Articles Posted in real estate law

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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:

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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:

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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:

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A public right of way, while it may be described as an easement, is much different from a private easement. The Supreme Court explained that ‘public ways, as applied to ways by land, are usually termed “highways” or “public roads,” and are such ways as every citizen has a right to use. A private way relates to those easements in which a particular person, or particular description or class of persons, have an interest or right as distinguished from the general public. A private easement ordinarily vests those use rights in the owner of a particular parcel of neighboring property, while the use rights of a public right-of-way are vested equally in each and every member of the public. Sacramento real estate attorneys often face issues concerning private easements – extent of use of the easement, interference with the easement, etc. but seldom need to address public right of way issues. In a recent decision, the court explained that using the language “for public road purposes” in the grant of easement between private parties does not create an easement for public use, but rather to allow access to a public road.

sacramento easement dispute attorney.jpgIn Schmidt v. Bank of America, N.A. the easement holder sold a portion of their property in La Mesa to Betty, reserving an easement, the language being:

“RESERVING to the grantor, her successors, assigns and/or heirs, the right of ingress and egress for public road purposes over, along and across the Easterly 40 feet thereof.”

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“Equitable subordination” is used to correct equitable wrongs in the priority of liens on real property. If fairness requires, a first lien or deed of trust can be subordinated, or reduced in priority below, a second lien, swapping their positions. (Civ. Code, §§ 2876, 2903, 2904. A lengthy description by the Supreme Court is copied below). When, through fraud or mistake, a party finds that his lien does not have the priority he bargained for, they should consult with a Sacramento real estate attorney to discuss equitable subordination. Such a lawsuit may result in the judge reclassifying the respective liens to make them fair. In a recent decision the court granted equitable subordination on behalf of two deeds of trust where there was both broker fraud (in forging signatures) and escrow negligence in failing to carry out instructions and reconvey a deed of trust.

Sacramento equitable subordination of loan.jpgIn Elbert Branscomb v. JPMorgan Chase Bank N.A., Navjot owned property on Canal Street in San Rafael. He had three loans; 1st, from Washington Mutual Bank; 2nd with MMB; and 3rd, a $500,000 loan from plaintiff Branscomb. All were secured by deeds of trust. However, Banscomb’s 3rd DOT only indicated that I the loan was for $100,000, due to the broker’s negligence. Navjot refinanced with WaMu, and Modified the MMU loan. Conditions of both were that the lenders were to keep their respective first & second positions. When the escrow officer asked Branscomb’s broker for a payoff of the third, he replied that it was zero, and signed a request for reconveyance. (Yikes, it was $500,000! This broker was bad news. He was also found to have forged his client’s signature on a number of documents. He had done this before, but Branscomb continued to work with him. They deserved each other.) Compounding the broker’s error, the escrow officer was negligent in not reconveying the Third deed of trust. When the first & second refinances recorded, Branscomb moved to 1st, and the other two dropped to 2nd & 3rd. This lawsuit for equitable subordination resulted.

Knowledge of the Plaintiff’s Lien Did Not Prevent Subordination

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Parties can provide in their contracts that any dispute be resolved by “general reference.” A general reference directs a referee to try all issues in the action. The hearing is conducted under the rules of evidence applicable to judicial proceedings. In a general reference, the referee prepares a statement of decision that stands as the decision of the court and is reviewable as if the court had rendered it. This results in a trial by a referee and not by a court or jury. “Judicial reference,” on the other hand, differs in that in that it involves sending a pending trial court action to a referee for hearing, determination and a report back to the court. The BIG DIFFERENCE between reference and arbitration is that a judgment obtained by reference can be appealed, but an arbitrator’s may not be appealed, regardless of how flawed it is. Sacramento real estate and business attorneys know that all the CAR forms have arbitration provisions, which are usually initialed by the parties without truly understanding them. I have railed before about how arbitrators are not held accountable for erroneous rulings.

The general referee’s statement of decision “stands as the decision of the court,” and once the statement of decision is final and filed by the referee, judgment must be entered thereon “in the same manner as if the action had been tried by the court.” After judgment is entered, the losing party may make post-trial motions for a new trial, and/or to vacate the judgment. The judgment entered on the general referee’s statement of decision may be appealed like any other judgment.

SACRAMENTO CONTRACT DISPUTE ATTORNEY.jpgIn a recent decision the court enforced a general reference provision that did not include an explicit waiver of a jury trial. In O’Donoghue v. Superior Court (Performing Arts LLC), a developer obtained a $20 million dollar construction loan for condos at 973 Market Street in San Francisco. Several individuals signed personal guarantees for the loan; the guaranty instrument had a general reference provision. Default occurred, a lawsuit filed, and the court enforced the reference, appointing a referee. The reference provision did not include a jury waiver; the guarantors appealed.

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I recently described a decision that overruled the rule that a borrower may not make a claim for fraud based on the other party misrepresenting what the contract will say (The Pendergrass Rule). In the past borrowers who claimed that their mortgage broker or lender made promises about their loan that were not true. Where these promises are in direct conflict with the terms of the written agreement, the parole evidence rule as described in Pendergrass prohibited allowing evidence of these statements in court. The California Supreme Court decision in Riverisland concluded that evidence of the false promises may be admitted as evidence of fraud. Another decision went a little farther in clarifying the new rule, finding that even sophisticated parties who engaged in extensive negotiations were not subject to the Pendergrass rule, and evidence of fraudulent statements could be admitted.

sacramento real estate contract fraud attorney.jpgIn Julius Castle Restaurant Inc. V. Payne, the parties entered a lease agreement, as well as purchase of the fixtures, of a restaurant in San Francisco. The lease agreement stated:

“Tenant acknowledges that as of the date of this Lease, Tenant has inspected the Premises and all improvements on the Premises and that the Premises and improvements are in good order, repair, and condition… This instrument constitutes the sole agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to Tenant, and the specified lease term, and correctly sets forth the obligations of Landlord and Tenant. Any agreement or representations respecting the Premises or their leasing by Landlord to Tenant not expressly set forth in this instrument are void.”

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A Deed of Trust in California can be used to secure contract obligations other payment of money. Usually, the primary obligation secured is the repayment of the loan. There are ancillary duties usually set out in the deed of trust, such as keeping the property in good repair, maintaining insurance, etc. However, in some cases the other obligations may be a primary secured obligation. Enforcement, by judicial foreclosure or nonjudicial trustee’s sale, essentially provides a dollars remedy through a foreclosure sale. Thus, the obligation being secured must be capable of liquidation (i.e. determining a specific monetary value) before enforcement. The contract may include a liquidated damages provision, which specifies how to calculate that monetary value. Whether a liquidated damages clause is enforceable is not always clear, and interested parties may want to consult with a Sacramento real estate and business attorney for clarification. Otherwise, without liquidated damages, determining the amount of damages would likely require a judicial foreclosure, in which monetary damages will be determined.

yolo and sacramento real estate attorney.jpgA dilemma arises when the property owner pays off the loan, but has not yet completed full performance of other obligations secured by the deed of trust. Usually, on paying off the loan, the borrower wants the lender to record a reconveyance of the deed of trust, effectively removing the ‘lien’ from the record. However, courts have found that reconveyance was not required. Such was the case in Dieckmeyer v. Redevelopment Agency of the City of Huntington Beach, where the plaintiff bought a condo through an affordable housing program. The program included restrictions on household incomes, and on future buyers. The deed of trust securing the purchase loan stated that it secured repayment of the note, future advances or obligations of the borrower, and…

“[p]erformance of each and every obligation, covenant, promise or agreement of Trustor contained herein in the Loan Agreement between Beneficiary and Trustor … and in that certain Affordable Housing Agreement [the CC & R’s] currently recorded on the property….”

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According to the California Legislature, the vast majority of joint tenancies in California are used as a will substitute among family members. In a joint tenancy, the survivor among the title holders “inherits” the property. This is different from holding the property as tenants in common, in which case each party owns a percentage interest in the property; if one passes, their percentage would go to the deceased person’s heirs. Real estate lawyers are reluctant to suggest joint tenancy because of the risks involved (though escrow officers suggest it). A joint tenancy requires a great amount of trust in the co-parties, because any joint tenant may sever the joint tenancy at any time by recording a deed. Thus, John Doe, joint tenant, could deed his interest to himself as John Doe, tenant in common, at any time, and the other owners of the property would never know. The result would be that the parties are no longer joint tenants, but are now tenants in common. Sacramento real estate attorneys commonly see this happen with estranged couples who bought property as joint tenants. One unexpected result of this problem surprised two Marin County brothers in a recent court case, when one brother deeded his interest to himself as tenant in common. This triggered reassessment, and they got hit with a huge tax bill.

Sacramento joint tenant attorney.jpgIn Benson v. Marin County Assessment Appeals Board, Mom was joint tenant with good son. After mom died, good son owned the property outright. He put his ungrateful brother on title as joint tenants. Ten years later Ungrateful severed the joint tenancy by recording a grant deed in which he granted to himself his interest as a tenant in common. The County Assessor felt this triggered the reassessment provisions, the assessed value of the house went up, and the property tax increased an additional $2,683 per year. Ungrateful brought this lawsuit claiming that severing the joint tenancy did not constitute a change in ownership for reassessment purposes, but was merely a change in the way title was held..

El Dorado deed attorney.jpgUnder Proposition 13 real property tax is based on “full cash value,” meaning “the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. Generally, any sale or transfer of property results in a change of ownership.
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A landlord or lessor does not have any possessory interest in the property during the term of the lease. That is the nature of a lease – the owner transfers the right to possession to the lessee. But what if, during the lease term, a third party trespasses on the property, in a way that may create a prescriptive easement?

Under California real estate law a prescriptive easement requires the trespasser showing that they have used the property “for the statutory period of five years, which use has been (1) open and notorious; (2) continuous and uninterrupted; (3) hostile to the true owner; and (4) under claim of right.” In this situation, the issue is the five year period. Real estate attorneys advise owners that the way a property owner cuts off a possible prescriptive easement is by filing a suit for trespass or ejectment. But an action for trespass is designed to protect possessory –not necessarily ownership–interests in land from unlawful interference. As the landlord does not have a right to possession during the lease term, he may not bring an action for trespass.

El Dorado trespass lawyer.jpgThis was the problem presented in a recent decision, where the court found that numerous lease terms ended of the course of the prescriptive period; in one instance the property did not have a tenant for over a year. If the owner never had a possessory right during the prescription period, he had a defense to the prescriptive easement claim. However, in this case, the lessor / owner did not have a tenant the entire period, so the court concluded it should have taken action to prevent the trespassing use. Parties in such situtations may want to consult an experienced Sacramento and El Dorado real estate attorney.

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