Opinion
NOT TO BE PUBLISHED
Super. Ct. No. 73278.
SIMS, J.
This appeal arises from a judgment that dismissed lenders from an action by borrowers seeking redress for fraud and duress committed by the mortgage broker.
When appellants Melissa Kaput and Donald Kaput (the Kaputs) sought a car loan in February 2006, they began a saga that resulted in their assumption of loans totaling $910,000 to fund speculation in a temporarily exuberant real estate market. The Kaputs allege that they participated in the speculation only after being badgered and defrauded by mortgage broker Thomas Hastert and his associates.
In hopes of avoiding foreclosure on the house the Kaputs owned outright before becoming involved in the real estate debacle, they filed suit against Hastert and his associates. The Kaputs also alleged four causes of action against respondents Wendy M. Watson, Janet Benham, Jeffrey A. Falla, Janis M. Jablecki, Rick G. Arena, Shannon M. Arena, Louis E. Ferri, Muriel T. Ferri, Lori A. Sabo, Susan Sliakis, and Joseph Sliakis – whom we shall refer to collectively as the lender defendants. The lender defendants provided the funds for the loans assumed by the Kaputs.
The trial court sustained without leave to amend the lender defendants’ demurrers as to the four causes of action for which they were named as defendants. The Kaputs appeal the judgment of dismissal as to the lender defendants, contending the trial court erroneously ruled that the complaint failed to state causes of action for accounting, quiet title, cancellation of instruments, rescission, or injunctive relief. Specifically, the Kaputs argue that (1) the complaint sets forth a valid cause of action for accounting because an accounting is necessary for the Kaputs to ascertain where the moneys from the Nevada City property loan ended up, (2) a quiet title action does not require allegations of wrongdoing by lender defendants to warrant relief, (3) the complaint’s failure to anticipate a defense of “bona fide purchasers” did not render the cause of action for cancellation of instruments defective, (4) the cause of action for rescission was properly pled even though it did not allege that the lender defendants themselves engaged in fraud or duress, (5) the Kaputs were entitled to injunctive relief based on the viability of their other claims against the lender defendants.
We affirm the trial court’s sustaining of the demurrer without leave to amend as to the cause of action for accounting. However, we reverse the judgment of dismissal and order the trial court to vacate its order sustaining the demurrer to the causes of action for quiet title, cancellation of instruments, rescission, and injunctive relief.
FACTUAL AND PROCEDURAL HISTORY
In reviewing the trial court’s order sustaining the lender defendant’s demurrer, we accept as true the factual allegations properly pleaded in the Kaputs’ operative complaint. (Gu v. BMW of North America, LLC (2005) 132 Cal.App.4th 195, 200; Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 193.) Accordingly, our statement of facts derives from the material allegations set forth in the Kaputs’ second amended complaint. (Ibid.)
Complaint
In February 2000, the Kaputs used all of their savings purchase a house in Downieville, California, free of any mortgages, liens, or encumbrances. They intended to live debt-free while Donald Kaput suffered serious health issues.
In February 2006, the Kaputs needed to purchase a new motor vehicle. They went to several car dealerships but were turned down for financing because of poor credit and lack of employment. Eventually, the Kaputs located a dealership that was willing to sell them a used 2001 Chevrolet Suburban for $26,000 if the Kaputs were willing to arrange a loan with Olympic Mortgage and Investment Company, Inc. (Olympic).
The Kaputs told a representative of Olympic that Donald Kaput was disabled, both of them had been unemployed since 2000, they had poor credit ratings, and had no income other than public assistance. However, the Kaputs noted that they owned their house outright. The Olympic representative urged them to borrow against the equity in their house – not only for the cost of the used vehicle but also to purchase real property for speculation.
After several days of negotiating, the Kaputs agreed to make a car loan with Olympic and to explore the idea of using home equity funds to build another house as a speculative investment. Mimi Simmons subsequently showed the Kaputs several real properties for sale. As soon as the Kaputs allowed Simmons to show them properties, their auto loan received approval.
The Kaputs obtained a vehicle from the dealership without having to sign any loan agreement or paying the dealership any money. The Kaputs were told that Olympic “had taken care of the financing.”
After receiving the vehicle, the Kaputs viewed only one other property with Simmons. When they eventually refused to invest in a vacant lot, the Kaputs received word from the dealership that their car loan had been “revoked.” The Kaputs attempted to return the car to the dealership, but the dealership refused to take it back. The Kaputs then contacted Olympic to ask what they should do. Olympic suggested that the Kaputs meet with Thomas Hastert at Loan Sense.
On February 15, 2006, the Kaputs met with Hastert. The Kaputs explained their problem and asked for a car loan. Hastert was already aware that the Kaputs owned their home outright, and he urged them to purchase land to build a house on for investment purposes. The Kaputs told him that they did not want to purchase land or build a “spec” house. Hastert said he understood. Nonetheless, he had the Kaputs sign numerous documents containing blank spaces among the terms and conditions. These documents included a promissory note and a deed of trust, which Hastert said he would fill in later.
A few days later, Hastert met with the Kaputs and told them that he had arranged for a $350,000 loan against their residence. The Kaputs expressed shock and noted that they had only wanted a $26,000 car loan. Hastert replied that they did not qualify for a car loan and that they had to get a sizable loan to make it worthwhile to the bank. Hastert added, “Now that you’ve got the loan, you’re paying interest on the funds, so you better invest it.” The Kaputs were urged to reconsider the vacant lot that Simmons already had shown to them.
The Kaputs protested that they lacked experience with speculative real estate projects but were assured by Hastert that “he would advise and guide them every step of the way.” Hastert also explained that he had put the proceeds from the $350,000 loan into accounts that would be used to pay for the car; the real property investment; related fees, commissions, and costs; and the payments on the home equity loan. The Kaputs asked why Hastert did not simply turn over the funds to them. He replied that “it was ‘safer’ this way because he would make sure all of the mortgage payments, fees, etc. were timely paid.”
Hastert also articulated a plan to extract the equity from the Nevada City property (yet to be purchased) in order to secure a construction loan for a “spec” house to be built elsewhere. Hastert declared he would handle the proceeds from the Nevada City property loan.
Following Hastert’s plan, the Kaputs purchased the Nevada City property with the proceeds from the home equity loan on their residence. Hastert also informed the Kaputs that he had secured a $560,000 loan on the Nevada City property. He claimed to have deposited the funds into various trust accounts set up for the benefit of the Kaputs.
The Kaputs later discovered that the Nevada City property loan was never fully funded. Due to lack of full funding, construction on the house was repeatedly delayed when Hastert failed to pay for labor, materials, and other expenses. Hastert refused demands by the Kaputs to handle the loan funds.
In October 2006, Hastert told the Kaputs that the home equity loan on their residence had “run out of money.” Hastert told the Kaputs not to worry because the Nevada City property loan funds were sufficient to cover the construction costs for the spec house as well as the mortgage on their Downieville residence.
A month later, the Kaputs became concerned that their loans would come due before the spec house could be completed or sold. Hastert had previously informed them that the two loans carried only a 12-month term and required balloon payments at the end of their terms. To reassure them about the balloon payments, Hastert declared the loans “extended.” When the Kaputs asked to have the extension put in writing, Hastert declined and stated: “You don’t need it in writing, I am the bank.”
In December 2006, Hastert admitted to the Kaputs that he had not fully funded either of their real property loans. Hastert stated that “he needed to find ‘new investors’ for the rest of the funding.” Soon, all of the bank accounts were depleted or overdrawn. Construction on the spec house halted.
The loans on the Downieville house and Nevada City property went into default. Hastert recorded a notice of default on the Downieville house in the amount of $363,512.65 and a notice of default on the Nevada City property in the amount of $456,583.25.
The Kaputs repeatedly asked Hastert for their files, an accounting of both loans, and an accounting of the accounts into which he placed the loan funds. Hastert refused to provide any information or documents.
For the Nevada City property loan, Hastert had filled in the deed of trust signed by the Kaputs so that the deed was drawn in favor of Nancy Selecman (85.71 percent), Janis Jablecki (8.93 percent), and Joseph and Susan Sliakis (5.36 percent). Selecman made partial assignments of her share of the deed of trust to Debra Newby (51.78 percent), Lori Sabo (8.93 percent), Wendy Watson (8.93 percent), Jeffrey Falla (9.82 percent), and Janet Benham (6.25 percent). Newby, in turn, made partial assignments to Richard and Sharron Arena (17.857 percent), Louis and Muriel Ferri (15.178 percent), and Hastert (51.78 percent and 18.745 percent).
Inexplicably, the fractional ownerships of the deed of trust for the Nevada City property add up to 151.78 percent. Consequently, there are competing ownership claims for the deed of trust to the Nevada City property.
The Kaputs alleged that Hastert never assigned or designated any funds received from lender defendants to the Nevada City property loan. Instead, Hastert used received funds to service any number of the many loans in which he was involved in order to keep a Ponzi scheme afloat. The Kaputs allege that Hastert is currently subject to state and federal investigations and criminal indictments.
“A Ponzi scheme is a fraudulent investment scheme where ‘money from the new investors is used directly to repay or pay interest to old investors, [usually] without any operation or revenue-producing activity other than the continual raising of new funds. This scheme takes its name from Charles Ponzi, who in the late 1920s was convicted for fraudulent schemes he conducted in Boston.’” (People v. Williams (2004) 118 Cal.App.4th 735, 739, fn. 2; see generally Cunningham v. Brown (1924) 265 U.S. 1, 7-9 [briefly recounting “the remarkable criminal financial career of Charles Ponzi”].)
In their fourteenth cause of action, the Kaputs allege that Hastert and the lender defendants “are in possession of the books, records, and information pertaining to the purchase of the Nevada City Property, the Downieville Loan, the Nevada City Loan, the funding of the Downieville Loan and the Nevada City Loan, the disposition of the loan proceeds, and the trust accounts, and therefore, the information is unknown to [the Kaputs] and cannot be ascertained without an accounting from these Defendants....” For this, the Kaputs seek an accounting.
In their fifteenth cause of action, the Kaputs allege that the deed of trust for the Nevada City property – as well as the subsequent partial assignments of interests in the deed of trust – “were fraudulent and created as part of the fraudulent conspiracy of Thomas Hastert” and his associates. This cause of action seeks to quiet title.
In their sixteenth cause of action, the Kaputs reallege that the deed of trust on the Nevada City property was fraudulently created and partially reassigned. For this, the Kaputs seek cancellation of instruments, including the deed of trust on the Nevada City property.
In their seventeenth cause of action, the Kaputs allege that “[t]he Nevada City Loan is void or voidable on the grounds that it was procured by duress, fraud or mistake, and suffers from a lack or failure of consideration.” For fraud, duress, mistake, and failure of consideration, the Kaputs seek rescission of the loan.
In their eighteenth cause of action, the Kaputs seek injunctive relief to prevent any of the defendants from attempting to foreclose on the Nevada City property pursuant to the deed of trust.
Demurrer
The lender defendants collectively filed a demurrer to the second amended complaint. The demurrer asserted that the Kaputs had failed to plead sufficient facts to state causes of action against the lender defendants. Specifically, the lender defendants argued that an action for accounting requires an allegation of the existence of a partnership or other relationship requiring accounting and that some balance is due to plaintiffs. Lender defendants argued that the second amended complaint failed to allege facts establishing a duty to provide an accounting to the Kaputs.
The demurrer was filed on behalf of Wendy Watson, Janet R. Benham, Jeffrey A. Falla, Janis M. Jablecki, Rick G. Arena, Shannon M. Arena, Louis E. Ferri, Muriel T. Ferri, Lori A. Sabo, and Joseph Sliakis. The demurrer did not purport to represent Susan Sliakis, even though she was named as a defendant in the fourteenth, fifteenth, seventeenth, and eighteenth causes of action as co-trustee (along with Joseph Sliakis) of the Sliakis Family Trust. In this appeal, a respondents’ brief has been filed by Janet R. Benham, Jeffrey A. Falla, Janis M. Jablecki, Rick G. Arena, Shannon M. Arena, Louis E. Ferri, Muriel T. Ferri, Lori A. Sabo, Susan Sliakis and Joseph Sliakis – which we shall refer to as the Benham brief. Wendy Watson has filed another respondent’s brief, which we shall refer to as the Watson brief.
Lender defendants asserted that quiet title represented a remedy rather than a cause of action. To the extent that a quiet title did constitute a cause of action founded on fraud, the fraud had to be specified with particularity. On this point, lender defendants pointed out that the second amended complaint did not allege that they had engaged in any wrongful conduct.
As to the cause of action for cancellation of instruments, lender defendants asserted that they fully funded their interests in the deed of trust. Lender defendants further argued that the second amended complaint presented “a clear picture that [the Kaputs] did actually approve and receive benefit from the money loaned by the Lender Defendants.”
Lender defendants argued that the Kaputs failed to allege a viable cause of action for rescission because the complaint did not set forth any facts of wrongdoing by the lender defendants.
Finally, lender defendants argued that the failure to set forth any viable cause of action against them required the trial court to deny the Kaputs any injunctive relief as requested in the eighteenth cause of action.
Trial Court Ruling
The trial court sustained the lender defendants’ demurrer without leave to amend and dismissed them from the case. In so ruling, the trial court explained: “The [second amended complaint] incorporates [allegations of fraud by] Hastert, McKnight, Newby, and Selecman and/or the use of McNight, Newby, Selecman as strawmen. There are absolutely no allegations of wrongdoing on the part of the lending defendants.”
“In its ruling on the demurrer to the [first amended complaint], the court addressed the defects in plaintiffs’ allegations concerning all causes of action against the lending defendants except the cancellation cause of action. That analysis is incorporated herein and will not be repeated. Leave to amend is not granted as to these causes of action.
In its ruling on the first amended complaint, the trial court explained: “The ‘lender defendants’ are those defendants who allegedly invested money with Hastert to lend to plaintiffs. There are no charging allegations between them. They are not alleged to be strawmen. A fair reading of the complaint shows it alleges defendants Selecman and Newby are strawmen, not these defendants. The allegations of fraud are not based on any conduct of these defendants. Given these allegations, there is no basis for a quiet title action based on fraud. See Stearns & S. Ranchos Co. v. Atchinson, Topeka and Santa Fee [sic] Railway Co. (1971) 19 Cal.App.3d 24, 32. Nor are the allegations showing a right to quiet title based on the conduct of third parties.
“As to the cause of action for cancellation, it is an equitable one. It is not available against innocent purchasers, e.g., bona fide purchasers. Friedberg v. Weissbuch (1955) 135 Cal.App.2d and California Credit etc. Corp v. Goodin (1926) 76 Cal.App. 785. A complaint seeking cancellation of a deed must allege that the defendants are not bona fide purchasers. See Denike v. Santa Clara Valley Agr. Society (1908) 9 Cal.App. 228. Plaintiffs do not make this allegation nor, given the allegations made in all three of their complaints, is there a reasonable possibility that they can allege that the lending defendants are not bona fide purchasers. Under this circumstance, leave to amend is not granted as to the cancellation cause of action.”
The Kaputs timely filed a notice of appeal from the judgment of dismissal in favor of the lender defendants.
STANDARD OF REVIEW
“The standard of review on appeal from a judgment dismissing an action after the sustaining of a demurrer without leave to amend is well established. ‘The function of a demurrer is to test the sufficiency of the [pleading] as a matter of law, and it raises only a question of law. [Citations.] On a question of law, we apply a de novo standard of review on appeal.’ (Holiday Matinee, Inc. v. Rambus, Inc. (2004) 118 Cal.App.4th 1413, 1420.)” (First Aid Services of San Diego, Inc. v. California Employment Development Dept. (2005) 133 Cal.App.4th 1470, 1476.)
“‘A demurrer tests the pleading alone, and not the evidence or the facts alleged.’ (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.) For that reason, we ‘assume the truth of the complaint’s properly pleaded or implied factual allegations.’ (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) We also ‘consider judicially noticed matters.’ (Ibid.) ‘In addition, we give the complaint a reasonable interpretation, and read it in context.’ (Ibid.) On appeal from a judgment of dismissal after a demurrer has been sustained without leave to amend, the plaintiff has the burden of proving error. (Ibid.)” (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1315.)
DISCUSSION
I
Accounting (Fourteenth Cause of Action)
The Kaputs contend the trial court erred in sustaining without leave to amend the demurrer to their cause of action for accounting. They assert an inability to tally or trace the funds received by Hastert from lender defendants without the remedy of an accounting. The Kaputs urge us to conclude that their need for documents alone supports a cause of action for accounting. We are not persuaded.
A cause of action for accounting requires the plaintiff to demonstrate, among other things, that the defendant engaged in misconduct that adversely affected the plaintiff. (Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 593-594.) In the absence of misconduct by the defendant, plaintiff has no right to an accounting. (Ibid. [collecting authority].) Thus, when a “defendant owes no money to plaintiffs and did not deprive them of any monies or the lawful use of [their property], as a matter of law, the accounting cause of action must be dismissed.” (Ibid.) “No California decision holds that the existence of a complicated accounting relationship between parties by itself permits the maintenance of a lawsuit between them when no money is owed or property must be returned.” (Id. at pp. 593-594.)
In this case, the complaint does not allege that the lender defendants engaged in fraud or duress. As the Kaputs acknowledge, the lender defendants “were on the other end of this incredible scheme of embezzlement, fraud, and conspiracy. They were ‘investors’ in fractionalized construction loans sold by Thomas Hastert, the lead defendant in this action. Just like the [Kaputs], the [lender] [r]espondents were, in all probability, lied to, manipulated, and defrauded by Hastert. And, just like [the Kaputs], they were average people who trusted what Hastert told them and failed to have their investments verified by a reputable professional.” The lack of fraud or duress by the lender defendants prevents the Kaputs from establishing a cause of action for accounting based on the lender defendants’ conduct. (Union Bank v. Superior Court, supra, 31 Cal.App.4th at pp. 593-594.)
The Kaputs erroneously seek to shift the burden onto the lender defendants to prove their innocence. The Kaputs assert: “The burden on the Respondents from prosecution of the Fourteenth Cause of action is nominal. All that they would be required to prove at trial is that they paid full value for the assignments of the Deed of Trust that they received, and further, that they had no knowledge of the fraud by Hastert.” The possibility that the lender defendants might encounter little difficulty in defeating the claim at trial does not mean that the Kaputs have set forth a viable cause of action for accounting. (Four Star Electric, Inc. v. F & H Construction (1992) 7 Cal.App.4th 1375, 1379.)
The Kaputs cannot establish a cause of action for accounting against the lender defendants, who have engaged in no misconduct. Accordingly, the trial court properly sustained without leave to amend the fourteenth cause of action for accounting.
II
Quiet Title (Fifteenth Cause of Action)
The Kaputs contend the trial court erred in ruling that they had to allege misconduct by the lender defendants to state a valid cause of action for quiet title. We agree.
A quiet title cause of action allows a plaintiff to establish title against adverse claims to real property. (Code Civ. Proc., § 760.020, subd. (a).) “[A] quiet title action is aimed at a person who may be asserting a claim to property, and is framed simply by alleging that the plaintiff is the owner and entitled to possession, and that the defendant claims an interest, adverse to the plaintiff, without right.” (Wolfe v. Lipsy (1985) 163 Cal.App.3d 633, 638 [examining predecessor statute to Code of Civil Procedure section 760.020], disapproved on other grounds in Droeger v. Friedman, Sloan & Ross (1991) 54 Cal.3d 26, 36-37.)
In this case, the Kaputs alleged that they are the true owners of the Nevada City property and that lender defendants wrongly assert an interest adverse to the Kaputs’ interest. These allegations suffice to establish the Kaputs’ cause of action for quiet title in the Nevada City property. (Wolfe v. Lipsy, supra, 163 Cal.App.3d at p. 638.)
Lender defendants contend the Kaputs’ complaint is defective because it fails to allege fraud with specificity as to the quiet title cause of action. Not so. A plaintiff seeking the remedy of quiet title must allege fraud only when the defendant has clear record title. (Kroeker v. Hurlbert (1940) 38 Cal.App.2d 261; see generally 5 Witkin, Cal. Proc. 5th (2008) Pleading, § 669, p. 95.) Here, lender defendants do not assert that they have clear title of record. Accordingly, the Kaputs were not required to plead fraud in setting forth a cause of action for quiet title. (5 Witkin, supra, § 669.)
Respondent Watson contends the quiet title cause of action fails because a related cause of action – for cancellation of instruments – is also without merit. In support, Watson relies on Ephraim v. Metropolitan Trust Co. of Cal. (1946) 28 Cal.2d 824. Ephraim involved a plaintiff’s assertion of a cause of action for quiet title that was inextricably linked with the allegations set forth in a cause of action for cancellation of instruments. (Id. at p. 833.) Because the plaintiff’s claim for cancellation of instruments lacked merit, the California Supreme Court held that the companion action for quiet title also failed. The high court explained that “where, as is true in the present pleading, the count to quiet title in regard to particularly named defendants clearly shows that it is based upon the same facts which are pleaded in the cause to remove a cloud, a general demurrer of those defendants should be sustained if the second count reveals a defect in plaintiff’s title or does not state a cause of action to remove a cloud.” (Id. at p. 833, italics added.)
Watson’s argument regarding the quiet title cause of action therefore stands or falls depending on whether the Kaputs have stated a viable cause of action for cancellation of instruments. As we shall explain in part III, post, the trial court erred in sustaining the lender defendant’s demurrer to the cause of action for cancellation of instruments. Accordingly, Watson’s argument on the issue of quiet title does not succeed.
The Kaputs properly pled a cause of action for quiet title. The trial court erred in sustaining the lender defendants’ demurrer to the fifteenth cause of action.
III
Cancellation of Instruments (Sixteenth Cause of Action)
The Kaputs contend the trial court erred in sustaining the demurrer to their cause of action for cancellation of instruments due to the complaint’s failure to anticipate a defense of “bona fide purchasers for value” by the lender defendants. The contention has merit.
A
In articulating a cause of action for cancellation of the deed of trust on the Nevada City property, the complaint alleged that Hastert made false and misleading statements in procuring the Kaputs’ signatures on loan documents. The Kaputs further alleged that fractional interests in the deed of trust were fraudulently conveyed as part of Hastert’s pattern of dishonesty. The complaint alleges the fraudulent transfers of the fractional interests in the deed of trust in several similar paragraphs, of which the following is typical:
“Selecman transferred to Lori Sabo and Wendy Watson a beneficial interest... under the Deed of Trust because it was: (a) prepared, executed, and delivered as an essential part of Hastert’s scheme to defraud the Plaintiffs of the Nevada City Property and the Downieville Property; (b) backdated to the date shown on its face when in fact it was made on or about March 5 to 7, 2007, as a result of Selecman learning that Hastert was under investigation by the California Department of Justice and the California Department of Real Estate for fraudulent and wrongful lending practices; and (c) Selecman and McKnight falsely notarized Selecman’s signature on the assignment and then failed to have such notarizations recorded in McKnight’s notary record book as required by law.”
Subsequent paragraphs reiterate substantially the same allegations with respect to the acquisition of interests in the Nevada City property deed of trust by Janet Benham, Jeffrey Falla, Debra J. Newby, Louis Ferri, Muriel Ferri, Richard Arena, Shannon Arena, Thomas Hastert, and the Patricia A. Cobb Revocable Trust.
B
An instrument, such as a deed of trust, that has been created without a meeting of the minds cannot be enforced as a contract. (Patterson v. Clifford F. Reid, Inc. (1933) 132 Cal.App. 454, 456-457.) To this end, Civil Code section 3412 provides: “A written instrument, in respect to which there is a reasonable apprehension that if left outstanding it may cause serious injury to a person against whom it is void or voidable, may, upon his application, be so adjudged, and ordered to be delivered up or canceled.”
Here, the Kaputs pled several facts negating the mutual consent necessary to create a valid deed of trust for the Nevada City property. They alleged that they signed the documents produced by Hastert even though they were blank as to material terms. And, the Kaputs further alleged that Hastert deliberately misled them about the nature and purpose of the documents – including the deed of trust.
In the Benham brief, lender respondents argue that the Kaputs “were required to and did not plead that lender defendants were not holders in due course/bona fide encumbrancers for value.”
Commercial Code section 3305 allows bona fide purchasers for value to enforce an instrument against the obligors of the instrument. However, even bona fide purchasers for value may not assert rights under an instrument created by fraud, duress, or mistake. “The theory of the defense is that the maker's signature on the instrument is ineffective because he or she did not intend to sign such an instrument at all. The defense extends to an instrument signed with knowledge that it is a negotiable instrument, but without knowledge of its essential terms.” (4 Masterson et al., Cal. Civ. Prac. (2006) Business Litigation, § 42:47, pp. 42-52 to 54.)
Commercial Code section 3305 provides in pertinent part:
The possibility that a defendant will assert a defense of bona fide purchaser and that a plaintiff will counter with allegations of fraud, duress, or mistake is irrelevant to the question of whether a complaint sets forth a viable cause of action for cancellation of instruments. “It is well settled that allegations of a complaint which anticipate or negate new matter are superfluous. ‘The only allegations essential to a complaint are those required in stating the cause of action, and allegations inserted for the purpose of intercepting and cutting off a defense are superfluous and immaterial. The matter alleged may be material in the case, but immaterial in the complaint, and a plaintiff cannot by pleading such matter at the outset call upon the defendant to answer it.’ (Canfield v. Tobias (1863) 21 Cal. 349, 350; 4 Witkin, Cal. Procedure op. cit. supra, Pleading, § 374, p. 426.)” (Four Star Electric, Inc. v. F & H Construction, supra, 7 Cal.App.4th 1375, 1382.) Thus, the Kaputs did not need to allege that the lender defendants were wrongdoers to set forth a cause of action for cancellation of instruments, as the Watson brief contends. (Ibid.)
Both the Benham brief and trial court’s ruling rely on the case of Denike v. Santa Clara Valley Agr. Society (1908) 9 Cal.App. 228 for the proposition that a demurrer must be sustained whenever a defendant appears to be a bona fide purchaser for value. Denike involved the unique circumstance that plaintiff society (represented in the action by one of its members) sued to recover land from defendant as a result of plaintiff’s fraud (or, at least, fraud by some of the members of plaintiff society). (Id. at pp. 229, 233.) The Denike court held that the complaint failed to set forth a cause of action for cancellation of instruments. (Id. at pp. 232-233.) The Denike court reasoned that a plaintiff could not recover property from a bona fide purchaser based on plaintiff’s own fraud. (Ibid.) In this case, the Kaputs do not allege they themselves committed fraud. Consequently, Denike is inapposite.
The Kaputs alleged sufficient facts to establish that there was no meeting of the minds when they signed the deed of trust with blanks as to its material terms. The Kaputs’ complaint did not plead a defective cause of action for cancellation because it failed to anticipate the defense of bona fide purchaser for value. Instead, the second amended complaint sufficiently alleged facts for a cause of action seeking cancellation of the deed of trust for the Nevada City property.
The trial court erred in sustaining the demurrer to the sixteenth cause of action.
IV
Rescission (Seventeenth Cause of Action)
The Kaputs next contend the trial court erred by sustaining the demurrer to the cause of action for rescission because the complaint did not allege misconduct by lender defendants. We agree.
A
The second amended complaint alleges that the deed of trust on the Nevada City property “is void or voidable on the grounds that it was procured by duress, fraud or mistake, and suffers from a lack or failure of consideration.” The cause of action for rescission reiterates the allegations that Hastert made false and misleading statements in securing the loan documents from the Kaputs. The Kaputs also realleged that Hastert’s misconduct included drawing up blank documents for the Kaputs to sign.
Based on these allegations, the Kaputs sought “rescission of the Nevada City Loan, including the promissory notes, deeds of trust, and all assignments, and restitution of all moneys lost by [the Kaputs] as a result of Defendants’ conduct concerning these loans.”
B
Rescission allows a party to a contract to be “relieved of the burdens and [to] procure restitutionary redress respecting a contract which was defective at its inception because consent was not freely or knowingly given.” (Runyan v. Pacific Air Industries, Inc. (1970) 2 Cal.3d 304, 317, fn. 16, italics added.) “A party may rescind a contract if, among other things, his or her consent was given by mistake or obtained through fraud, or there has been a material failure of consideration. ([Civ. Code, ]§ 1689, subds. (b)(1) & (2).) ‘Thus, when a party has been induced by fraud or mistake to enter into a contract, the party may have the contract set aside and seek restitution of those benefits lost to him by the transaction. [Citation.]’ (Merced County Mut. Fire Ins. Co. v. State of California (1991) 233 Cal.App.3d 765, 771.)” (Reveles v. Toyota by the Bay (1997) 57 Cal.App.4th 1139, 1152, disapproved on other grounds in Snukal v. Flightways Mfg., Inc. (2000) 23 Cal.4th 754, 775, fn. 6.)
In pertinent part, Civil Code section 1689 provides: “(b) A party to a contract may rescind the contract in the following cases: [¶] (1) If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party. [¶] (2) If the consideration for the obligation of the rescinding party fails, in whole or in part, through the fault of the party as to whom he rescinds.”
To secure the remedy of rescission of contract, a party must “[g]ive notice of rescission to the party as to whom he rescinds; and [¶] [r]estore to the other party everything of value which he has received from him under the contract or offer to restore the same upon condition that the other party do likewise, unless the latter is unable or positively refuses to do so.” (Civ. Code, § 1691.)
The Kaputs’ complaint alleged that the deed of trust and loan documents for the Nevada City property were void from the start because of Hastert’s fraud, duress, and the Kaputs’ mistake of fact in signing “blank” documents. In their complaint, the Kaputs allege that they are ready “to return any and all consideration, if any, which has been given by the Defendants” who held fractional interests in the Nevada City property deed of trust. This pleading suffices to state a cause of action for rescission.
Lender defendants argue that the complaint is defective because it did not allege that the lenders were the ones who engaged in the fraud or duress. However, if the contract was void at the outset, the subsequent purchase for value by the lender defendants does not cure the problems of the contract’s formation. (Runyan v. Pacific Air Industries, Inc., supra, 2 Cal.3d at p. 317, fn. 16.) The Kaputs have alleged sufficient facts regarding fraud, duress, and mistake in the making of the deed of trust to set forth a viable cause of action for rescission.
Lender defendants next contend that the Kaputs lack the present ability to repay the loans. We reject the contention because it relates to the likelihood of plaintiffs’ ability to prove their allegations rather than the legal sufficiency of their complaint. Accordingly, we reject the contention. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc., (1998) 68 Cal.App.4th 445, 459; Schifando v. City of Los Angeles, (2003) 31 Cal.4th 1074, 1081.)
Lender defendants argue that the action for rescission fails because the Kaputs accepted the benefits of the funds from the Nevada City loan. In support of their argument, the lender defendants cite Civil Code section 1589, which provides: “A voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting.”
As the Kaputs point out, lender defendants did not present this argument in their demurrer. The demurrer’s failure to raise this argument is unsurprising because acceptance of benefits constitutes an affirmative defense. (See Schwing, 2 Cal. Affirmative Defenses (2010) § 32:2, p. 199; see also, e.g., Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1018.) As we have already explained in part II-B, ante, a complaint is not defective for failure to anticipate defenses that defendants might assert. (Four Star Electric, Inc. v. F & H Construction, supra, 7 Cal.App.4th at p. 1382.) Consequently, lender defendants’ argument does not establish a defect in the second amended complaint’s cause of action for rescission.
The trial court erred in sustaining the demurrer without leave to amend as to the Kaputs’ cause of action for rescission.
V
Injunctive Relief (Eighteenth Cause of Action)
The Kaputs contend the trial court erred in sustaining the demurrer to their cause of action for preliminary and injunctive relief enjoining the lender defendants from foreclosing on the Nevada City property. We agree.
The trial court concluded that the Kaputs’ failure to set forth any other viable cause of action against the lender defendants meant that they had no right to injunctive relief. Lender defendants reiterate this reasoning. The Benham brief argues: “Any such preliminary or permanent injunctions are remedies to which [the Kaputs] may only be entitled if they have otherwise pled sufficiently causes of action against Lender [Defendants].” The Watson brief echoes that “some actionable wrong” must support the granting of injunctive relief to the Kaputs.
As we have explained in parts II through IV, ante, the Kaputs did set forth valid causes of action against lender defendants in addition to the claim for injunctive relief. Before the Kaputs’ causes of action for quiet title, cancellation of instruments, and rescission are properly resolved, foreclosure on the deed of trust for the Nevada City property is premature. (California Nat. Bank v. Havis (2004) 120 Cal.App.4th 1122, 1139.) Accordingly, we reverse the trial court’s sustaining of the demurrer without leave to amend as to the cause of action for injunctive relief.
DISPOSITION
The judgment of dismissal is reversed and remanded to the trial court with instructions to vacate its order sustaining the lender defendants’ demurrer without leave to amend the fifteenth (quiet title), sixteenth (cancellation of instruments), seventeenth (rescission), and eighteenth (injunctive relief) causes of action. The trial court shall enter a new order overruling lender defendants’ demurrer to those causes of action. The order sustaining the demurrer without leave to amend the fourteenth cause of action for accounting is affirmed.
The parties shall bear their own costs on appeal. (Cal. Rules of Court, rule 8.278(a)(5).)
We concur: SCOTLAND, Acting P. J., ROBIE, J.
Retired Presiding Justice of the Court of Appeal, Third Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
Susan Sliakis’s absence from the list of persons represented by the demurrer to the second amended complaint makes no difference to the disposition of this appeal. Joseph Sliakis’s appearance in the trial court, on behalf of the Sliakis Family Trust sufficed to preserve the Sliakis Family Trust’s interests in demurring to the second amended complaint.
“There is no basis for rescission due to any conduct of these defendants.
“There are no acts supporting grant of an injunction. It is not alleged that defendants are foreclosing on the property or have committed any other acts for which an injunction can be issued.
“No cause of action is stated for constructive trust regarding the monies defendants invested with Hastert to lend to plaintiffs. There are no allegations that these defendants had anything to do with Hastert or the money after Hastert received the money from defendants and lent it to plaintiffs.”
“(a) Except as stated in subdivision (b), the right to enforce the obligation of a party to pay an instrument is subject to all of the following: [¶] (1) A defense of the obligor based on (A) infancy of the obligor to the extent it is a defense to a simple contract, (B) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (C) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (D) discharge of the obligor in insolvency proceedings.
“[¶]... [¶]
“(b) The right of a holder in due course to enforce the obligation of a party to pay the instrument is subject to defenses of the obligor stated in paragraph (1) of subdivision (a), but is not subject to defenses of the obligor stated in paragraph (2) of subdivision (a) or claims in recoupment stated in paragraph (3) of subdivision (a) against a person other than the holder.
“(c) Except as stated in subdivision (d), in an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment, or claim to the instrument (Section 3306) of another person, but the other person’s claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. An obligor is not obliged to pay the instrument if the person seeking enforcement of the instrument does not have rights of a holder in due course and the obligor proves that the instrument is a lost or stolen instrument.
“(d) In an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the person entitled to enforce the instrument any defense or claim in recoupment under subdivision (a) that the accommodated party could assert against the person entitled to enforce the instrument, except the defenses of discharge in insolvency proceedings, infancy, and lack of legal capacity.” (Italics added.)