Collecting A Judgment against a Bankrupt LLC - When You Can Hold The Members Liable.

October 16, 2014

Individuals create LLCs, same with corporations, for ownership and investment purposes primarily to enjoy limited liability. If you invest $10 in an LLC and someone gets a huge judgment against the LLC, the most you could lose is your investment -the $10. The judgment creditor would not be able to come after you personally to collect the balance of their judgment. However, not all LLCs or corporations have assets from which a judgment may be collected. Sacramento area business and real estate attorneys are occasionally asked by clients withe judgments what can be done to go after the members, managers, directors or shareholders. As one group of LLC members recently discovered, if the LLC's distributions to them leaves the LLC penniless and essentially dissolved, the creditor may collect from the members.


Yolo LLC attorney.jpgIn CB RICHARD ELLIS, INC. v. TERRA NOSTRA CONSULTANTS, the real estate broker was seeking their commission on sale of 38 acres in Murrieta for $11.8 million. While the broker had the property listed, the buyer made an offer. Before closing, either the listing ended or the LLC which owned the property fired the broker, it was not clear. The sale closed. A few days after the cash went from escrow to the seller LLC's bank account, it all left the account and was distributed to the members. The broker arbitrated its dispute with the LLC (because there was an arbitration provision in the listing agreement) and obtained a judgment against the LLC. But, of course, the LLC had no money.

The broker than filed suit against the members. Its argument was in the Corporations code, which provides for liability in the event the entity has been dissolved. Applicable was the old Section 17350 (which was replaced by the equivalent section 17707.07) provides:

(a) (1) Causes of action against a dissolved limited liability company, whether arising before or after the dissolution of the limited liability company, may be enforced against any of the following:

(A) Against the dissolved limited liability company, to the extent of its undistributed assets, including, without limitation, any insurance assets held by the limited liability company that may be available to satisfy claims.

(B) If any of the assets of the dissolved limited liability company have been distributed to members, against members of the dissolved limited liability company to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.


sacramento broker commission attorney.jpgIt was subsection (B) that the broker was looking at -over $11 million was distributed to the members. But, argued the members, this code section only applies when the corporation had been dissolved. Another section of the corporations code (old 17355, now replaced by 17707.1 ), states that an LLC shall be dissolved when it provides so in the operating agreement, when the members vote to dissolve, or a court issues a decree of judicial dissolution. None of these formal steps had occurred!

The Court of appeal said get lost. The purpose of section 17350 was designed to prevent unjust enrichment of LLC members, when the members have received assets which the LLC needs to pay creditors. Here, there was a de facto dissolution, and the broker could make the claim against the creditors. Otherwise, an LLC could be free to distribute all its assets, and then the next day vote to dissolve, with the members escaping free and clear.


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Judicial Reference Better than Arbitration In California - But the reason the court can refuse to order reference

September 30, 2014

Judicial reference, unlike arbitration, works within the court system. A lawsuit is filed, and the judge appoints a referee to assist in the case, or decide it on their own. Parties can agree, in their contracts, that disputes are to be determined by a general judicial reference. This means the entire dispute is to be resolved by a referee. An advantage of judicial reference over other forms of dispute resolution (read 'binding arbitration') is that a referee's decision is treated like a judge's decision for purposes of appeal. On the other hand, an arbitrator's decision cannot be appealed for errors of fact or law, as I have railed about several times in this blog. But as some parties found out in a 2011 decision, a judicial reference provision is not a guaranty that the dispute will be decided by a referee, and parties interested in reference should consult with a Sacramento business and real estate attorney as to what is possible. In this case the California Supreme Court concluded that a judge could decline to appoint a referee if there is a possibility of conflicting rulings on a common issue of law or fact.

Sacramento judicial reference attorney.jpgIn Tarrant Bell Property, LLC v. The Superior Court, 120 residents of a mobile home park in Alameda County sued the park owners complaining that they had not maintained the common areas of the park and subjected residents to substandard living conditions. Of those residents, 100 residents' leases had a provision that provided that disputes were to be resolved, first, by arbitration, or should the arbitration provision be found to be unenforceable, by general judicial reference. Key here is that the remaining 20 residents, 17% of the total, had leases that did not require arbitration and reference.

The plaintiffs asked the judge to order arbitration or reference, the park owners opposed either. The trail court judge refused to order arbitration or reference. The opinion does not describe why the court denied arbitration, but focuses instead on denial of reference.

The concern was that, with two groups of plaintiffs one having the lease provision and the other not, there was a possibility of inconsistent judgments:

Woodland  judicial reference attorney.jpg"Ordering two groups of real parties in interest to try their cases in separate but parallel proceedings would not reduce the burdens on this court or the parties, result in any cost savings, streamline the proceedings, or achieve efficiencies of any kind. The parties would be required to conduct the same discovery, litigate, and ultimately try the same issues in separate but parallel forums. A general reference would thus result in a duplication of effort, increased costs, and potentially, delays in resolution. Moreover, it would not reduce any burden on this Court, which would almost certainly have to hear, and decide, all of the same issues."

The Court of Appeal did not overturn the decision, and neither did the Supreme Court. The Supreme Court started with the judicial reference statutes, Code of Civil Procedure Sections 638 +. Section 638 provides that the court may appoint a referee if the parties agreement states that the dispute shall be heard by a referee. "May" is permissive, meaning that the court has discretion, even if the parties agreement states "shall," which does not allow for discretion.

Thus, the court will not follow the intent of the parties, (at least 83% of them), in refusing to enforce a provision for judicial reference that they had in their leases. The facts here, where there were 120 different lease contracts, are not common for most contracting parties. But a common scenario where the problem would arise is a real estate purchase contract. Often, when there are real estate sales disputes, the brokers are included as defendants. But, the brokers are not parties to the purchase contract. Thus, a judicial reference provision would apply only to the dispute between the buyer and seller, but not between the plaintiff and broker.


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California Homeowner's Insurance & Neighbor Lawsuits - How to determine if an encroachment was an "accident" that will be covered

September 23, 2014


Homeowners Insurance is not limited to fires, fallen trees, and general mayhem. When a homeowner is sued by a neighbor, the homeowner should routinely 'tender' the claim to the carrier (present the lawsuit to the insurance company, asking the insurer to provide your defense in the lawsuit). The question then becomes whether or not the lawsuit will be covered under the terms of the policy. Standard insurance policies cover an "occurrence", which is usually defined as an accident. If you are sued over a neighbor issue, you should consult a Sacramento real estate attorney regarding whether there may be insurance coverage. Over the years the California courts have set out guidelines for determining what could be considered an "accident" for these purposes. One homeowner, after an earthquake, rebuilt their residence encroaching onto their neighbor's property "by accident." The neighbor sued, and the homeowner tendered the suit to their insurance carrier. The homeowner was disappointed when the court found that, even though they had a good faith but mistaken belief that they were legally entitled to build where they did, it did not qualify under the policy and the insurer did not have to cover the defense. The bottom line - mistakenly believing that you have a right to do something, and then doing it, does not result in an accident.

sacramento homeowners insurance attorney.jpgIn Fire Insurance Exchange v. the Superior Court, the property was in Big Bear. When the owner tendered the claim to their insurer, the insurer denied the claim, so the homeowner sued the insurer. The insurer argued that the owners intentionally built their house over the property line, so it was not an accident. The owners countered that they were mistaken, believing that they owned the property where they built, so the construction was an accident.

The court first looked at the language of the insurance policy: it covered -

"those damages which an insured becomes legally obligated to pay because of ... property damages ... resulting from an occurrence to which this coverage applies." An "occurrence" is defined in turn as "an accident including exposure to conditions which results during the policy period in ... property damage."

"Accident" is given a commonsense interpretation that it is an unintentional, unexpected, chance occurrence. An accident does not occur when somebody does a deliberate act (like building a house) unless something independent and unforeseen happens which causes the damage. For example, a driver may intentionally speed. If he negligently hits another car, the speeding was still intentional, but hitting the other car, the act which cause the harm, was not intended, and was thus an accident.

sacramento encroachment attorney.jpgWhen the owner deliberately intended to perform every step that led to the damage, the fact that he did not intend to cause harm does not transform it into an accident. The court reviewed several decisions where an insured committed an act based on the mistaken belief that they had a legal right to do so. For example, a party was accused of sexual assault. The insured thought there was consent, but their mistaken belief did not make it an accident.

The general principal California is that the term "accident" refers to the nature of the conduct itself rather than to its consequences. Here, the homeowner intended to build the house where they built it. That they had a mistaken belief that it was on their land did not transform it into an accident - there conduct was intentional, and there was no independent, unforeseen happening that caused the harm.


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The One Step a California Judgment Creditor Must Take In Addition to Recording An Abstract of Judgment to Collect Surplus Funds from a Foreclosure Sale.

September 10, 2014

A creditor who is awarded a money judgment in California must still collect the money that they are owed. The two most common steps they take are to garnish wages (if possible) and to record an 'abstract of judgment' in any county where the debtor owns real estate. The abstract then creates a lien against the property. If the owner seeks to sell, or refinance, the judgment must be paid off to clear title. The judgment creditor could also foreclose the judgment lien, if there is sufficient equity in the property.

However, what if a senior lien forecloses? In a decision out of Costa Mesa, the judgment creditor was disappointed to learn that recording the abstract was not enough. As explained below, the foreclosing trustee was not required to search the record for abstracts. The creditor is required to also record a request for notice under Civil Code section 2924b(a). However, that does not work if a notice of default had been already recorded - in that case the creditor must monitor the foreclosure, and make a demand on the trustee immediately after the sale, before surplus funds have been distributed. Unsure creditors should consult with a Yolo and Sacramento real estate attorney.

Yolo real estate attorney 3.jpg In Banc of America Leasing & Capital, LLC v. 3 Arch Trustee Services, the creditor obtained a judgment against the real property owner. It recorded an abstract of judgment. Unfortunately for the creditor, the notice of default and notice of sale had already been recorded. The sale occurred, and, the borrower having equity in the property, there was a surplus of almost $115,000 left after paying the senior lien. The trustee paid this money to former owner, who also had the judgment against him. He made out ok.

The creditor sued the trustee, claiming that they had notice of the creditor's interest due to the abstract, and the judgment should have been paid. The court said no. A trustee owes no duty to provide notices to any person unless the trust deed or the statute specifically provides for such notice. Civil Code section 2924b governs notices of default in nonjudicial foreclosure proceedings. The trustee must mail a default notice as follows:

First, section 2924b, subdivision (b) requires a trustee to give notice to:

(1) the trustor or mortgagor at his or her last known address if different than the address specified in the deed of trust, and

(2) to those persons who had recorded a statutory request for notice.

sacramento foreclosure surplus funds.jpg Second, section 2924b, subdivision (c), requires a trustee to give notice to other categories of parties, including 'the successor in interest, as of the recording date of the notice of default, of the interest being foreclosed.' Section 2924b, subdivision (c)(1) requires this additional notice, however, only if the party acquired the interest 'by an instrument sufficient to impart constructive notice of the ... interest in the land ... and provided the instrument is recorded in the office of the county recorder so as to impart that constructive notice prior to the recording date of the notice of default and provided the instrument as so recorded sets forth a mailing address which the county recorder shall use, as instructed within the instrument, for the return of the instrument after recording.

This creditor did not record prior to recording of the notice of default. It was out of luck. Anyone who is interested in a specific property or creditor may record a request for notice of the notice of default and notice of sale. BUT, this must be recorded after the recording of the deed of trust or mortgage and prior to the recording of the notice of default.

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What NOT to Do When Buying Property and Concerned about a Prescriptive Easement

August 28, 2014


Figure this - you are in the process of buying a commercial real property and you see service vehicles (such as FedEx, UPS, and other companies) from the neighboring business crossing over the property to access their business, and some of the other property employees parking in the soon-to-be your parking spaces. What do you do? Ask the owner of the neighboring property about it? That is what the disappointed buyer in today's post. Your Sacramento real estate lawyer might advise you to get representations from your Seller, as a condition to your contract. Also, some title insurance policies will cover prescriptive rights, but our buyer just brought it up with his future neighbor eight months before escrow closed. He told him that he did not want their vehicles crossing the property line. The neighbor replied 'no problem. We'll take care of it.' But they did not take care of it -in fact, the neighbor already believed that he had a prescriptive easement. The sale closed escrow, the trespass continued, and the buyer sued the trespassing neighbor.

sacramento real estate attorneys.jpgIn Steven Hoffman v. 162 North Wolfe LLC, The buyer, who was a commercial real estate broker, sued the Sunnyvale neighbor, claiming that the neighbor defrauded them by falsely advising that they had no claims or interest with respect to the property. (Here's the google street view of the two properties) The Hoffmans alleged two fraud claims--concealment/suppression of facts, and intentional misrepresentation. After the conversation discussed above, the buyer did not bring the matter up with his seller, nor did he again discuss it with the neighbor. He claims that he thought it was taken care of.


concealment/suppression of facts- No legal relationship

The court first noted the necessary elements of a concealment/suppression claim consist of "'(1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage. The defendant argued that it had no relationship with the buyer, thus did not have any duty to disclose their prescriptive rights. The court agreed, stating that the person charged with concealment or nondisclosure of facts must be under a legal duty to disclose them. Such a duty to disclose can arise from the relationship between doctor and patient, employer and prospective employee, seller and buyer, or parties entering into any kind of contractual agreement. But none of those situations existed here- they had no relationship, and thus no legal duty to disclose a claim to prescriptive rights. The plaintiff argued that, when a party does make a representation, he has an obligation to speak honestly and not make misleading statements. However, in this case, the neighbor was NOT asked if they claimed an interest in the neighboring property, and the statement that "we'll take care of it" cannot be reasonably construed as speaking about their claimed interest in the property.

Concealment/suppression of facts- No Justifiable Reliance

The plaintiff must also show that they actually relied on the misrepresentation or concealment, and that such reliance was reasonable. But after the conversation with the defendant, the plaintiff here continued to see, continuing for eight months, vehicles from the other property crossing the property the plaintiff was buying.

Intention Misrepresentation
The plaintiff claimed that the statement "We'll take care of it", was an intentional misrepresentation." But the court concluded that this was "too vague to be enforced." And, even if it was considered a misrepresentation, again there was no justifiable reliance.


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When a California Real Estate Broker is a Dual Agent, both the Listing and Selling Agents Are Dual Agents and Fiduciaries- How and Why That Makes A Difference

August 26, 2014


When a California real estate agent lists a property for sale with his broker, it is not unusual for another agent from the same brokerage to assist the buyer. When the same broker represents both parties in the transaction, that broker is a "dual agent," and owes fiduciary duties to both parties. A fiduciary is required to give diligent and faithful service act toward the principal in the highest good faith and undivided service and loyalty, and must disclose to the principal all information that may affect the principals' affairs or decisions. This is much greater than an arm's length business transaction. But what sometimes confuses the agent/salesperson is that when his broker is a dual agent, he is too, and has the same fiduciary duties. Salespersons wondering what that fiduciary duty implies should consult with a real estate attorney because, in a recent decision the salesperson was surprised to learn that he was a dual agent, and that meant that he did not have to deliberately mislead a buyer to be found liable for fraud.

Sacramento  real estate broker attorney.jpgIn Horiike v. Coldwell Banker Residential Brokerage Company, a salesperson listed a house in Malibu for sale. There was a first buyer who asked the salesperson, Cortazzo, what the square footage was. His listing stated that it had 15,000 square feet of living area. The first buyer asked for verification of the square footage. He advised them to hire a specialist to accurately determine the size. He also included this in the real estate transfer disclosure statement, and changed the MLS listing to read "0" square feet, and other comments.

The first buyer backed out and along came the plaintiff Horiike, (see him here) who was represented by another salesperson from the same brokerage. Cortazzo gave him the old flyer that stated the property was 15,000 square feet.. Escrow was opened, and they all signed the agency confirmation statement, indicating that Coldwell Banker was agent for both buyer and seller. Unfortunately for him, Cortazzo did not advise the buyers to hire an expert to measure the square footage of the living area. The sale closed, the buyer wanted to have work done on the house, found that it was only 11,964 square feet, and sued everybody.

At trial the jury found that Cortazzo had reasonable grounds for believing the property had 15,000 square feet, thus he was not liable for negligent misrepresentation. The trial court also dismissed the breach of fiduciary duty claim against Cortazzo, claiming that he was not a fiduciary.

The court of appeals first set out the legal terminology and relationships of the parties. Under the California statutory scheme an "agent" is a licensed real estate broker "under whose license a listing is executed or an offer to purchase is obtained." (Civil § 2079.13, subd. (a).) An "associate licensee" is a licensed real estate broker or salesperson "who is either licensed under a broker or has entered into a written contract with a broker to act as the broker's agent in connection with acts requiring a real estate license and to function under the broker's supervision in the capacity of an associate licensee." (subd. (b).) " 'Dual agent' means an agent acting, either directly or through an associate licensee, as agent for both the seller and the buyer in a real property transaction." (. subd.(d).)

El Dorado real estate broker attorney.jpgThe court noted that salespersons commonly believe that there is no dual representation if one salesperson represents buyer, another represents the seller, even though they both have the same broker. Thus Cortazzo was a fiduciary, and had a greater obligation. "A fiduciary must tell its principal of all information it possesses that is material to the principal's interests. A fiduciary's failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent."

Possible liability for constructive fraud raises the bar - Cortazzo's reasonable and good faith belief that the property was 15,000 sq ft is not a defense to constructive fraud. The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary's motives or the principal's decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. Also, a careless misstatement may constitute constructive fraud even though there is no fraudulent intent.

Remember Cortazzo's advice to the first buyer - hire a specialist to confirm the size; and how he changed the MLS listing to zero sq ft. We know about this because the plaintiff found out, and will use this evidence to show that Cortazzo had some doubt as to the actual measurement. This decision made his defense much more difficult.

Uncertain Boundary Line and Missing Monuments - Some Rules For How You Locate the Line in California

August 14, 2014

In less urban areas, property boundary lines and their corner markers are often lost. Trees fall or are logged, slopes give way, streams erode banks, and all of nature conspires to make marks on the ground disappear. California real estate disputes often hinge on locating a property line on the ground through rugged terrain. Real Estate and property attorneys advise their clients that a survey will be required -and it is best for the parties to share the cost of the survey. However, if the value is high enough, there may be competing surveys with different results. Such was the situation in a recent decision out of Santa Cruz, where the parties disputed who owned some redwood trees.

Sacramento boundary dispute attorney.jpgIn Jacques Bloxham v. Todd Salinger, the parties owned adjoin parcels with a common boundary line in Soquel Creek. Neither surveyor was able to locate the North and South Corners of the common property line. They reviewed the field notes of the original survey, which took place 150 years ago. They did locate a "witness tree" stump (the tree had been logged). A witness tree is one which has been blazed, is near a corner, it is located at a specific distance and bearing from the corner. If you know the distance and bearing, you can locate where the corner was by measuring from the witness tree. They also find "line trees" -trees directly on the line, indicated by blazes.


FOLLOWING THE FOOTSTEPS OF THE ORIGINAL SURVEYOR

In determining who was correct, the Court of Appeals went through the numerous rules regarding land surveying, including California statutes, and the Manual of Surveying Instructions, which is published by the Bureau of Land management. First of all, the location of a disputed boundary line is proven by retracing, as nearly as possible based upon existing evidence, the footsteps of the original surveyor who made the last-accepted government survey and place the corners and lines where they were placed by him.
"It is for the trial court, upon all the evidence, to fix the [common sectional corner] at a point where it will best accord with the natural objects described in the [original] field-notes as being about it, and found to exist on the ground, and which is least inconsistent with the distances mentioned in the notes and plat." The location of the monuments placed in connection with the original survey is of primary importance; monuments control over courses, distances, lines and angles. Code Civ. Proc. § 2077
Here, were the last survey was conduction in the 1850's, an expert witness established that compasses of that time were capable of measuring accurately to a quarter of a degree, which meant that there could be a discrepancy of plus or minus 15 minutes, as measured from a witness tree. Thus, there will be some slack in relocating the corner today.

LOST CORNER vs. OBLITERATED CORNER

These are specifically defined terms in the Manual of Survey Instructions. A lost corner is a point of a survey whose position cannot be determined, beyond reasonable doubt, either from traces of the original marks or from acceptable evidence or testimony that bears upon the original position, and whose location can be restored only by reference to one or more interdependent corners.

Sacramento  survey dispute attorney.jpgAn obliterated corner is a corner that can be established beyond a reasonable doubt even though the corner and its accessories have been lost. Its position can be located by the acts and testimony of interested landowners, competent evidence, necessary records in order to show where the corner was actually located on the ground by the creating surveyor.

The winning surveyor here determined that the corners were lost corners, because they could not be reestablished without reasonable doubt; but he was able to set corners within 10 to 15 feet of the original corners. He established them based on locations of the witness stumps, and line tree stumps, which he could physically locate. He was in the vicinity of the footsteps of the original surveyor, relying on indicators on the ground. The decision did not detail the efforts of the other surveyor, but concluded that this surveyor followed the law, and that the trial judge ruled in his favor based on weighing the evidence. In other words, the other party did not establish that his survey was contrary to law.

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Drafting a lawsuit when the lender denies a permanent loan modification after a HAMP trial Period - Some Necessary Allegations

August 7, 2014

I have written before about courts calling to account lenders who reneg on loan modifications after the borrower made numerous trial plan payments. Courts have ruled against lenders based on promissory estoppel, offer and acceptance creating a contract, for lack of a signed, written modification; and lack of a modification signed by the lender. Usually, when the property is about to be, or already has been, sold at a trustee's sale, the borrower consults a Sacramento real estate attorney about such a situation. In a recent decision the lender was disappointed when the court found that the plaintiff properly alleged numerous claims against it.

Sacramento real estate loan attorney 2.jpgIn James Rufini v. CitiMortgage, Inc., the Sonoma homeowner sought a loan modification. In June 2009 CitiMortgage approved the loan modification, and told him he would receive a permanent modification in October after timely making three trial payments. He continued making the trial payments through December, in January the lender told him that his permanent loan modification agreement would be ready in three days. Three months later, since he had not received the written agreement, he rented out the house (and lived with his son) to offset expenses while waiting for the modification. The modification was then denied because the home was not "owner-occupied." The lender then refused to accept his mortgage payments at the modified level. A notice of trustee's sale was recorded, and the borrower got a 30-day postponement, while the lender was requesting additional information, like income information. Meanwhile, CitiMortgage transferred the loan to PennyMac. CitiMortgage kept discussing the modification, and the property was foreclosed. The borrower claimed that the lender's contact said he had known all along the loan had been transferred to PennyMac.

BREACH OF CONTRACT
The borrower sued the lender for breach of contract. He claimed it was the agreement to modify the loan that was breached. The court first reviewed the HAMP modification procedure:

1. The participating lender initially determines whether a borrower satisfies certain threshold requirements regarding the amount of the loan balance, monthly payment, and owner occupancy.
If the borrower qualifies, it then implements the HAMP modification process in two stages.
2. In the first stage, it provides the borrower with a "Trial Period Plan" (TPP), setting forth the trial payment terms, instructs the borrower to sign and return the TPP and other documents, and requests the first trial payment.
3. In the second stage, if the borrower has made all required trial payments and complied with all of the TPP's other terms, and if the borrower's representations on which the modification is based remain correct, the lender must offer the borrower a permanent loan modification.
The court reviewed the decisions that require, in the event that the borrower has a TPP and makes the three timely payments, that the lender must offer the borrower a permanent loan modification. If the lender doers not do so, the borrower may sue for breach of the trial modification plan. The court here agreed; Rufini was suing for breach of the modification plan. He could also allege a claim for breach of duty of good faith and fair dealing based on the lender's failure to modify the loan.

NEGLIGENT MISREPRESENTATION
The court first set out the elements of negligent misrepresentation:
(1) the defendant made a false representation;
(2) without reasonable grounds for believing it to be true;
(3) with the intent to deceive the plaintiff;
(4) justifiable reliance on the representation; and
(5) resulting harm

The borrower claimed that CitiMortgage falsely told him that he was approved for a permanent modification and thereafter carried on the pretense of efforts to finalize it, while planning to foreclose, intending that he reply on the representations. He reasonably relied on them in expending time in modification negotiations, and foregoing pursuing other opportunities.
The lender argued that they owe their borrowers no duty not to misrepresent the truth. HA HA!, the court said, lenders have a common law duty not to make misleading representations of material facts.


Sacramento real estate mortgage attorney.jpgBUSINESS & PROFESSIONS CODE §17200
This Is the 'Unfair Competition Law.' The homeowner alleged that the lender committed an unlawful business practice when it denied his loan modification in bad faith "on the grounds that the home was not owner occupied when in fact it was owner occupied," and pretended to engage in loan modification efforts while actually intending to foreclose.
The bank argued that this was insufficient, because it failed to allege a predicate act in violation of a statute. The court found that the B&P language makes clear that a practice may by unfair even if it is not prevented by some other law.
Next, the bank argued that he could not bring the unlawful competition claim because he had allege that he lost money or property. However, he alleged that the unfair practices deprived him of the opportunity to pursue other means of avoiding foreclosure.

Lastly, the bank argued that the unfair competition law only applies to ongoing conduct. But no- that used to be the case, but not any longer. The law allows basing a claim on a single instance of unfair conduct.

This Appeal was from a demurrer to the complaint, alleging that the complaint, as it was written, did not support these causes of action. But these are just allegations, and the plaintiff is a long way from proving them. He still has to show the house was owner occupied, and it does not sound like it was. He also has to convince a judge or jury that the CitiMortgage employee knew the property was going to foreclosure, but kept negotiating a modification anyway.

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How you can determine if your real estate contract is specific enough to be enforced - what essential terms are required.

Let's get this out of the way - the only essential terms for a real estate sale contract are the identities of the buyer and seller, the property in question, and the purchase price. Essentially, that is the law in California. Of course, the courts have found ways around the rule, but the trend of the law favors carrying out the parties' intent once the court has determined that the parties had intended to make a contract. The courts will hear evidence of the parties' intent to explain essential terms. (Okun v. Morton, 203 Cal. App. 3d 805) Sacramento real estate attorneys are occasionally asked about contracts in which all the standard details are left out, and asked how to enforce, or deny, the contract. When there is no time for payment specified, I always advise the "a reasonable time" is inferred, whatever that means in the circumstances. Such a situation was addressed by the Supreme Court when a tenant wanted to enforce a purchase option that was included in the lease.

sacramento real estate purchase attorney.jpgIn Patel v. Liebermensch, the tenants leased a condo in San Diego. The lease included the following purchase and sale option:
"Through the end of the year 2003, the selling price is $290,000. The selling price increases by 3% through the end of the year 2004 and cancels with expiration of your occupancy. Should this option to buy be exercised, $1,200.00 shall be refunded to you."
The option contract did not specify the time or manner of payment, which the landlord claimed rendered the agreement unenforceable. The court of appeal decided that, while it might be reasonable in some circumstances to imply standard terms on these points into the contract, here it was not, because the seller contemplated conducting a 1031 exchange (which would have specific timing requirements) which involved serious tax consequences.

The Supreme Court disagreed, finding the option real estate purchase contract enforceable. The seller's undisclosed intentions are not considered part of the contract.

It first noted that the equitable remedy of specific performance cannot be granted if the terms of a contract are not certain enough for the court to know what to enforce. (Civ.Code, § 3390, subd. 5)

In the absence of express conditions, custom determines incidental matters relating to the opening of an escrow, furnishing deeds, title insurance policies, prorating of taxes, and the like. "The material factors to be ascertained from the written contract are the seller, the buyer, the price to be paid, the time and manner of payment, and the property to be transferred, describing it so it may be identified." However, the manner and time of payment may be determined by "reference to custom and reason when the contract is silent on the question, unless the contract includes seller financing provisions that are not sufficiently clear enough to protect the seller."

el dorado real estate option attorney.jpgThe court concluded that, since time and manner of payment are terms that may be supplied by implication, they are not material elements that must appear in writing in every real estate sale agreement. What is for sure is that in a contract for the sale of real estate the delivery of the deed and the payment of the purchase price are dependent and concurrent conditions; the happen at the same time, and not without each other.

Civil Code section 1657 applies here to interpret of the contract: "If no time is specified for the performance of an act required to be performed, a reasonable time is allowed. If the act is in its nature capable of being done instantly--as, for example, if it consists in the payment of money only--it must be performed immediately upon the thing to be done being exactly ascertained. The purchase price is deemed payable upon delivery of the deed.

Thus, the case was sent back to the trial court to determine what a "reasonable time" for payment was. To determine this, the parties will have to have evidence from real estate professionals, testifying as experts, as to what a reasonable amount of time is standard in San Diego residential sales for escrow to close.


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California Commercial Lease - How to Determine if Option to Renew is Not Enforceable


California commercial leases often include options for renewal of the lease beyond the initial term. Option terms can provide the duration of the renewal, and describe the future rent, or provide a mechanism for calculating the rent to be paid. But, frequently commercial lease attorneys encounter leases that are not so specific. They can describe the procedure for exercising the option, and the future term or terms, but only provide that the rent was to be as agreed upon. Lessors and landlords do this to provide some assurance to the potential tenant that they may be able to stay in the location for another tenant without committing themselves to rent terms, or even that this tenant. The tenant who has not consulted a real estate attorney enters the lease with the false comfort that they have the right to stay if they want. Such was the case in a Supreme Court decision where the tenant, who had made significant improvements to the property, learned that they did not have a right to stay.


ElDorado real estate and leasing attorney.jpgIn Ablett v. Clausen the Lease provided these option terms:
the lessees 'shall have the first right and a prior option to secure a lease upon said premises before the same are offered to any other person, firm or corporation for lease or rental and that said option shall contemplate a lease for a period of five (5) years upon terms to be then agreed upon.'
The landlord and tenant had some disputes about grading in the parking area of the property where the tenant had the 'Rite Spot' restaurant;, and the landlord's refusal to allow the tenant to remodel the restaurant. So, the landlord told the tenant that they would NOT renew the lease on expiration - the option was terminated. The tenant filed suit to have the court declare they were entitled to another five year rental, under the same terms and conditions.

The trial court ruled in favor of the tenants, so the landlord appealed. The tenant argued that the provision, 'first right and prior option', does not in any way qualify the right of renewal. The court first noted that terms as 'first privilege', and 'first right', and concluded that such provisions do not give the lessee an absolute right to a renewal, but one conditioned upon the lessor's leasing the property, in which case the lessee may have first refusal.

Sacramento real estate option attorney.jpgThe landlord argued that the option provision does not give even a conditional right to a renewal, but is too uncertain to be enforced; it is just an agreement to contract in the future, which is not enforceable. Here, the court noted that the rule is that where "either party by the terms of the promise may refuse to agree to anything to which the other party will agree, it is impossible for the law to affix any obligation to such a promise." There are some court decisions which find that when the only term of a lease which still requires the parties' agreement is the rent, there can be an exception allowing the court to determine a reasonable rent. But here, the Supreme Court found this permissible only where there are some ascertainable standards in the option for the court to decide the terms of the lease. That is not the case here. The original Lease was nine pages long, yet the only term provided by the option provision is how long the renewed lease would last. There is neither discussion of rent, nor a standard by which it may be calculated. Thus, the terms were not specific enough to be enforced.

This opinion takes a long time to get to what was really the obvious conclusion - where the option requires the parties to agree in the future, it is false comfort for the tenant to think they have a right to renew the lease.


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The Option to Buy California Real Estate, and Escape Clauses - How Part Performance Made the Promise Binding


Sometimes possible real estate buyers do want to close the deal unless they can obtain certain benefits, such as a zoning change, or lot split. To lock up the property and make their investment worthwhile, they enter an option contract. An option is a unilateral contract under which a property owner, for consideration, agrees to sell its property to another (optionee) if, within a specified time period, the optionee elects to exercise the right to purchase. The owner has made an irrevocable offer to sell at the specified terms in return for the consideration. To be enforceable, the option contract must have consideration paid by the optionee, and sufficiently describe the purchase terms - parties considering such a deal may want to consult with a Sacramento real estate attorney to ensure its enforceability.

The optionee is not required to buy, but if they follow the terms for exercising the option, it becomes a simple purchase contract. Otherwise, it expires. In one court decision, the question arose of whether there was adequate consideration, or just an illusory promise that was not legally binding. the buyer had an escape clause that did not require him to do anything. The plaintiff who then decided not to sell was disappointed to learn that the buyer's part performance made the promise binding.

Sacramento option contract attorney.jpgIn Steiner v. Thaxton, Steiner entered a contract to buy 10 acres of bare land. However, the agreement provided that Steiner could cancel the deal at any time at his sole discretion. It states:

"It is expressly understood that [Steiner] may, at [his] absolute and sole discretion during this period, elect not to continue in this transaction and this purchase contract will become null and void."

He proceeded to seek county approval for a parcel split, and to obtain development permits, spending thousands of dollars. The seller then said he did not want to sell, and the buyer sued for specific performance of the contract.

The court first concluded that the contract was in fact an option. When the owner binds himself to sell on specified terms, and leaves it discretionary with the other party to the contract whether he will or will not buy, it constitutes simply an optional contract. Thus, the question arose as to whether there was consideration for the option.

Was There Consideration?

Civil Code section 1605 defines consideration as "Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person...as an inducement to the promisor"

In our case the promisor is the owner of the land.

Thus, there is a 2-part test in order to find consideration:

1- The promisee must confer (or agree to confer) a benefit or must suffer (or agree to suffer) prejudice.

2- the benefit or prejudice must actually be bargained for as the exchange for the promise.

option contract attorney.jpgHere, part 1 was accomplished - the buyer/optionee's promise to seek a parcel split may have been illusory at the time the agreement was entered into, but he subsequently undertook substantial steps toward obtaining the parcel split and incurred significant expenses. The effort provided a benefit to the seller/optionor, and was a prejudice suffered by the buyer.

Secondly, part 2 was accomplished -the promise to obtain a parcel split was bargained for and induced the seller to enter the contract. There was evidence that the seller told the buyer that it was important to him that any potential buyer seeks to obtain a parcel split.

Thus, the court concluded that the buyer's part performance cured the illusory nature of the contract; thus there was sufficient consideration for the option, and that it was enforceable.

The steps that probably took place were a) the buyer tied up the property at a specific price, b) he signed a deal with another person to buy from him all or part of the finished product, with lot split and permits completed, and then c) he began the process of obtaining the development rights. There was a third party who interned in the lawsuit, because the buyer had assigned some of his rights.

Detailed terms of the purchase contract are set out in the footnotes of the opinion. But this begs the question - why did the parties not just enter an option contract? A nominal cash consideration could have been paid; after all, the seller has now tied up his property to some extent.


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Conditions in California Real Estate Contracts - It makes a Difference if they are Dependent or Independent

A condition in a contract is a fact, the happening or nonhappening of which creates or extinguishes a duty on the part of the promisor. If the promisor makes an absolute or unconditional promise, he must perform when the time arrives. But if the promisor makes a conditional promise, he must perform only if the condition precedent occurs. The promise may be dependent upon the performance of another condition, in which case they would be dependant and concurrent conditions. In this case neither party is in default until one party performs or tenders performance. In the typical real estate contract seen by Sacramento real estate attorneys, delivery of the deed and payment of the purchase price are dependent and concurrent conditions. There must be performance or tender thereof by one party to put the other in default. In a recent decision, the court agreed with the swindled would-be buyer, who argued that return of their $3 million dollar deposit was an independent condition

Sacramento real estate contract attorney.jpgIn Rutherford Holdings, LLC v. Plaza Del Rey, Rutherford contracted to buy a mobile home park from Plaza, and provided a deposit of $3 million dollars. The agreement provided that the deposit was nonrefundable unless Plaza materially breached the purchase agreement or failed or refused to close.

Prior to the closing date, Plaza told the buyer that Plaza could reduce its property tax bill for the year if it was not in this contract for sale. The contract would increase the value that the tax was based on. If they did not close by the closing date, the tax would be based on a lesser value. Plaza promised the buyer that they would sell the property after the closing date, and after Plaza filed it tax returns. The buyer agreed! The closing date came and went and neither party performed; Plaza never tendered the deed to Rutherford, and Rutherford never tendered the full purchase price to Plaza. Plaza paid less in taxes, then said they would not sell the property to Rutherford, plus they were keeping the deposit, ha ha! This suit followed.

The court first noted that in a contract for the sale of real estate the delivery of the deed and the payment of the purchase price are dependent and concurrent conditions. Where the parties' contractual obligations constitute concurrent conditions, neither party is in default until one party performs or tenders performance. However, here, the buyer argued that the seller's obligation to return the deposit was independent of the Buyer's promise to pay the full purchase price. If the two covenants are independent, breach of one does not excuse performance of the other. The buyer's failure to place the money in escrow did not excuse Plaza's failure to return the deposit.

El Dorado real estate contract attorney.jpgIn this case the Court was looking at whether the Complaint sufficiently described a legitimate claim. Where an ambiguous contract is the basis of an action, the parties are expected to provide their own interpretation of its meaning. If their interpretation is not clearly incorrect, the court accepts as correct plaintiff's allegations as to the meaning of the agreement.

Here, the purchase agreement can be reasonably interpreted to mean what the Buyer has claimed. "While [that] interpretation ... ultimately may prove invalid," at the pleading stage, it is sufficient that the agreement is reasonably susceptible of this meaning." Thus, the Buyer had properly made the claim that return of the deposit was an independent condition, and should have been returned. It's too bad this buyer had to go through the appeal process at this stage of the lawsuit. The seller seems to be a real con artist, convincing the buyer to let the contract lapse with a promise to sell on the same terms, then keeping the $3 million dollar deposit.



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The Sham Guaranty in California - How to Avoid By Making Sure There is Separation Beween the Borrowower & Guarantor


I have written in the past about Sham Guaranties - this is a guaranty of a loan where the guarantor has such a close identity with the borrower that they are in effect providing a guaranty of their own loan. Such a sham guaranty is not enforceable. A typical scenario would be with a limited partnership. The general partner is fully liable for the debts of the limited partnership. If all the principals of the general partner sign the guaranty, the question arises of whether anything has been added by the guaranty. This is a sham especially when the lender takes a role in encouraging the formation of the entity, and only investigates the financial wherewithal of the individual guarantors. Business and real estate attorneys for lenders usually pay special attention to make sure they really will have an effective guaranty. In a recent decision. the guarantors were unhappy to learn that they were liable on the guaranty - there was too much separation between themselves and the borrowers, which they did on purpose so that they would not occur direct liability on the loan.


Sacramento real estate loan sham guaranty attorney.jpg In California Bank & Trust v. Lawlor, the bank loaned millions to Heritage Partners, secured by numerous real estate projects. Smith and Lawlor owned and controlled Covenant Management, which owned and controlled Heritage Capital, which was the general partner of the Heritage partnerships. They really tried to isolate themselves from the borrower to avoid personal liability. The lender required Smith and Lawlor to sign continuing guaranties. The borrower went into default, the lender foreclosed, and had a deficiency of $15 million dollars. California Bank and Trust brought this action to collect on the loan guaranties. Smith and Lawlor argued that the guaranties were sham guaranties and therefore they were actually the primary obligors on the loans, not true guarantors. As primary obligors, Smith and Lawlor claimed that they were entitled to the protection of California's antideficiency statutes. This should prohibit the lender from obtaining a judgment against them for the difference between the value of the security and the outstanding loan balances.

The antideficiency statutes strictly limit the right to recover deficiency judgments for the amount the debt exceeds the value of the security. The antideficiency laws promote several public policy objectives:
(1) to prevent a multiplicity of actions,
(2) to prevent an overvaluation of the security,
(3) to prevent the aggravation of an economic recession which would result if creditors lost their property and were also burdened with personal liability, and
(4) to prevent the creditor from making an unreasonably low bid at the foreclosure sale, acquire the asset below its value, and also recover a personal judgment against the debtor.

These protections are NOT provided to a true guarantor, however. The courts must decide whether the purported debtor is anything other than an instrumentality used by the individuals who guaranteed the debtor's obligation, and whether such instrumentality actually removed the individuals from their status and obligations as debtors.
The court surveyed numerous sham guaranty decisions, and noted that it would look to the purpose and effect of the parties' agreement to determine whether the guaranties constitute an attempt to circumvent the antideficiency law and recover deficiency judgments when those judgments otherwise would be prohibited. The test is to determine 1) whether the legal relationship between the guarantor and the purported primary obligor truly separated the guarantor from the principal underlying obligation, and 2) whether the lender required or structured the transaction in a manner designed to cast a primary obligor in the appearance of a guarantor.

Regarding the legal relationship, The Defendants are not the primary obligors on the loans because they did not enter into the business loan agreements or execute the promissory notes with the lender. Also, Cartwright Properties's and Heritage's (two of the borrowers) legal status as a limited liability company and a limited partnership provide legal separation between those entities as the primary obligors and Defendants as the guarantors. For the Heritage loans, there was an additional layer of separation existed between Smith and Lawlor and the primary obligors because there was both a limited partnership and a limited liability company between them and the primary obligors. Though the defendants owned and controlled these entities, there was no evidence that these were mere shells, which would allow the plaintiff to pierce the corporate veil ('ultra vires').

Sacramento loan guaranty attorney.jpgRegarding the lender's involvement, There was no evidence that the lender requested, required, or otherwise had any involvement in selecting the entities, or the form of the entities, that were the borrowers and primary obligors. Defendants offered no evidence showing Smith and Lawlor were the primary obligors on the loans or that the lender attempted to separate Defendants' interests in the loans by making Cartwright Properties and Heritage the borrowers while relegating Defendants to the position of guarantors.
These defendants did a great job structuring entities to shield themselves from personal liability. A property constructed LLC, corporation, or limited partnership can do that. The downside however, is that this level of protection eliminates the sham guaranty defense.

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In California if you Obstruct a Prescriptive Easement, the Court can Require You to Remove the Obstruction, Even if it is a Commercial Building.

A prescriptive easement is a right established in someone else's property by using that property in a consistent way over a period of at lease five years. The easement holder starts out as a trespasser, If the true owner does not take action to stop the trespass, or establish that the use is permitted, they lose. A real estate Professor has pointed out that 'historically, prescription has had the theoretical basis of a lost grant of property. Its continued use has been justified because of its functional utility in helping to cause prompt termination of controversies before the possible loss of evidence and in stabilizing long continued property uses.' (Powell, The Law of Real Property). Sacramento real estate attorneys often see the lawsuit to establish a prescriptive easement instigated when the owner of the property blocks the prescriptive use, by building a fence, installing a locked gate, or the like. If the easement is established, the court can require the property owner to move the obstruction. But to what extent? The California Supreme Court made it clear - when the obstructor builds knowing of the claim of an easement, with litigation ongoing, the court need not show mercy - in one case, they required removal of a commercial warehouse.

sacramento prescriptive easement rights attorney.jpgIn Ernest E. Warsaw v. Chicago Metallic Ceilings, Inc., the plaintiff built a large commercial building with the loading docks on the north side of the building. There was room for a forty foot driveway along that Northern boundary of the parcel, but forty feet was never enough room for big trucks to turn and back in to the loading docks. They always encroached on the adjoining property. The defendant's adjacent parcel to the North had been vacant land all this time. The parties had in the past discussed creating a granted easement, but nothing came of it. After more than seven years had passed, the defendant decided to build on the southern portion of its property. They graded a pad that blocked the plaintiff's use of the area, and the plaintiff filed this lawsuit.

The Court decided three issues:
1. Was a prescriptive easement created?
2. Could the defendant be required to remove the building?
3. Was the defendant entitled to be paid any money?

A Prescriptive Easement was Created

The party claiming a prescriptive easement must show use of the property which has been open, notorious, continuous and adverse for an uninterrupted period of five years. Here, the truckers using the neighboring property followed a definite course and pattern, and while no two truck drivers followed the exact course ... the deviation taken by various drivers over the seven-year period was only slight.


The Defendant Could Be Required To Move The Obstruction, Even if it is a Building

Yolo easement lawyer.jpgA court of equity may issue a mandatory injunction for protection and preservation of an easement including, where appropriate, an order for removal of an obstruction already erected; even if the cost of removal is great under certain circumstances, especially if the encroaching structure was willfully erected with knowledge of the claimed easement. Where, by innocent mistake or oversight, buildings erected slightly encroach, the damage to the owner of the buildings by their removal would be greatly disproportionate to the injury, so the court might not order their removal However, where the defendant acted with a full knowledge of the complainant's rights and with an understanding of the consequences which might ensue, courts will not deny relief on the ground that the loss caused by it will be disproportionate to the good accomplished. Here, construction of the building was not started until the lawsuit had begun. It was completed before the trial. The defendants rolled the dice, assuming that they would win but they lost.

The Defendant is Not Entitled to Compensation

The defendant argued that, in equity, the court should grant compensation for the fair market value of the easement, or alternatively share the cost of removing or restructuring the building. The court said no. Civil Code section 1007, enacted in 1872, provides that 'Occupancy for the period prescribed by the Code of Civil Procedure as sufficient to bar any action for the recovery of the property confers a title thereto, denominated a title by prescription, which is sufficient against all ....' Here, on finding the creation of the easement, the plaintiff has title. There are no grounds for requiring compensation. The court looked at the history of prescriptive rights, and its functional utility in helping to cause prompt termination of controversies before the possible loss of evidence and in stabilizing long continued property uses. With this as its aim, there are no grounds for compensation the defendant for damages.

It is a little surprising that the court made the defendant tear out its commercial building, but I think the court was influenced by the chutzpah of the defendant, who constructed the building while the lawsuit was ongoing. Screw you, the defendant was saying, but he was forced to eat his words.


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Deeding California Property to Someone To Avoid Creditors Not a Fraudulent Conveyance When There is No Equity; How the Homestead Exemption Helps Beat Intentional Fraud

When someone who owes a debt transfers property out of their name in order to prevent the creditor from collecting against that property, the transfer may be set aside under the Uniform Fraudulent Transfer Act (UFTA, California Civil Code section 3439.04 et seq.). AN important element of a fraudulent conveyance is that an injury must occur. Mere intent to delay or defraud is not enough. Thus, in the case of real property, a real estate attorney must determine whether, on seizing the real estate and selling it, would the creditor actually get anything after the liens are paid. In a recent decision, a creditor was surprised when the automatic homestead exemption (not a declared homestead) was applied to determine that there was no equity in the property.

sacramento fradulent conveyance attorney.jpgIn Fidelity National Title Insurance Company v. Schroeder, Fidelity screwed up when it allowed a property to be refinanced without paying an existing judgment lien. Fidelity, as title insurer, thus had to pay off the creditor, and then stepped into their shoes, hoping to get a judgment and record their own lien against the property. However, the property was owned by two people, and the one whom the judgment was against conveyed his interest to the other, to avoid attachment of Fidelity's lien. This lawsuit ensued, and the trial court dismissed the action by Fidelity, finding that, if the property were sold, after paying the existing liens, the remaining equity was protected by the debtor's undeclared homestead exemption. Fidelity appealed, arguing that, in the case of an automatic homestead exemption, the judgment lien still attaches to the property.

The appellate court first addressed the difference between the two types of homestead exemption:

Declared Homestead
Declared Homestead law protects declared homesteads from judgment liens (see §§ 704.950 & 697.340), with the exception that a judgment lien may attach to a declared homestead in the amount of any surplus over the total of prior liens and encumbrances plus the amount of the homestead exemption.

Automatic Homestead
the automatic homestead exemption does not prevent the attachment of judgment liens against a dwelling (Reddy, 8 Cal.App.4th 118 at pp. 121-122), but affords protection when a judgment creditor seeks a court ordered sale of the dwelling after a notice of levy. Under section 704.800, unless a bid exceeds the amount of the homestead exemption plus all liens and encumbrances on the property, "the homestead shall not be sold and shall be released and is not thereafter subject to a court order for sale upon subsequent application by the same judgment creditor for a period of one year."


sacramento homestead exemption attorney.jpgThe court pointed out that the injury requirement is part of the UFTA, which not only requires that excluding senior liens from the definition of "asset" (for the purpose of determining if a fraudulent transfer of an asset occurred), but also property "to the extent it is generally exempt under nonbankruptcy law." (Civ. Code, §3439.01, subd. (a)(1), (2), The automatic homestead protection is such an exemption. The automatic homestead exemption and the declared homestead exemption are contained in the chapter of the enforcement of judgment law that specifically addresses exemptions.


Fidelity argued that this was contrary to the prior Reddy decision, but the court disagreed. Reddy pointed out that, in the case of an automatic homestead exemption, a creditors judgment lien attaches against the debtor's residence. However, Reddy did not deal with the issue of injury, or the definition of asset, which excludes exempt property. Here, the title company did not present evidence that the property had sufficient value to cover the seniors liens and homestead exemption, and still raise enough cash for this creditor.


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