real estate law

Published on: August 28, 2012

California real estate partition action provides for attorney fees – One Court apportioned them based on bad conduct of a party who got greedy

A California partition action is a legal procedure in which any co-owner can get a court order requiring the parties to split the property, buy each other out, or sell the property and split the proceeds. A statute allows the court to award payment of attorney fees incurred “for the common good” either by the percentage interests in the property, or based on equitable considerations. Experienced Sacramento and El Dorado real estate attorneys seldom do you see attorney fees awarded, but in a recent decision a party who claimed an 85% interest in the property did not impress the Judge and was surprised by the fee award.

california partition action.jpg In Lin v Jen, Jane filed a partition action, claiming she owned 85% of a property and her brother Jack owned 15%, which was what the deed said. Five other siblings heard about it, and entered the case claiming equal interests in the property. Evidence Code section 662 raises a presumption that a deed is correct- to overcome it, you must present clear and convincing evidence. The other siblings presented letters from Jane showing that they all had an interest. The Judge found this to be clear and convincing evidence that Jane was being untruthful. That beat the presumption, and the judge ruled that each of the seven brothers and sisters owned one seventh interest in the property.

The five siblings made a motion for attorney fees, asking the Judge to require Jane to pay 85% of them, based her conduct in the lawsuit. The Judge said, no, each party would pay a proportion based on their interest in the property.

Published on: August 21, 2012

California homeowner sues loan servicer, but servicer files cross claim for judicial foreclosure. Servicer can file in its own name, and this borrower may be liable for deficiency two different ways.

by Law Office of James J. Falcone

Usually, residential lenders do not file judicial foreclosures. Rather, they prefer to hold a trustee’s sale to get the property back. This is a much faster, and streamlined, process which is governed by statute. In holding a trustee’s sale foreclosure however, the lender gives up any rights to a deficiency judgment. The borrower loses the house, but does not owe any money. Often the owner tries to stop the foreclosure by trustee’s sale by filing a lawsuit, alleging defects in the lender’s procedure, and seeking an injunction against proceeding. That is what happened in a recent San Diego case, but the wise lender surprised the borrower with a cross-complaint for judicial foreclosure.

judicial foreclosure.jpg In Arabia v BAC Home Loans Servicing, L.P., Arabia refinanced his home. It was 2005, and he got an astronomical valuation- he took out a $2.8 million first, and a home equity loan of $1 million- probably lots of cash. He quit paying on the first loan in 2007. BAC began trustee sale proceedings. And Arabia sued. BAC filed a cross-complaint for judicial foreclosure. This was smart for the lender; since they were going to be tied up in a lawsuit, they might as well seek judicial foreclosure, with the resulting chance at a deficiency judgment. There was a lot of money at stake -($3.8 million total in the first and second loans. At the foreclosure the lender got the property back for a bid of $1.95 million, presumably the balance on the first). Maybe they felt that the borrower had assets, and a judgment against him could be collected.

The Servicer Can File Judicial Foreclosure

Published on: August 16, 2012

California Quiet Title actions; a lawsuit to resolve disputes between different claims affecting title to real estate

by Law Office of James J. Falcone

There are many different types of interest is real property; outright ownership, easements, life estates, co-ownership, prescriptive rights, etc. Often there is a dispute between parties with conflicting claims as to property rights. Usually it is the case of someone with title and possession denying the rights of someone else who claims a right in the property. A quiet title action is brought to establish, or “quiet”, title or an interest in real estate between adverse parties. Quiet title actions have very specific statutory requirements regarding allegations, service, publication of notice, and procedure. Anyone contemplating such an action should contact an experienced Sacramento and Placer real estate attorney.

quiet title action.jpg Anyone can establish their legal or equitable right, title, estate, lien, or interest in property or cloud upon title against adverse parties. (CCP §760.010) An adverse party is anyone who claims an ownership interest, interferes with the plaintiff’s enjoyment of the property, decreases the value of the property, or renders the title uninsurable. A quiet title can be brought in addition to, and cumulative with other remedies, such as damages or for ejectment. The plaintiff has to hold a legal interest, as opposed to an equitable interest, but there are exceptions. The plaintiff’s interest in the land can be the title to the property, an easement, a license, a lease, or title by adverse possession.

Quiet title actions must be filed in the superior court where the real property, or any part of it, is located. The judgment binds all persons, known and unknown, claiming an interest in the property. (CCP §764.030) It binds non-parties to the lawsuit who have adverse claims in the property that was not of record at the time the suit was filed and lis pendens recorded. The plaintiff must search the county recorder’s records before filing to make sure that everyone is included, because it is not binding on non-parties whose claim is of record prior to the lawsuit.

Published on: August 9, 2012

California real estate lender surprised that C.C.P. 580b applies to settlement of lawsuit, denied deficiency judgment

by Law Office of James J. Falcone

It is a given under California law that a seller financing a purchase money loan in the sale of real estate may not get a deficiency judgment against the borrower, but is only entitled to foreclose the property. CCP section 580b provides that, when the buyer purchases property, if buyer gives the seller a note for all or some of the price, “no deficiency judgment shall lie.”

anti deficiency 580b.jpg In Weinstein v. Rocha, the plaintiffs bought a multi-unit property in L.A. They obtained primary financing of $820,000 from a lender, who held a first deed of trust, and the defendant / seller financed the balance with a loan secured by a second deed of trust. The buyer discovered that there were multiple housing code violations that were not disclosed. They sued the seller for failure to disclose.

The parties reached settlement, and entered a settlement agreement that reduced the balance of the debt buyer owed seller, but provided that if the buyer defaulted, the seller could accelerate the loan and demand payment of the original amount in full. If buyer did not immediately pay the balance, the seller could foreclose their second deed of trust.

Published on: August 6, 2012

New California SB 1069 – CCP 580b protects borrowers from deficiency judgments after refinancing real estate loans

by Law Office of James J. Falcone

California has a number of statutory provisions that provide borrowers with protection from deficiency judgments- personal liability for the loan balance remaining after a foreclosure sale. There is protection if the seller takes back the note, or, in the case of a standard third party loan, if it is a residence, there is protection for the loan used to buy the property. Recent legislation provides for protection in a short sale. Also, if the lender who made the original purchase money loan refinanced the loan, there is protection. With enactment of SB 1069, beginning January 1, 2013, any lender who provides a refinance of the purchase money loan will also be prevented from obtaining a deficiency judgment against the borrower. Each borrower’s situation is different, and anyone in a default situation should consult an experienced Sacramento and Yolo real estate lawyer to determine their risk of personal liability.

california antideficiency and refinance loan.jpg The change makes sense in light of the historic purpose of Civil Procedure section 580b. In the event of a depression of land values, it is to prevent aggravating the downturn that would result if defaulting purchasers lost the land PLUS had personal liability. It is based on the premise that the lender is in the best position to determine the true value of the security for its loan, which is the property. If the lender overvalues the property, the lender should bear the risk of not obtaining the balance of the loan value in a foreclosure sale.

But why should this be different in the case of a refinance of the original loan? This has been a problem for borrowers the past few years, as many people refinanced with different lenders. The new refinance lender should be in as good a position as the original to determine the value of the property. In fact, it has been lenders’ willingness to overvalue property that had contributed to price inflation.

Published on: August 2, 2012

Bad Faith Waste & Intentional Impairment of Security – when a California borrower is liable for harm to the real estate that secures their loan. Part 2, impairment of security.

by Law Office of James J. Falcone

I wrote last about a Sacramento developer who demolished the building on a property to build a mixed-use development. But, the market crashed, the developer defaulted, and the property was foreclosed by trustee’s sale. The lender than sued; in the last post I discussed the claim for bad faith waste.

impairment of security.jpg In Fait v. New Faze Development, Inc., the lender also raised a claim for “intentional impairment of security”, meaning that the borrower intentionally reduced the value of the property which was security for the loan. The defendants again argued that there was no evidence that they acted with intent to harm the value of the real estate. However, the court noted that, in prior decisions, even though the defendants likely knew that their conduct would reduce the value of the property, the courts never required an “intent to harm.” This dies not need to be proven for intentional impairment of security.

Also, this lawsuit was against the corporate borrower plus individual employee defendants. The defendants claimed that the individuals could not be liable for impairment of security as innocent agents of New Faze. Again, the court ruled against them. A prior decision established that third parties could be liable for impairment of security. Civil Code section 1714 provides that everyone is liable for the result of his willful acts, and also for the want of ordinary care or skill in the management of his property or person. As third parties can generally be liable for negligent impairment of security, the defendants had to show that the individuals acted with ordinary care or skill with respect to the security interest in the property.

Published on: August 1, 2012

Bad Faith Waste & Intentional Impairment of Security – when a California borrower is liable for harm to the real estate that secures their loan. Part 1, bad faith waste.

by Law Office of James J. Falcone

It is a general rule of California real estate law that the possessor of property, whether as owner (with a loan against the property), or tenant, not to commit waste. Waste is any act, omission, or neglect that materially reduces the market value of the property. When you take out a loan to buy property, the deed of trust requires that you do not commit waste, and provides that waste can be a default under the terms of the loan. An experienced Sacramento and El Dorado real estate attorney will advise that the reason is that the property secures the debt. Theoretically, the lender gave you an amount equal to or less than what the property is worth, and if you cause the property to become worth less than the loan, the lender is at risk. You seldom see this issue come up in real estate loans, but it did in a surprising way in a recent Sacramento decision.

real estate waste.jpg In Fait v. New Faze Development, Inc., a Sacramento developer purchased two lots containing a church and other small building in 2005. The plan was to redevelop it into a mixed use property. They evicted the tenants and demolished the property in 2006. The economy tanked and the developer defaulted, resulting in a foreclosure sale of the bare land. The lender then sued for bad faith waste and intentional impairment of security- demolishing the building reduced the value of the property, and thus what the lender got on the foreclosure sale.

The trial court threw out the bad faith waste claim, finding that there was no evidence of recklessness and intent to despoil the property. But the court of appeals reversed – evidence of recklessness and intent to despoil is not required, based on the 1975 California Supreme Court decision in Cornelison.

Published on: July 31, 2012

California Mechanics Liens and Bankruptcy -The Rules on recording and foreclosing the lien

by Law Office of James J. Falcone

California law provides that a contractor or supplier of materials who furnishes labor or materials for construction on real property may record a notice of lien (known as a mechanic’s lien) against the property. (Civil Code 3115) If the contractor is not paid, they then have 90 days from recording to file a lawsuit to foreclose the lien. This gives the contractor a much stronger position than having a mere breach of contract claim, because the lien clouds title, and the owner could actually lose the property. Mechanic’s liens are commonly recorded when there is a problem with payment, as the contractor’s rights can be cut off by passing time. In a recent decision an owner who thought bankruptcy would protect him from enforcement of the lien got a surprise, as the court reviewed the mechanics of mechanics liens in bankruptcy.

mechanic's lien.jpg In Pioneer Construction, Inc. v. Global Investment Corp. (Probably not affiliated with Massive Dynamic Corp.) Pioneer did work on 19 lots owned by Global and recorded a mechanic’s lien for $2.4 million. Global filed bankruptcy, and Pioneer recorded a 2nd lien for $2.6 million. Pioneer then filed a “Notice of Perfection of Security Interest” in the bankruptcy.

The lender on the subject real estate got relief from stay (permission from the bankruptcy court to proceed) and foreclosed on the property, which was sold at a trustee’s sale. Once sold, the property was no longer part of the bankruptcy estate, so Pioneer was not prevented by the automatic stay (11USC 362) from filing suit to foreclose its lien, which it did. The buyers at the foreclosure sale fought back.

Published on: July 24, 2012

California Civil Code 2079 only establishes the selling broker’s duty to inspect and disclose- the code does not apply to buyer’s broker. What about the section’s statute of limitations, and the Buyer broker’s duty?

by Law Office of James J. Falcone

It is common knowledge in California that real estate brokers have a duty to perform a reasonably diligent inspection and to disclose material findings with the prospective purchases. This applies to both seller and buyers agents. The Transfer Disclosure Statement (Civil § 1102.6) requires both the Seller & Buyer agents conduct a “reasonably competent and diligent inspection” and to disclose their finding. Section 2079 of the civil code specifies a broker’s duty to inspect. However, A two year statute of limitations applies to 2079, after which lawsuits cannot be pursued against the broker. However, in a recent decision in the Third District (Sacramento), a dual agent was surprised to learn the two year period applies only to the seller’s broker.

broker duty to inspect.jpg In William L. Lyon v. Sup. Ct., The Lyon brokerage was a dual agent, representing both the sellers and the buyers on sale of a residence in Rocklin, CA. The buyers signed a buyer-broker agreement which affirmed that, as a dual agent, the broker is obligated to disclose known facts affecting the value of the property. The buyers soon discovered construction defects and filed suit, alleging that the sellers know of water related problems and painted the house dark brown to cover them up. While the house was listed, rain caused the covered problems to reappear, so they painted over them again. The buyers sued, naming the seller and the brokers.

The broker argued that all their claims were barred by the two-year statute of limitations in 2079.4, applicable to the duty expressed in 2079. Importantly, the buyers sued Lyon as broker for the buyer; one half of the dual agency equation. The court pointed out that 2079 established a duty only for brokers representing the seller. That statute states that it applies-

Published on: July 19, 2012

California Commercial Loan Guaranty Means What It Says; The Guarantor Is Liable, and the lender does not have to foreclose the property first.

by Law Office of James J. Falcone

I wrote in March about the loan guaranties and how the guarantor can waive antideficiency protections. A recent decision out of Sacramento concerned a commercial loan where, because of the drop in property value, the lender did not bother to foreclose but went directly to the guarantor, and was successful.

Loan Guaranty.jpg In Gray1 LLC v. Kolokotronis, in 2006 Kolokotronis was the Guarantor of a $17.7 million dollar loan to Sheldon Terrace LLC, a real estate project the Guarantor had set up. By 2008 the value of the real estate had crashed. The loan had a provision providing that if the value of the security was far less than the balance of the loan, it was a default and the lender could call the loan due. That happened here, and neither the borrower or the Guarantor cured the default or paid off the loan. So, the lender sued the Guarantor.

First, the guarantor argued that language in the guaranty describing debt “due or not due” suggests that the instrument was a demand note, not a guaranty. The court said no; in this context the phrase meant nothing more than part of the broad definition of the borrower’s obligations that the guarantor is guaranteeing. A guaranty relates to a future liability of the principal. Civil Code section 2814.