Loan Guaranties and Lender Misconduct - When the Guarantor Is Released Due to the Lenders' Actions.

November 17, 2015

Guarantors of California commercial real estate loans are regularly required to sign waivers of defenses. Guarantors would otherwise have the usual defenses that borrowers have, such as anti-deficiency protection (see at bottom re: the Gradsky Waiver). Civil Code section 2856 specifies what specific defenses may be waived; the waiver often includes language which provides for waiver of all defenses listed in Civil Code section 2856. However, Sacramento real estate attorneys occasionally see situations where the lender engaged in such bad behavior that the waivers come into question. This situation arose in a decision last year from Southern California.

sacramento loan guaranty waiver attorney.jpgIn California Bank & Trust v. DelPonti, Five Corners LLC obtained a loan to develop a 70-unit townhome project. DelPonti was one of the guarantors. After 18 months of work, the bank stopped paying approved payment applications, bringing the project to a halt. The bank entered an agreement with Five Corners in which the bank promised to pay the subcontractors if they discounted their bills, mitigating the guarantors' damages. Nonetheless, the bank foreclosed on the project. The bank sued Five Corners and the Guarantors for the deficiency. The trial court ruled for the guarantors, finding that the bank was guilty of willful misconduct, and a) the bank breached the loan agreement by refusing to honor the four approved payment applications, and b) the bank led the Guarantors to believe that they would be released from the guaranty if they performed according to the later agreement. The Court of Appeals also ruled for the Guarantors, finding that the waivers they signed did not include equitable defenses for their bad conduct.

The bank argued that the Guarantors waived all their defenses under the guaranty agreement. The Court said, no, not all of them. Section 2856 provides lists of the specific defenses (set out below) to enforcement of the guaranty. However, a guarantor cannot be held liable where a contract is unlawful or contravenes public policy. Here, the Bank was arguing that, before default, the Guarantors waived the bank's own misconduct. But that was not expressly waived in the Guaranty, nor provided for in the Civil Code. The Court did not interpret Civil Code section 2856 to permit a lender to enforce predefault waivers beyond those specified, where to do so would result in the lender's unjust enrichment, and allow the lender to profit from its own fraudulent conduct. Thus, these Guarantors waiver was limited to those statutory defenses expressly provided for in the in the agreement. "A waiver of statutory defenses is not deemed to waive all defenses, especially equitable defenses, such as unclean hands, where to enforce the guaranty would allow a lender to profit by its own fraudulent conduct. The doctrine of unclean hands bars a plaintiff from relief when the plaintiff has engaged in misconduct relating directly to the transaction concerning which suit is brought."

sacramento real estate loan guaranty attorney.jpgThis particular waiver agreement stated "Except as prohibited by applicable law, Guarantor waives...." This language contemplates the retention of defenses, the predefault waiver of which would be contrary to public policy. The guaranty relationships, the lender owes the guarantor a duty of continuous good faith and fair dealing. Here, the bank failed that duty, and public policy required the court to construe the guaranty so it as it did not allow the bank to profit from its own misconduct.

[In Union Bank v. Gradsky, the lender held a trustee sale and then sued the guarantor for the deficiency. The court found that the guarantor also had statutory anti-deficiency protection. As a result, guarantors have since been required to waive their defenses, hence the "Gradsky waiver."]


Rescission of a Real Estate Contract - It is hard to Undo the Harm, But the Court Must No Matter How Difficult

October 21, 2015

When there has been a breach of contract or fraud related to a real estate contract, the injured party can either seek damages, or disaffirm the contract, treat it as rescinded (called rescission), and seek damages for the rescission. In the case of rescission, Civil Code Section 1689 permits rescission when the consent to the contract was given by mistake or obtained through fraud or undue influence exercised by the party as to whom he rescinds. The party that was harmed must offer to restore to the other party everything of value they had received under the contract. Sacramento real estate attorneys often see clients in difficult positions regarding returning everything of value - if it was a purchase contract, you have to give the property back though you have already made changes to it and it may now have encumbrances. If it was a loan contract, it is not always easy to give the money back, since it has already been spent. Nonetheless, rescission is a good remedy for undoing the damage done. Such was the case in an unusual situation in San Carlos when buyers bought a house for $2.35 million and spent $300,000 in renovations, but were able to rescind the purchase contract.

sacramento rescission attorney.jpgIn Wong v. Stoler (an UNPUBLISHED opinion), the Wongs bought a hillside home from the Stolers. After they moved in and renovations were underway, they were surprised to discover that they were not hooked up to the City's public sewer system, but instead to a private system.

The sellers provided the Wongs with a transfer disclosure statement completed in 2002 by the prior owners, an updated 2008 transfer disclosure statement, and a supplemental sellers' checklist, which represented to the Buyers that the property was connected to the City sewer. They did not tell the Buyers any details about recorded CC&Rs that discussed the private sewer system nor did they disclose the existence of a Homeowners Association.

About four months after taking possession, the Wongs first learned about the private system through an email from a neighbor. They tried to work out a more formal association with the neighbors, and also offered to dedicate the system to the City, but nothing worked out, so they sought to rescind the contract. This lawsuit was the result.

sacramento contract rescission attorney.jpgIn rescission of a real estate purchase, the seller must refund all payments received in connection with the sale. If the buyer has taken possession of the property, the buyer must restore possession to the seller. As consequential damages, rescinding buyers or sellers may recover such items as real estate commissions paid in connection with the sale], escrow expenses, interest on specific sums of money paid to the other party, and attorney fees in appropriate. The trial court decided this was too much. The Sellers had bought a new home and spent $100,000 in improvements, and the Buyers had spent three times that on their home.

The trial court found that the sellers acted fraudulently, but denied rescission, claiming that unwinding the transaction would be impractical and too burdensome on the sellers. Instead, it required the sellers to pay for any repairs or maintenance for the next 10 years. The buyers appealed.

The court of appeal overruled the trial court. Under Civil Code section 1692, once a court has determined that the contract was rescinded, "[t]he aggrieved party shall be awarded complete relief, including restitution of benefits, if any, conferred by him as a result of the transaction and any consequential damages to which he is entitled." The fundamental principle 'is that "in such actions the court should do complete equity between the parties" and to that end "may grant any monetary relief necessary" to do so.


A Lis Pendens Must Be Mailed To Owners at the Address in the Assessor's Role to be Valid; But Sometimes There is an Exception

October 8, 2015

A Lis Pendens, or Notice of Pending Action, is a document that is recorded to give constructive record notice of a pending lawsuit. The lawsuit must involve a claim which affects (a) title to, or right to possession of, real property or (b) the use of an easement. (C.C.P. § 405.4) When recorded, the Notice gives notice to subsequent buyers, transferees and encumbrancers that an action is pending which affects the real property. Sacramento real estate attorneys routinely record Lis Pendens and, for the Notice to be effective, also mail a copy of the Notice, by registered or certified mail, return receipt requested, to all known addresses of the parties and to all owners of record of the real property affected by real property claim as shown by the county assessment roll. (Civ. Proc. Code § 405.22).

In a recent case from Riverside County, a claimant who recorded a lis pendens was disappointed that the mailing requirement was serious, and their Notice was ineffective against a party to whom it was not mailed, even though the party knew about the lawsuit.

lis pendens lawyer sacramento.jpgJ.A. Carr v. Ronald A. Rosen involved a vacant lot in Riverside. Carr claimed that he had adversely possessed it. The property was co-owner by Ortiz and Colon, and Colon conveyed her half interest to Lopez. Before Lopez' deed was recorded, Carr filed a lawsuit, recorded a lis pendens on May 12, but did not mail it to anyone. His attorney filed a declaration stating that Ortiz and Colon had no known address; but the assessor's role showed a mailing address. Lopez was neither named in the suit, nor mailed a Notice. On October 13 Lopez' deed was recorded. The court entered judgment for Carr, against Ortiz, Colon.

Carr brought another action against Lopez, who was the successor to Colon. In this new lawsuit, Lopez argued that the lis pendens, and thus the judgment, was ineffective as to Colon's interest in the property, because it was not mailedColon at the address shown on the assessor's role. Thus, Lopez owned the property free and clear. The Court agreed.

lis pendens attorney sacramento.jpgCritical to the decision was Code of Civil Procedure section 405.22, which states that, before recording a lis pendens, the claimant must...

"cause a copy of the notice to be mailed, by registered or certified mail, return receipt requested, to all known addresses of the parties to whom the real property claim is adverse and to all owners of record of the real property affected by the real property claim as shown by the latest county assessment roll. If there is no known address for service on an adverse party or owner, then as to that party or owner a declaration under penalty of perjury to that effect may be recorded instead of the proof of service required above, and the service on that party or owner shall not be required."
The court found that this statute anticipates that the plaintiff will check the assessment role. Only if no address is listed may the plaintiff file the declaration of no known address. That was not the case here - an address was listed in the assessor's role, but plaintiff failed to mail the document.

The Court distinguished the case of Biddle v. Superior Court (170 Cal.App. 3d 135). In Biddle the plaintiffs mailed the lis pendens to one of the defendant's two known addresses, but not the other; and they also failed to send it return receipt requested. The defendants had actual notice of the lis pendens. They filed motions to expunge without arguing the lack of proper notice. That court found that the plaintiff substantially complied with the service requirement and unquestionably conveyed prompt actual notice to the defendants, thereby satisfying the purpose of the statute. The Carr court found that Biddle had two prongs:

First, the plaintiffs substantially complied with the mailing requirement; and second, the defendants waived any defects in the motion to expunge when they did not claim lack of statutory notice. In our case, the Carr court found that Carr had not satisfied either prong.


Multiple Parties to a Commercial Lease - Why They Do Not Need to All Be Named in a Single Lawsuit

September 29, 2015

In the past, when multiple parties were obligated under the same commercial lease, they were presumed to be jointly liable. They are each responsible for their share of the total. If the other side wanted to enforce the agreement, they had to name all the jointly liable parties in the same lawsuit (the compulsory joinder or all-or-none rule). If you filed suit but couldn't locate one of the lessees, they were off the hook. But over time the Courts changed the rule by converting "joint" obligations into "joint and several" obligations. These are considered to be a contract that is made both separately with each promisor and jointly with all the promisors. Civil Code section 1659 provides "Where all the parties who unite in a promise receive some benefit from the consideration, whether past or present, their promise is presumed to be joint and several."

Sacramento commercial lease lawyer.jpgParties who are jointly and severally liable may be sued together in one lawsuit, or names in separate lawsuits, brought at different times. Nothing short of satisfaction of the debt bars any further actions against other parties. But, what happens to the rule of res judicata, or claim preclusion? Judgments are generally conclusive. The doctrine of res judicata precludes parties from relitigating a cause of action that has been finally determined by a court of competent jurisdiction. Any issue necessarily decided in such litigation is conclusively determined as to the parties or their privies if the issue is involved in a subsequent lawsuit on a different cause of action. Sacramento real estate attorneys rarely see issues of claim preclusion raised in commercial lease practice. However, in a recent decision the commercial landlord scored a judgment of over $2 million against one of three co-signors on the lease. The landlord then sued the other two tenants, who argued res judicata - there was already a judgment on the lease, and further action was prohibited. Both the trial court and court of appeals agreed with the tenants forgetting a key element of the res judicata doctrine. It took the Supreme Court to straighten them out.

In DKN Holdings LLC v. Wade Faerber, Caputo, Faerber, and Neal leased from DKN a commercial space in a shopping center to operate a fitness center for ten years. The lease stated that the parties who signed the lease "shall have joint and several responsibility" to comply with the lease terms. Caputo alone sued DKN for fraud, and DKN counter-claimed for rent. DKN did not bring the other tenants into the lawsuit. After trial, all the tenant's claims were rejected, but the landlord was awarded over $2.8 million.

california commercial lease lawyer.jpgDKN then sued the other two tenants for back rent. The other tenants argued that because DKN's rights under the lease had been adjudicated in the Caputo action, suit against Faerber was barred by the rule against splitting a cause of action. The trial court agreed with the tenants, and the court of appeal did too. But the California Supreme Court did not.

The tenants characterized the issue as a clash between two doctrines - that of joint and several liability, and that of the preclusive effect of judgments. But the Supreme Court found that the doctrines are separate, and neither had to take precedence. Judgment in the first action against Caputo did not bar a judgment in the second action against the other two tenants, even though the suit alleges the same claim of wrongdoing, because they the suits were against different parties. The joint and several liability does not conflict with res judicata, because this doctrine operates in harmony with joint and several liability principles because it only bars repeated claims for the same relief between the same parties.


Escrow - Who the Money Belongs To, And Why it is Important

September 14, 2015

An escrow involves the deposit of money, documents, or other things, with a third party to be delivered on occurrence of specified conditions. In a typical transaction, the buyer of real estate deposits the purchase money, and the seller deposits the deed to the property. The instructions provide that the deed is to be recorded on receipt and distribution to the seller of the purchase money. Typically, in Northern California real estate escrows are handled by a "controlled escrow company" referring to any person or company "whose principal business is the handling of escrows of real property transactions" that contemplate the issuance of title insurance, where the escrow holder is controlled by or controls a title insurer or an underwritten title company. (Ins. Code, § 12340.6, subd. (a)). What are most important in an escrow is who makes the deposit, and what their instructions are. In a recent escrow, the parties were sloppy in their $48 million dollar transaction and instructions, which resulted in a $1 million dollar surprise. It always amazes this Sacramento real estate attorney when a little bit of attention during the transaction would have prevented paying a huge amount of attention (read as 'fees') in litigation.

sacramento attorney escrow.jpgIn Tribeca Companies, LLC v. First American Title Insurance, Tribeca was an LLC that invested in distressed properties by buying and foreclosing defaulted mortgage loans. Tribeca entered a joint venture with Grishin that was to invest cash for the deals. The joint venture was called Sky Group LLC. Grishin's member in the JV was his SGSF LLC. Tribeca's member was Sky Pacific. Sky Pacific was the manager of the LLC. The Joint Venture Agreement provided that, for each deal, SGSF was to deposit $1 million in escrow and review the deal. If it did not like the deal, its money would be refunded. If it approved the investment in writing, the money would become nonrefundable, and SGSF was to deposit the balance of the necessary funds.

Tribeca opened an escrow for the JV with First American. Here's where it gets sloppy - Grishin individually wired $1 million dollars into the escrow, but the escrow officer mistakenly credited the money to Tribeca. Grishin informed Tribeca by telephone that he approved of the deal. The deal they were working on fell apart, largely because Grishin had only $16 million to invest, but needed $47 million. Tribeca thought yahoo!, $1 million for me. Not so fast. Grishin instructed the escrow officer to return the funds, which they did. Tribeca sued the escrow company.

Tribeca's lawsuit alleged claims of breach of contract, breach of fiduciary duty, negligence, fraud, and negligent misrepresentation. The court noted that an essential element of each of these claims is that a defendant's alleged misconduct was the cause in fact of the plaintiff's damage. "An act is a cause in fact if it is a necessary antecedent of an event." In the claim for breach of contract, the test for causation in a breach of contract ... action is whether the breach was a substantial factor in causing the damages.

escrow attorney Sacramento.jpgCourts have held "[t]he deposit of moneys in the escrow does not alter or change the ownership thereof." First American held Grishin's money in trust for his benefit, and no other party had any claim to his funds because he never designated another party as the beneficiary. Tribeca's deal was with SGSF LLC; these were Grishin's own personal funds. And besides, SGSF never approved the deal in writing, so regardless of the source of the funds, they remained refundable.

Civil Code section 2344 provides that "If an agent receives anything for the benefit of his principal, to the possession of which another person is entitled, he must, on demand, surrender it to such person ... and is responsible therefore, if, after notice from the owner, he delivers it to his principal." There was no reason for the escrow to release the money to anyone other than the party that deposited the money. A $48 million dollar deal in which the parties failed to follow the terms of their own agreements. Maybe Grishin was very smart and Tribeca dumb or these people were so awash in dough that no one cared for following the rules.


California Statute of frauds and real property - how placing property in trust does not require a deed

September 1, 2015

The statute of frauds is legislation developed to prevent fraud by requiring a writing for several forms of agreement. The idea is that these transactions are too important to be left to claims of oral agreements. An important topic addressed by the statute of frauds is real estate. Covered are agreements for the sale, gift, financing, leasing for longer than one year, and contracts that cannot be performed within one year. (California Civil Code section 1624). The contract (called the 'Memorandum") must identify the subject matter of the contract and the parties; indicate that a contract has been made or offered by the person signing the memorandum; and state the essential terms of the agreement. If it is for the sale of real property, it must name the parties, identify the property, and set forth the price and terms of payment with a reasonable degree of certainty. Sacramento real estate attorneys rarely see real estate contracts that do not satisfy the statute of frauds except in old law books.

But there are different rules when it comes to trusts. Trusts are governed by the Probate Code, and in a recent decision a creditor was disappointed to learn how little it takes to satisfy the statute of frauds.

sacramento attorney Statute of frauds.jpgIn Ukkestad v. RBS Asset Finance, Inc., Larry created a trust, and then died. His creditor wanted to go after some real estate in Vista and Indio that he owned, claiming that it had not been conveyed to the trust.

Common practice is to record a deed granting the property to the trustee of the trust. That was not done here, and the creditor argued that there was not a sufficient description of the real property. The court disagreed.

The trust instrument stated:
"The Grantor [i.e., Mabee], by the execution of this instrument, hereby assigns, grants and conveys to the Trustees of this instrument all of the Grantor's right, title and interest in and to all of his real and personal property, including all Tangible Personal Property, stocks, bonds, cash, mutual funds and promissory notes, all amounts on deposit from time to time at any bank, savings and loan association or investment institution, real property, leases on real property, interests in business entities and all other property owned by the Grantor, wherever situated.... The Grantor intends this assignment to be effective as of the date of this instrument even though other documents may be necessary to perfect title to such property in the name of the Trustees."

Real property may be made part of a trust's assets if two requirements are met:
1. The owner of the real property is the settlor creating the trust with himself or herself as the trustee.

2. Compliance with the statute of frauds.
The statute of frauds in Probate Code section 15206 states: "A trust in relation to real property is not valid unless evidenced ...:
(a) By a written instrument signed by the trustee ....
(b) By a written instrument conveying the trust property signed by the settlor
(c) By operation of law."

Statute of frauds sacramento attorney.jpgThe Supreme Court has stated that a memorandum is sufficient to convey real property if it describes the land such that it could be identified " with reasonable certainty." If the description merely contains the "means or key" by which the actual description may be determined and located on the ground.

Here, the question was whether the language Larry used in trust was sufficient. It stated that he is conveying "all of his real and personal property" to the trustee, including "real property ... wherever situated."

This court found the description to be sufficient. One could do a title search and find all the real estate Larry owned. The court noted a decision in which the description was insufficient - the trust referenced property in an attached schedule A, but there was no schedule attached. Larry's trust had the magic words.


A California Lis Pendens (Notice of Pending Action) May Be Recorded In a Fraudulent Conveyance Lawsuit - When it Can Be Done

August 13, 2015

A lis pendens is a recorded notice of a lawsuit that concerns title or possession to real property. It is called a "Notice of Pending Action" in the statutes, but Judges and attorneys still like the old term. The purpose is to give notice of the lawsuit - anyone who acquires an interest in the property or a lien against it is later in time and subject to the results of the suit. A fraudulent conveyance is when a debtor transfers property out of their name in order to prevent their creditors from reaching it to satisfy their claim. Sacramento Business and real estate attorneys often see fraudulent conveyance actions to undo a transfer of a debtor's assets that rendered the debtor insolvent. What happens when the two items coincide? In a recent case a judgment holder claimed that their lien was superior to that of someone who alleged a fraudulent conveyance and recorded a lis pendens, though they did not claim a direct interest in the property. The appellate court surprised them finding that the date of the fraudulent conveyance judgment related back to the recording of the lis pendens.

Sacramento lis pendens attorney.jpgIn Mira Overseas Consulting Ltd. v. Muse Family Enterprises, Ltd., David Smith owned BTM Funding. Smith bought a house in Pacific Palisades for $10 million, but BTM held title so he could hide it from his wife during their divorce. Defendant Muse was an investor in BTM. Smith later deeded the property to himself, then to his new wife, but these were not recorded until BTM had financial problems. Once they were recorded, BTM's primary asset was gone, and BTM was insolvent.

Muse sued BTM, Smith, and his wife, seeking to void the deeds as a fraudulent conveyance. Muse recorded a Lis Pendens in September 2010. A Judgment was entered and recorded nullifying all the deeds.

Mira Consulting, now owned by David's ex-wife, had made the loan for the house purchase, also sued SBTM, Smith, and his wife. Mira obtained a money judgment, recording an abstract in July 2011. Mira then sued Muse, claiming that its judgment lien was superior to any claimed by Muse.

The Court said no - the lis pendens recorded in 2010 established Muse in first priority. Because a lis pendens provides constructive notice of the litigation, any judgment later obtained in the action relates back to the filing of the lis pendens.

The court noted that a judgment favorable to the plaintiff relates to, and receives its priority from, the date the lis pendens is recorded, and is senior and prior to any interests in the property acquired after that date. As set forth in Code of Civil Procedure, section 405.24: "From the time of recording the notice of pendency of action, a purchaser, encumbrancer, or other transferee of the real property described in the notice shall be deemed to have constructive notice of the pendency of the noticed action as it relates to the real property and only of its pendency against parties not fictitiously named. The rights and interest of the claimant in the property, as ultimately determined in the pending noticed action, shall relate back to the date of the recording of the notice." (Italics added.)

Sacramento lis pendens lawyer.jpgIt also noted that a fraudulent conveyance is a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim. The possible remedies include voiding, or un-doing, the transfer of property to the extent necessary to pay the creditor. Citing the Supreme Court in Kirkeby v. Superior Court (2004) 33 Cal 4th 642, voiding of a transfer of real property will affect title to the real property. Therefore, a fraudulent conveyance action seeking avoidance of a clearly 'affects title to, or the right to possession of' (Code Civ. Proc., § 405.4) real property and is therefore a real property claim for the purposes of the lis pendens statutes.

In this case Smith was a bad actor, defrauding the ex-wife and his creditors. He quickly folded, and the fight was between creditors. Here, quickly recording the lis pendens won out.


Civil Code 1009 and Preventing Public Rights to Use Private Land for recreation - Whose Land is Protected

California landowners need to be concerned about public use of their property. A high level of public use may imply an offer of dedication for public use. Unlike a prescriptive easement, public recreational use rights may be created without regard to how much any one individual uses the property, but rather by the extent of use by the more general 'public.' However, since 1972, Civil Code section 1009 established that No recreational public use, after March 4, 1972, can establish a permanent public right of use of property by prescription or implied dedication unless the owner makes a specific written, irrevocable offer of dedication, or unless a governmental entity has made visible improvements on the land, or has cleaned and maintained it in such a manner that the owner should know of the public use. California real estate attorneys advise their clients as to how they can prevent rights from being establish by posting the property, resulting in a permissive use. In a recent case a landowner tried to invoke section 1009 to prevent rights being established to cross his property to use other property for recreation. He was disappointed when the court said no, the recreation has to be on your property for the statute to apply.

sacramento public recreation easement attorney.jpgIn Antonio Pulido et al., v. Alfred Robert Pereira, Jr., the Pulidos owned some bare land in Calaveras County. To reach it they took Hogan Dam Road and turned off onto Quartz Hill Drive to access their property. They intended to build a house on their property, but in the meantime were using the property to shoot at targets. In 2007 Pereira put a lock on the gate at the turn off to Quartz Hill Drive. The Pulidos claimed that they had established a prescriptive easement. The court first noted the requirements for a prescriptive easement:
"The party claiming such an easement must show use of the property which has been open, notorious, continuous and adverse for an uninterrupted period of five years."

Pereira argued that, under Civil Code section 1009, the public's use of another's property for "recreation purposes" can never result into a right to use that property prohibited the establishment of a prescriptive easement.

sacramento easement public recreation attorney.jpgThe court found that it was a matter of statutory interpretation, and determining the intent of the legislature. That intent was expressed in the introduction to the code section (set out below), which was to encourage landowners to allow recreational use of THEIR property without the threat of just such an easement being established. Here, there was no public use, This was a matter of an easement between adjoining landowners. The recreation taking place was not on Pereira's property, nor was "the public" using Quartz Hill Drive to reach a public recreation area.

1009. (a) The Legislature finds that:
(1) It is in the best interests of the state to encourage owners
of private real property to continue to make their lands available
for public recreational use to supplement opportunities available on
tax-supported publicly owned facilities.
(2) Owners of private real property are confronted with the threat
of loss of rights in their property if they allow or continue to
allow members of the public to use, enjoy or pass over their property
for recreational purposes.
(3) The stability and marketability of record titles is clouded by
such public use, thereby compelling the owner to exclude the public
from his property.


The Security First Rule - The Steps to Obtaining a Deficiency Judgment

There are numerous anti-deficiency laws concerning California real estate. An Important one, especially with commercial real estate, is CCP section 726(a). It is broadly described as the "one form of action" rule. This broad rule has two components - a) the "one action rule", a prohibition of multiple lawsuits to collect a debt secured by real estate; and b) the "security first rule," which requires the creditor to proceed first against all the real property security (exhausting the security) first through judicial foreclosure before enforcing the underlying debt. 726 provides for a lender to file a judicial foreclosure lawsuit which will allow them to recover a deficiency judgment against the borrower. This statute is subject to many Judge-made requirements and sub-rules, and a careful lender or borrower will want to consult a Sacramento real estate attorney. In a decision from Southern California, the lender got a big surprise when they discovered that because of its mistake, it could not obtain a deficiency judgment.

NOTE: A petition for review was granted by the Supreme Court; this case may not be cited.

Sacramento security first attorney.jpgIn First California Bank v. McDonald, the bank made a $1.5 million dollar loan to a husband and wife. The loan was secured by a deed of trust on property in Wasco. As additional security, the wife signed a deed of trust on her separate property located in Shafter. Eventually, Sally wanted to sell the Shafter property. The Bank agreed to the sale with the understanding that the bank would get the proceeds, and the couple would not be released of liability. The husband did not sign the release agreement.

The husband died in September 2009, a probate followed, and the husband's children were appointed personal representatives. The Note went into default, and the Bank filed a complaint for judicial foreclosure. If sale of the Wasco property did not raise enough money to pay off the over one million dollars still owing, the judicial foreclosure would allow the Bank to collect the balance from the wife and the husband's estate. The husband's children argued that, because the Bank had released the Shafter property without their father's consent, the Bank violated the security first rule of Code of Civil Procedure section 726(a), and thus the Husband's estate was released from personal liability. A creditor may waive that right by not following the requirements of section 726, and not obtaining the consent of the debtor to do so.

The court focused on Section 726(a) of the Code. It provides for judicial foreclosure, which allows for personal liability unless "judgment for any waived by the judgment creditor..."

Here, the Husband's children's' argument was based on the "security first" rule. Where the debt is secured by multiple properties, the rule requires that all property securing the debt is included in a single judicial foreclosure before seeking a personal judgment on the debt. Failure to do so gives the debtor an affirmative defense in the foreclosure action. When the debtor signs a note secured by a deed of trust on real property, they do not make an absolute promise to pay the debt, but rather makes a conditional promise to pay any deficiency any deficiency that remains after a judicial sale of the property does not satisfy the debt.

Sacramento One form of action attorney.jpgThe courts have found that the purpose of the security first rule is to-
(1) prevent a multiplicity of actions, (2) compel creditors to exhaust all of the security before any entry of a deficiency judgment, (3) require the debtor be credited with the fair market value of the secured property before being subjected to personal liability, and (4) to encourage responsible lending practices that do not overvalue the collateral.

Based on the security first rule, the court concluded that the Bank was required to include both the Wasco and Shafter properties in its judicial foreclosure lawsuit, unless it can prove that all the debtors (meaning the Husband) consented to the release of the Shafter property as security for the loan.

One of the Justices wrote a concurring opinion which seems to disagree with the majority. It cites the Hibernia rule - when the debtor's title to the property has been extinguished after granting the deed of trust, the lender does not need to include that property in the judicial foreclosure, unless that lender is responsible for the extinguishing the security. Here, the court found that the Bank was responsible in that extinguishment because it released the Shafter property. The concurring justice found the remedy too harsh. Especially where, as happened here, the proceeds from the Shafter sale were applied to the debt and reduced the total amount owed. Thus, there was no prejudice to the debtors.


Equitable Easements - When the Trespasser's Burden Is Not So Bad to Warrant an Easement

An equitable easement is judged-created on equitable grounds even though the user is not entitled to an easement on one of the more traditional grounds. The judge balances the rights of the various parties and decides whether there should be an injunction to prohibit the trespass, or alternatively to convert the trespass into a right, and order compensation for the victim. They were first developed to prevent a property owner inconvenienced to a "minor degree" by a trespass from nevertheless engaging in "legal extortion" against an innocent trespasser by demanding an exorbitant sum in exchange for not filing suit to enjoin the trespass. When wondering whether they have such an easement, a property should consult with the Sacramento real estate attorney, as there are usually several other grounds in play, such as a prescriptive easement, or easement by necessity. In a recent decision, the court of appeals found that the burden of removing some patio furniture was not sufficient to establish an equitable easement.

Sacramento equitable easement attorney.jpgIn Lilli SHOEN, v. Juliet ZACARIAS the parties were two neighbors who lived on the side of a hill. Between their adjacent lots there was a small patch of flat land, about 500 square feet that was mostly on Shoen's lot. However, due to steepness, it was difficult to access and use from Schoen's parcel. However, it was accessible from Zacarias's lot by way of a staircase. Zacarias had placed patio furniture on the flat patch, and used it. An owner prior to Shoen had given Zacarias permission to use the flat patch as long as that owner continued in possession. The property was eventually sold, and Shoen took possession in 2012. Shoen demanded that they remove the furniture, to no avail. Shoen sued for injunctive relief and damages; Zacarias countered with easement claims.

The trial court found that Zacarias was entitled to an equitable 15 year easement, on payment to Schoen of $15,000. The court found that for Schoen to build a staircase would cost $100,000. It cost Zacarias $275 to have the patio furniture removed. The appellate court overturned the decision, because it was ridiculous.

The court of appeal first looked at origins of the equitable easement remedy; first, the 'legal extortion' angle, and then, how equitable easements give the trespasser "what is, in effect, the right of eminent domain by permitting him to occupy property owned by another. This right is in tension with the Constitutional prescription against the taking of land. As a result, courts use an "abundance of caution,", and require showing that the hardship on the trespasser be greatly disproportionate to the hardship on the owner. "To allow a court to reassign property rights on a lesser showing is to dilute the sanctity of property rights enshrined in our Constitutions."

Sacramento equitable easement lawyer.jpgIt found that the court must focus on whether the burden on the trespasser in ceasing the trespass is so greatly disproportionate to the burden on the property owner from the loss of use of the trespassed-upon property that the courts should make an exception to the general rules of property ownership and require the owner to accept damages instead of reclamation of her own land.

In this case, removing the patio furniture was not such a great burden after all. Interestingly, the trial court did not address the prescriptive easement claim. The initial permission to use the property would not allow prescriptive rights, but once the property was sold, the five-year clock to create a prescriptive right would have started.


The Irrevocable License to Use Another's Land - The Two Steps Required

A license gives authority to a licensee to perform an act or acts on the property of another pursuant to the express or implied permission of the owner. The licensor generally can revoke a license at any time without excuse or without consideration to the licensee. Also, the license is lost if the licensee conveys their property - the license is personal to the individual and does not attach to the land. However, the license can become irrevocable when a landowner knowingly permits another to repeatedly perform acts on his or her land, and the licensee, in reasonable reliance on the continuation of the license, has expended time and a substantial amount of money on improvements with the licensor's knowledge. Under such circumstances, it would be inequitable to terminate the license. (Miller & Starr, as cited by Richardson v. Franc) Often in these cases, Sacramento real estate attorneys focus on whether the owner granted permission or the activity was obvious so that the owner was aware, and whether or not the actual expenditures were substantial. In a recent Northern California decision, none of these factors were even close, and an irrevocable license was found.

Sacramento irrevocable license lawyer.jpg In James Scott Richardson v. Greg Franc, the Richardsons had a deeded easement across the defendants' property in Novato for "access and public utility purposes." For twenty years, the Richardsons (and the prior owners) maintained landscaping, irrigation, and lighting on both sides of the road within the easement area. They had installed drip irrigation with pumps and separate drip lines for the individual trees and plants. They installed water fixtures for fire control. And they installed electric lights. They regularly maintained the landscaped area, trimming, weeding and replacing plants. They also had a landscaper performing these functions. They and their predecessors had never asked for permission, nor did the owners of the land which the easement crossed (the servient property) expressly grant permission. Six silent years after the defendants bought the servient property, they suddenly demanded that the plaintiffs remove the landscaping and improvements within the easement. They cut the irrigation and electrical lines. Plaintiffs filed this lawsuit, alleging equitable easement and irrevocable licenses. The trial court found an irrevocable license, and the defendants appealed.

The court first found that there was no equitable easement established. This would have required the plaintiff - easement holder to be without knowledge, or the means of knowledge, of the facts. Here their Grant Deed on its face described the easement for access and public utility purposes. The landscaping and improvements are not required for these purposes. The owner is charged with knowing what their deed says, so they were with knowledge.

Sacramento irrevocable license attorney.jpgOn the other hand, a license is authority to do an act on another's land, with full knowledge of the facts. Thus, the lack of knowledge was not an obstacle. Here, each owner of the servient property allowed, without complaint, the plaintiffs to improve and maintain the easement area, expending substantial amounts for landscaping, maintenance, care, and physical labor. In fact, this occurred over 20 years without objection.

These defendants were way out of line to complain, and cut the irrigation and power lines. Unfortunately for the plaintiffs, success in this lawsuit does not provide for an award of attorney fees.


Property Owners in California Are Now Liable to Recreational Users for The Owners Negligence in the Owners' Activities on Their Property

California real property owners with larger parcels can occasionally have recreational users on the land. Invited or otherwise, hikers, bikers, hunters and fisherman may wander on personally property whether the owner is aware of it or not. Generally, they are not required to keep the property safe nor warn of hazards. If the recreational user is injured, the property owner has some protection from liability. But what if the user is injured by the landowner's activities? A recent California Supreme Court decision has found that the active conduct of the landowner, if conducted negligently, may result in liability to a recreational user who is injured.

Sacramento recreational property liability attorney.jpgIn Klein v. United States, Klein was riding his bicycle on a road in a National Forest. It was a two-lane paved road open to the public. He was hit head-on by a car driven by a U.S Fish and Wildlife volunteer, on his way to watch some birds. Klein was seriously injured, lost the use of his left arm, and was forced to take a medical retirement. His wife also had to take an early retirement to care for him. They sued the United States in Federal Court.

Under the Federal Tort Claims act, the U.S. may be liable when, under state law, an individual would have liability. On appeal, the Ninth Circuit was concerned that there were no California decisions which directly addressed this issue, so they could not determine whether there was liability under state law. The Federal Appellate Court issued an order requesting the California Supreme Court determine how state law would be applied on these facts.

The lower court had initially decided that California Civil Code section 846 immunized the United States, as landowner, from liability for its' employee's negligent driving which occurred in the scope of the employee's employment.

Section 846 provides that:
"An owner of any estate or any other interest in real property, whether possessory or nonpossessory, owes no duty of care to keep the premises safe for entry or use by others for any recreational purpose or to give any warning of hazardous conditions, uses of structures, or activities on those premises to persons entering for a recreational purpose, except as provided in this section."

Actually, in this case it is Government Code section 831.7 that immunizes public entities from liability for injuries occurring during a" hazardous recreational activity." But the Supreme Court had determined that this Government Code section was intended to be identical to Civil 846; so the analysis begins and ends with 846.
Here, the California Court concluded that, yes, a landowner, like a recreational user, owes a duty to exercise due care while performing activities that could result in injuries to others.

Sacramento recreational property risk attorney.jpgThe Supreme Court posed an example showing why this was the correct decision. A landowner and his brother, whom lives in another state, drive to a bar and drink too much. On the way back to the landowner's property, the driver loses control while turning off the highway onto the landowner's property, and runs over a pedestrian. Under the Court's construction, liability does not depend on whether the pedestrian was standing on the public road or the private property, nor whether the landowner or his out-of-state brother was the driver. The driver would risk liability if he was negligent.

The court did not restrict the decision to negligent driving alone, but to all activities. This decision likely will encourage landowners to discourage recreational users from entering the land, post the property to prohibit trespassing, and even fence their property.


When is a Property Owner Liable For Injuries That Happen Off the Property?

All owners of real estate in California risk liability for injuries to others on the premises. The owner has possession (or control) of the property, and if it can be established they had knowledge of a dangerous condition, they are at risk. Real estate attorneys advise their clients that to establish liability the injured party must show that the owner had a duty of care to the injured party, there was a breach of the duty of care that was the proximate cause of the injuries, and the injured party suffered damages. But what about injuries that occur off the property? A landowner in LA County was disappointed to learn that they may have liability for an injury that occurred off the premises, to someone who had not been on the defendant's property.

Sacramento property liability attorney.jpgIn Annocki v. Peterson Enterprises, LLC, a vehicle which exited the defendant's restaurant parking lot collided with and killed a motorcyclist. The biker's parents brought this suit for damages. The restaurant parking lot faced the Pacific Coast Highway, and there was a divided median. The patron left the parking lot and tried to make a left turn into oncoming traffic. The plaintiffs claim that the owner was negligent in that the design of the driveway created a decreased visibility of the adjacent highway. There were no signs indicating 'right-turn only."

The court first reviewed the law on determining whether the owner had a duty to someone off the premises. The California Supreme Court has determined that this requires balancing of a number of considerations; the major ones are

1) the foreseeability of harm to the plaintiff,
2) the degree of certainty that the plaintiff suffered injury,
3) the closeness of the connection between the defendant's conduct and the injury suffered,
4) the moral blame attached to the defendant's conduct,
5) the policy of preventing future harm,
6) the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and
7) the availability, cost, and prevalence of insurance for the risk involved. (Rowland v. Christian)

Sacramento property liability lawyer.jpgWhen the defendant has no control over the property, there is no duty to exercise reasonable care; thus no duty to prevent injury on a neighboring property. However, there are exceptions. If the landowner's property is maintained in a way that exposes persons to an unreasonable risk of injury offsite, they may be liable for injuries.

When this court reviewed the Rowland factors it found that the facts here support finding defendant had a duty to warn patrons of the danger in exiting its parking lot as it was on notice of the dangerous conditions of the highway and the risk it posed to patrons leaving the restaurant as well as the danger to persons traveling the highway from a patron exiting the lot in an unsafe manner.

" First, given the center divider in the roadway, it was foreseeable that patrons exiting at night might not be aware of its presence and make an unsafe turn. At night the dividers in the road would be more difficult to see and patrons leaving the restaurant may have consumed alcohol.
Second, an unsafe turn would likely cause harm either to the patron leaving the parking lot or persons on the roadway.
Third, there is close connection between Geoffrey's failure to warn and the injury plaintiffs' decedent suffered.
The remaining factors are closely connected: there is moral blame that can be attached to defendant's failure to take minimal, inexpensive steps to avert harm to its patrons and persons in the roadway. Prominent reflective signage and driveway paint would have done much to avoid the accident here."

Sacramento real estate liability attorney.jpgThis court allowed the plaintiffs to amend their complaint (to survive a demurrer) and therefore, this is not the end of the case. However, given the court's direction, the restaurateur is exposed to serious damages, and is presumably insured.


California real estate contract covenants can be merged in the Deed - What it takes

April 23, 2015

Real estate contracts contain covenants and warranties that the parties sometimes want to enforce after the sale has been concluded. Whether or not they are still enforceable is determined by whether the covenants were "merged in the deed." The idea is that, once the Seller grants and Buyer accepts the deed, the deed is conclusive and all bets are off. The general rule is that any covenants in a contract between the parties are merged into the deed. If a covenant is not performed, then the rights of the parties depend on the terms of the deed. If the deed does not discuss the covenants, then whether these covenants survive and remain enforceable after closing depends on the intent of the parties. The starting point for figuring out the party's intent is the language of the deed. When a provision in a deed is certain and unambiguous it prevails over an inconsistent provision in a contract of purchase pursuant to which the deed was given. Sacramento real estate attorneys commonly see situations where the intent is clear - the contract states whether the conditions survive, or do not. More troubling is the case where the contract is not so clear.

Sacramento deed attorney.jpg
In Rams Gate Winery, LLC v. Joseph G. Roche
, Rams Gate bought a Sonoma County winery property from Roche. As part of the agreement, the Roches agreed to provide
"[w]ithin ten days of the Effective Date" "written disclosure" of any "information known to Seller" regarding violations of "building, zoning, fire, health, environmental statutes, ordinances or regulations; [and] any known geological hazards; ... soil reports, ... geotechnical reports, ... and all other facts, events, conditions or agreements which have a material effect on the value of the ownership or use of the Property...."
Escrow closed, and eventually the Buyer learned that there was a fault running through the property that limited its development. The Buyer claimed that, prior to entering the agreement, the Sellers had both a site plan and a geological report prepared, which both identified a fault or fault trace on the land, and which required the Sellers to relocate their winery's building pad from its original planned location in order to provide a 50-foot setback. These were not disclosed to the Buyer.

The Buyer sued, and the trial court ruled for the Seller, finding that the disclosure requirement was "merged in the deed" when the parties closed escrow. Buyer appealed. The trial court ruling was on summary judgment, meaning the court said that there was no issue of fact which a judge or jury could go either way.

In this case the deed apparently had the typical language like "For a valuable consideration, receipt of which is hereby acknowledged, Seller Grants to Buyer the following described real property in the County..." The court found it a "rather pedestrian instrument addressing only "the mechanics of transferring title" and containing a legal description of the property conveyed." It concluded that, from the face of the deed itself, it appears that not all of the terms of the contract were "merged" into the deed.

merged in the deed.jpgThe Sellers argued that the sole purpose for the disclosure covenant was to aid the buyer in doing its due diligence investigation to determine whether or not to go through with the deal. Once the buyer decided to close the transaction, it gave up any claim for breach of the disclosure obligation.

But the Buyers countered with a declaration stating that their understanding was that the covenants would survive closing. There was no agreement that the covenants and warranties would merge in the deed and be extinguished at the close of escrow. Rather, it was the buyers' intention that these provisions in the purchase and sale agreement would continue to be enforceable after close of escrow.

The court of appeal agreed with the Buyers. The declaration provided by the Buyers should be considered in figuring out the parties' mutual intent on the survival issues. Thought the purchase and sale agreement had several paragraphs that specifically provided for their own survival after close of escrow that alone does not compel the conclusion that no other provisions could survive without similar language.

I agree that there may be triable issues of fact. The fact that some of the covenants had language stating that they survive closing is a strong argument for the Sellers. But, stepping back and viewing from the distance, it appears that the Seller deliberately withheld these reports from the Buyer. The Seller had to relocate the site it planned to build on. This bad conduct may influence the factfinder enough to overcome the Sellers arguments at trial.


What A Co-Beneficiary of a California Deed of Trust Must Do if they want to foreclose without agreement of other cobeneficiaries.

April 10, 2015

In California, most lenders on real estate take back a deed of trust in which they are named the "beneficiary." If the borrower defaults, the beneficiary may then instruct the trustee to proceed to foreclose. Occasionally there is more than one beneficiary, resulting in multiple cobeneficiaries. They may all have contributed a percentage of the funding, or may have been assigned a fractional interest in the note and deed of trust after-the-fact. If the borrower defaults on their loan, California real estate attorneys will advise their lender clients to instruct the trustee to initiate foreclosure proceedings by execution a declaration of default. But, what happens if the cobeneficiaries do not agree to proceed to foreclose? The law is clear that each cobeneficiary has a right to proceed with the foreclosure; however, trustees are not forced to agree, and are reluctant to do so. Beneficiaries must rely on a statutory agreement ahead of time if they want this protection.

Sacramento cobeneficiary dispute.jpgIn apparently the only California decision to address the issue head on, Perkins v. Chad Development Corp., there were two cobeneficiaries. The borrower had defaulted on loan payments, and had let the property taxes go in to arrears. One cobeneficiary wanted to proceed to a nonjudicial foreclosure, the other did not. The property was foreclosed, and the buyer brought a quiet title action to clear title in his name. A third party intervened, claiming an equitable interest in the property. His argument was that the foreclosure sale was not valid because the Notice of Default and Election to Sell had not been executed by both cobeneficiaries. The court did not agree.

The court first noted that joint beneficiaries have a community of interest in the secured obligation akin to a joint venture or partnership, and any of them should have sufficient agency powers to record the notice of default to protect their mutual interests. As a cobeneficiary, beneficiary Perkins was a tenant in common in the beneficial interest under the note and trust deed. A cotenant has a right to protect the estate from injury or loss without the aid or assistance of other cotenants. As the borrower had defaulted on trust deed and had permitted the taxes to go delinquent, Perkins as a cotenant was entitled to protect the common beneficial interest by foreclosing the security.

Sacramento trustee sale.jpgThis makes legal sense, but as a practical matter, it may be impossible to find a trustee will to accept instructions from one cobeneficiary without participation and agreement of al cobeneficiaries. The only solution that may assure the ability to complete a foreclosure without all the cobeneficiaries' agreement, is that the cobeneficiaries enter a written agreement which provides for such an event. Even better, there is a statutory procedure that provides for recording an agreement to allow foreclosure by cobeneficiaries holding greater than 50% interest. Civil Code section 2141.9 provides that
"All holders of notes secured by the same real property or a series of undivided interests in notes secured by real property equivalent to a series transaction may agree in writing to be governed by the desires of the holders of more than 50 percent of the record beneficial interest of those notes or interests..." "A description of the agreement shall be included in a recorded document such as the deed of trust or the assignment of interests."
It may not be possible to get cobeneficiaries to agree to enter this agreement, but that would be a red flag to future problems