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Real Estate investors in California often work through a licensed Broker, who puts together investor’s cash with potential borrowers. Investors prefer these arrangements (hard-money loans) because they can obtain a higher interest rate for their money, fully secured by a deed of trust recorded against real property. These loans are made through a licensed Broker because broker arranged loans are not subject to usury laws. (More details at the end of this article.) Real Estate Attorneys may be tasked with the job of determining if the usury law applies, and if so, whether this particular loan is usurious. If the loan is usurious, the concern for the investor is to be treated as a holder in due course, free from the defense of usury. It was a bad day for some investors in the Bay Area when the court decided that they were not holders in due course, because the unlicensed Broker kept possession of the notes in order to service them.

In Creative Ventures, LLC v. Jim Ward & Associates, Jim Ward was a licensed real estate broker, and his license was placed with a corporation. He retired and the license expired. He came out of retirement, created a new corporation, JWA, and applied to the DRE to renew his license for the old corporation. Apparently he did not realize that he needed a new license for the new corporation.

A real estate developer borrowed $3 million from JWA. It was through four Promissory Notes, two at 8% interest and two at 10% interest. All the notes included a 6% Broker commission. (For usury purposes, the interest rate is added to the commission, so here they were 14% and 16%, over the 10% usury limit.) This would be ok if JWA was licensed, but it was not. A lawsuit followed.

One of the issues in the decision is whether the investors could be liable for usury. JWA did not indorse the notes to the investors. The investors claimed that the notes were for the benefit JWA and “all assignees of this Note,” and thus they were in constructive possession of the notes. The court said no. An assignment transfers the cause of action or rights in the property, but not transfer of the particular property itself. Thus the investors could not be holders in due course, safe from the usury claim.

Holder in Due Course
Commercial Code 3305(b) provides that a holder in due course takes his or her interest free of many defenses, including the defense of usury. A holder in due course is the “holder of an instrument” who took the instrument for value, in good faith, and without notice “that any party has a defense or claim. To be a holder in due course, one must be a “holder” of the instrument. The “holder” is the “person in possession of a negotiable instrument that is payable either to bearer or, to an identified person that is the person in possession. Investors might have become holders had JWA negotiated the notes by indorsing and transferring possession to Investors. Commercial Code 3201.

The reason for all this is based on the’ law merchant’, not a person but a body of law developed in medieval times to govern transactions between merchants throughout Europe. It was not the law of any state or country, but of the merchants themselves. Under common law contracts could not be transferred so that the transferee could enforce the contract directly. The law of negotiable instruments was developed to allow use of these instruments as evidence of money. The holder may then enforce the instrument in their own name. Such negotiability requires that the transfer may be perfected without notice to the debtor, and that the indorsee may take the instrument as a holder in due course, free from the defenses available to the prior parties between themselves.

Here, the Broker screwed up twice, first in not being properly licensed, and secondly, by holding the notes and not protecting his investors.

A loan is exempt from the usury law if the loan is “made or arranged by any person licensed as a real estate broker by the State of California and secured in whole or in part by liens on real property….” Broker “arranged” loans are those in which the broker acts as an intermediary and causes a loan to be obtained or procured as by structuring the loan as the agent for the lender, setting the interest rate and points to be paid, reviewing the loan and forbearance documents, conducting title searches, or drafting the terms of the loan.

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Most California real estate appraisals are done to obtain a loan secured by the property, often involving the initial purchase. The lender requires the appraisal, often requiring the borrower to pay for it. However, parties other than the lender obtain copies of the appraisal. The question then arises, who may rely on the appraisal? If a Buyer wants an appraisal to make a purchase decision, they could include an appraisal contingency in the purchase contract; if they do not like what the appraisal reveals, they can bow out of the contract. This type of appraisal would certainly be prepared for the buyer to be able to rely on. However, less sophisticated buyers may believe that, because they paid for their lender’s appraisal, it is theirs, and they may rely on it. Parties interested in an appraisal may want to consult with an experienced real estate attorney to determine the best way to protect themselves. In a decision concerning a commercial real estate purchase, a buyer apparently did not have much guidance in entering the purchase contract, and was disappointed when he discovered that he could not rely on the lender’s appraisal.

California real estate appraisal attorneyIn Willemsen v. Mitrosilis (230 Cal. App. 4th 622), Willemsen entered a contract to buy 4.8 acres of vacant land in San Bernardino County in order to use the property as a recycling facility. His lender hired an appraiser to appraise the property to see if its value would support the purchase price and hence, the loan amount. The sale closed, and the Buyer discovered that the city intended to run roads across the property, and earthquake faultiness run through the parcel. He sued everyone, including the appraiser.

The appraisal stated that the intended use of the appraisal was to assist the lender in analyzing a new loan for the subject property. “The report may not be used for any purpose by any person other [than] the party to whom it is addressed…”
At the end of this post is a quotation from Prosser regarding the prevailing view on liability to third parties in this situation. The court in our case did not address Prosser, but first looked at a decision that relied on the Restatement of Torts:
“…liability should be confined to cases in which the supplier ‘manifests an intent to supply the information for the sort of use in which the plaintiff’s loss occurs.’ [Citation.]” This follows because the risk of liability to which the supplier subjects himself by undertaking to give the information.
The court contrasted this situation with one in which there was third-party liability. In Soderberg (44 Cal App 4th 1760), a broker obtained an appraisal on a parcel in order to shop a loan to deed of trust investors. The court found that the appraiser knew that a particular group or class of persons to which plaintiffs belonged—potential investors contacted by the mortgage broker who ordered the appraisal—would rely on his report in the course of a specific type of transaction he contemplated. However, in our case, there is no indication that the appraiser had the knowledge or intent that Willemsen would rely on the appraisal. They knew and intended for the bank to rely on it to determine the value would support the loan.

The court ruled for the appraiser. The buyer could have inspected the property to learn about city permits, roads, and earthquake faults, but did not. He could have had an appraisal contingency, but did not. He wanted to rely on the appraisal which was not prepared for his benefit, and thus was out of court. The appraisal supported the lender’s decision to lend the money, but there was no indication that the lender was concerned about the fault lines or roads. Tough luck for this buyer.

commercial-apppraisal-attorneyIn a 1986 decision, (quoting Prosser on Torts) one court stated “…most of the courts have drawn the line, holding that mere reasonable anticipation that the statement will be communicated to others, or even knowledge that the recipient intends to make a commercial use of it in dealing with unspecified strangers, is not sufficient to create a duty of care toward them. Thus attorneys, abstractors of title, inspectors of goods, accountants, surveyors, the operator of a ticker service and a bank dealing with a nondepositor’s check all have been held to be under no obligation to third parties.’ (Christiansen v. Roddy, 186 Cal. App. 3d 780, 786, (Ct. App. 1986))

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Expert opinions are occasionally relied on in California real estate disputes. Experts may be hired initially to determine if there are grounds for a lawsuit. In ongoing litigation, an expert may be hired to offer an opinion to establish damages, or to serve as a witness at trial as to the other party’s breach of a duty, or to counter an expert identified by the opposing party. Experts are usually hired by Sacramento real estate attorneys, rather than their clients, so that the expert’s report is protected by the attorney privilege.

Some examples of expert opinion in real estate cases –

Valuation of property – it must be based on matter perceived by the expert or made known to the witness before the hearing, that is of the type reasonably may be relied upon by an expert in determining the value of property. (Evidence Code section 814)

Construction defect – review and evaluation of the specifications and plans, materials that were used, and degree of care and skill used by the contractor are usually required and undertaken by experts.

Broker and Agent Negligence – expert testimony is admissible regarding the breach of the duty of care, including testimony as to custom and practice. However, such testimony is not admitted to establish whether there is a duty in the first place.

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In California, every contract includes an implied obligation not to do anything that prevents the other party from benefiting from the contract, and to cooperate if necessary for the other party.  This is called the implied covenant of good faith and fair dealing.  It does not create a new obligation but applies to those obligations which have been agreed on.  The Restatement of Contracts comments provide that the bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty.  Sacramento Real Estate attorneys see the argument come up often in real estate contracts which end up falling out of escrow, and occasionally commercial leases in which the parties fail to cooperate.  Courts generally allow parties to use unfettered discretion, without restriction of the covenant, if the contract provides for unfettered discretion, and there is adequate consideration (162 Cal App. 4th 1107, 1121).  In a decision involving an office lease at 595 Market Street in San Francisco the tenant wanted to sublease the premises, and thought that the landlord breached the implied covenant by terminating the lease.  But the lease provided that the landlord could do so, so the tenant had covenanted away its argument.

 

covenant of good faith attorneyIn Carma Developers (Cal) Inc. v. Marathon Development, Carma entered a lease of the 30th floor of the building for ten years.  Carma’s business changed, its headquarters moved to Houston, and Carma submitted a proposal to the lessor to sublease a portion of the premises.  The Lease had a provision (set out below) that in such a case the lessor had the right to terminate the lease.  The Court first noted that it has been suggested the covenant requires the party holding such power to exercise it “for any purpose within the reasonable contemplation of the parties at the time of formation-to capture opportunities that were preserved upon entering the contract, interpreted objectively.”  It repeated to principles that have emerged:

1, breach of a specific provision of the contract is not a necessary prerequisite, and

2, nor is it necessary that the party’s conduct be dishonest. Dishonesty presupposes subjective immorality; the covenant of good faith can be breached for objectively unreasonable conduct, regardless of the actor’s motive.

 

The scope of the conduct required is governed by the purpose and terms of the contract.  The conduct may be expressly permitted, or at least not prohibited.

 

The tenant argued that the lessor could not in good faith terminate unless they had reasonable a reasonable objection to the proposed subtenant.  But the court found that this was contrary to the clear terms of the Lease.  “No obligation can be implied … which would result in the obliteration of a right expressly given under a written contract…”  Here, the landlord terminated the lease to capture the increased rental value of the property.  This was specifically permitted by the lease and was within the reasonable expectations of the parties.  There was no breach of the covenant of good faith and fair dealing.

 

 

Sacramento good faith attorneyLEASE PROVISIONS

Paragraph 15(a) provided in part: “Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, assign this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any person other than Tenant.”

 

Paragraph 15(b) provided: “Before entering into any assignment of this Lease or into a sublease of all or part of the Premises, Tenant shall give written notice to Landlord identifying the intended assignee or sublessee by name and address and specifying the terms of the intended assignment or sublease. For a period of thirty (30) days after such notice is given, Landlord shall have the right by written notice to Tenant to terminate this Lease as of a date specified in such notice, which date shall not be less than thirty (30) days nor more than sixty (60) days after the date such notice is given. If Landlord so terminates this Lease, Landlord may, if it elects, enter into a new lease covering the Premises with the intended assignee or sublessee on such terms as Landlord and such person may agree or enter into a new lease covering the Premises with any other person; in such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such termination and reletting. From and after the date of such termination of this Lease, Tenant shall have no further obligation to Landlord hereunder, except for matters occurring or obligations arising hereunder prior to the date of such termination.”

 

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<big>In commercial real estate transactions, disclosures and representations are often heavily negotiated terms.  Sacramento real estate attorneys work with the Buyers and Sellers where the Buyer/Investor seeking complete disclosure and subsequent liability of the Seller, while the Seller seeks the opposite. In a recent decision, some investors were buying tenancy-in-common interests in an office complex and were provided with a Private Placement Memorandum that explained how expensive and risky the investment would be. But they claimed that they relied on representations of the selling agents instead.

 

sacramento commercial real estate investment attorneyIn WA Southwest 2, LLC v. First American Title Insurance Company et al., The plaintiffs had sold an investment property and needed to complete a 1031 exchange to defer capital gains. They did so by making a tenancy-in-common investment in an office building in Tempe, Arizona. Involved in the investments were the defendants- a title company, a tax attorney, and the real estate broker. The property failed and was lost to foreclosure, and plaintiffs filed this suit. They claimed that they were misled by defendants’ misrepresentations regarding the sales load and risks of the investment (sales load being the fees, expenses, and commissions paid). Plaintiffs claimed that they would not have invested in the Property had they known that the total sales load percentage actually exceeded the 15 percent capital gains tax they had sought to defer.

At issue in this case was the statute of limitations– they made the investment in 2006, and filed suit in 2012. However, plaintiffs argued that the court should apply the delayed discovery rule. This rule delays starting the time running when until the plaintiff discovered, or had reason to discovery, the claim. In making this argument, the plaintiffs must show that they were reasonably diligent, but still could not have discovered it sooner.

The court described what plaintiffs claimed to be misleading representations as a recommendation that the plaintiffs should make the investment “because it has been subjected to thorough due diligence review, is designed and structured by experts for the tenants in common, offers long term professional experienced management and leasing and will allow you to invest more of your money in income producing property because the sales loads are less than 10% while the taxes you will have to pay if you do not timely invest will be 15%. ”

To the claim that the sales load was greater than 10% (it was more than 20%), the court looked at the Disclosures in the private placement memorandum which the plaintiffs received. The memo stated that the facilitator was buying the property for $11,600,000, which was not market value, nor would an appraisal be done. The total investment cost was to be $13,170,000, over 11 million dollars more than the price of the property.

sacramento commercial real estate investment attorneyIt also stated:

“The Investment Cost consists of the purchase price of $11,600,000 payable to the seller plus the costs described herein, including:
(i) the Acquisition Fee of $505,000 payable to Acquisitions for identifying and analyzing the Property, negotiating the contract to purchase the Property and assigning the purchase contract to the Purchasers;
(ii) selling commissions and due diligence allowances;
(iii) organizational and offering expenses;
(iv) loan costs and fees payable to the Lender;
(v) closing costs …;
(vi) working capital reserves …; and
(vii) $300,000 in reserves which Acquisitions expects the Lender will withhold from Loan proceeds.

Right off the bat, in (i) above, the facilitator is being paid over half a million for putting the deal together.

Plaintiffs argued that the statute of limitations did not begin to run until, after the foreclosure, they consulted with tax experts who pointed out the problems. However, these plaintiffs were all accredited investors who had received the private placement memorandum. Reasonable diligence on their part does not allow them to ignore the memorandum. The court found that the entire sales load, including the $505,000 fee, was disclosed to them prior to closing the deal. The court found that they were on notice that the sales load exceeded the 15% capital gains rate they were trying to defer. Perhaps the plaintiffs didn’t do the math.

Not that it was required for the decision; the Court also quoted the placement memorandum’s bold-faced all caps disclosure:
“THE INTERESTS AND INVESTOR UNITS OFFERED HEREBY ARE HIGHLY SPECULATIVE. AN INVESTMENT IN THE INTERESTS OR INVESTOR UNITS INVOLVES SUBSTANTIAL INVESTMENT AND TAX RISKS.” “THE PURCHASE OF INTERESTS AND INVESTOR UNITS INVOLVES SIGNIFICANT RISKS. INVESTORS MUST READ AND CAREFULLY CONSIDER THE DISCUSSION SET FORTH BELOW IN ‘RISK FACTORS.’ ” “PURCHASE OF THE INTERESTS AND INVESTOR UNITS IS SUITABLE ONLY FOR PERSONS OF SUBSTANTIAL MEANS WHO HAVE NO NEED FOR LIQUIDITY IN THEIR INVESTMENT.”</big>

 

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In California, generally when a real estate buyer defaults on the loan and loses the property to foreclosure, the lender may not pursue a deficiency judgment against the borrower where the foreclosure sale proceeds are not enough to cover the amount of the debt. Lenders may go after loan guarantors for a deficiency judgment, but only if they are true guarantors. Where the borrower and the guarantor are the same, however, the guaranty is considered an unenforceable sham. I like reading about sham guaranty cases, because the courts actually call them a sham, a word not used often enough in judicial opinions. Sacramento real estate attorneys see the argument applied when either the guarantors are trying to squirm out of liability, or where the bank set up the transaction to avoid the antideficiency laws. In a recent decision out of Napa County, it does not appear that the borrowers intended to set-up the lender for a sham, but were able to make the sham argument that they were the sole owners of the borrower LLC, which was merely a shell and they were its alter ego. The court said no, there was adequate separation between the guarantors and the borrower.

attorney sacramento sham loan guaranty.jpgIN CADC/RAD Venture 2011-1 LLC v Richard Bradley et al. Bradley and Yates were owners of No Boundaries LLC, which owed property in Seattle. They were selling that building and wanted to exchange it for 7 acres in Napa. Bradley entered a contract to buy the Napa land, and No Boundaries submitted a loan application. The loan was approved, with Bradley and Yates being required to sign loan guaranties. At the last minute the buyers decided to change the borrower to the newly created Nohea LLC. The bank was willing to allow the change in borrowers because the defendant guarantors had enough money to justify the loan. The $2.1 million loan closed, and Bradley and Yates signed commercial guaranty agreements in which they waived their rights under the California antideficiency laws. Nohea LLC did not provide the bank with any financial information. Of course, the loan went into default, the bank foreclosed, and brought this lawsuit against Bradley and Yates, the guarantors. Bradley and Yates claimed that the guaranties were unenforceable shams.

A threshold issue in sham guaranty cases is whether the guarantor of a loan is also obligated as a borrower. An example is where a partnership was the borrower, and the partners are guarantors. Under partnership law, general partners are already liable for the debts of the partnership, so the guaranty added nothing. Likewise where a corporation is organized solely to take out a loan, and is not capitalized. Thus the corporation was a mere instrumentality used by the defendants, who were in fact the buyers.

In assessing sham guaranty claims, several courts have also considered whether the lender structured the transaction to circumvent the protections of the antideficiency laws. For example, individuals intended to buy a property, but the lender required them to transfer title to an entity which they solely owned. This was a sham to get around the antideficiency laws.

lawyer sacramento sham loan guaranty.jpgOne factor that is considered is whether the lender structured the transaction to avoid the purpose of the antideficiency laws based on evidence the lender relied on extensive financial statements from the guarantors but never inquired about the financial standing of the borrower.

The Court concluded that the following principles applied:
A guaranty is an unenforceable sham where the guarantor is the principal obligor on the debt. This is the case where either

(1) the guarantor personally executes underlying loan agreements or a deed of trust, or

(2) the guarantor is, in reality, the principal obligor under a different name by operation of trust or corporate law or some other applicable legal principle.

In this case, there was sufficient legal separation between the borrower and guarantor, and the loan was not structured by the lender to subvert the antideficiency laws. The guarantors were liable for the loan deficiency.

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

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

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

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

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

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

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

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

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

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

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

The court of appeal overruled the trial court. Under Civil Code section 1692, once a court has determined that the contract was rescinded, “[t]he aggrieved party shall be awarded complete relief, including restitution of benefits, if any, conferred by him as a result of the transaction and any consequential damages to which he is entitled.” The fundamental principle ‘is that “in such actions the court should do complete equity between the parties” and to that end “may grant any monetary relief necessary” to do so.

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

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

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

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

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

“cause a copy of the notice to be mailed, by registered or certified mail, return receipt requested, to all known addresses of the parties to whom the real property claim is adverse and to all owners of record of the real property affected by the real property claim as shown by the latest county assessment roll. If there is no known address for service on an adverse party or owner, then as to that party or owner a declaration under penalty of perjury to that effect may be recorded instead of the proof of service required above, and the service on that party or owner shall not be required.”

The court found that this statute anticipates that the plaintiff will check the assessment role. Only if no address is listed may the plaintiff file the declaration of no known address. That was not the case here – an address was listed in the assessor’s role, but plaintiff failed to mail the document.

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

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

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

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

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

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

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

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