Case Name: John Phelps, et al. v. Vandyk Mortgage Corporation, et al.
Case No.: 1-14-CV-260978
Date: June 24, 2014
Time: 9:00 a.m.
Dept: 21
Currently before the Court is the demurrer of defendant VanDyk Mortgage Corporation (“VanDyk”) to the complaint of plaintiffs John Phelps and Andrew Chorlton (“Plaintiffs”). VanDyk demurs to each cause of action asserted in the complaint on the grounds that Mr. Chorlton lacks standing to sue and Plaintiffs otherwise fail to allege facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).)
Mr. Chorlton’s Claims

As an initial matter, VanDyk’s arguments concerning Mr. Chorlton’s claims lack merit and Mr. Chorlton has alleged facts sufficient to demonstrate his standing to pursue the claims at issue. Plaintiffs allege that Mr. Chorlton “lost at least $130,000 due to his investments into the fraudulent bridge loan scheme” (Complaint, ¶ 17; see also Complaint, ¶ 48 [Mr. Chorlton’s total loss without interest was $129,735.75]), and thus establish that Mr. Chorlton suffered a significant injury due to Defendants’ actions and has standing to pursue his claims. (See Blumhorst v. Jewish Family Services of Los Angeles (2005) 126 Cal.App.4th 993, 1001[“A person who invokes the judicial process lacks standing if [he or she] … does not have a real interest in the ultimate adjudication because [he or she] has neither suffered nor is about to suffer any injury of sufficient magnitude reasonably to assure that all of the relevant facts and issues will be adequately presented.”], internal citations and quotations omitted.)

To the extent that VanDyk seeks to argue that the complaint fails to allege facts sufficient to state causes of action by Mr. Chorlton outside of the standing issue, while it is true that the complaint provides more background concerning the history of Mr. Phelps’s relationship with VanDyk and the Individual Defendants (see Complaint, ¶¶ 30-34), as urged by Plaintiffs, the majority of the complaint’s allegations pertain to “Plaintiffs” collectively, and the analysis presented below with respect to each cause of action is based upon such allegations. Given that the essential allegations concerning VanDyk’s actions are identical as to both Plaintiffs, there is no basis to find that the claims brought by Mr. Chorlton fail for the simple reason that it was Mr. Chorlton rather than Mr. Phelps who brought them.

Mr. Chorlton has thus alleged facts sufficient to demonstrate his standing to pursue the claims at issue and the demurrer will not be sustained on the basis of VanDyk’s arguments concerning Mr. Chorlton’s claims.
The First Cause of Action for Fraud and the Second Cause of Action for Negligent Misrepresentation

Although allowing that “the Complaint contains myriad examples of [defendants Diane Cobb and Paul Sloan Davis’s (the “Individual Defendants”)] representations and communications” (Motion, p. 10), VanDyk contends that Plaintiffs fail to state claims for fraud and negligent misrepresentation against it because they do not allege any misrepresentations made by VanDyk directly, and thus do not plead these claims with adequate specificity.

“The requirement of specificity in a fraud action against a corporation requires the plaintiff to allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” (Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157.) Here, Plaintiffs allege that Ms. Cobb was a VanDyk employee who was acting within the scope of her duties at the time she made misrepresentations to Plaintiffs concerning the bridge loans (see Complaint, ¶¶ 20 and 24), and that defendant D.M. Financial (“D.M.”), in which Ms. Cobb and Ms. Davis were partners, was a mortgage broker representing VanDyk (Complaint, ¶¶ 22 and 23). While they allege many of the misrepresentations at issue in general terms, without stating when, where, by which of the Individual Defendants, and to which of the Plaintiffs certain statements were made (see Complaint, ¶¶ 2-5 [stating that “Ms. Cobb and Mr. Davis” made certain representations to “Plaintiffs” at unspecified times starting in 2009]), Plaintiffs identify and attach exemplary statements by Ms. Cobb and Mr. Davis that include the requisite detail (see Complaint, ¶ 2, Ex. 1 [February 10, 2009 letter from Ms. Cobb and Mr. Davis to Mr. Phelps representing nature of bridge loans and terms of investment therein, which Plaintiffs allege was also sent to Mr. Chorlton], ¶ 40, Ex. 4 [February 6, 2009 letter from Mr. Davis representing terms of bridge loans]). This is adequate to state a claim for fraud under the circumstances. (See Committee On Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 217-218 [“considerations of practicality enter in” to the determination of whether a complaint alleging numerous misrepresentations is pleaded with adequate specificity; in such cases, pleading a representative sampling of misrepresentations may be appropriate], superseded by statute on another point as stated in Californians For Disability Rights v. Mervyn’s, LLC (2006) 39 Cal.4th 223, 227.)

The demurrer to the first and second causes of action is accordingly OVERRULED.
The Third Cause of Action for Breach of Fiduciary Duty

VanDyk contends that Plaintiffs fail to allege facts supporting the conclusion that it owed them a fiduciary duty, arguing that Plaintiffs allege it is a lending institution and citing Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1093, fn.1 for the proposition that “[t]he relationship between a lending institution and its borrower-client is not fiduciary in nature.” Plaintiffs contend that VanDyk acted as their mortgage broker in connection with the events giving rise to their complaint, not their lender.

It is true that the complaint alleges that VanDyk served as a lender of first mortgages to the third-party bridge loan borrowers (Complaint, ¶¶ 4 and 18) and, earlier, to various of Mr. Phelps’s family members (Complaint, ¶¶ 32 and 33). However, a single institution can act as a lender and a mortgage broker, even with respect to a single client. (See Smith v. Home Loan Funding, Inc. (2011) 192 Cal.App.4th 1331, 1335-1336 [rejecting argument that defendant could not have acted as a mortgage broker when the loan documents at issue identified it as the lender].) Here, as discussed above, Plaintiffs allege that the Individual Defendants formed D.M. as an informal partnership or association intended to serve as a mortgage broker representing VanDyk and to arrange bridge loans for borrowers. (Complaint, ¶ 23.) They state that Ms. Cobb described VanDyk to Mr. Phelps “as a mortgage banker ‘with the ability to broker,” and VanDyk subsequently “became the mortgage broker for various members of the Phelps family.” (Complaint, ¶ 31.) More importantly, Plaintiffs allege that they directed the funds at issue in this lawsuit to VanDyk through the Individual Defendants. (Complaint, ¶¶ 5 and 42.) Thus, while Plaintiffs’ complaint contains allegations pertaining to VanDyk’s activities as a lender, it is clear that VanDyk’s actions as an alleged mortgage broker, whether directly or through D.M., form the basis for Plaintiffs’ claims in this lawsuit. Mortgage loan brokers owe fiduciary duties not only to borrowers, but to lenders such as Plaintiffs, a proposition which VanDyk does not dispute. (See Barry v. Raskov (1991) 232 Cal.App.3d 447, 455 [“The broker owes [the fiduciary duty of good faith] to the lender-investor as well as to the borrower.”].)

Consequently, VanDyk’s argument that Plaintiffs fail to allege facts supporting the conclusion that it owed them a fiduciary duty lacks merit, and the demurrer to the third cause of action is OVERRULED.

The Fourth Cause of Action for Negligence
VanDyk contends that the fourth cause of action fails to state a claim because VanDyk owed no duty of care to Plaintiffs in connection with the bridge loans, while Plaintiffs argue that VanDyk took on a duty towards them through the actions of the Individual Defendants as its agents.
VanDyk does not contend that Plaintiffs were not owed a duty of care by someone in connection with the bridge loans, but rather argues that VanDyk itself does not owe such a duty given that its liability arising from its employees’ relations with third parties is limited and Plaintiffs fail to allege facts supporting the conclusion that Ms. Cobb and the other defendants were its agents with respect to the bridge loans. Here, however, Plaintiffs not only allege the ultimate fact that the other defendants acted as VanDyk’s agents with respect to the bridge loan, but they plead specific facts supporting this conclusion. (See Complaint, ¶ 23 [the Individual Defendants formed D.M. as an informal partnership or association intended to serve as a mortgage broker representing VanDyk]; ¶¶ 4 and 18 [the Individual Defendants represented to Plaintiffs that VanDyk benefited from the bridge loans because it was also lending to the borrower, typically via the first mortgage, and VanDyk in fact served as the mortgage lender for the bridge loans Plaintiffs purportedly invested in]; ¶¶ 3, 5, 36, and 38 [using VanDyk facilities and equipment, the Individual Defendants provided Plaintiffs with deeds of trust that were supposedly recorded, as well as promissory notes, property descriptions, and credit reports, and many of these documents stated that they were generated by or for VanDyk; specifically, VanDyk generated and paid for the credit reports provided to Plaintiffs and the promissory notes issued to Plaintiffs were issued on behalf of VanDyk]; ¶ 24 [the actions of the Individual Defendants with respect to the bridge loans coincided with Ms. Cobb’s duties as a branch manager at VanDyk]; and ¶¶ 5, 39, and 42 [the Individual Defendants’ representations concerning the bridge loans were made on behalf of VanDyk, Plaintiffs entrusted the funds at issue to the Individual Defendants on behalf of VanDyk, and VanDyk knew about, supported, and directly benefited from the bridge loans].)
Consequently, the Plaintiffs have adequately alleged that the other defendants acted as VanDyk’s agents with respect to the bridge loans and VanDyk’s argument that it owed Plaintiffs no duty arising from the other defendants’ actions lacks merit. (See R & B Auto Center, Inc. v. Farmers Group, Inc. (2006) 140 Cal.App.4th 327, 345-346.) (City of Industry v. City of Fillmore (2011) 198 Cal.App.4th 191, 212-213 [on demurrer, “[a]n allegation of agency is an allegation of ultimate fact that must be accepted as true”]; Garton v. Title Ins. & Trust Co. (1980) 106 Cal.App.3d 365, 376 [“Generally, an allegation of agency is an allegation of ultimate fact and is, of itself, sufficient to avoid a demurrer.”]; see also Mangindin v. Washington Mut. Bank (N.D. Cal. 2009) 637 F.Supp.2d 700, 710 [“general allegations of agency between a broker and lender are sufficient to survive a motion to dismiss on a negligence claim under California law”].)|

In light of the above, the demurrer to the fourth cause of action is OVERRULED.

The Fifth Cause of Action for Aiding and Abetting Fraud and the Sixth Cause of Action for Aiding and Abetting Breach of Fiduciary Duty

VanDyk contends that Plaintiffs fail to state claims for aiding and abetting because they do not plead any facts supporting the conclusion that VanDyk had actual knowledge of the underlying torts at issue.

“Liability may … be imposed on one who aids and abets the commission of an intentional tort if the person (a) knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person’s own conduct, separately considered, constitutes a breach of duty to the third person.” (Casey v. U.S. Bank Nat. Ass’n. (2005) 127 Cal.App.4th 1138, 1144 (hereinafter, “Casey”), internal citations and quotation marks omitted.) Here, the parties dispute whether Plaintiffs have adequately alleged knowledge in support of the first Casey theory. Under that theory, “the complaint must allege the defendant’s actual knowledge of the specific [tort] for which it seeks to hold the defendant liable,” and general allegations that the defendant knew the underlying tortfeasors were involved in wrongful or illegal conduct do not suffice. (Id. at p. 1152.)

Here, while VanDyk contends that it did not know about the bridge loans at issue, Plaintiffs allege that it did, and they plead facts supporting this conclusion, such as that Ms. Cobb was employed by VanDyk (Complaint, ¶ 20), the Individual Defendants used VanDyk facilities and equipment to carry out their scheme (Complaint, ¶ 3), VanDyk generated and paid for the credit reports provided to Plaintiffs in connection with the bridge loans (Complaint, ¶¶ 36 and 38), and the promissory notes issued to Plaintiffs were issued on behalf of VanDyk (Complaint, ¶ 5). Plaintiffs also specifically allege that VanDyk knew the loans were fraudulent (Complaint, ¶¶ 78 and 85 [“Defendants, and each of them, knew that the conduct of Ms. Cobb and Mr. Davis constituted a fraud”]), and the facts alleged by Plaintiff support this conclusion. Further, as discussed above, Plaintiffs adequately allege that the other Defendants committed the torts at issue as agents for VanDyk, and thus, their knowledge is imputed to VanDyk for purposes of Plaintiffs’ aiding and abetting claims. (See Moore v. Phillips (1959) 176 Cal.App.2d 702, 709 [stating the general rule that “notice to an officer or authorized agent of a corporation is notice to the corporation”].)

Consequently, Plaintiffs have adequately alleged the knowledge element of their aiding and abetting claim. (See Marcelos v. Dominguez (N.D. Cal., July 18, 2008) No. C 08-00056 WHA, 2008 WL 2788173, *9 [complaint adequately alleged that mortgage lender aided and abetted the fraud of its broker and his associate upon a borrower, where it was alleged that the lender: “(i) enfranchised [the broker and associate] to solicit potential borrowers; (ii) knew or should have known that [they] would divulge to potential borrowers their relationship with [the lender]; and (iii) knew or should have known that [they] were using its financing, name, and goodwill in a fraudulent scheme”].) Casey, which is relied upon by VanDyk, is distinguishable because it involved a claim that a bank aided and abetted wrongdoing by its customer rather than its employee or agent, and the plaintiff in that case alleged that the bank had general knowledge of wrongful activity rather than specific knowledge of the tort that was being committed (see Casey v. U.S. Bank National Ass’n, supra, 127 Cal.App.4th at p. 1148 [“though the complaint provide[d] ample details of the [defendants’] improper conduct in their business dealings with the [underlying tortfeasors], the complaint fail[ed] to establish that the banks had actual knowledge of the primary violation in which they purportedly participated”]).

The demurrer to the fifth and sixth causes of action is thus OVERRULED.