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When there are multiple liens on real property and the senior lien or deed of trust is foreclosed, the junior liens are wiped out, and the junior lienholders have lost their security for the debt. All they have left is the underlying debt, which they can then seek to collect directly from the debtor. These latter parties are termed “sold-out juniors.” Generally, when a debt is secured by real property, the creditor must seek to be paid from the property first (by foreclosure). If the senior lienholder conducts a trustee sale, and the property does not raise enough cash to pay them off, it’s too bad- they cannot go after the debtor personally. However, if they are a junior, once they lose the security, they may go after the debtor for a monetary judgment. But sometimes Sacramento real estate attorneys are confronted by senior and junior loans that are made by, or acquired by, the same individual lender. If the lender forecloses on the first, does it become a sold-out junior as to the second?

Sacramento-one-form-of-action-lawyerIn Black Sky Capital, LLC v. Michael Cobb, plaintiff Black Sky held both the first and second loans (totaling over $11.7 million dollars) on a property in Rancho Cucamonga. Black Sky foreclosed on the first, holding a trustee’s sale. It then filed suit to recover the balance owed on the 2nd junior note, and this appeal was the result.

Section 580d Applies only to the Deed of Trust Foreclosed, and does not apply to a Junior Lien after a Trustee’s Sale on the first – Regardless of whether it is the same lender

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Encroachment, or trespass, is an invasion of real property rights by another. It can be anything, such as a fence, a railroad, landscaping, a parking lot or building. When the owner of the property wants to stop it, they may file an action for a permanent injunction prohibiting the use. Real Estate attorneys frequently see actions for injunction resulting in cross-complaints to establish a right to use the property, such as by adverse possession. However, the decisions regarding the statutes of limitations in such cases vary somewhat unpredictably, due to there being two sets of statutes that may apply –one giving 3 years, the other 5. In a decision by the Third District Court of Appeals (covering 23 counties including Sacramento, Yolo, Placer & El Dorado, full list below*) that has not been agreed with by the Supreme Court or other Districts, the court ruled that enjoining a permanent encroachment should be characterized as an action to recover real property, applying the 5 year statute..

Sacramento-encroachment-attorneyIn Harrison v. Welch, buyers of a vacant lot brought an action against their neighbor to quiet title and to enjoin neighbor’s encroachment on their land. The neighbor, who had placed a woodshed and landscaping on the lot, filed a cross-complaint alleging adverse possession and prescriptive easement. The trial judge ruled that the Buyer was barred by the statute of limitations and that the neighbors had not established adverse possession or prescriptive easement. Nonetheless, the court engaged in an equitable “balancing of the hardships, giving both the plaintiff and the defendant some satisfaction. Both parties appealed.

The statute of limitations issues revolved around two sets of statutes covering different concepts – recovery of real property, vs. stopping an encroachment. The statutes are in two consecutive Chapters of the Code of Civil Procedure-

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In a sales transaction, there is often included a guaranty, where one party guarantees to pay the debt of another. More accurately, a guarantor is “one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor.” (Civil.C. 2787). Thus if you buy a business or real estate, and the seller is concerned that you might not be able to pay for it, the seller may want someone with a stronger balance sheet to guaranty the debt. When a dispute arises, Sacramento business and real estate attorneys question what exactly was guaranteed, and if the guarantor was exonerated. Exoneration can occur if the creditor or seller does something that changes the terms of the deal without the guarantor’s approval. Both issues arose in a recent decision concerning the sale of a motorcycle dealership.

Sacramento-real-esate-loan-guaranty-attorneyIn G&W Warren’s Inc. v. Judson V. Dabney II, the Warrens sold their dealership to Dabney. The paperwork starts with a master “Asset Purchase Agreement.” This incorporated by reference …

– (1) a promissory note in the amount of $1,016,000 signed by Dabney as Maker;

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A court may create an “equitable easement”, on equitable grounds, even though the user is not entitled to an easement on one of the more traditional grounds. The judge balances the rights of the various parties to achieve an equitable solution. Generally, the courts apply a three-part test to determine if such an easement should be legally granted. In most cases there is an existing use, and either one landowner sues to stop the use (they see it as a trespass), or the user sues to legally establish the easement. However, in a recent decision out of Ventura County, the court granted an equitable easement where there had been no preexisting use.

Sacramento-equitable-easement-attorneyIn Hinrichs v. Melton, Hinrichs inherited two adjoining parcels. He used to live in a house on the southern lot, but had lived in Alaska for the past 20 years. He conveyed the southern property to Asquith, which left the northern parcel landlocked – it had no legal access from anywhere. The trial court granted the plaintiff an easement by necessity over the Asquinth parcel, up to the Melton property. Beginning at the Melton property, the court granted an equitable easement under the doctrine of balancing the hardships.

The Equitable Easement

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A fraudulent transfer is a transfer of property by a debtor to a third party with the intent to put that property out of reach of a creditor to satisfy their claim. If found to be a fraudulent transfer, the transfer is voidable as to the debtor. Voidable means that, if the third party took in good faith and gave reasonably equivalent value in exchange for the property, the transfer may not be reversed. If it had been void, the law assumes the transfer did not take place, and the creditor can attach the property. Parties facing a potential liability should consult with an attorney to determine the effect of transferring any assets to avoid a finding that the transfer was fraudulent relative to their creditors. In the decision I discuss today there was a judgment lien against real estate that was transferred and money borrowed, but the title insurer did not alert the lender. The lender in this case lucked out.

Sacramento-fraudulent-transfer-lawyerIn Nautilus, Inc. v. Chao Chen Yang et al., Nautilus is a maker of exercise equipment. It obtained a Judgment for $8 million dollars against Stanley Yang for counterfeiting Nautilus products. Nautilus recorded the judgment in April 2012. Immediately prior to the recording, Stanley and his brother Peter, who were both on title to a house in Fountain Valley, conveyed the property to their father Chao. After the judgment was recorded Chao obtained a reverse mortgage against the property. In the loan process the title Insurer failed to note the Judgment as an exception.

The loan cash was used to pay off the existing liens on the property, and Chao kept the balance of the cash. Nautilus discovered the conveyance and loan, and filed suit to set aside the fraudulent transfer. The trial court found that the lender was a good faith lender for value, and thus Nautilus could not recover damages from the lender. This appeal followed.

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Default judgments occasionally occur, and sometimes they may be set-aside or vacated by the court. There are several statutory grounds for a judgment debtor to get a default vacated. But what happens in the default judgment concerns title to real property? If there is a default judgment in the chain of title, potential buyers need to take notice and may need to consult a real estate attorney. There is a possibility that the judgment could be vacated, and the result would affect the buyer’s title. A question arises – is the potential buyer a bona fide purchaser for value, who may rely on the recorded judgment? And what are the limits to vacating the default? Those are questions learned the hard way by a disappointed buyer in a recent decision.

Sacramento-BFP-lawyerIn OC Interior Services, Inc. (OCI) vs. Nationstar Mortgage Inc., OC purchased real property knowing about a recorded default judgment in the chain of title. The default judgment nullified the appellant’s deed of trust. It started when the original owner obtained a $2 million loan on a property in Silverado, California. He filed a lawsuit to cancel the deed of trust and snuck in a default judgment. OCI paid $750,000 for the property, knowing that it was worth $1.5 million. OCI was aware of the issue; it obtained title insurance for $937,500- over $150 thousand more than the purchase price! Before OCI purchased the property it asked its title insurer “‘what happens if this [default judgment] gets appealed?’ And they said, ‘That’s why you have title insurance.’ ”

The original lender got the default judgment vacated and proceeded to foreclose. OCI filed this lawsuit. OCI claimed that it qualified as a bona fide purchaser for value, relying on the recorded default judgment showing that the deed of trust had been wiped out. The court of appeals did not agree.

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The Statute of Frauds requires certain agreements to be in writing. The reason is that these agreements are too important to allow oral agreements, as they are susceptible to fraud. It is codified in Civil Code section 1624, and also applies to agreements for real estate commissions, about which the Supreme Court has said that a “broker’s real estate commissions agreement is invalid unless the agreement `or some note or memorandum thereof, is in writing and subscribed by the party to be charged or by the party’s agent.'” But what happens when not everyone who should sign does? Parties may need to consult with a Sacramento real estate attorney, because a dispute may result that the contract is not valid. I have never seen a matter where a real estate broker did not require ALL the parties on title to sign a listing agreement, but that was the case in a February decision regarding a listing agreement signed in 2013 – they waited four years to get a result, which is why, in my experience, everybody must sign. In this case, in a decision that combined the statute of frauds, the equal dignities rule, and the parole evidence rule, the broker lucked out…

Sacramento-Statute-of-frauds-attorneyIn Bernice Jacobs v. John Locatelli as Trustee, Jacobs was the broker looking to sell vacant land in Marin for over $2 million dollars. The broker Jacobs signed, as did Locatelli. However, there were blank signature lines for five other people, five other owners.

Right above Locatelli’s signature line is the notation “Owner: John B. Locatelli, Trustee of the John B. Locatelli Trust,” with his title listed as “Trustee.” As mentioned above, while there were signature lines for the remaining owners, they were left blank. However, at the very top of the agreement, “Owner” is defined (with emphasis added) as “John B. Locatelli, Trustee of the John B. Locatelli Trust, et al.” “Et al.” clearly means, in this context, “and others.”

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California law takes trees seriously and provides enhanced damages when someone harms them. There is provision for doubling the damages incurred for harm caused to timber, trees, and underwood, and trebling it if the harm is intentional. (Civil Code section 3346.) Another provision allows doubling the damages for harm to trees. (Civil Procedure section 733, set out below). Sacramento real estate attorneys commonly get asked about neighbor trees with overhanging branches and troublesome roots. However, in a recent decision where a landowner with an abundance of chutzpah went onto their neighbor’s property and cut trees to improve their view, they were surprised to learn that not only were they liable for three times the $40,000 to restore the property, but also three times the $30,000 awarded noneconomic damages for annoyance and loss of enjoyment of the property.

Sacramento-tree-damage-attorneyIn Jeanette E. Fulle v. Kaveh M. Kanani, the defendant lived uphill from the plaintiff. Plaintiff Fulle’s trees blocked the defendant’s view of the San Fernando Valley, so the defendant had workers go onto the plaintiff’s property and cut down the limbs and branches of six trees. Of course, he did not ask permission first. This lawsuit ensued.

The jury awarded $47,000 in damages, plus another $30,000 for noneconomic loss “including annoyance and discomfort, loss of enjoyment of the real property, inconvenience and emotional distress.” The trial judge trebled the economic damages per section 3346, but would not apply the multiplier to the noneconomic damages. It reasoned that use of the phrase “actual determinant” in 3346 intended to narrow the multiplier to economic damages. This appeal followed.

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There is a difference between an “Agreement to Agree” and an Agreement to Negotiate the Terms of an Agreement. An agreement to agree is not an enforceable contract, and thus there is no duty to negotiate. In the case of the agreement to negotiate, failure to reach the ultimate agreement alone is not a breach of the agreement to negotiate. Only if the failure is due to one party’s failure to negotiate in good faith is there a breach. That is because California law imposes an implied covenant of good faith and fair dealing in contracts. Parties entering preliminary agreements in expectation of further negotiations and a formal contract should be very careful how they describe that initial agreement. For example, a Letter of Intent regarding purchase of real property may be interpreted as containing a duty to negotiate in good faith, unless the Letter expressly disclaims such as agreement. The Agreement should also include waivers of the implied covenant of good faith and fair dealing and damages, and state that it does not create an obligation to negotiate. A party considering a Letter of Intent in a large real estate transaction may want to consult with an experienced real estate attorney to be sure the Letter describes what their actual intent is.

sacramento-letter-of-intent-attorneyIn one case a letter to the plaintiff from the defendant began: “ It is a pleasure to draft the outline of our future agreement ….” After outlining the terms of the agreement, the letter concluded: “If this is a general understanding of the agreement, I ask that you sign a copy of this letter, so that I might forward it to Corporate Counsel for the drafting of a contract. When we have a draft, we will discuss it and hopefully shall have a completed contract and operating unit in the very near future.” (Beck v. Am Health) The court concluded that it was an agreement to agree, because the language of the letter showed an intention that no binding contract would exist until there was a formal contract.

When parties begin the negotiation process with no obligation to do so, they do not have a duty to negotiate in good faith. It is only if the parties are contractually compelled to negotiate doe the covenant to negotiate in good faith become implied.

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In my prior post I discussed the doctrine of Practical Location and how it was historically the same as that of Agreed Boundary. Years ago in more rural times, properties were not so strictly delineated and there were few fixed and permanent monuments to guide owners. Sacramento real estate attorneys could know that where parties in good faith resolve their doubt regarding a boundary by the practical location of the common boundary it will be considered the boundary called for by the deed. Over time as land became more regulated these concepts appear to diverge, but did they really?

Sacramento-property-line-attorney It wasn’t until the French decision in 1963 that the court came up with a specific formulation for the doctrine of boundary by practical location, which appears to be from whole cloth as the elements described were not provided in the cases or the law review article cited by the court. The French court stated that the doctrine of practical location “… provides that where the owner of a larger tract conveys a parcel thereof that he has delineated on the ground by fixed monuments, and the parties rely on such monuments as establishing the intended boundaries, the latter will prevail over any differing description in the deed.” (French v. Brinkman (1963) 60 Cal.2d 547, 551.)

New in this decision was the requirement that there be fixed monuments, even thought there were none in the case before the court. In French the plaintiff figured the property line was at the fence, and he sold the property to the fence. The line was actually beyond the fence, and the dispute arose. The court found plaintiff’s testimony prevailing, and that title would be quieted by practical location, at the fence line. Worth noting is that there were no stakes, pins, posts or markers discussed. Prior to building improvements (including the wall that acted as a fence), the plaintiffs could not find the original surveyor’s stakes. “Accordingly, they ‘just guessed’ at the property line.” Yet, the practical location prevailed.