California Real Estate Lawyers Blog

I have written several times about the finality of Arbitration decisions, and haw they cannot be overturned even if the Arbitrator did not follow the law, or ignored the facts. Also discussed here has been the plight of the unlicensed contractor, and how he is not entitled to be paid, and has the give the money back, no matter how much work he did or how much he spent on the project. In both cases, parties should be sure to understand their situation, and may want to consult with a Sacramento and Yolo real estate and construction attorney. Both issues came together recently in a case were the arbitrator did not require the unlicensed contractor to disgorge his compensation. The court said the Arbitration Award was invalid.

In Mouris Ahdout v. Majid Hekmatjah et.al., A Family Limited Partnership and Braum were the sole members and owners of a LLC. They formed the LLC to develop and sell a condominium project on property the had owned. The LLC Operating Agreement specified that the LLC would enter an agreement with BIDI (Braum Investment & Development, Inc.), general contractor, to execute contracts and purchase orders to develop the project. Braum, member of the LLC, owned BIDI. Braum was also designated the manager of the LLC. BIDI did not have a Class B Contractor's License, required under California law to build a commercial building.

The LLC operating agreement also said that BIDI was not to get any fees for acting as general contractor. However, the profit-sharing allocations under the Operating Agreement gave Braum an additional 25 percent allocation, so BIDI was actually getting paid for acting as general contractor.

There were numerous problems on the project- death of the architect, plan revisions required by the City Building Department, and construction delays, cost overruns, etc. The FLP owners were unhappy with the delays, costs, and also that there expectation of luxury condos turning out to be economy units. The parties had binding Arbitration Agreements, so the FLP started an arbitration action. Among other claims, they sought that BIDI disgorge all compensation for its contracting services as per Business and Professions Code section 7031 subdivision (b), because it worked as an unlicensed contractor.

From the evidence before the Arbitrator, it appears that the FLP knew BIDI was not licenced. City Building Dept. Accepted Braum, manager of the project, as owner, and the permit was issued to the owner/builder. The Arbitrator ruled for Braum and BIDI, that they were not required to disgorge, as they acted as consultant to the LLC and were not engaged in any work typically done by general contractors.

The FLP filed a petition in Court to throw out the Arbitration award because the Arbitrator exceeded his authority by allowing unlicensed contractors to keep their compensation. Additional evidence in the court proceeding was a bank loan application in which Braum declared under penalty of perjury that Braum Construction was the contractor; a similar declaration was submitted to the City. Preliminary Notices and invoices listed BIDI as contractor.

ILLEGAL CONTRACT EXCEPTION

The Court of Appeal first considered the argument that this was an illegal contract, which provides an exception to reviewing an arbitration award. A claim arising out of an illegal transaction is not a proper subject matter for arbitration, and an arbitration award based on an illegal contract cannot be enforced. However, in this case, the illegality (paying an unlicensed contractor) did not "infect" the entire contract. Remember, the provision was in the LLC Operating Agreement, which covers a lot of ground. It was not just a construction contact between BIDI and the LLC. Therefore, the exception did not apply.

PUBLIC POLICY EXCEPTION

Numerous courts have found that an Arbitrator exceeds it powers within the meaning of Civil Code section 1286.2 by issuing an award that violates an explicit expression of public policy. If such a scenario applies, the court must set aside the Arbitrator's award. Here, the court found that section 7031 was just such an explicit expression of public policy.

In this case, the trial case should have reviewed all the evidence to determine whether disgorgement of compensation for BIDI's construction work was required by 7031. The Arbitrator's finding that BIDI was not the general contractor was not binding on the court. The judge must look at all evidence, regardless of whether the Arbitrator had reviewed it.

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California Courts sometimes reserve jurisdiction over parties or an action after the case has gone to final judgment, for various reasons. Jurisdiction is generally the power to hear and determine the claims of the parties. Some examples of court's holding on to jurisdiction are to to enforce settlement in an action at the request of parties; or to determine the distribution of a fund of money deposited in court; and to make such other and further orders and decrees as might be deemed proper to carry out the judgment. In fact, there is a specific procedure to have the court reserve jurisdiction to enforce a settlement agreement. Where parties reach a settlement agreement that requires one or both parties to perform some acts that will not be complete within 45 days, they can file a "Notice of Conditional Settlement" per Rules of Court Rule 3.1385. In the Notice, they give the Court a date certain that the suit will be dismissed. Until then, the case becomes inactive, and off the court calendar, but still the court has jurisdiction to enforce the terms of the settlement agreement until the dismissal date.

However, there is a limit to how long the court may keep jurisdiction over the parties. In Stump's Market, Inc., v. Plaza De Santa Fe Limited, LLC, Stumps had rented space for a grocery store in a shopping center from Plaza. The relationship had lasted several years. They negotiated a modification granting Stump five additional five-year options. The rent included a calculation of the percentage of sales (percentage rent). There was some water damage in the parking garage below Stumps grocery store. Plaza said it was caused by condensation from Stump's freezer. Stump disagreed, claiming that it was due to a leak that Stump had informed Plaza about.

They did not agree on what caused the damage, but they agreed that Stump would go ahead and repair the damage. They apparently did not agree (at least in writing) if, and how, they would split the cost. They got into a dispute as to paying for the repairs, calculating percentage rent, and Stump's exercise of the next option. The lawsuit ensued.

At trial the jury did not believe Plaza's witnesses, and found for Stump. In addition, the court retained jurisdiction until the judge decided that Stumps no longer had a right to occupy the premises. The life of the lease- another 17 years.

The court of appeals said that's crazy. It first noted that jurisdiction over a cause or parties after a final judgment, order, or decree is exceptional and limited to special situations. The jurisdiction of a court of equity to enforce its decrees is coextensive with its jurisdiction to determine the rights of the parties. Jurisdiction of the cause continues for this purpose, or leave may be expressly reserved to reinstate the cause for the purpose of enforcing the decree, or to make such further orders as may be necessary.

But here, the court retained jurisdiction to solve problems that did not yet exist, concerning an arms-length contract. Here, there is no future event that is certain to occur. Under California law, a case must present an actual controversy between parties before the court will consider it. Here, there was only a concern that there may be a controversy sometime in the next seventeen years.

Oh well, Stump almost hit the jackpot. To be able to waltz into court anytime you think the landlord is not playing fair, without the expense of filing a new lawsuit, would be sweet. Plaza realized what a precarious existence it would live for the next seventeen years, and wisely appealed the decision.

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Homeowners associations in common interest developments have the ability to conduct a non-judicial foreclosure to collect delinquent assessment fees. However, the law places numerous restrictions on the association's ability to foreclose to collect assessments. One of those restrictions is in provided the homeowner a right of redemption. I have written before about the right of redemption that exists with judicial foreclosure- a process in which the lender files a lawsuit for a court supervised foreclosure. In that situation, after the foreclosure sale, the borrower has a right for a period of time to redeem the property- pay the full amount of the debt owed, and get the property back. This right does not generally exist in nonjudicial sales, in which a trustee sells the property, usually outside the courthouse. However, in a common interested development, the foreclosed owner has a 90 day right of redemption. The owner can deposit the redemption price with the officer who conducted the foreclosure sale before the expiration of the redemption period. Owners in this situation should consult a Sacramento real estate and owners association attorney to be sure of their rights.

Civil Code section 1367.4 prohibits a homeowners association from foreclosing to collect assessments totaling less that $1,800 (not including fees and costs). If it totals $1,800 or more, they can foreclose if they do the following:

1. Offer the owner to participate in alternative dispute resolution;
2. The decision to foreclose must be personally made by the members of the board of directors;
3. The board must personally serve the owner-occupant with notice of the decision to foreclose;
4. A non-judicial foreclosure shall be subject to a right of redemption for a period of 90 days after the trustee sales.

The redemption process itself is governed by Civil Code section 729.040 +. Surprising to the association in a recent decision is the requirement of Civil Code section 729.050, which requires the trustee, after the sale, to promptly notify the debtor of their redemption rights.
"If property is sold subject to the right of redemption,
promptly after the sale the levying officer or trustee who conducted
the sale shall serve notice of the right of redemption on the
judgment debtor. Service shall be made personally or by mail. The
notice of the right of redemption shall indicate the applicable
redemption period."

In Afshan Multani v. Witkin & Neal, the homeowner sued, alleging defects in the sale. (The complaint alleges that the association did many bad things- they changed the locks before the foreclosure, and reported him as a trespasser to police, which required him to stay away from his condominium, and of course failure to account for payments he had made). The association sought summary judgment. The former owner claimed they were not provided the required notice of the right to redeem per section 729.050. The defendants claimed that the plaintiff suffered no prejudice, as they had enough information to independently calculate when the redemption period would end. Not so fast, the court said- the owner had no independent duty to calculate the applicable redemption period. The statute requiring the trustee to give notice relieves the borrower of any such burden.

The defendant also claimed that the plaintiff's claim must fail because he failed to allege that he tendered (offered to pay) the amount of the secured debt. However, the court found in this circumstance, where the debtor is entitled to redeem but the trustee had not provided the statutory notice, the debtor is not required to allege tender.

The right of redemption is an ancient and important concept in real estate as well as all other secured transactions. In addition to the statutory protections such as discussed above, the courts recognize a equity of redemption - the sense of fairness in allowing an owner to bring the debt current. This is because courts recognize that the owner has already paid considerable amount by the time the trouble arises. In refusing to brush aside this notice requirement as a mere technicality, the judges recognized what the equitable result should be.

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It is well established that California real property owners have duties toward guests and people they invite to the property to let them know about concealed dangerous conditions. Even a foreclosing lender who takes possession of a house has a duty to disclose what they should know about, and the agent and owner are each deemed to know everything that the other knows. And, the owner's broker has an equal duty of disclosure. Sacramento and El Dorado real estate attorneys, when asked what needs to be disclosed, usually say everything- if it was material enough for you to ask me, it was important to disclose. In a recent decision a lender who took the property after foreclosure, and their broker, were surprised to learn that, because they might have known about a possible danger, they might end up liable for a potential buyer's injury.

In Pindra Hall v. Aurora Loan Services LLC, Hall was a real estate agent showing a home for sale in Lafayette to a client. The house was owned by Aurora Loan Services, who took it back in a foreclosure. The property has a finished attic, which was accessed by pull-down stairway ladder. It was hinged; when it was raised, it folded, and went up into the attic opening as the opening was closed.

Aurora, the owner after foreclosure, had the house inspected by a contractor. The contractor provided a report listing more than 50 items under the heading "Health and Safety Required Repairs-Group 1." Buried in that list was "Stair-Remove and replace attic stair." The report was delivered to Aurora, and the listing agent read it. The report was left on the kitchen counter for visiting agents and potential buyers to review.

Of course, Hall was reluctant to climb the stairs. Her clients climbed them to the attic; Hall followed, a hinge broke, the stairs failed, and she broke her leg. The opinion doesn't say how the clients, now stranded in the attic with the agent writhing in pain on the floor below, got out of the attic. The lawsuit followed, and the defendants filed a motion for summary judgment. This motion argued that they had no notice of the defect in the ladder, so they were entitled to dismissal of the action as a matter of law.

The Owner's Duty
The court, citing Civil Code section 1714, noted that the policy in California is that everyone is responsible for an injury caused to another by his want of ordinary care or skill in the management of his property. Property owners are required to maintain their property in reasonably safe condition. Regarding visitors to the property, the scope of their duty, the owner's actual or constructive knowledge of the dangerous condition is a key to establishing liability. They must have this knowledge or, have been able by the exercise of ordinary care to discover the condition.

The Broker's Duty
Information about a property known by the broker is imputed to the owner, and vice versa. Each has notice of what the other has notice of, and ought to communicate to the other. Civil Code section 2332. Negligence of the broker is negligence of the owner. Section 2338. When showing a house, the broker has a duty of care to warn the guest of a concealed danger on the premises of which they were aware of and which injury might be reasonably foreseen.

The Evidence

We know that the owner and broker received the report, and that the broker read it. It did not specify that the stairs were dangerous, but the stairs were listed under the heading "Health and Safety Required Repairs-Group 1." . The contractor, in his deposition, did not remember any safety concerns with the ladder, nor that it appeared dangerous. If there had been problems other than appearance, he would have noted it in his report. He thought these stairs were "crummy" products and looked bad.

However, the court found that there was still a possibility that a jury could still find that a reasonable person who received the report might have believed that the stairway ladder needed to be replaced because it was in disrepair. The issue was listed in the report under safety items, and the contractor did not really remember much about the stairs. It found that this was a triable issue of fact as to whether or not the defendants knew or should have known that the stairway ladder was a concealed danger.

photos: http://www.flickr.com/photos/inspectionsbybob/4476946931/sizes/m/in/photostream/
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It is a rule of California real estate that whenever a greater estate and a lesser estate in the same parcel of real property are held by the same person, without an intermediate interest or estate, the lesser estate generally merges into the greater estate and is extinguished. A greater estate is the greater interest in land. For example, for an easement, the real property that has the right of easement is greater; the property that the easement is subject to is the lesser. Also, a tenant holds a lesser estate; the landlord holds the greater estate. If the landlord transfer the property to the tenant, the lease is extinguished because the greater and the lesser are merged in one person. While merger is an ancient legal rule, Sacramento and Yolo real estate attorneys do not often encounter merger issues. However, in a recent decision from Southern California a plaintiff was disappointed that there was no merger.

In Hamilton Court LLC v East Olympic L.P., a lot on a city block in Los Angeles was owned by East Olympic. However, East Olympic's yard and encroached on the lot owned by Angelus. The parties reached an agreement in which Angelus granted an exclusive easement to East Olympic, which gave East Olympic the right to keep the yard and shed where they were. Angelus then sold its property to a partnership of A & B. East Olympic sold its property to a partnership of A and C. In the sale to A and C, East Olympic took back a deed of trust secured by the property PLUS the easement over the former Angelus property.

Partner C then conveyed its interest in the East Olympic property to B. That meant that A and B owned both lots simultaneously. A and B stopped making payments on the note to East Olympic. East Olympic then foreclosed the deed of trust, which was secured by the property plus the easement.

Partners A and B then sued East Olympic to quiet title. They claimed that when C conveyed its interest to B, A and B owned both properties, and the easement was extinguished by law according to Civil Code section 811. They wanted to take over East Olympic's yard and shed.

The court said not so fast. The doctrine of merger applies only when it prevents an injustice, injury, or prejudice to a third person. Whether or not there is a merger depends on the intent of the parties. There will be no merger if it is inequitable.

East Olympic claimed the parties intended that there not be a merger. In fact, in the deed of trust, East Olympic also stated that C could convey its interest to B, as long as the transfer is made subject to the promissory note and deed of trust, and did not affect the priority of the deed of trust. The Court agreed, and found that there was no merger.

This is an example of smart (or lucky) lawyering and an overreaching plaintiff. East Olympic put language in the deed of trust that, without mentioning merger, allowed the court to protect the easement in this decision. From the facts as reported in the decision, it almost seems as if A and B had this idea all along, and set up East Olympic to extinguish its easement. The court caught on and did not allow it.

Photos: http://www.flickr.com/photos/buttepubliclibrary/4248573844/sizes/m/in/photostream/
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California real estate transactions usually have provisions requiring that the parties arbitrate any dispute, rather than file a lawsuit. Sometimes they file suit anyway, and an opponent in the real estate contract dispute makes a motion to the court to order the parties to arbitrate, rather than litigate. The Code of Civil Procedure (1281.2) generally requires the court to order arbitration if there is a binding agreement to do so. However, there is an exception when:

"A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact."

Questions of conflicting rulings are occasionally seen by Sacramento & Yolo real estate attorneys. Some defendants in a real estate lawsuit in Southern California were surprised recently when the court refused to compel arbitration. In Gohar Barsegian v. Kessler & Kessler, Barsegian was the buyer of a $3.7 million dollar property. A dispute arose, and the buyer sued her attorney and the seller. In a switch from the usual facts, The buyer's contact with the attorney contained an arbitration provision; the seller was not a party to that agreement. Apparently there was not such a provision in the real estate contract. The complaint claimed that the seller recommended the attorney to the buyer, and that the seller and attorney had a longstanding relationship, and the attorney was secretly representing the seller as well as the buyer.

In the Complaint the buyer alleged that "all defendants are agents of each other." This is commonly done in lawsuits to allege a liability relationship between the parties, in the event that the evidence supports that relationship. The defendants argued that this was a binding judicial admission, establishing that there was no third party for purposes of Civil Procedure section 1281.2. Thus, arbitration should be compelled.

A judicial admission is a fact conclusively established by concession, removing the issue from the litigation, and may not be contradicted by any party. It is a waiver of the proof of the fact. The mere allegation is not enough; the opposing party must admit it is true. When an answer admits any allegations of a complaint, it is a judicial admission. Likewise, in discovery, when a party serves a Request for Admission, if the other party admits it, it qualifies. Also qualifying are facts that the parties stipulate to.

However, in this case, the defendants did not want to admit that they were agents of each other - rather, they wanted to be able to contest the truth of the allegation. They wished to hold the buyer to the trust of the allegation for the purpose to compel arbitration, but they wanted to retain the right to prove to the arbitrator that they were not agents of each other. As a result, the court refused to treat the allegation of mutual agency as a judicial admission. Here, the defendants wanted their cake, and to eat it too. But they certainly did not want to face arbitration admitting that they were agents, acting on behalf of each other. Instead, they will fight it out in court.

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The business judgment rule is a policy under California law which protects directors of corporations in certain circumstances. It contains two parts. The first part is statutory, which protects directors from personal liability if they act, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

The conditions are that-
(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:
(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented.

(2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person's professional or expert competence.

(3) A committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes to merit confidence, so long as, in any such case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted. (Corp. Code section 309)

The second part is based on court decisions and shields board decisions made in good faith in what the directors believe to be in the corporations best interest.

Sacramento business attorneys are often asked by corporate clients whether the board's decision is protected by the business judgment rule. In a recent decision out of Tulare County, a corporation' board was surprised to learn that the business judgment rule did not protect them when a contract gave the corporation certain discretion, but the board acted outside that discretion. In Scheenstra v. California Dairies, Inc., Scheenestra was a member of defendant milk marketing cooperative, which was a corporation. The contract between the members and the cooperation required the corporation to accept all milk of its members, but "subject to the right of the Board, in its discretion, upon written notice to the membership ... to allocate equitably among the members on a uniform basis ... the quantity ... of milk to be received by the Association." The corporation reduced quotas, and the plaintiff sued for breach of contract because his quota was too low.

The Court of Appeal agreed with the plaintiff. The quota system adopted by the board was not equitable and uniform. Therefore, it was outside the scope of the discretion granted by the contract. When a contract grants the corporation's board of directors limited discretion, the court first determines if the action of the board falls within the discretion granted. If it does, the decision is not protected by the business judgment rule. The business judgment rule does not allow a board of directors to change the terms of a contract, expanding its own discretionary authority. The court interprets the contract, and the reasonable expectations of the parties.

The court first had to determine whether or not the board acted within the discretion awarded in the contract. To that, it ordinary principals of law for interpreting contracts. It found that the standards applied to the plaintiff were not the same as those applied to the other members. Thus, the decision was not equitable and uniform.

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Tender
California law requires a plaintiff asking the court to set aside a foreclosure to offer to pay the full debt (called a "tender"). The general rule is that a plaintiff may not challenge the propriety of a foreclosure sale without offering to repay what they borrowed. The idea is that if the plaintiff could not had redeemed the property if the sale procedure had not been defective, any of the irregularities in the sale did not result in damage to the plaintiff. There are exceptions to the tender requirement-

a) being fraudulently induced into taking the loan;
b) otherwise attacking the validity of the debt;
c) alleging a defect in the foreclosure that would render the sale void or voidable.

Whether or not a tender is required is an issue frequently disputed by Sacramento and El Dorado real estate attorneys. However, a lender was recently disappointed when a court ruled that a plaintiff did not need to allege a tender to enjoin a trustee's sale- that is, stop it from happening, rather than undo it later.

>In Arden M. Intengan v. BAC Home Loans Servicing LP, the plaintiff had borrowed nearly $700,000, secured by real property in Daley City. There was a default, and a trustee's sale was scheduled, but before the sale took place the borrower filed the lawsuit. The lender sought a demurrer to have the suit dismissed, claiming, among other things, that the plaintiff had failed to tender payment.

The court said no, the courts have not recognized a tender requirement in cases in which a borrower is seeking to enjoin a foreclosure sale.

Judicial Notice

Judicial Notice occurs when the court accepts the existence of fact or law without formal proof. The fact or law must usually be something that is indisputably true. A party can defeat the other side's request for judicial notice by showing that fact or law is reasonably subject to dispute. In California state court, Judicial Notice is limited by the evidence code, indicating matters which the court must take notice of, and matters which the court may take notice of.

In this same lawsuit the plaintiff claimed the lender did not comply with Civil Code section 2923.5, which requires the lender to attempt to contact the borrower to explore workout opportunities before recording a notice of default. The trustee may not record a notice of default until 30 days have passed after the loan servicer has made initial contact with the borrower to assess the borrower's financial situation and explore options for avoiding foreclosure, or has satisfied the due diligence requirements of the statute. The plaintiff claimed that the lender did not try to contact them; no one tried by phone, or any other method. The lender's notice of default contained a declaration stating that they have "tried with due diligence" to contact the borrower as required by the Civil Code. In support of its demur, the lender asked the court to take judicial notice of this declaration.

The court ruled for the borrower. The borrower's allegation that there was no attempt to contact them created a conflict in the evidence. While the court could take judicial notice of the existence of the declaration, it could not take notice of the facts alleged in the notice. This conflict in evidence could not be resolved at the demur stage.

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Many California real property owners have challenged lenders foreclosure proceedings based on state and federal laws enacted the past few years to help homeowners during the real estate collapse.. In most cases, the courts have found that the laws do not create new, enforceable rights, with a few exceptions. Mis-interpretation of requirements placed on lenders, through statutes and language of the deed of trust could be perilous, and interested parties should consult with an experienced Sacramento & Yolo real estate attorney. A recent decision out of Alameda County presents one such case, where the deed of trust required the lender to follow HUD servicing guidelines.

In Pfeifer v. Countrywide Homes, a mother and son obtained a $607,000 loan that was purchased by Countrywide. The mother was incompetent, and the son was her court appointed guardian ad litem. It was an FHA guaranteed loan. The standard FHA form Deed of Trust stated, in paragraph 9, which sets forth the "grounds for acceleration of debt." It states:

"[l]ender may, except as limited by regulations issued by the Secretary, in the case of payment defaults, require immediate payment in full of all sums secured by this Security Instrument... that the "[l]ender shall, if permitted by applicable law ... and with the prior approval of the Secretary, require immediate payment in full of all sums secured by this Security Instrument ...." In subdivision (d), under the heading of "Regulations of HUD Secretary," the agreement reads as follows: "In many circumstances regulations issued by the Secretary will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary."

Countrywide began foreclosure proceedings; before the trustee's sale, the borrowers filed this lawsuit. The homeowners claimed that the lenders began foreclosing without complying with HUD guidelines- specifically, there was no face-to-face interview with them, as required by the Code of Federal Regulations (24 CFR section 203.604 & 203.500).

The court noted that the purpose of the FHA insured loan program was to allow loans to low-income families that would otherwise not qualify. It does so by guaranteeing that the lenders will not lose any money if the property was foreclosed. There are two purposes for the regulations- one, to encourage lenders, but second, to prevent foreclosures of HUD mortgages so that the government did not have to pay out on the guaranty. The face-to-face interview is required because FHA borrowers tend to have a general lack of experience in financial management and limited access to information about resources to avoid foreclosure.

The power to foreclose is granted the trustee in a deed of trust by the language of the deed of trust, but that power "does not accrue until its conditions precedent have been fulfilled." Here, the obligation to follow the HUD servicing rules, including the interview, are a condition that must be fulfilled before the power to foreclose accrues.

This decision provides clear guidance to servicers of FHA loans, as well as borrowers, as to what steps must be taken before the trustee may record a notice of sale. Unwary servicers may find their foreclosure proceedings blocked by the courts, as more wary homeowners learn the rules by which they must play.

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In February I published a blog about a California court that would not take judicial notice of a document on a Federal Agency website. It dealt with the FDIC sale of Washington Mutual mortgage loan accounts to JP Morgan Chase. JPMorgan was conveyed all the assets, but none of the liabilities. That means that JPMorgan could foreclose, but the borrower could not make any claims against JP Morgan that they had against WaMu. In a recent court decision, a different court did take judicial notice of that same document on the website. The difference was due both the difference in the courts' approaches, plus the borrowers' attorneys' arguments. A borrower or lender with questions about the different approaches should contact an experienced Sacramento real estate and business attorney, to be sure they do not get the same surprise.

"Judicial notice" is the court's recognition of the existence of a matter of law or fact without the necessity of formal proof. It can be described as a substitute for (formal) proof, a judicial shortcut, doing away with the formal necessity for evidence. Judicial notice is limited to matters which are indisputably true. A request for judicial notice can be defeated by showing the matter is reasonably subject to dispute. In California state court, Judicial Notice is limited by the evidence code, indicating matters which the court must take notice of, and matters which the court may take notice of. Federal Courts have a broader discretion as to what they may take judicial notice of.

In Michael D. Scott v. JPMorgan Chase Bank (2013 WL 1098436), the borrower had a $975,000 construction loan. Washington Mutual acquired the loan, was taken over by the FDIC, and JPMorgan acquired the loan, and foreclosed. Scott filed suit, making several claims against JPMorgan. JP Morgan claimed that it had not acquired WaMu's liabilities along with the assets, and sought judicial notice of the Purchase and Assumption Agreement, as posted on the FDIC web site.

The court first noted that, when judicial notice of a contact, which is a 'legally operative' document, the court can take notice of its existence, plus its legal effect.

The court said Jolley was different - there, the borrower objected to the PA Agreement, with a declaration form someone who had knowledge of the original document, and stated that what was submitted was not the actual P&A Agreement. Here, Scott did not dispute that the copy attached in this case, and on the web site, is the actual P&A Agreement. Thus, in Jolley, it was reasonably subject to dispute, but not in this case.

The Court also noted that what was being taken notice of was not the contractual form of the document, but the official act of transfer that it evinces, bring it in line with Evidence Code section 452(c). Thus, it took judicial notice of the fact that JPMorgan acquired the assets, but not the liabilities. The borrower must sue the FDIC, instead.

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Generally, in California to prove a claim for fraud and deceit based on concealment, the plaintiff must prove five elements:
(1) the defendant must have concealed or suppressed a material fact,
(2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff,
(4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and
(5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.

In determining whether a party has a duty to disclose some fact, they should consult with a Sacramento and El Dorado real estate and business attorney. In a recent decision in Orange County, some guarantors of a $7 million dollar loan were a tad disappointed when they found out that the bank did not have to disclose its decision not to extend the loan term.

In SCC Acquisitions Inc. v. Central Pacific Bank, the bank loaned the money to buy real estate and pay pre-development costs. The loan was interest only for a one year term, but the bank had the option to extend the loan. They extended it a few times over the course of three years. In 2008 they reviewed the loan and downgraded its riskiness, requiring setting aside another $1 million capital reserve. An internal memo stated that if a decision was made not to renew the loan, the borrower should be notified of the decision.

The bank sent the borrowers a term sheet which discussed restructuring the loan, but it stated that it was for discussion purposes only and should not be viewed as a commitment to lend. The restructure didn't happen, the borrower was in default, the bank sold the loan, and the new holder, "Gray 1", sued the guarantors. The guarantors sued the bank, claiming fraud.

The court first looked at the plaintiff's argument that the internal bank memo required the bank to notify the borrower that they had decided not to extend the loan. The court said no; the memo did not create a duty to disclose. The court noted that a duty to disclose may be created in four ways:
a) it may be directly imposed by statute or other prescriptive law;
b) it may be voluntarily assumed by contractual undertaking;
c) it may arise as an incident of a relationship between the defendant and the plaintiff; and
d) it may arise as a result of other conduct by the defendant that makes it wrongful for him to remain silent.

Here, the plaintiff argues that the duty arose because the bank provided the term sheet, but did not disclose its decision. But nothing in the bank memo created a duty to disclose.

The court next addressed the argument that providing the term sheet was conduct establishing a misrepresentation. But the term sheet on its face stated that it was not a commitment, representation, or promise to renew the loan on the terms set forth therein: "Please be advised that this is for discussion purposes only, is subject to Bank approval and should not be construed as a commitment to lend." The term sheet could not, by itself, be considered a promise to extend the loan, and be deemed a misrepresentation.

I don't know if it is good or bad to see the big money losing the same arguments that little money has been making. Before the recent homeowner protections, when double tracking of foreclosures and loan modifications was common, homeowners would make the same arguments to judges and be shot down. At there appears to be some consistency.

Photos: http://www.flickr.com/photos/reallyboring/6827724643/sizes/s/in/photostream/
http://www.flickr.com/photos/nhofer/3548110228/sizes/n/in/photostream/

A deed of trust represents security for the loan. It has several parties- a) the trustor, who is the borrower and owner of record for the real property that is security for the loan; b) the beneficiary, who is the lender whose debt is secured by the deed of trust; and c) the trustee, who holds bare legal title only for the purpose of conveying it in the event of a foreclosure. The deed of trust contains a "power of sale," giving the trustee the ability to foreclose. Once the deed of trust is created and recorded, if there is a default, the beneficiary routinely changes who the trustee is by recording a "substitution of trustee," putting a new trustee in the job. Homeowners in this situation should consult with a Sacramento and Yolo real estate attorney to determine their rights. In a recent case, the borrower- homeowner who lost their property to foreclosure realized that the original deed of trust did not name a trustee, and sued to set aside the foreclosure sale. The court said no.

In Shuster vs. BAC Home Loans Servicing LP (formerly known as Countrywide Loan Servicing) Shuster borrowed $670,000 to buy a house in Simi Valley. Mortgage Electronic Registration Systems, Inc. (MERS) was named beneficiary; but there was no trustee named in the document. Shuster ended up in default, MERS recorded a Substitution of Trustee, and the new trustee foreclosed. Shuster brought this action.

Shuster argued that, with no trustee, there was no one to receive the conveyance of bare legal title. This transforms the deed of trust into a standard mortgage. Under California law, a mortgage that is not standard deed of trust (with a power of sale) may only be foreclosed by judicial foreclosure - filing a lawsuit for foreclosure and obtaining a court order.

The court said no. A deed of trust is not like a grant deed. With a grant deed, failure to name a grantee makes the deed void. However, in the case of a deed of trust, the instrument only conveys the bare legal title for purpose of foreclosure, and "carries none of the other incidents of ownership of the property." Here MERS, as beneficiary, appointed a substitute trustee prior to the foreclosure, that was enough.

This is a case of first impression in California, meaning it is the first time a court of appeal has ruled on this issue. As is common, the displaced homeowner made every argument they could find to get the home back. This was a good argument to make, but it didn't work.

Photo: http://www.flickr.com/photos/spirit_rainbow_sunshine/3277859700/sizes/m/in/photostream/

An acceleration clause in a loan document or promissory note is a provision that requires the entire amount of the unpaid principal and interest to become due when the specified event occurs. There are two kinds. First, in a typical Promissory Note, the entire amount may become due in the event of default in payment of an installment, or any other violation of the terms of the loan documents. The other kind, typical in mortgages and real estate loans, may require the entire balance to become due on sale of the property that is security for the debt. Parties with concerns about an acceleration clause should consult with a Sacramento business or real estate attorney to understand how it applies in their own circumstances. It was the first type of acceleration clause that was the subject of a recent decision, in which a lender was surprised that his acceleration clause (and the higher rate of interest it included), could not be invoked.

In JCC Development v. Hyman Levy, Levy was a 'philanthropist' who was negotiating with JCC to purchase and operate a Jewish Community Center. He deposited $2.7 million into escrow. The negotiations took longer than expected, so the parties agreed that the $2.7 million would be converted to a loan to JCC, secured by a mortgage on the property. The promissory note provided for interest at the rate of 5%. The acceleration clause provided that, on acceleration, interest would increase to the legal maximum. It stated:

"If: (I) Maker shall default in the payment of any interest, principal, or any other sums due hereunder, or (ii) Maker shall default on performance of any of the covenants, agreements, terms or provisions of the deed of trust securing this Note... then, at Lender's option, all sums owing hereunder shall, at once, become immediately due and payable. Thereafter, interest shall accrue at the maximum legal rate permitted to be charged by non-exempt lenders under the usury laws of the State of California."

The term of the Note was until September 30, 2006, which came and went with the parties still negotiating sale of the property. Levy did not demand repayment at that time. In January 2007, Levy demanded repayment. In June Levy recorded a Notice of Default. He calculated the amount due using the maximum interest as provided for in the acceleration clause. There was some argument about this, but JCC paid the full amount, under protest, and filed this suit.

The Court found Levy was not entitled to the increased interest. The acceleration clause applies only if there is a default, and the lender exercises his option to accelerate the debt. Here, the loan matured on September 30, 2006. On maturity, there is no loan left to accelerate- the entire balance is already due.

This is a case of no good deed goes unpunished. From the opinion it really does appear that Levy was acting as a philanthropist, and helping out the struggling center. Rather than hold JCC to strict enforcement of the loan, he continued to negotiate for purchase of the property. It does not appear that the Note called for any interim payments of principal or interest, default in which would allow the lender to accelerate. But, if it did, the lender would be required to notify that he was accelerating the loan, and that the entire amount was now due. Then he would have gotten the increased interest.

Photos:
http://pixabay.com/en/space-shuttle-lift-off-liftoff-nasa-992/
http://www.flickr.com/photos/northcharleston/6672930199/sizes/n/in/photostream/

In California, a tree growing on a property line is considered a "line tree," and the owners on both sides have rights and responsibilities. The Civil Code states that they own the tree in common. (Civil Code section 834) As a result, neither owner is free to cut down the tree without consent of the neighbor, nor to cut away the part in his side if it would injure the common interest in the tree. If they do, they can be liable for double or triple the harm done. Anyone with a tree line concern should consult with a Sacramento and El Dorado real estate attorney before taking action, or they may be in the position of the landowner who recently was hit with a judgment for over $107,000.

In Kallis v Sones there was an Aleppo pine tree growing on the property line. Close to the base it split into two separate trunks, which were far enough apart that the fence ran between them. The defendants became concerned that the tree would topple over, so they hired workers who cut down the entire tree. The tree was large- 70 feet tall, and the separate trunks measured 23 inches & 24 inches in diameter. The shocked neighbors sued.

The tree cutters lost the suit, and the contested issue became damages. Generally, damages may be awarded in an amount that will compensate for the detriment that was caused. The court awarded damages for the value of the entire tree, not just the portion on the plaintiff's side. The defendants complained that the amount should be reduced to the percentage of tree that was on plaintiff's side of the line. The court said no. The tree's unusual size and form made it unusual. The large canopy shaded the plaintiff's entire home. The large canopy was highly valued and had great personal value to the plaintiffs. The court had discretion to determine the measure of damages, and was not required to reduce it.

It gets better- the court then doubled the damages award under Civil Code section 3346, which allows for harm to trees, in some cases, that damages be twice the sum of that which would compensate for the actual detriment. The damage award was for value of the tree, plus installation and after care. The defendant argued that this doubling should not apply to the cost of installation and future care of a tree, but the court said no. Once the court determined the actual damage award, it could double the entire amount.

When neighbors in this situation consult an experienced attorney, the results are often different. Both parties are aware of their rights and risks in this situation. If cutting the tree is threatened, the neighbor may obtain a TRO to prevent it until a judge reviews the situation. If a solution can not be worked out, they can present their case to a judge before cutting down the tree. Following the court order would protect both parties from incurring damages.

photos:
http://www.flickr.com/photos/greenmarlin/3861641336/sizes/m/in/photostream/
http://www.flickr.com/photos/sgtgary/7157899288/sizes/n/in/photostream/

Last post I discussed the decision in Scott Call Jolley v. Chase Home Finance, Inc., where there were ongoing disputes between the borrower and lender, and the lender made many representations that they would likely agree to a loan modification. The court concluded a duty may have been created that could make the lender liable for its negligence. Another aspect of that decision was the Lenders efforts to get into evidence documents and websites which it could not show were authentic, and the Court refused to allow the evidence. Anyone who is concerned about presenting evidence to the court should consult an experienced Sacramento and El Dorado real estate lending attorney. In this decision, the attorney did not do so well.

The problem arose when Chase asked the bank to take "judicial notice" of facts. The doctrine of Judicial Notice is a substitute for formal proof. A party asks the court to take judicial notice of certain matters that are assumed to be indisputably true, and the introduction of evidence to prove them will not be required. In California it is allowed by provisions of the Evidence Code, sections 450 to 460.

This case involved disputes between a borrower and his lender Washington Mutual, which went into FDIC receivership and acquired by Chase. Chase bought the assets of WaMu through a purchase agreement between Chase and the FDIC. The Purchase Agreement required Chase to assume liability for WaMu's accounts. However, it stated that Chase did NOT assume liability for any borrower claims arising out of WaMu's lending activities. That is what Jolley's lawsuit was about.

To prove that Chase was not liable, Chase presented to the court a partial copy of the Purchase Agreement attached to its attorney's declaration, who also claimed that it was on the FDIC's website. Chase claimed that section 452(c) of the Evidence Code, which allows judicial notice of "official acts of the legislative, executive, and judicial departments of the United States and of any state of the United States" applied. The FDIC is a federal agency, this was its website (an official act), so judicial notice was appropriate.

The court said no. The attorney-declarant was not "custodian of records," and did not indicate that she had any special knowledge of the document. The court found that this was not allowed. Just because information is on the internet does not mean that it is not reasonably subject to dispute. The court may take judicial notice of the existence of a website, but not necessarily of its factual content. The court noted that some Federal Court decisions have allowed judicial notice of website contents, but that is not the case in California state court.

This would have been solved a declaration for the custodian of records for Chase presenting the FDIC document as authentic. But as often happens these days with distressed loans, the attorney probably could not get much information or proof out of the of their client.

Photos: http://www.flickr.com/photos/milanocookiez/2689962911/sizes/n/in/photostream/
http://www.flickr.com/photos/wmacs/3408287362/sizes/s/in/photostream/