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California commercial tenants sometimes need to sublease their premises, or assign the lease. Without fail, they remain liable to the property owner for the lease, in the event that the subtenant does not perform. Breach of the lease does not automatically terminate it – the owner must exercise its right to terminate the lease. But what happens if the sublessor files for bankruptcy protection? In bankruptcy the bankrupt sublessor has 60 days to “assume” the lease. (Bankruptcy Code section 365(d)(4). In the 9th circuit Federal Court (covering California), if the lease is not assumed, the bankrupt owner’s right to possession under the lease ends. (In re Lovett 757 F.2d 1035) The master lease no longer exists, extinguishing all subordinate rights, such as a Sublease. Suddenly, the sub-tenant no longer has a lease, and is out in the cold. The California Court of appeal decision discussed below adopts this rule. Parties considering a sublease may want to consult with a Sacramento real estate attorney. A solution to the disappearing sublease may be, at the time of entering the sublease, for the subtenant to enter a non-disturbance agreement or option to enter a new lease with the property owner.

sacramento sublease attorney.jpgIn 366-386 Street LP v. Superior Court (Monro), Paem was the assignee of the lease for Rosebud’s English Pub on Geary in San Francisco. In the assignment transaction, Paem gave to the assignor a note and deed of trust, secured by the business. Paem filed Chapter 11. The bankruptcy court rejected the lease, and thus the debtor (and trustee) no longer had any right, title, or interest in the lease. This extinguished the assignor’s security interest in the lease.

The Assignor then filed a state court action, seeking relief from forfeiture of its security interest under Code of Civil Procedure section 1179. This section provides that The court may relieve a tenant against a forfeiture of a lease whether or not the tenancy has terminated, and restore him or her to his or her former estate or tenancy, in case of hardship, as provided in Section 1174.

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Liquidated damages provisions in California real estate contracts provide that the parties, at the time they enter into the contract, determine what the damages will be if there is a specified breach of the contract. It must represent a reasonable attempt to anticipate the losses to be suffered. It will not be enforced if it is primarily a penalty for punishing the party at fault. It must bear some relationship to what they parties may foresee as the actual damages that will occur. However, the parties could also have negotiated for alternative performance, where one side has a choice; Do things A & B, and you get paid something. Do just A, and you get paid something less.

A recent decision out of San Joaquin County shows how important it is to be clear in the contract, and one may need to consult a Sacramento real estate and business attorney for clarification. If the provision is not to be determined a penalty, you must actually have a reasonable basis for calculating the amount at the time of entering the contract, and also the contract must have language describing the parties agreement that the actual dollar amount has some relationship to the likely damages. If the number appears reasonable, it may qualify as both liquidated damages OR alternative performance. If it is not reasonable, the only hope is that if it is found to be alternative performance.

sacramento liqudated damages attorney.jpgIn Brian McGuire v. More-Gas Investments, LLC, McGuire had a contract to buy property to build a house. The property sold for over $1 million dollars, and was amongst vineyards in Acampo. The buyer wanted to make sure his view would be protected.

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Code of Civil Procedure §726 is referred to as the “one action rule,” and the “security first rule.” It provides that, where there is a debt secured by real estate, there may only be one form of action to collect the debt, and that remedy is foreclosure. If it is through a lawsuit for judicial foreclosure, with some exceptions the lender may also obtain a deficiency judgment in that same action. If the lender conducts a non-judicial trustee’s sale, it is barred from collecting for the deficiency. On its face the rule is simple, but what if either the borrower, or the real property, is not located in California where section 726 applies? In that case, lenders and borrowers should consult with a Sacramento and El Dorado real state attorney, as there are numerous statutes and court decisions that cover the issues in this area. One such issue is where the lender gets a deficiency judgment after foreclosure of out of state property. Another issue, discussed here, is where the foreclosure is out of state, but the lender wants to sue for the balance in California. In this case, 726 does not apply.

Yolo real estate attorney one action rule.jpgIn Felton v. West ((1894)102 Cal 266), both parties lived I n California. Felton loaned West over $90,000, and West signed a promissory note, which was secured by property West owned in Oregon. West didn’t pay the loan, and there was a foreclosure sale of the Oregon property. The sale price did not cover the debt, so the lender sued the borrower, in California, for the balance, about $44,000.

Defendant argued that section 726 barred the action. As there was a prior action in Oregon to recover for the same debt, section 726 prohibited the California action- after all, there can be only “one form of action…,” and that already occurred in Oregon.

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A Loan Guaranty is a promise by the guarantor to pay the debt of another. In commercial real estate loans they are commonly used to provide additional security to the lender. Such loans are often given to new entities without a financial history, and the lender wants a person (with assets) on the hook for the debt if the entity fails. Last week I discussed a decision where the guarantor excluded a house from liability on the guaranty, but when he sold the home, the cash proceeds could be grabbed by the creditor. This article concerns the scenario in which the guarantor can escape liability, if the it turns out that they signed what courts consider a “sham guaranty.” This could arise due to deliberate action by the lender, insufficient investigation by the lender, or inartfully worded guaranty language. Parties concerned about what exactly their guaranty covers should consult with a Sacramento real estate attorney.

sacramento loan guaranty attorney 1.jpgCivil Code section 2787 provides that a “guarantor is one who promises to answer for the debt, default, or miscarriage of another…” What has become known as a sham guaranty is one where the guarantor is found to be the same as the borrower. The clearest case is where an individual signs a promissory note promising to pay the debt. The lender requires the same individual to sign a guaranty for the same debt, waiving many defenses. For example, there are statutory anti-deficiency protections for real estate borrowers, prohibiting the lender from collecting from the borrower. These protections are not extended to guarantors, and loan guaranties usually have waivers of all these defenses. In the sham guaranty the lender may think that by having the same borrower guaranty the loan allows for a deficiency judgment against the borrower as guarantor. Or, it may be used in hopes that the borrower/guarantor does not understand, and truly expects to be personally liable for the debt.

The sham guaranty defense extends to partnerships. In a general partnership, where each partner is already liable for debts of the partnership, their guaranty of partnership debt would be a sham. For Limited Partnerships, the same could apply to the general partner. River Bank America v. Diller is instructive, in a case where the principals of the corporate general partner signed the guaranty. The Bank wanted the borrower to form a limited partnership to be the borrower. A new entity was formed to be the general partner. The lender always considered the individuals as the primarily obligors, and had them guaranty the loan. The lender did not investigate the financial health of the new entity created to be general partner. The court found that, had the individuals themselves been the general partners, and had they attempted to guarantee the debt, there is no question such guaranty would have been a sham. Instead, the general partner of the primary obligor is a corporation which the individuals fully owned and controlled. However, the court found that this was a distinction without a difference. (The court was influenced also by evidence of the lender’s intent to subvert the antideficiency protection.

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Loan guaranties are contracts in which the guarantor promises to pay the debt if the principal debtor fails to pay. This is not what happens when someone thinks they guaranteed a home mortgage loan for their son or their significant other- they are usually equally liable on the loan. A guaranty more routinely shows up when an entity, such as an LLC or corporation, borrows money or signs a lease. The lender or landlord wants the individuals involved to guaranty the debt. If the guarantor has substantial assets, the lender may allow them to carve out some assets from being available for collection, such as their residence. Loan guarantors should consult with a Sacramento real estate and business attorney to closely review the terms of their guaranty so that they understand what their liability is. In a recent case (which was the first published opinion on the issue in the U.S.), the guarantor excluded a house from liability. He sold the house, and was surprised when the court ruled that, while the house was not attachable to pay the debt, the proceeds of the house (cash from the sale) were not excluded, and could be grabbed by the Lender. That the house was on Lake Como tells you that this was alota cash.

sacramento loan guaranty attorney.jpgIn Series AGI West Linn of Appian Group Investors DE LLC, Series loaned $3.1 million to a limited partnership which was developing a market in Oregon. Robert Eves, the developer, guaranteed the loan. The lender had Eves sign a Loan Guaranty, which provided:

” The following assets are excluded from the Robert J. Eves personal Guaranty: … The personal residence of Robert J. Eves at Via Regina, 27 Moltrasio, Como, Italy and its contents.”

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Mortgage loan brokers have a duty to mitigate the risk of possible loan fraud in California. The extent that title insurance would do this is a topic for another day, but brokers routinely arrange for title insurance for their lenders. Another protection against fraud is to have signatures notarized; at least the person signing has proven their identity. In a perfect storm for one mortgage Broker, it was the notary committing the fraud, and the trial court judge would not let them submit evidence that they got title insurance to help protect the lender against such acts. The judge claimed that the collateral source rule required the evidence be kept out. With this evidence barred, the Lender hammered the jury with claims that the Broker was negligent and breached its fiduciary duty, and the jury agreed. The appellate court did not.

El dorado real estate lawyer.jpg In Bryan Chanda V. Federal Home Loans Corporation, Chanda was a money lender and Federal was a private mortgage broker. Barker was the office manager for the owner of a commercial building in El Centro. Barker was also a Notary Public. Barker contacted Federal requesting an equity loan of $165,000 on behalf of the owners of the building. Federal’s loan officer wanted to arrange to meet with the owners so that they could sign the note and deed of trust, but Barker said one of the owners was not available. But, she would be happy to take the documents and get their notarized signatures. Barker then forged the signatures, and notarized them. Sacramento real estate trial attorneys rarely see fraudulent notarizations, but when they do, the notary is usually long gone.

Six months later, Barker asked for a larger replacement loan of $480,000. She again forged and notarized the signatures. The property owners learned about the fraud (no indication whether or not Barker had skipped town yet), and sued everyone. A forged deed of trust is not effective (though they can win out over unclean hands). The lender cross-complained against everyone, including Federal for negligence and breach of fiduciary duty. All parties and claims settled, except the lender’s claims against the Broker.

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My last post discussed the relative hardship doctrine in California real estate law. This doctrine provides that, once the court determines that a trespass has occurred, the court conducts an equitable balancing to determine whether to grant an injunction prohibiting the trespass, or whether to award damages instead. If the court determines that it will award damages and not disturb the trespass, it essentially gives the trespasser an easement, which may allow exclusive use. This result differs from the law on prescriptive easements, which prohibits granting exclusive prescriptive rights. This blog discusses how it differs For a better understanding, a party with questions should consult with a Sacramento and El Dorado real estate attorney.

ElDorado real estate attorney.jpgIn the decision of Hirshfield v Schwartz, One neighbor in Bel-Air mistakenly encroached on the other neighbor’s property in installing a strong block wall in front, and in the rear, extensive underground water and electrical lines, and several motors (for the pool and waterfall) underground in a concrete and iron enclosure. The judge balanced the hardship to the trespasser to move these items, vs. the harm to the victim, and decided that they did not need to be moved. The trespasser was to compensate the victim instead. In doing so, the judge granted the trespassers an interest in the neighbor’s property, which it called an ‘easement.’ The victim appealed, claiming that this is contrary to the decisions in several prescriptive easement cases, which hold that such an exclusive easement is an unlawful remedy in boundary disputes.

The appellate court disagreed with the prescriptive easement characterization, and thus those decisions were irrelevant. Here’s why.

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When a court is considering whether to grant an injunction to stop an innocent (the trespasser does not know they are trespassing) trespass to real estate, the judge applies the balancing the hardships test – how is the owner whose property is being encroached upon, versus the hardship to the trespasser to remove the encroachment. This is an equitable decision, as opposed to the case of prescriptive easement, in which the judge applies a strict set of statutory rules. Cases have established that there should not be an “exclusive” prescriptive easement. However, in a relative hardship analysis, the court may establish what is actually an exclusive use easement.. Sacramento and El Dorado real estate attorneys may consider the difference in the two remedies in fashioning their claims for relief.

sacramento real estate trespass lawyer.jpgIn Hirshfield v. Schwartz, the Hirshfields were elderly sisters who lived in their Bel-Air house since 1940. The Schwartzes moved in 1979. Both assumed that the chain link fence between their properties marked their property line. The defendants made several improvements: they extended the fence, built waterfalls a koi pond and stone deck, added a putting green and sand trap. After a car entered their front yard, to keep the kids safe they built an exceptionally strong block wall with the largest rebar available. Meanwhile the plaintiff sisters maintained a variety of exotic plants and trees, making it a botanical showplace..

It always starts with a survey, which the plaintiffs did. The survey disclosed that the defendants trespassed on their property in two locations. In the front, the block wall encroached. In the rear, part of the sand trap, extensive underground water and electrical lines, and several motors underground in a concrete and iron enclosure were encroaching. The plaintiffs, claiming that they needed the front portion to build a circular driveway, and the rear portion to install a greenhouse, filed suit to quiet title and trespass.

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Often a party to a lawsuit will have great success at trial, resulting in a money judgment. Then the judgment holder tries to collect the judgment, and finds that the debtor is judgment – proof, has no assets, or files bankruptcy to avoid liability for that judgment. Sacramento business attorneys are frequently presented with the problem of an uncollectible judgment. One solution – A judgment may be amended to add additional judgment debtors on the ground that a person or entity is the alter ego of the original judgment debtor; it is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. That happened to a plaintiff in a recent decision, and the court found that the creditor met the test to nail the parties responsible for the damages, who were not originally named defendants.

sacramento business lawyer -judgment debtor.jpgIn Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, Relentless sued Airborne concerning purchase of a French military jet that was not certified for flight. Relentless won a money judgment for damages of one dollar ($1.00), plus was awarded attorney fees of over $174,000 and costs of over $6,000. Airborne limited partnership was a deadbeat, with no assets, so Relentless could not collect its judgment. Relentless the sought to add the husband and wife team behind Airborne, plus their two corporations, as judgment debtors.

The court first reviewed the law concerning adding additional judgment debtors. The theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. The three-part test requires the judgment holder show:

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Option agreements for sale or lease of property often have a form of lease or purchase agreement attached, to be entered on exercising the option. The expectation is that, if the option is exercised, the attached contract will be signed by the parties and govern the transaction. Occasionally the option will contain all the terms, and not attach a form contract, and may or may not refer to entering an agreement. Sacramento and ElDorado real estate attorneys advise clients to prepare the Agreement and attach it to the option, otherwise there could be a dispute when the option was exercised. In pone such case, after the option to lease property was exercised, the property owner backed out. His legal argument was that the option was only a contract to enter a contract, and did not affect title to his property. The court said no, in this case, the option was sufficient as a lease.

In John Gavina v. Lon Smith, Plaintiff Gavina granted Defendant an option for an oil and gas lease on Gavina’s property. The option stated all the details of the lease, (set out below), but also had an attached lease form that, on exercise of the option, was to be signed by the parties. Smith exercised the option and deposited the money in escrow. Gavina refused to accept the money from the escrow, did not sign the formal lease form, offered to give Smith the option fee back. Essentially, they told Smith to get lost. The lawsuit resulted.

sacramento lease attorney.jpgThe judge was not impressed by Gavina’s conduct. Because of the nature of the suit (quiet title), it first addressed the question of whether the option itself created a contract, or was merely an executable contract to make a lease. It found the intent of the parties, as expressed in the option agreement, to set forth in both the option and the attached form of lease all the terms and conditions on which Gavina’s offer to lease was made. By exercising the option, Smith accepted the offer and agreed to the lease on the those terms. The requirement of a written lease was satisfied. (Statute of Frauds) Nothing more was required to make a binding lease.

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