attempt to
circumvent the junior mortgage by acquiring and foreclosing the first mortgage?
Comment 2: By definition, when the debtor
acquires a note against itself, the note is extinguished. This is also true when
an alter ego of the debtor acquires the note. If the note was extinguished, then
the foreclosure of the mortgage securing the note was a nullity. If that is the
case, then the junior suffered no damages by definition. Why didn't that theory
Comment 3: (For California mavens only.) Once
the court concludes that this is a 580b situation, how does in conclude that
fraud provides an exception? Fraud may be an exception when the fraud causes
damages that reduce the amount that can be recovered from the property. This
makes it equitable to lift the prohibition on deficiencies to the extent of the
injury caused by the fraud. But in this case the court of appeals used the
allegation of fraud to lift the antideficiency protection entirely. California's
antideficiency policy has been chewed up pretty thoroughly in California in
recent years, but there should have been enough left to prevent this result.
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