Filed 5/5/20 David v. Capital One, N.A. CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

EDUARDO DAVID et al.,

Plaintiffs and Appellants,

v.

CAPITAL ONE, N.A. et al.,

Defendants and Respondents.

D076003

(Super. Ct. No.

37-2018-00019908-CU-NP-CTL)

APPEAL from a judgment of the Superior Court of San Diego County, Joel. R.

Wohlfeil, Judge. Affirmed.

Law Office of Terence J. Mix and Terence J. Mix for Plaintiffs and Appellants.

Severson & Werson and Jan T. Chilton, Loren Wade Coe for Defendants and Respondents.

Appellants Eduardo and Maria-Stela David sued Capital One, N.A., whose successor is ING Bank (ING), and Integrated Lender Services, Inc. (Integrated), the trustee at a nonjudicial foreclosure sale (collectively respondents). The Davids alleged the bank fraudulently misrepresented the amount of cancelled debt on a federal tax form (Form 1099-C) after the bank foreclosed on their home. The Davids also asserted a cause of action for negligent breach of trustees duties against Integrated, alleging it failed to inform the Davids that their debt had been paid in full following the foreclosure sale. Respondents successfully moved for summary judgment.

The Davids appeal. We conclude their contentions are without merit and affirm.

FACTUAL AND PROCEDURAL BACKGROUND

We summarize the admissible evidence in the light most favorable to the Davids, the parties opposing the summary judgment. (See Duarte v. Pacific Specialty Ins. Co. (2017) 13 Cal.App.5th 45, 52.)

Background

In September 2006, the Davids borrowed $576,000 from ING to refinance their home loan. This loan was secured by a deed of trust on their home. In 2009, the Davids defaulted on the ING loan.

In September 2010, the foreclosure sale was held, and Integrated accepted ING’s credit bid for $625,813.79. The trustee’s deed upon sale conveying the property to ING was recorded in October 2010, and stated, “The amount of the unpaid debt together with costs was $625,813.79” and “The amount paid by the grantee at the trustee sale was $625,813.79.”

In January 2011, ING sent the Davids a Form 1099-C stating that in 2010, ING had cancelled $235,600 in debt owed by the Davids. A Form 1099-C is an Internal Revenue Service (IRS) form that creditors must file when they discharge indebtedness, including certain mortgage debt. (See 26 U.S.C. § 6050P; 26 C.F.R. § 1.6050P-1; see also Dimas v. JP Morgan Chase Bank, N.A. (N.D. Cal. 2018) [2018 WL 809508 *1, 8].) It is a reporting tool designed to assist the IRS in tracking lenders’ debt forgiveness, which can sometimes constitute taxable income to the borrower. (Ibid.; see F.D.I.C. v. Cashion (4th Cir. 2013) 720 F.3d 169, 180.)

Upon reviewing the Form 1099-C, Mr. David became very upset about the substantial amount of the claimed cancelled debt. He and his wife suffered emotional distress at the fear of paying taxes on the cancelled debt stated therein. They obtained an extension to file their taxes, and in September 2011, gave the Form 1099-C to their accountant. He completed their tax returns in October 2011, and at that time the Davids learned they did not owe any taxes for the claimed cancelled debt. Their emotional distress ceased at that time. Mr. David did not have any communications with the IRS about the Form 1099-C. The IRS has never contacted the Davids about paying any taxes for any cancelled debt pertaining to the foreclosure. They have never paid any taxes related to the amount stated on the Form 1099-C.

In July 2015, the Davids received an unsolicited letter from attorney Terence Mix, which they claim they never opened until March 2018. Mix claimed that ING had sent an “improper” Form 1099-C.

Complaint

In April 2018, the Davids (represented by attorney Mix) filed a complaint against respondents for negligent breach of trustee duties and fraudulent misrepresentations. A copy of the trustee’s deed upon sale was attached to the complaint.

On the fraud claim, the Davids alleged that in the Form 1099-C issued in January 2011, ING fraudulently represented that the Davids owed $235,600 as of October 29, 2010, despite the fact ING had cancelled that amount in principal debt. They claimed they did not owe that amount on any date after the September 17, 2010 foreclosure sale, when the debt was paid in full. The Davids claimed ING knew its representations were false but made them “with the intent to defraud [them], to induce them to accept said misrepresentations as true, and thus not challenge said purported cancellation of debt with the IRS or any other federal agency.”

The Davids further alleged they did not know the representations on the Form 1099-C were false; but believing them to be true, they “justifiably and reasonably relied upon [respondents’] representations.” The Davids claimed they “were and are not knowledgeable about income tax matters and have no expertise in the area of taxation and the foreclosure of real estate; that they reasonably assumed that a major national bank, with all of its resources, including experts on taxes and real estate, would know all of the rules and laws and would not have made the cancellation of debt if not allowed under the law[.]” They alleged that “[a]s a legal and proximate result” of respondents’ fraudulent misrepresentations and the issuance of the Form 1099-C, they “sustained economic damages in an amount not currently known,” and emotional distress damages.

Respondents unsuccessfully demurred to the complaint. They next answered the complaint and asserted a statute of limitations defense.

Respondents’ Summary Judgment Motion

Respondents moved for summary judgment, arguing: (1) under IRS instructions, cancelled debt is calculated by subtracting the property’s fair market value from the principal debt owed at the time of sale but here, the full credit bid did not represent the property’s fair market value and was not used in calculating the cancelled debt; (2) the completed Form 1099-C is a privileged communication because it was made to a quasi-judicial agency, the IRS, in order for it to determine whether the cancelled debt was adequately addressed in the tax return; (3) the undisputed facts show the Davids’ claims were barred by the statute of limitations; (4) the negligence claim fails because Integrated did not owe the Davids a duty of care; (5) the fraud claim fails because the Davids cannot prove the intent-to-cause-reliance and actual-reliance elements; and (6) the Davids suffered no recoverable economic damages resulting from the claimed wrongful acts.

In support, respondents produced Mr. David’s deposition testimony in which he admitted he received the Form 1099-C from ING in January 2011. He testified that when he reviewed the form, he believed he was going to have to pay a large amount of taxes. He admitted that ultimately he was never required to pay those taxes.

Respondents also produced the Davids’ interrogatory responses, in which they denied having any contact or communication with the IRS regarding the reported cancelled debt, and acknowledged they have not been subject to an IRS audit, investigation, or demand regarding any obligation to pay taxes on the reported cancelled debt amount or on any other cancelled debt amount relating to the September 2010 foreclosure.

Respondents requested the court take judicial notice of the grant deed recorded in January 2011 and two IRS publications pertaining to Form1099-C. The IRS publications provide that financial institutions must file a Form 1099-C pertaining to debt cancellation events. A debt cancellation event includes: “A cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor’s right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a ‘power of sale’ in the mortgage or deed of trust is exercised.” The rules state lenders need only include the principal portion of the cancelled debt, and not interest or related costs.

The Davids’ Summary Judgment Opposition

In opposition, the Davids argued respondents did not meet their burden on the fraud cause of action, and/or present triable issues of fact on the merits and timeliness of this claim.

The Davids submitted supporting declarations. Mr. David’s declaration read in part: “When I received the Form 1099-C from ING in January 2011, I believed that it accurately set forth our tax obligation; that my wife and I are not knowledgeable about income tax and foreclosure matters, and have no expertise in the area of taxation and foreclosure; that I assumed that a major national bank, with all of its resources, including experts on taxes and real estate, would know all of the rules and laws and would not have made the cancellation of debt if not allowed under the law.” He added that he did not attend the foreclosure sale.

Mr. David also averred: “In January 2011, I began experiencing severe emotional distress when I initially received the Form 1099-C from ING. My emotional distress was manifested by sleepless nights several times a week over a period of 9 months; almost daily impaired ability to concentrate, which impacted me at work, resulting in several reprimands from my superior; fear that the IRS would deplete my limited remaining financial resources; impairment of my social life, withdrawing and not wanting to go out with friends; and loss of weight due to not wanting to eat. I quickly went into a state of depression, overwhelmed with a feeling of hopelessness and helplessness, as I struggled with the idea of how we could survive financially while paying off a huge tax debt through an agreement with the IRS. It was not until I received our tax returns in October 2011 that I finally felt that the nightmare was behind me and all remaining distress disappeared.” He explained their accountant had concluded “that we owed no taxes as a result of the [Form] 1099-C.”

Mrs. David’s declaration was similar. She said that in January 2011, she began experiencing emotional distress manifested by depression, frequent lack of sleep and frequent crying because she feared “that the IRS would deplete their limited remaining financial resources; impairment of my social life, withdrawing and not wanting to go out with friends; and gaining weight as a result of overeating.”

The Davids also identified their economic losses in their declarations. As detailed below, these claimed losses consisted of investigation/litigation costs incurred after attorney Mix contacted them.

Respondents’ Reply

Respondents reiterated their arguments that the undisputed facts established the Davids’ fraud claim was untimely and that the Davids lacked evidence supporting the reliance, intent-to-rely, and damage elements of their claim.

Court’s Ruling

After considering the parties’ moving and opposing papers and conducting a hearing, the court granted summary judgment in respondents’ favor. It did not rule on the statute of limitations issue, but rather relied on the United States Tax Court’s decision in Frazier v. C.I.R. (T. C. 1998) 111 T.C. 243. It reasoned: “As stated within the Frazier opinion, income will arise when the discharged amount of the debt exceeds the fair market value [FMV] of the property. In this case, the undisputed evidence demonstrates that the fair market value of the property was $425,000 such that the discharge amount exceeded the FMV. This resulted in ‘income’ reportable on a Form 1099-C. As was the case in the Frazier opinion, [the Davids fail] to offer expert testimony (or any other evidence) on the fair market value and [do] not directly challenge the accuracy of the appraisal. Instead, [they] incorrectly argue[] that the bid-in amount must be used to determine the amount realized, regardless of how arbitrarily that amount may have been determined. Therefore, [respondents] did not breach any duty that may have been owed and did not make any fraudulent representations. Summary judgment is granted on this basis and it is not necessary to address [respondents’] other arguments.”

The court entered judgment in respondents’ favor.

DISCUSSION

I. Summary Judgment Standards

A summary judgment motion “shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) A triable issue of material fact exists only if “the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.)

The issues on a summary judgment motion are framed by the pleadings. (Conroy v. Regents of University of California (2009) 45 Cal.4th 1244, 1250.) A moving defendant has the initial burden to show one or more elements of the plaintiff’s cause of action cannot be established, or that there is a complete defense to the claim. (Minish v. Hanuman Fellowship (2013) 214 Cal.App.4th 437, 444.) A moving defendant can satisfy this burden by showing “through factually devoid discovery responses that the plaintiff does not possess and cannot reasonably obtain needed evidence.” (Collin v. CalPortland Co. (2014) 228 Cal.App.4th 582, 587.)

If the defendant meets this burden, the burden shifts to the plaintiff to show the existence of a triable issue of material fact as to the cause of action or affirmative defense. (Collin v. CalPortland Co., supra, 228 Cal.App.4th at p. 588.) The plaintiff must set forth specific facts based on admissible evidence. (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476-477.) In ruling on the motion, the trial court must consider the admissible evidence and all inferences reasonably drawn from the evidence in the light most favorable to the plaintiff. (Aguilar v. Atlantic Richfield Co., supra, 25 Cal.4th at p. 843.)

“On appeal, the reviewing court makes ‘ “an independent assessment of the correctness of the trial court’s ruling, applying the same legal standard as the trial court in determining whether there are any genuine issues of material fact or whether the moving party is entitled to judgment as a matter of law.” ‘ ” (Hesperia Citizens for Responsible Development v. City of Hesperia (2007) 151 Cal.App.4th 653, 658.) Under this standard, the appellant retains the burden to show trial court error, and our evaluation is limited to the “contentions adequately raised in the [appellant’s] briefs.” (Paslay v. State Farm General Ins. Co. (2016) 248 Cal.App.4th 639, 644-645; accord, Orange County Water Dist. v. Sabic Innovative Plastics US (2017) 14 Cal.App.5th 343, 368.)

“We review the court’s ruling, not its reasoning, and we will uphold its ruling if it is correct on any theory of law applicable to the case.” (Border Business Park, Inc. v. City of San Diego (2006) 142 Cal.App.4th 1538, 1561.) We may affirm the summary judgment on any ground on which it was submitted, even if the court did not rule on that ground. (See, e.g., Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251, 1255, 1263-1264.)

II. Statute of Limitations Defense

In moving for summary judgment on the fraud claim, respondents contended the claim was barred by the three-year statute of limitations, and the Davids would be unable to prove the reliance, intent-to-rely, and damage elements of the claim. As the trial court did not rule on the statute of limitations issue, at this court’s request the Davids submitted a supplemental brief to address this contention. We conclude summary judgment was properly granted because the cause of action was untimely.

A fraud cause of action must be brought three years from accrual. (§ 338, subd. (d).) The cause of action accrues upon “the discovery, by the aggrieved party, of the facts constituting the fraud[.]” (Ibid.) A negligence claim is subject to a two-year statute of limitations. (§ 335.1.) To the extent the Davids allege wrongdoing based on respondents’ distribution of proceeds of trustee’s sale and obligation to issue a discharge certificate or reconvey under Civil Code sections 2924k, or 2941 respectively, the statute of limitations is three years. (§ 338, subd. (a).)

“An important exception to the general rule of accrual is the ‘discovery rule,’ which postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807-808 (Fox).) “A plaintiff has reason to discover a cause of action when he or she ‘has reason at least to suspect a factual basis for its elements.’ [Citations.] Under the discovery rule, suspicion of one or more of the elements of a cause of action, coupled with knowledge of any remaining elements, will generally trigger the statute of limitations period.” (Ibid.) “In other words, plaintiffs are required to conduct a reasonable investigation after becoming aware of an injury, and are charged with knowledge of the information that would have been revealed by such an investigation.” (Fox, at p. 808.)

“[T]o rely on the discovery rule for delayed accrual of a cause of action, ‘[a] plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.’ [Citation.] In assessing the sufficiency of the allegations of delayed discovery, the court places the burden on the plaintiff to ‘show diligence’ ” (Fox, supra, 35 Cal.4th at p. 808, emphasis added.)

“The discovery rule does not encourage dilatory tactics because plaintiffs are charged with presumptive knowledge of an injury if they have ‘ ” ‘information of circumstances to put [them] on inquiry’ ” ‘ or if they have ‘ ” ‘the opportunity to obtain knowledge from sources open to [their] investigation.’ ” ‘ ” (Fox, supra, 35 Cal.4th at pp. 807-808.) Belated discovery is usually a question of fact, but may be decided as a matter of law when reasonable minds cannot differ. (Blanks v. Seyfarth Shaw LLP (2009) 171 Cal.App.4th 336, 375; E Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1320.)

All of the operative dates alleged in the complaint occurred more than eight years prior to the Davids filing the action. ” ‘A defendant has the initial burden to show that undisputed facts support summary judgment based on the application of an affirmative defense’ ” like the statute of limitations. (Drexler v. Peterson (2016) 4 Cal.App.5th 1181, 1188.) Once the moving party carries its initial burden, we then decide whether the opposing party has demonstrated the existence of a triable issue of material fact. (Ibid.) The respondents satisfied this burden by showing that Mr. David admitted at his deposition and in his declaration that he received the Form 1099-C containing the allegedly inflated debt cancellation amount in January 2011, and that he immediately suffered emotional distress because he did not believe he could afford to pay taxes if this debt cancellation amount was treated as income.

On this record, the limitations period accrued in January 2011, and thus the complaint filed in April 2018 was untimely. In January 2011, the Davids had all the information that would have placed a reasonable person on notice regarding the claimed misrepresentation (wrong debt cancellation amount) on the Form 1099-C. They were on notice of all facts relevant to their current claims on that date. Mr. David testified in his deposition that he did not conduct any independent research to determine whether the cancelled debt would be part of their taxable income.

The Davids argue they had no reason to suspect wrongdoing and they were unaware of the true facts (that the debt cancellation amount was inflated) and thus had no reason to investigate until they opened Attorney Mix’s letter in April 2018. However, they presented no evidence showing what facts in Attorney Mix’s letter provided them with any additional information to support their claim. And thus the Davids did not present a triable issue for a jury.

In October 2010, Integrated recorded the trustee’s deed upon sale, which showed a total unpaid debt of $625,813.79. Because $625,813.79 (total debt) minus $625,813.79 (sale price)=$0, the proceeds from the foreclosure sale apparently satisfied the debt on the property; there was nothing for ING to forgive. Accordingly, the Form 1099-C, which reflected $235,600 in cancelled debt and was issued in January 2011, was plainly inaccurate. While the Davids are technically correct that the Form 1099-C did not reveal that the debt had been extinguished—and, therefore, the form may not have been sufficient itself to trigger a suspicion of wrongdoing—the trustee’s deed of sale did reveal that information.

However, the Davids’ complaint reveals neither when they learned the sale price of their home and the amount of the outstanding debt nor when they obtained a copy of the trustee’s deed of sale. They were required to allege those facts, and if they did not have that information when they received the Form 1099-C, to explain when they learned it and what efforts they made to discover it. (Fox, supra, 35 Cal.4th at pp. 808-809, 811 [complaint must allege specific facts supporting allegation that plaintiff did not know and could not reasonably discover that injury has occurred].) That is, the Davids were required to plead facts showing when and how they learned that the Form 1099-C was wrong as a factual matter. (See id. at p. 808 [pleading requirements for discovery rule].) As such, the Davids did not meet their burden under the discovery rule. The Davids did not meet their summary judgment burden to show how and when they learned the form was wrong for purposes of the discovery rule.

 

DISPOSITION

The judgment is affirmed. The parties are to bear their own costs on appeal.

O’ROURKE, Acting P. J.

WE CONCUR:

AARON, J.

IRION, J.