MERRITT v. WELLS FARGO BANK, N.A.
SALMA MERRITT et al., Plaintiffs and Appellants,
WELLS FARGO BANK, N.A., Defendant and Respondent.
Court of Appeals of California, Sixth District.
Filed December 19, 2011.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
Homeowners, husband and wife, allege that Wells Fargo Bank (Wells Fargo) conspired with others to engage in predatory lending practices related to their home loan. They filed an action against Well Fargo alleging a variety of tort and contract claims, including conspiracy to commit fraud. Wells Fargo demurred, arguing that the homeowners could not state a cause of action against Wells Fargo because it did not originate, fund, or service the loan. The trial court sustained Wells Fargo’s demurrer to the original complaint with leave to amend, but sustained the demurrer to the first amended complaint without leave to amend.
On appeal, plaintiffs and appellants David and Salma Merritt (hereafter jointly the Merritts) raise three procedural claims and one claim based on the legal merits related to the demurrer of defendant and respondent Wells Fargo.
First, they contend that, pursuant to Code of Civil Procedure section 472,1 they had the right to amend their first amended complaint any time prior to the hearing on the demurrer thereto and that, once their amendment was filed, the trial court was obligated to accept the amendment, to vacate the hearing on the demurrer, and to instruct the defendants to file further responsive pleadings. Regarding this issue of first impression, we hold that the statutory right to amend “any pleading” once without leave of court in section 472 applies only to a party’s original pleading, not an amended pleading. Consequently, the Merritts were not entitled to file an amendment to their first amended complaint as a matter of course, and were required to obtain leave of court before filing the amendment.
Second, the Merritts contend the court erred when it sustained the demurrer to the conspiracy cause of action in the first amended complaint, since it had overruled the demurrer to that cause of action in the original complaint. We hold that the court was not precluded from sustaining a demurrer to the conspiracy cause of action in the first amended complaint simply because it had previously overruled the demurrer to that cause of action in the original complaint.
Third, the Merritts argue the court committed prejudicial error when it failed to specify the grounds upon which it sustained the demurrers. We find that the court met its duty to specify the statutory grounds on which it sustained the demurrer and was not required to state its reasons for doing so.
Finally, the Merritts argue that the court erred on the legal merits when it sustained Wells Fargo’s demurrer without leave to amend. We hold that, with regard to all but one of their claims, the Merritts have failed their burden on appeal to provide this court with reasoned argument, supported by citations to the record and legal authority, which demonstrates that the court erred. We conclude, however, that the Merritts have met their burden of demonstrating error with regard to their claim for conspiracy to commit fraud and should be granted leave to amend to state such a cause of action. As we shall explain, although Wells Fargo did not originate the loan, the Merritts claim that it actively participated in a scheme through which it provided money to fund the subprime mortgages that Countrywide Home Loans (Countrywide) sold to unsophisticated, first time borrowers “with full knowledge of [Countrywide's] deceptive acts and omissions” with the intent of increasing Countrywide’s and Wells Fargo’s presence in the subprime mortgage market and increasing profits for all involved.
We will therefore reverse the judgment and direct the trial court to enter a new order: (1) sustaining Wells Fargo’s demurrer to the first and second causes of action with leave to amend to state a single cause of action for conspiracy to defraud; and (2) sustaining Wells Fargo’s demurrers to the remaining causes of action without leave to amend.
I. Initial Loan Transaction
In February 2006, the Merritts entered into a real estate purchase agreement to buy their first home, a townhouse in Sunnyvale, California, for $729,000.
After two lenders had committed to fund their loan, the Merritts contacted Michael Colyer, an employee of Countrywide for a quote. Colyer told them he could arrange for a loan with payments that were “`maybe 40 percent lower’” than what the other lenders had quoted. The Merritts completed a loan application, which stated that David’s3 annual gross income for 2006 would be $60,000 and that Salma received temporary “disability payments of $5,200″ that would decrease to $1,400 in September 2008. (The first amended complaint does not indicate the frequency with which Salma received these payments.)
On March 14, 2006, two days before the deadline to remove the loan contingency in their purchase contract, Colyer gave the Merritts a good faith estimate based on a 30-year, FHA (Federal Housing Administration) loan for $729,000 with an interest rate between one and three percent. The estimate indicated that, with a down payment of five percent, the Merritts’ monthly payments would be between $1,800 and $2,200 for principal and interest and $400 for property taxes.
On March 15, 2006, the Merritts hired Colyer to broker their loan. The following day, relying on Colyer’s good faith estimate, the Merritts removed the loan contingency from their purchase contract.
On March 20, 2006, Colyer told the Merritts that it was not possible to obtain an FHA loan on the terms set forth in the good faith estimate, that they would be better off with something different, and that he could sell them a loan that allowed them to keep their five percent down payment to use for other investments. Colyer did not tell the Merritts that Countrywide’s policy was to discourage down payments to increase the amount of the loans, which resulted in higher revenue and commissions for Colyer and others.
On March 25, 2006, Colyer told the Merritts he had “worked out a much better loan product” with payments of $5,200 per month. The Merritts told Colyer they could not afford that much and would go to another lender. Colyer said a subordinate had prepared the loan, there were errors in the loan, and asked for time to clear it up. The Merritts contacted the two lenders from whom they had previously obtained estimates and were told there was not enough time to underwrite their loan prior to close of escrow on April 10, 2006. The Merritts’ realtor told them that, if they did not obtain funding in time, they would lose their earnest money and open themselves up for a lawsuit.
Later that day, Colyer contacted the Merritts and said he had put together the “`best loan possible.’” The new loan was a “Combo loan,” consisting of a 30-year, adjustable rate mortgage for $591,200 (hereafter first loan) and a home equity line of credit (HELOC) for $147,800. Both loans were interest-only loans.
The interest-only payments on the first loan were $3,202.33 per month and the interest rate was 6.5 percent for the first five years.
The interest rate on the HELOC was “discounted” to 7.5 percent the first month, and adjusted periodically thereafter. The adjustable rate was based on the Wall Street Journal prime rate plus three percent. Between May 2006 and December 2007, the interest rate on the HELOC ranged from 10.5 to 11.25 percent.
Initially, the Merritts paid only the interest on the HELOC and their payments ranged from $1,349.43 to $1,412.20 per month. From May 2006 until October 2006, the payments on the first loan and the HELOC combined ranged from $4,551.76 to $4,614.53 per month.
After October 2006, the Merritts made payments toward principal on the HELOC. By December 2007, they had paid $45,138.53 toward principal and reduced the balance on the HELOC to $102,061.47, which in turn reduced their monthly interest obligation (the interest due in December 2007 was $910.16).
When Countrywide created the Merritts’ loan in March 2006, its underwriter, Katherine Colciano, had reservations about approving the loan and told Colyer the Merritts would not be able to repay the loans and would be “headed towards certain default” by the end of 2008. Colyer told Colciano to disregard that problem and to contact corporate headquarters to “gain exception approval.” Colciano did so and her supervisor approved the loan.
On March 27, 2006, Colyer sent an escrow agent from First American Title to the Merritts’ apartment to obtain their signatures on the loan documents. When the Merritts attempted to read and copy the signed loan papers, the escrow agent told them she did not have time for that and said she would provide them copies. Prior to close of escrow no one from Countrywide disclosed or discussed the material terms of the Merritts’ loans with them. The following day, while reviewing the loan documents, the Merritts were surprised to learn that there were two loans, that neither was an FHA loan, and that their payments would be more than $4,569 per month. They called Colyer, who told them that this was the only way to finance their loan and that if they made their payments on time for a year, he would help them refinance with a loan that would dramatically reduce their payments.
Between October 2006 and October 2008, the Merritts wrote a series of letters to Colyer and executives at Countrywide and Bank of America, which had acquired Countrywide, complaining about their loans and the failure to refinance their loans. They asked to be placed in an FHA loan or a conventional 30-year fixed loan. In October 2008, they wrote a letter to Wells Fargo, in which they stated that they had just learned that Wells Fargo owned their loan and asked to be placed in “a conventional fixed 30 year/FHA loan with affordable monthly payments.”
II. Loan Modification
In February 2009, the Merritts signed a loan modification agreement with Countrywide. At that time, they were $2,222.94 in arrears on the HELOC and the unpaid principle was $93,527.56. Regarding the HELOC, Countrywide agreed to add the unpaid amount to principal, deem the loan current, and reduce the interest rate by decreasing the margin over the index from three to zero percent. Regarding the first loan, the principle balance had increased from the original $591,800 to $603,028.16. Countrywide agreed to convert the first loan from an interest-only loan to a fixed-rate loan as of April 2009 with an interest rate of 4.5 percent until April 2012, at which time the interest rate would increase to 6.5 percent. The Merritts allege the “loan modification on its face conceals past fraud” and does not “allow them to pay off their loans or correct past fraudulent wrongdoing.”4
III. Allegations Regarding Countrywide’s Practices and Wells Fargo’s Role in the Alleged Conspiracy
The Merritts allege that under chief executive officer Angelo Mozilo, Countrywide discarded the “quality loan principles” and underwriting standards it had previously employed and “restructure[d] the company to strip equity from certain American borrowers to maximize [its] profits” by increasing its sales in the subprime mortgage loan market. Beginning in 2000, executives of Bank of America and Wells Fargo agreed “to supply Mozilo and Countrywide with a flow of money if Mozilo would lead Countrywide to selling subprime loans for [Bank of America, Wells Fargo] and Does 1-30 that are designed to strip equity from borrowers['] properties and transferred [sic] it to them.” Countrywide trained its mortgage loan brokers to tell prospective borrowers that Countrywide would provide them with “no closing cost, 30-year fixed FHA or other `conventional’ or `prime’ loans at 1, 2, 3 or some other low percentage and or payment rate in order to secure borrowers commitment to Countrywide, then design and sell loans . . . that [were] twice or more times what was promised,” which the borrowers did not have the ability to repay and which would increase the potential for defaults and foreclosures and strip the equity from the properties. Countrywide earned additional profits by “securitizing and selling loans to investors,” foreclosing on property owners, purchasing “the very homes they had set up to foreclose,” and “reselling properties with new financing . . . .” Countrywide instructed its staff and subcontractor appraisers “to falsely inflate” the values of properties it was planning to fund, “to sell mortgage loans at higher than fair market property value and to earn higher commissions and profits . . . .” Countrywide targeted “certain communities,” including first-time home buyers who were “unsophisticated in purchasing mortgage loans,” and African-Americans, Latinos, and Native Americans.
The Merritts claim further that Countrywide sold the subprime loans to investors, including Bank of America and Wells Fargo, and that the investors asked Countrywide to find borrowers for subprime and Combo loans that they could “purchase in the hundreds of millions of dollars.” Wells Fargo and others asked Countrywide to design Combo loans that Wells Fargo “could fund and designate into mortgage backed securities (MBS) or special purpose vehicles (SPV)”; Countrywide sold these loans to Wells Fargo and others “before borrowers were identified and loans were originated.” The Merritts assert Wells Fargo and others were “participants in Countrywide’s loan business, advanced money to [Countrywide] to make loans that they ordered,” that the loans were delivered to Wells Fargo . . . by pre-assignment on loan origination with full knowledge of the Countrywide Defendants['] deceptive acts and omissions . . . .” Wells Fargo allegedly hired Mozilo and Countrywide to originate consumer home loans because it did not want to be identified with predatory lending.
The Merritts assert that real estate agent Johnny Chen (who represented the sellers) and Colyer arranged for real estate appraiser John Benson “to falsely inflate the value of the property beyond its actual market value of $670,000″ to maximize Countrywide’s profits. They assert Countrywide engineered “larger principle balance loans by falsely inflating” property values through a network of appraisers, including Benson, and urged borrowers “to encumber their homes over 100% of fair market or assessed” value. Countrywide’s “bait and switch tactic was part of defendants’ predatory, deceptive, misleading and false loan marketing and sales practices.”
The Merritts contend that the interest rate they paid on the HELOC was four to seven percent greater than what they had agreed to in the HELOC agreement and that Countrywide, Wells Fargo, and others overcharged them by $10,000. They allege the defendants failed to properly credit all of the payments they made toward principle and falsely charged them more than $75,233. They allege Countrywide discouraged borrowers from paying down the balances on their loans to insure that it received the highest possible interest payments to maximize profits for itself, Wells Fargo, and others.
In December 2009, the Merritts filed a complaint against Countrywide, Bank of America, Wells Fargo, Colyer, Chen, Benson, and executives of each of the lender defendants, including John Stumpf, the CEO of Wells Fargo. The original complaint alleged causes of action for conspiracy, conspiracy to commit fraud, false advertising (Bus. & Prof. Code, § 17500), unfair business practices (Bus. & Prof. Code, § 17200), race discrimination in housing, and violating Civil Code section 1920 (which sets forth statutory requirements for mortgage loans).
Bank of America, Wells Fargo, Stumpf, and Chen demurred to the complaint. In April 2010, the court overruled the demurrers to the conspiracy cause of action and sustained the demurrers to the remaining causes of action with leave to amend.
In August 2010, the Merritts filed a first amended complaint that added new causes of action, deleted some causes of action, and added new parties. The new parties were MERSCORP5 (MERS) and First American Title Insurance Company (First American Title). The causes of action alleged in the first amended complaint included fraud and misrepresentation, unfair business practices, conspiracy, breach of fiduciary duty, breach of contract, rescission, declaratory relief, breach of the title insurance contract, and intentional infliction of emotional distress.
In September, 2010, the Merritts dismissed Stumpf without prejudice.
The defendants affiliated with Bank of America, MERS, and Countrywide filed a motion to strike and demurred to the first amended complaint. Wells Fargo also filed a demurrer asserting that each cause of action in the first amended complaint failed to state a cause of action against Wells Fargo. In its demurrer, Wells Fargo argued: (1) that the Merritts’ boilerplate agency allegations were insufficient to hold Wells Fargo liable for the conduct of others; (2) that the first amended complaint failed to allege fraud by Wells Fargo or that Wells Fargo participated in a conspiracy; (3) that the breach of fiduciary duty and intentional infliction of emotional distress claims were time barred; (4) that the first amended complaint did not allege a breach of a fiduciary duty or unfair or unlawful conduct by Wells Fargo; (5) that the breach of contract and rescission claims failed because the Merritts had not alleged a contract with Wells Fargo; and (6) that the Merritts were not entitled to declaratory relief because their other claims were deficient as to Wells Fargo.
Rather than file opposition to the demurrers, the Merritts filed a 15-page, 76-paragraph amendment to their first amended complaint. The amendment stated that it (1) was filed “pursuant to CCP § 472, which allows for an Amendment to be filed on any pleading after demurrer and before trial or hearing of the issue of law thereon,” and (2) contained facts that addressed the points raised in the demurrers.
Wells Fargo objected to the amendment, arguing that the Merritts’ right to amend without leave of court had long passed and that the amendment was a sham that contradicted facts that had already been judicially noticed by the court. Wells Fargo relied on the declaration of Rhonda Bernard-Thomas, a mortgage quality analyst for Wells Fargo, who declared that she had reviewed Wells Fargo’s records and that Wells Fargo did not originate or service the Merritts’ loans.6 Wells Fargo also filed a notice of non-opposition, which argued that the Merritts’ failure to oppose the demurrer and their attempt to amend were admissions that the demurrer was meritorious.
The court denied the other defendants’ motion to strike and sustained their demurrers with leave to amend. Regarding Wells Fargo, the trial court’s tentative ruling was to sustain Wells Fargo’s demurrer with leave to amend, but at the hearing on the demurrer, the court invited argument on the question whether leave to amend should be granted. Wells Fargo argued that it was uncontested that it had no lending or customer relationship with the Merritts. Wells Fargo told the court the parties had already gone through two rounds of pleading in federal court and two rounds of pleading in state court. It argued that there was nothing new in the amendment and that it was “deeply unfair to continue dragging a non party to this loan through this litigation.” The Merritts argued that since Wells Fargo admitted it invested in their loan, it was a “de facto lender” and that although Countrywide took them through the application and origination process, Wells Fargo supplied the money. They also argued that Code of Civil Procedure section 472 allows them to amend any pleading, including their first amended complaint, prior to the hearing on a demurrer. In rebuttal, Wells Fargo denied admitting that it was a lender or that it had invested in the Merritts’ loans.
The court sustained Wells Fargo’s demurrer to the first amended complaint without leave to amend. The Merritts appeal.7
Before we discuss the Merritts’ procedural claims, we address their request for judicial notice and their motion to augment the record, as well as Wells Fargo’s motion to strike portions of the Merritts’ reply brief.
I. Request for Judicial Notice and Motions on Appeal
The Merritts have filed a motion requesting this court to either take judicial notice of or augment the record with two documents they obtained from Wells Fargo in response to a subpoena duces tecum in February 2011, three months after the trial court filed the order that is at issue in this appeal. The Merritts acknowledge that the documents were not before the court at the hearing on Wells Fargo’s demurrer to their first amended complaint, but reason, in part, that the documents are judicially noticeable because one of them was attached as an exhibit to their third amended complaint in April 2011. The Merritts argue that the documents are relevant because they support their contention that Wells Fargo was directly involved in their loans and rebut Wells Fargo’s claim that it had nothing to do with the loans.
Wells Fargo opposes the Merritts’ request for judicial notice/motion to augment, arguing that the documents are irrelevant because while they indicate Wells Fargo was the “master servicer” of a trust that holds an interest in one of the Merritts’ loans, that does not mean that Wells Fargo originated or serviced the Merritts’ loans. In addition to filing opposition to the Merritts’ request for judicial notice/motion to augment, Wells Fargo has filed a motion to strike the portions of the Merritts’ reply brief that refer to this material.
Augmentation cannot be used to supplement the record with materials that were not before the trial court when it ruled on Wells Fargo’s demurrer to the Merritts’ first amended complaint. (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 444, fn. 3 (Vons); In re Zeth S. (2003) 31 Cal.4th 396, 405.)
On appeal from a judgment of dismissal after a demurrer has been sustained without leave to amend, relevant matters that were properly the subject of judicial notice may be treated as having been pleaded. (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 5.) And the appellate court may take judicial notice of such matters. (See Evid. Code, § 459, subd. (a); Sacramento Brewing Co. v. Desmond, Miller & Desmond (1999) 75 Cal.App.4th 1082, 1085, fn. 3.) The Merritts did not ask the trial court to take judicial notice of the material at issue when it heard the demurrer to the first amended complaint. If they had, it would not have been judicially noticeable under either Evidence Code sections 451 or 452. That the Merritts attached some of the material as an exhibit to their third amended complaint, after the ruling on the demurrer at issue here, does not make it judicially noticeable in this proceeding under Evidence Code section 452, subdivision (d) (a court may judicially notice the records of any court of this state). “Reviewing courts generally do not take judicial notice of evidence not presented to the trial court. Rather, normally `when reviewing the correctness of a trial court’s judgment, an appellate court will consider only matters which were part of the record at the time the judgment was entered.’” (Vons, supra, 14 Cal.4th at p. 444, fn. 3.) No exceptional circumstances exist that justify deviating from the rules stated above by taking judicial notice of this material on appeal. (Ibid.). For these reasons, the Merritts’ request for judicial notice/motion to augment is denied. Wells Fargo’s motion to strike the Merritts’ reply brief is granted to the extent that we shall disregard those portions of the brief that mention the material attached to the request for judicial notice.
II. Procedural Claims
A. Failure to Permit Amendment of the First Amended Complaint as a Matter of Right
The Merritts contend that under section 472 they had a right to amend the first amended complaint without leave of court prior to the hearing on the demurrers to the first amended complaint and that once the amendment was filed, the trial court should have vacated the hearing, accepted the amendment to the first amended complaint, and instructed the defendants to file further responsive pleadings. The Merritts argue the court erred prejudicially and denied them due process when it failed to afford them “their basic right to amend.”
Wells Fargo argues that section 472 authorizes a party to amend its pleading once as a matter of right, without leave of court, and that after the trial court sustained its demurrer to the original complaint, “the Merritts’ positive right to amend without leave of court expired and they could amend only `by obtaining permission of the court.’” Wells Fargo argues that the Merritts should also have obtained the court’s permission to file the amendment to the first amended complaint.
The resolution of this question requires us to interpret section 472. The interpretation of a statue is a question of law, which we review de novo. (People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 432.)
“In statutory construction cases, our fundamental task is to ascertain the intent of the lawmakers so as to effectuate the purpose of the statute. [Citation omitted.] `We begin by examining the statutory language, giving the words their usual and ordinary meaning.’ [Citations omitted.] If the terms of the statute are unambiguous, we presume the lawmakers meant what they said, and the plain meaning of the language governs. [Citations omitted.] If there is ambiguity, however, we may then look to extrinsic sources, including the ostensible objects to be achieved and the legislative history. [Citation omitted.] In such cases, we `”`select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute, and avoid an interpretation that would lead to absurd consequences.’”‘” (Estate of Griswold (2001) 25 Cal.4th 904, 910-911, quoting Day v. City of Fontana (2001) 25 Cal.4th 268, 272.)
Section 472 provides in part: “Any pleading may be amended once by the party of course, and without costs, at any time before the answer or demurrer is filed, or after demurrer and before the trial of the issue of law thereon, by filing the same as amended and serving a copy on the adverse party, . . .” ” `This section states the right to amend at the outset, for a limited period, without leave of court.’” (Gross v. Department of Transportation (1986) 180 Cal.App.3d 1102, 1105 (Gross), citing 5 Witkin Cal. Procedure (3d ed. 1985) Pleading, § 1119, p. 536; accord 5 Witkin Cal. Procedure (5th ed. 2008) Pleading, § 1192, p. 624.) “Section 472, by its terms, expressly applies to amendments made to the pleadings before the filing of responsive pleadings. Section 472 does not limit what types of amendments may be made of course and without leave of court. The only limitations expressed in section 472 are that the amendment be made before the answer or demurrer is filed, or after the demurrer [is filed,] but before it is heard.” (Gross, 180 Cal.App.3d at p. 1105.)
Over 100 years ago, the California Supreme Court construed section 472 in Tingley v. Times Mirror (1907) 151 Cal. 1 (Tingley). After its demurrer to the complaint was overruled, the defendant in Tingley filed an answer. Eight months later, on the day before trial, the defendant filed an amended answer without leave of court and the court granted the plaintiff’s motion to strike the amended answer. After the jury was impaneled, the defendant made a motion for leave to file the same amended answer, which was denied. (Id. at p. 7.)
On appeal, the defendant in Tingley argued that the language of former section 472, which was almost identical to the current statute and provided that an amended pleading may be filed “at any time before answer or demurrer filed, or after demurrer, and before the trial of the issue of law thereon,” gave the defendant the absolute right to file an amended answer without leave of court any time prior to trial. (Tingley, supra, 151 Cal. at p. 9.) The court concluded that while section 472 authorizes both plaintiffs and defendants to amend their pleadings, the time within which either party may exercise that right is limited. (Id. at p. 10.) The court held: “the right of plaintiff to amend his complaint as of course is extended only up to the time when the answer of defendant is filed, or if a demurrer is interposed by defendant only while the issue of law raised thereby is undetermined. If the defendant answers without demurring, or if his demurrer to the complaint is overruled, the right of plaintiff under the section to amend as of course is gone. The right of defendant to amend can be exercised only during the time that a demurrer to the answer if interposed by plaintiff is undetermined, or should the plaintiff not demur, then the defendant is concluded from amending as of course . . ., by the expiration of the time within which such demurrer might have been interposed. When the demurrer of the plaintiff to the answer is overruled, or the time has expired within which the plaintiff might have demurred to the answer, the issues of fact are then fully joined and the right of defendant to amend under the section as of course is gone. [¶] . . . . Under this construction equal rights to amend are given to both parties; each has a right to amend while the issue of law raised by demurrer to his pleading is undetermined.” (Id. at pp. 10-11, italics added.) Thus, the court rejected the defendant’s contention that he had the right to amend his answer without leave of court at any time before trial.
The Merritts rely on Barton v. Khan (2007) 157 Cal.App.4th 1216 (Barton). In Barton, a shareholder who was a former employee, officer, and director of the corporate defendant sued the corporate defendant and three of its officers and directors (individual defendants). The original complaint alleged intentional and negligent breach of fiduciary duty by the individual defendants and Labor Code violations by the corporate defendant. The corporate defendant answered the complaint and the individual defendants demurred. (Id. at p. 1218.) Three days before the hearing on the demurrer, instead of opposing the demurrer, the plaintiff attempted to file a first amended complaint which he believed addressed the deficiencies raised by the individual defendants’ demurrer. (Ibid.) Since one of the defendants (the corporate defendant) had already answered, the court clerk refused to file the first amended complaint. At the hearing, the plaintiff argued that the clerk had erred in refusing to accept his first amended complaint. The trial court sustained the demurrer without leave to amend. (Ibid.)
The appellate court in Barton reversed. The court explained, “the purpose of the statute permitting amendments as of right before an answer is filed or a demurrer is ruled upon is to promote judicial efficiency and reduce the costs of litigation. If a defect in a pleading can be cured before the defendant has answered or the court has heard a demurrer, both judicial resources and attorney time will be saved in the process. . . . As we read the statute, a plaintiff has a right to amend his or her pleading at any time before a responsive pleading is filed and even after a responsive pleading is filed up to the time of the hearing on the demurrer. Of course, if the only responsive pleading filed in a case is an answer, there will be no hearing on a demurrer.” (Barton, supra, 157 Cal.App.4th at p. 1221.) The court held that the trial court erred in refusing to accept the amended complaint for filing or giving plaintiff leave to amend and explained that if the clerk had done so, the hearing on the demurrer would have been taken off calendar, and the individual defendants would have had the opportunity to demur to the amended complaint. (Ibid.) The essential holding in Barton is that in a case involving multiple defendants, the filing of an answer by one of the defendants does not divest the plaintiff of the right to amend the complaint with respect to causes of action alleged against other defendants who have not yet answered or had a hearing on their demurrers to the complaint.
This case is distinguishable from Barton in one important respect. In Barton, the plaintiff attempted to amend his original complaint before the hearing on the individual defendants’ first demurrer. Here, the Merritts attempted to amend their first amended complaint after the court had already heard and ruled on the demurrer to the original complaint and granted leave to amend.
None of the cases reviewed above address the precise issue presented here: whether the statutory right to amend one’s pleading once, without leave of court, applies only to the party’s original pleading or whether that right applies to the party’s subsequent amended pleadings, like the first amended complaint in this case. The parties have not cited any cases directly on point and, as the authors of one treatise have observed, this appears to be a question of first impression. The treatise states: “Because [section] 472 allows amendment of `any pleading’ without leave of court, it has been argued that, where a demurrer has been sustained with leave to amend and [the] plaintiff files an amended complaint, the amended complaint may also be amended once without leave of court before [the] defendant answers or demurs. [¶] However, there is no known case permitting this. In addition, the statutory wording—`Any pleading may be amend once’—may be interpreted to preclude an amendment to an amended pleading.” (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2011) § 6:610.5, p. 6-156; see also id. at § 6:603, p. 6-155.)
At issue in this case is the meaning of the phrase “any pleading” in section 472, which provides that “[a]ny pleading may be amended once by the party of course, . . . at any time before the answer or demurrer is filed,” or before the hearing on a demurrer. In effect, the Merritts assert that “any pleading” includes the original pleading (their complaint) and any amended pleading (their first amended complaint and any successive amendments or amended complaints). Wells Fargo argues that “any pleading” in section 472 refers only to the party’s original pleading.
Section 420 defines “pleadings” as “the formal allegations by the parties of their respective claims and defenses, for the judgment of the Court.” “The pleadings allowed in civil actions are complaints, demurrers, answers, and cross-complaints.” (§ 422.10.)
Gautier v. General Telephone Co. (1965) 234 Cal.App.2d 302 (Gautier) is instructive. There the court affirmed the trial court’s order sustaining the defendant’s demurrer to the plaintiffs’ fourth amended complaint without leave to amend. After explaining why each of the plaintiffs’ causes of action was defective, the court stated, “The amended pleading in question was plaintiffs’ fifth attempt to state several causes of action under several theories of recovery. True, the trial court should be liberal in allowing amendments where the defect in the pleading is one of form only; but a litigant does not have a positive right to amend his pleading after a demurrer thereto has been sustained. `His leave to amend afterward is always of grace, not of right. (. . ., § 472.)’” (Gautier, at p. 310.) The court held that since the trial court could reasonably conclude that the complaint was incapable of being amended to state a cause of action, it did not abuse its discretion when it sustained the demurrer without leave to amend. (Ibid.)
The Merritts’ reliance on Kittredge Sports Co. v. Superior Court (1989) 213 Cal.App.3d 1045 (Kittredge) is misplaced. The appellate court in Kittredge reversed a trial court order that had denied the plaintiff’s motion to amend its complaint to add two additional causes of action after the case had been pending for three years. (Id. at p. 1047.) Although Kittredge does not state that the defendant had answered the complaint, we assume that is so, given the amount of time that had passed before the plaintiff filed its motion to amend. Kittredge does not address the question whether a party may amend an amended pleading as a matter of right, without leave of court, while a demurrer is pending.
In our view, the statutory right to amend “once” as a matter “of course,” without leave of court, applies only to a party’s original pleading (i.e., the party’s original complaint, demurrer, answer, or cross-complaint). When a party files more than one type of pleading (i.e., an answer and a cross-complaint) the right to amend applies once to each type of pleading filed. The right to file an amended pleading once without leave of court expires when the defendant answers a complaint or the court conducts a hearing on the demurrer to the original pleading or the time for the plaintiff to demur to an answer has expired. (§ 472; Tingley, supra, 151 Cal. at pp. 10-11.) To conclude that the right to file an amended pleading without leave of court applies to an amended pleading that is filed after the court sustains a demurrer to the original pleading with leave to amend, as was the case here, requires that we conclude that the right to amend that expired upon the hearing of the first demurrer was revived by the filing of the amended pleading. Once the statutory right to amend the original pleading has expired, especially when the court has ruled on a demurrer to the pleading, all further requests to amend require leave of court. In other words, after the court weighs in on the question whether the pleading may be amended, the right to amend “once” without leave of court is lost and all further requests to amend should be directed to the court.
To hold otherwise would invite mischief and delay. For example, the Merritts filed their original complaint in December 2009. Wells Fargo filed its demurrer in February 2010 and the court sustained Wells Fargo’s demurrer to the original complaint with leave to amend in April 2010. The Merritts filed their first amended complaint in August 2010 and Wells Fargo filed its demurrer thereto in September 2010, with a hearing date in January 2011. The hearing was subsequently advanced to November 9, 2010. On October 28, 1010, rather than oppose the demurrer, the Merritts filed their amendment to the first amended complaint. Under the Merritts’ interpretation of the statute, the filing of the amendment required the court to vacate the hearing on the demurrer and direct Wells Fargo to respond to the amendment, without conducting a hearing on the merits of the demurrer to the first amended complaint. Conceivably, Wells Fargo could have demurred to the amendment, with a further hearing scheduled. Under the Merritts’ interpretation of section 472, they would have had the right to file a second amended complaint any time prior to the hearing on the demurrer to the amendment, which would have required the court to vacate the hearing and order Wells Fargo to respond to the second amended complaint. And, under this interpretation, there is nothing to prevent them from continuing in this manner and filing successive amended pleadings, each time arguing that they had the right to amend without leave of court and without a hearing on the demurrer. Thus, the party that is relying on the right to amend an amended pleading could conceivably respond to each demurrer with an amended pleading that in effect cuts off the other party’s right to a hearing on its demurrer and delays the process of settling the pleadings. We do not think the Legislature intended such a result.
The rule we adopt is consistent with the language of section 472, allows for an orderly procedure for testing the pleadings, provides a bright line rule, and avoids mischief. If a party agrees that the opposing party’s demurrer to an amended pleading is well taken, that party can file a short opposition to the demurrer that advises the court of its position, along with a copy of its proposed amended pleading or an explanation of how it intends to amend to address the issues raised by the demurrer. But the decision whether the party will be allowed to amend further belongs to the court.
In summary, we hold that the phrase “any pleading” in section 472 refers to a party’s original or first pleading (i.e. a complaint, an answer, a demurrer, or a cross-complaint) and that a party has a right to amend its original pleading as a matter of right once before the deadlines set forth in Tingley, supra, 151 Cal. at pages 10-11. For the purpose of section 472, the phrase “any pleading” does not include an amended pleading.
B. Sustaining Demurrer When Previous Demurrer to Same Cause of Action Had Been Overruled
The Merritts contend that the court erred when it sustained Wells Fargo’s demurrer to the conspiracy cause of action in their first amended complaint, since it had previously overruled Wells Fargo’s demurrer to that cause of action in the original complaint. They argue the court’s error was compounded when it sustained demurrers, “which did not actually demonstrate the legal insufficiency of the [first amended complaint], but raised factual disputes which should have been left for a trial or summary judgment.”
There is a split of authority on the question whether, in cases where a demurrer has been sustained as to some causes of action and overruled as to others, the defendant may demur to the amended complaint on grounds that were overruled in a demurrer to the prior complaint.
In Bennett v. Suncloud (1997) 56 Cal.App.4th 91, the court held that such demurrers are improper because the court is “foreclosed from rendering a new determination on the viability of those claims unless some new facts or circumstances were brought to [its] attention.” (Id. at pp. 96-97.) But Pacific States Enterprises, Inc. v. City of Coachella (1993) 13 Cal.App.4th 1414 (Pacific States) concluded that it was not improper for the defendants to demur to an amended pleading on grounds that had been overruled in a previous demurrer to the complaint. The court reasoned that the “interests of all parties are advanced by avoiding a trial and reversal for defect in pleadings. The objecting party is acting properly in raising the point at his first opportunity, by general demurrer. If the demurrer is erroneously overruled, he is acting properly in raising the point again, at his next opportunity. If the trial judge made the former ruling himself, he is not bound by it. [Citation.] And, if the demurrer was overruled by a different judge, the trial judge is equally free to reexamine the sufficiency of the pleading.” (Id. at p. 1420, fn. 3, citing Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 877 [discussing the analogous situation of granting a motion for judgment on the pleadings following a prior overruling of a demurrer with respect to the same pleading].) This court followed Pacific States in Pavicich v. Santucci (2000) 85 Cal.App.4th 382, 389, footnote 3; accord Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1036. For these reasons, we reject the Merritts’ contention that, because it had previously overruled the demurrer to the conspiracy cause of action in the original complaint, the court erred when it sustained Wells Fargo’s demurrer to the conspiracy cause of action in their first amended complaint.
C. Alleged Failure to Specify Grounds for Sustaining Demurrers
The Merritts argue the court committed prejudicial error when it failed to specify the grounds upon which it sustained the demurrers to the first amended complaint. As will be shown below, the record does not support this contention.
When a court sustains a demurrer without leave to amend, it is required to state “the specific ground or grounds upon which the decision or order is based which may be by reference to appropriate pages and paragraphs of the demurrer.” (§ 472d.) The grounds for a demurrer are listed in section 430.10. They include the failure to state facts sufficient to constitute a cause of action (§ 430.10, subd. (e)).8
“The grounds for a demurrer differ from the reasons for sustaining a demurrer on a particular ground. A court sustaining a demurrer is required to state the specific grounds for its decision, but is not required to state its reasons for sustaining the demurrer on the specified grounds. [Citations.]” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 111; italics added.)
Wells Fargo demurred to each of the nine causes of action in the Merritts’ first amended complaint on a single ground. With regard to each cause of action, it argued that the Merritts’ first amended complaint failed to state facts sufficient to constitute a cause of action (§ 430.10, subd. (e)). In its order on the demurrer, the trial court stated that Wells Fargo’s “demurrer to each cause of action of the first amended complaint on the ground that the pleading does not state facts sufficient to constitute a cause of action [Code Civ. Proc., § 430.10, subd. (e)] is SUSTAINED without leave to amend given the pleading and the history of pleading referred to by Wells Fargo in argument.” Thus, the order specified the statutory ground that the court relied on in sustaining the demurrers. Nothing more was required. We therefore reject the Merritts’ contention that the court failed to specify the grounds upon which it sustained the demurrers to the first amended complaint.
II. Sufficiency of First Amended Complaint
The Merritts contend that their first amended complaint was sufficient to state a cause of action against Wells Fargo and that the trial court erred when it failed to grant them leave to amend.
A. General Principles Regarding Demurrers; Standard of Review
“A general demurrer searches the complaint for all defects going to the existence of a cause of action and places at issue the legal merits of the action on assumed facts.” (Carman v. Alvord (1982) 31 Cal.3d 318, 324 (Carman).)
On appeal from an order sustaining a demurrer, “we examine the complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any legal theory, such facts being assumed true for this purpose.” (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415.) We will affirm “if proper on any grounds stated in the demurrer, whether or not the court acted on that ground.” (Carman, supra, 31 Cal.3d at p. 324.) On appeal, “the plaintiff bears the burden of demonstrating that the trial court erred” in sustaining the demurrer. (Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 879.)
“In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. `We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.’” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318; accord, Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081 (Schifando).) Moreover, “we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (Blank v. Kirwan, at p. 318; see Schifando, at p. 1081.) “If the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated, that aspect of the complaint is good against a demurrer.” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38.)
“If the court sustained the demurrer without leave to amend, as here, we must decide whether there is a reasonable possibility the plaintiff could cure the defect with an amendment.” (Schifando, supra, 31 Cal.4th at p. 1081.) “The burden of proving such reasonable possibility is squarely on the plaintiff.” (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.) “As a general rule, if there is a reasonable possibility the defect in the complaint could be cured by amendment, it is an abuse of discretion to sustain a demurrer without leave to amend.” (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.) “Nevertheless, where the nature of the plaintiff’s claim is clear, and under substantive law no liability exists, a court should deny leave to amend because no amendment could change the result.” (Ibid.)
B. The Merritts’ Burden on Appeal and Alleged Waiver
The Merritts’ arguments regarding the sufficiency of their first amended complaint and the propriety of granting leave to amend focus on their cause of action for conspiracy to commit fraud. In contrast, Wells Fargo addresses each of the causes of action in the first amended complaint with specific arguments regarding how each fails to state a cause of action. Wells Fargo argues, “the Merritts’ opening brief makes no serious attempt to salvage any of their causes of action on the merits, other than to claim they should be allowed to proceed on a conspiracy theory. . . . The Merritts do not detail or cite to any legal principles regarding the substance of their other claims, much less explain why those causes of action withstand scrutiny under those principles or why the trial court’s ruling was incorrect on the merits.” We agree, except with regard to the cause of action for conspiracy to defraud.
One of the fundamental rules of appellate review is that an appealed judgment is presumed to be correct and “error must be affirmatively shown.” (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) The appellant has the burden of overcoming the presumption of correctness. “To demonstrate error, appellant must present meaningful legal analysis supported by citations to authority and citations to facts in the record that support the claim of error.” (In re S.C. (2006) 138 Cal.App.4th 396, 408.) And where the appeal involves a judgment of dismissal after a demurrer has been sustained without leave to amend, the appellant has the burden of demonstrating a reasonable possibility that he can cure the defect in his pleading with an amendment. (Schifando, supra, 31 Cal.4th at p. 1081; Blank v. Kirwan, supra, 39 Cal.3d at p. 318.) The appellant’s burden on appeal requires “more than simply stating a bare assertion that the judgment, or part of it, is erroneous and leaving it to the appellate court to figure out why; it is not the appellate court’s role to construct theories or arguments that would undermine the judgment and defeat the presumption of correctness.” (Eisenberg et al., Cal. Practice Guide: Civil Appeals and Writs (The Rutter Group 2009) ¶ 8:17.1, p. 8-5 to 8-6, citing Niko v. Foreman (2006) 144 Cal.App.4th 344, 368.) When the appellant asserts a point but fails to support it with reasoned argument and citations to authority, the appellate court may treat it as waived and pass it without consideration. (People v. Stanley (1995) 10 Cal.4th 764, 793; see, e.g., Taylor v. Roseville Toyota, Inc. (2006) 138 Cal.App.4th 994, 1001, fn. 2 [contention forfeited, where it is "merely asserted without argument or authority"].)
In this case, the Merritts’ arguments focus on their procedural claims and make no effort to demonstrate how their causes of action for unfair business practices, breach of fiduciary duty, breach of contract, rescission, declaratory relief, breach of the title insurance contract, or intentional infliction of emotional distress survive Wells Fargo’s demurrer. We therefore conclude, with regard to these causes of action, the Merritts have waived any further claim of error on appeal.
The Merritts’ brief does contain arguments with citations to legal authority and the record regarding the sufficiency of their claims for fraud and conspiracy. We shall turn to those claims next. We begin by discussing the nature of a conspiracy claim.
C. General Principles Regarding Conspiracy
“Conspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration. [Citation.] By participation in a civil conspiracy, a coconspirator effectively adopts as his or her own the torts of other coconspirators within the ambit of the conspiracy. [Citation.] In this way, a coconspirator incurs tort liability co-equal with the immediate tortfeasors.” (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-511 (Applied Equipment).) “As long as two or more persons agree to perform a wrongful act, the law places civil liability for the resulting damages on all of them, regardless of whether they actually commit the tort themselves. [Citation.] `The effect of charging . . . conspiratorial conduct is to implicate all . . . who agree to the plan to commit the wrong as well as those who actually carry it out.’” (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784.) “`[T]he basis of a civil conspiracy is the formation of a group of two or more persons who have agreed to a common plan or design to commit a tortious act.’ [Citations.] The conspiring defendants must also have actual knowledge that a tort is planned and concur in the tortious scheme with knowledge of its unlawful purpose.” (Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1582.) “`[T]he major significance of the conspiracy lies in the fact that it renders each participant in the wrongful act responsible as a joint tortfeasor for all damages ensuing from the wrong, irrespective of whether or not he was a direct actor and regardless of the degree of his activity.’” (Applied Equipment, at p. 511.)
“The elements of a civil conspiracy are `(1) the formation and operation of the conspiracy; (2) the wrongful act or acts done pursuant thereto; and (3) the damage resulting.’” (Mosier v. Southern California Physicians Insurance Exchange (1998) 63 Cal.App.4th 1022, 1048.) “A complaint for civil conspiracy states a cause of action only when it alleges the commission of a civil wrong that causes damage. Though conspiracy may render additional parties liable for the wrong, the conspiracy itself is not actionable without a wrong.” (Okun v. Superior Court (1981) 29 Cal.3d 442, 454.) Because civil conspiracy is easy to allege, “plaintiffs have a weighty burden to prove it. [Citation.] They must show that each member of the conspiracy acted in concert and came to a mutual understanding to accomplish a common and unlawful plan, and that one or more of them committed an overt act to further it. [Citation.] It is not enough that the conspiring officers knew of an intended wrongful act, they had to agree—expressly or tacitly—to achieve it. Unless there is such a meeting of the minds, `”the independent acts of two or more wrongdoers do not amount to a conspiracy.”‘” (Choate v. County of Orange (2000) 86 Cal.App.4th 312, 333.)
“Liability as a co-conspirator depends upon projected joint action. `The mere knowledge, acquiescence, or approval of the act, without co-operation or agreement to cooperate is not enough . . . .’ [Citation.] But once the plan for joint action is shown, `a defendant may be held liable who in fact committed no overt act and gained no benefit therefrom.’” (Wetherton v. Growers Farm Labor Assn. (1969) 275 Cal.App.2d 168, 176, disapproved on another ground in Applied Equipment, supra, 7 Cal.4th at p. 521, fn. 10 .)
“[A] plaintiff is entitled to damages from those defendants who concurred in the tortious scheme with knowledge of its unlawful purpose. [Citation.] Furthermore, the requisite concurrence and knowledge `may be inferred from the nature of the acts done, the relation of the parties, the interests of the alleged conspirators, and other circumstances.’ [Citation.] Tacit consent as well as express approval will suffice to hold a person liable as a coconspirator.” (Wyatt, supra, 24 Cal.3d at pp. 784-785.) The existence of a conspiracy may be inferred from circumstances; the “conspiracy need not be the result of an express agreement but may rest upon tacit assent and acquiescence.” (Holder v. Home Savings & Loan Assn. of Los Angeles (1968) 267 Cal.App.2d 91, 108.)
D. General Principles Regarding Fraud Claims
The tort that is the basis of the Merritts’ conspiracy claim is fraud. We therefore briefly review the legal principles relative to stating a cause of action for fraud.
The elements of fraud that give rise to a tort action for deceit are: “`(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or “scienter”); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.’” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) “`Promissory fraud’ is a subspecies of fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud. [Citations.] [¶] An action for promissory fraud may lie where a defendant fraudulently induces the plaintiff to enter into a contract.” (Ibid.)
“In California, fraud must be pled specifically; general and conclusory allegations do not suffice. [Citations.] . . . [¶] `This particularity requirement necessitates pleading facts which “show how, when, where, to whom, and by what means the representations were tendered.”‘ [Citation.] A plaintiff’s burden in asserting a fraud claim against a corporate employer is even greater. In such a case, the plaintiff must `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.’” (Lazar, supra, 12 Cal.4th at p. 645.) With these principles in mind, we turn to the Merritts’ cause of action for conspiracy to defraud.
The Merritts allege that beginning in 2000, executives of Bank of America and Wells Fargo agreed “to supply Mozilo and Countrywide with a flow of money if Mozilo would lead Countrywide to selling subprime loans for [Bank of America, Wells Fargo] and Does 1-30 that are designed to strip equity from borrowers['] properties and transferred [sic] it to them.” The first amended complaint alleges the CEO of Wells Fargo spoke with executives of Countrywide twice a month between January and June 2000 about their proposal to “supply Mozilo and Countrywide with a flow of money” if Mozilo would lead Countrywide to selling subprime loans for Wells Fargo. The Merritts allege that Countrywide accepted the offer and that pursuant to this scheme, Countrywide trained its loan brokers to tell prospective borrowers that Countrywide would provide them with “no closing cost,” conventional or prime loans at low percentage rates to secure the borrowers’ commitment to Countrywide, then design and sell loans that cost two or more times what had been promised, which the borrowers could not repay and which would increase the potential for default and strip the equity from their properties, as was done in their case. The Merritts allege this “bait and switch tactic was part of defendants’ predatory, deceptive, misleading and false loan marketing and sales practices.” They also assert Countrywide engineered “larger principle balance loans by falsely inflating” property values through a network of appraisers and urging borrowers “to encumber their homes over 100% of fair market or assessed” value to maximize Countrywide’s profits, resulting in greater indebtedness for borrowers. They claim Countrywide targeted first-time home buyers who were unsophisticated in purchasing home loans. They also allege Countrywide discouraged borrowers from paying down the balances on their loans to insure the highest possible interest payments to maximize profits for itself, Wells Fargo, and others.
The Merritts allege that Countrywide sold these subprime loans to investors, including Wells Fargo, and that the investors asked Countrywide to find borrowers for subprime loans that they could “purchase in the hundreds of millions of dollars” and “designate into mortgage backed securities (MBS) or special purpose vehicles (SPV).” They assert Countrywide sold these loans to Wells Fargo and others even “before borrowers were identified and loans were originated.” The Merritts assert Wells Fargo and others “advanced money to [Countrywide] to make loans that they ordered,” that the loans were “delivered to Wells Fargo . . . by pre-assignment on loan origination with full knowledge of [Countrywide's] deceptive acts and omissions” and that Wells Fargo hired Mozilo and Countrywide to originate consumer home loans because it did not want to be identified with predatory lending. They allege that on or about October 24, 2005, after Fannie Mae and Freddie Mac stopped buying subprime loans on the secondary mortgage market, executives from Countrywide proposed to Wells Fargo that they could continue subprime lending by designing combo loans consisting of adjustable rate mortgages and HELOC’s “to be `invested’ in by, and presold to” Wells Fargo and that Wells Fargo agreed and instructed Countrywide “to promulgate the necessary practices to achieve such.” The Merritts also allege Wells Fargo and its CEO were directly involved with Countrywide in charging the Merritts excessive interest on the HELOC (more than was required by the HELOC agreement) resulting in false overcharges of more than $10,000.
In their proposed amendment to their first amended complaint, the Merritts allege that, in addition to financing for the broader scheme, Wells Fargo and Does 1 through 30 provided the funds that were used to finance their home loan.
On appeal, the Merritts contend the only thing missing from their first amended complaint is an explicit allegation that Wells Fargo’s board of directors authorized and approved the actions taken by Stumpf and others on behalf of Wells Fargo. They assert they included such an allegation in their amendment to the first amended complaint.
In our view, these allegations were sufficient to state a cause of action against Wells Fargo for conspiracy to commit fraud. The Merritts allege the formation and operation of the conspiracy: that Wells Fargo and others provided money to fund the subprime mortgages that Countrywide sold to unsophisticated, first time borrowers with the intent of increasing Countrywide’s and the other lenders’ presence in the subprime mortgage market and increasing profits for all involved. The Merritts allege wrongful acts done pursuant to the conspiracy, including misrepresenting the terms of the loan in the good faith estimate, and then directing them into higher interest loan products, which required less money down, and misrepresenting the property’s value by obtaining an inflated appraisal, all of which resulted in significantly higher interest payments for the Merritts, reduced any potential equity they might obtain, and increased profits to the lenders. The Merritts also allege specific dollar amounts of damages.
Wells Fargo argues that while “the Merritts appear to allege some conspiratorial conduct in connection with the issuance of their mortgage loan,” the amended complaint “confirms that Wells Fargo had nothing to do with the issuance of the Merritts’ loan whatsoever, meaning that Wells Fargo could not have owed the Merritts any tort duties.” It argues that the Merritts’ “claim also fails because they cannot establish that Wells Fargo committed the same quantum of fraudulent misconduct as the other defendants with respect to the Merritts’ loan” and that “the overwhelming majority of the conduct alleged in the complaint was committed by parties other than Wells Fargo.” They assert that it “defies both logic and the law that Wells Fargo can be held equally liable as a co-conspirator for other defendants’ allegedly fraudulent acts in connection with the Merritts’ loan, when Wells Fargo (1) had very little to do with this alleged conspiracy by comparison, and (2) nothing to do with Merritts’ loan in particular.”
Wells Fargo misses the mark. The first amended complaint alleges with particularity the representations made by Colyer and others regarding the value of the property at issue, the financing terms promised in the good faith estimate, and the loan products that were ultimately sold to the Merritts. Copies of the first deed of trust, HELOC agreement, and the good faith estimate were attached to the first amended complaint and incorporated therein by reference. The first amended complaint also alleges that the Merritts’ loan was one of many that were made pursuant to a scheme to increase the presence of Countrywide, Bank of America, and Wells Fargo in the subprime loan market and that Wells Fargo funded subprime loans that were originated by Countrywide “with full knowledge of [Countrywide's] deceptive acts and omissions,” with the goal of increasing all participants’ profits. The first amended complaint also alleged that Countrywide presold the loans to Wells Fargo before borrowers were identified and steered the Merritts into the type of loan products that Wells Fargo had “ordered for MBS and SPV.” As noted previously, the major significance of the conspiracy cause of action “`lies in the fact that it renders each participant in the wrongful act responsible as a joint tortfeasor for all damages ensuing from the wrong, irrespective of whether or not he was a direct actor and regardless of the degree of his activity.’” (Applied Equipment, supra, 7 Cal.4th at p. 511.) Thus, whether Wells Fargo committed “the same quantum of fraudulent misconduct as the other defendants” or “had very little to do with this alleged conspiracy by comparison” is irrelevant to the question whether it is potentially liable as a co-conspirator.
Wells Fargo’s reliance on Slakey Brothers Sacramento, Inc. v. Parker (1968) 265 Cal.App.2d 204 (Slakey) is misplaced. The plaintiffs in Slakey were the creditors of Jay Parker, “an insolvent subdivider.” (Id. at p. 206.) The plaintiffs sued Parker, his attorney, his accountants, and a savings and loan company that lent Parker money. They alleged that the defendants conspired to defraud the plaintiff creditors by concealing Parker’s financial peril and inducing the creditors to forebear and advance even more credit to Parker. (Ibid.) The trial court in Slakey sustained the attorney defendant’s demurrer to the second amended complaint without leave to amend. (Id. at p. 205.) The court of appeal affirmed. The court observed that with regard to the attorney, the plaintiffs had alleged limited participation in the conspiracy in two ways: (1) the attorney borrowed money from the savings and loan as an agent of Parker; and (2) the attorney wrote a letter to the creditors advising them that Parker was working hard to refinance his operation so that the creditors could be repaid. (Id. at pp. 210-211.) The court held that the plaintiffs had failed to allege how the loan damaged them, an essential element of a fraud cause of action, and that the letter did not contain any “actionable falsehood” and that the plaintiffs therefore could not state a cause of action for conspiracy to defraud against the attorney. The court also stated, “This allegation of [the attorney's] limited participation in the conspiracy contrasts strongly with the allegation of unlimited participation by the group of defendants. As an assertion of [the attorney's] personal participation in his codefendants’ conspiracy, the complaint is at best equivocal. At worst, the allegation of limited involvement is pregnant with an admission against unlimited involvement. In view of the law’s demand for specific pleading of fraudulent conduct, plaintiffs’ second amended complaint was vulnerable to . . . general demurrer.” (Id. at p. 211.) In contrast, the Merritts’ do not allege limited involvement by Wells Fargo; they allege that Wells Fargo was one of the banks that provided the funds that made the whole scheme possible and enabled Countrywide to increase its presence in the subprime market and provide subprime loans to Wells Fargo as an investment vehicle.
Considering the allegations of the first amended complaint and the proposed amendment to the first amended complaint, we conclude that there is a reasonable possibility the first and second causes of action in the first amended complaint can be cured by amendment to state a single cause of action for conspiracy to defraud. We therefore conclude that the trial court abused its discretion when it sustained Wells Fargo’s demurrer to the first and second causes of action in the first amended complaint without leave to amend and will reverse the judgment. (Schifando, supra, 31 Cal.4th at p. 1081.)
The judgment is reversed and the trial court is directed to enter a new order on Wells Fargo’s demurrer to the first amended complaint, which: (1) sustains Wells Fargo’s demurrer to the first and second causes of action with leave to amend and (2) sustains Wells Fargo’s demurrers to the remaining causes of action without leave to amend.
PREMO, ACTING P.J. and DUFFY, J.**, concurs.
* Judge of the Santa Clara County Superior Court assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
Back to Reference
1. All further statutory references are to the Code of Civil Procedure unless otherwise stated.
Back to Reference
2. The facts are based on the allegations of the Merritts’ first amended complaint.
Back to Reference
3. For clarity and ease of reference, and meaning no disrespect, we shall hereafter refer to the Merritts individually by their first names only.
Back to Reference
4. In their amendment to the first amended complaint, the Merritts allege they refused to consummate the loan modification agreement and have not made any payments pursuant to the agreement.
Back to Reference
5. “As case law explains, `MERS [Mortgage Electronic Registration Systems, Inc.] is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members’ interests to MERS. MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members.’ [Citation.] `A side effect of the MERS system is that a transfer of an interest in a mortgage loan between two MERS members is unknown to those outside the MERS system.’” (Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1151, citing Mortgage Electronic Registration Systems v. Nebraska Dept. of Banking & Finance (2005) 270 Neb. 529, 530 and Jackson v. Mortgage Electronic Registration Systems, Inc. (Minn. 2009) 770 N.W.2d 487, 491.)
Back to Reference
6. On appeal from a judgment of dismissal after a demurrer has been sustained without leave to amend, this court assumes the truth of all facts properly pleaded by the plaintiff. (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 5.) We also consider all evidentiary facts found in recitals of exhibits attached to the complaint and relevant matters that are properly the subject of judicial notice. (Id. at p. 5; Satten v. Webb (2002) 99 Cal.App.4th 365, 375.) But a demurer may not refer to matters that are outside the pleadings that are not subject to judicial notice. (Arce v. Kaiser Foundation Health Plan, Inc. (2010) 181 Cal.App.4th 471, 482.) The declaration of Ms. Bernard-Thomas was not the proper subject of a request for judicial notice. (Evid. Code, §§ 451, 452). Such evidence is inappropriate at the demurrer stage. We shall therefore disregard the declaration.
Back to Reference
7. Although the record does not contain a judgment of dismissal, we treat the order sustaining Wells Fargo’s demurrer without leave to amend as appealable. “The general rule of appealability is this: `An order sustaining a demurrer without leave to amend is not appealable, and an appeal is proper only after entry of a dismissal on such an order.’ [Citation.] But `when the trial court has sustained a demurrer to all of the complaint’s causes of action, appellate courts may deem the order to incorporate a judgment of dismissal, since all that is left to make the order appealable is the formality of the entry of a dismissal order or judgment.’” (Melton v. Boustred (2010) 183 Cal.App.4th 521, 528, fn.1.) That is the case here with regard to Wells Fargo. “`We will accordingly deem the order on the demurrer to incorporate a judgment of dismissal and will review the order.’” (Ibid.)
Back to Reference
8. According to section 430.10, the other grounds for a demurrer are: “(a) The court has no jurisdiction of the subject of the cause of action alleged in the pleading. [¶] (b) The person who filed the pleading does not have the legal capacity to sue. [¶] (c) There is another action pending between the same parties on the same cause of action. [¶] (d) There is a defect or misjoinder of parties. [¶] [¶] (f) The pleading is uncertain. As used in this subdivision, `uncertain’ includes ambiguous and unintelligible. [¶] (g) In an action founded upon a contract, it cannot be ascertained from the pleading whether the contract is written, is oral, or is implied by conduct. [¶] (h) No certificate was filed as required by Section 411.35. [¶] (i) No certificate was filed as required by Section 411.36.”
Back to Reference
** Retired Associate Justice of the Court of Appeal, Sixth Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.