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February 2010

Judgment Creditors: Rights to Foreclosure Proceeds

By Blog, Litigation, Real Estate Law

After winning a lawsuit, a creditor is faced with collecting the money awarded in the judgment.  If there is any chance the debtor owns real property in California, the judgment creditor will often record an Abstract of Judgment in the official records of the county or counties where the property is located.  This then creates a lien on the property that can be foreclosed, or which must be paid off upon sale if, as is usually the case, the buyer wants its title to the property unencumbered by creditors of the seller.
There is a hole in the creditor’s security, however, as illustrated in the recent case of Banc of America Leasing & Capital, LLC v. 3 Arch Trustee Services, Inc.  (09 C.D.O.S. 181, December 11, 2009).  BofA held a judgment against Christopher Wong.  Mr. Wong owned property in Costa Mesa, so BofA recorded an abstract of judgment in Orange County.  At the time the abstract was recorded, Mr. Wong was in default under a loan secured by the property, and the lender had recorded a notice of default and a notice of foreclosure sale.  The foreclosure sale occurred, with the sale resulting in excess proceeds of over $100,000 after the foreclosing lender had been fully paid.  The trustee that conducted the foreclosure sale, 3 Arch, paid the entire amount of excess proceeds to Mr. Wong, with nothing going to BofA despite its recorded abstract.  BofA was displeased with this result, and sued 3 Arch for failing to check the  public records and paying the excess proceeds to the junior lien holder (BofA).  The trial court agreed with BofA, but the result was overturned by the appellate court.
The appellate court carefully considered the entire structure of non-judicial foreclosure procedures in California.  It concluded that a foreclosing trustee has no duty to give notice of a pending or completed foreclosure proceeding to a junior judgment creditor unless the creditor has recorded, in addition to or as part of the abstract of judgment, a special request for notice.  The request for notice must be recorded after the foreclosing lender records the deed of trust being foreclosed, and before the notice of default is recorded commencing foreclosure.  BofA argued that this places an unreasonable burden on judgment creditors, who will need to continually check and recheck the public records in the counties where the debtor may acquire or refinance property after the abstract is recorded.  The court acknowledged that this places a significant burden on judgment creditors, but left it to the legislature to deal with.
The takeaway from this case is that judgment creditors should always record a special request for notice together with their abstract of judgment, and should run a title check on any known properties owned by the debtor to determine if a notice of default has been recorded.  If a notice of default has been recorded, the creditor should immediately submit a written claim to the foreclosing trustee, under penalty of perjury, specifying the amount of the claim and otherwise meeting the requirements of Civil Code Section 2924.
Thomas B. Jacob, Real Estate Group

Commercial Lease Estoppel Certificate Disclaimers

By Blog, Real Estate Law

Commercial tenants are often asked by their landlords to sign estoppel certificates, usually in connection with the sale or refinancing of the property.  Prospective lenders and buyers do not want surprises, so they seek confirmation directly from the tenant regarding lease matters that could have an impact on their decision to lend or buy.  Matters typically covered include whether the landlord is in default, whether the tenant has any rights to buy the property or extend its lease, whether tenant improvements have been completed to the tenant’s satisfaction, etc.
Estoppel certificates can be dangerous for tenants, since important rights under the lease can be inadvertently waived if an estoppel certificate is improperly filled out.  In a recent trend, larger tenants have begun to protect themselves against this risk by adding broad disclaimers to every estoppel certificate they are requested to complete.  While these disclaimers take many different forms, the basic goal of these clauses is to prevent anything in the estoppel certificate from waiving or adversely affecting any rights of the tenant under the lease, regardless of what is represented and regardless of whether or not the tenant has been negligent in preparing the estoppel.   Here is a link to one such disclaimer clause that is based on one being used by Apple Computer: Estoppel Addendum
These types of waivers can seriously undercut the intended value of obtaining estoppels in the first place, which is to provide assurances to prospective lenders or buyers who will be relying upon the current statements of the tenant.  So, of course, lenders and landlords are fighting back.  We are now seeing many landlords include a form of estoppel certificate as an exhibit to their leases, with a lease clause obligating the tenant to sign that agreed upon form upon request.  And of course the form does not include the tenant-friendly disclaimers.  Landlords are often able to get away with this approach, since they have more leverage at the time the lease is being negotiated than when they are later requesting an estoppel certificate. Unfortunately, this is contributing to the trend toward ever-longer, more comprehensive and more expensive leases.
“The man who says he is willing to meet you halfway is usually a poor judge of distance.”              – Laurence J. Peter
Thomas B. Jacob, Real Estate Group

DIRT: Real Estate Law, Trends and Analysis

By Blog, Real Estate Law

I am a member of a group called DIRT, which is a national, on-line forum for sharing of trends and insights among real estate attorneys and others interested in real estate law.  It was started and continues to be managed by Professor Patrick Randolph from the University of Missouri – Kansas City Law School.  Prof. Randolph has done a remarkable job of creating an active and engaging forum for the sharing of real estate law develops.  Readers are likely to see many entries on this blog that have their genesis in issues raised and discussed on DIRT.
One of the regular insightful participants on DIRT is Jack Murray, Vice President and General Counsel for First American Title Company’s National Commercial Division.  Mr. Murray is a prolific writer, with many of his articles posted in a special First American Underwriting Library dedicated solely to Mr. Murray’s work.  Here is the link.
In addition to scholarly law review articles, Mr. Murray also has a delightful sense of humor.  In a recent posting on DIRT in response to an inquiry about the rights of a secured real estate lender upon the death of the borrower, he states that lenders often insert the following protective provisions in their loan documents to cover this situation:

DEATH.  Upon the death of any individual [Borrower], the lien of this Mortgage will extend to, and include, any cemetery plot, crypt, or other place of final interment of such deceased [Borrower], together with any and all rents, issues, incomes, and profits arising therefrom, and any and all renewals, replacements, accessions, improvements, and substitutions, and a prior perfected security interest in and to any and all effects, articles of personal adornment, gold fillings, and other things of value severed or capable of severance without material injury to the corpse of the deceased [Borrower]. The foregoing lien and security interest may be enforced by any lawful procedure and will continue until whichever of the following occurs first: (i) full payment of the Indebtedness; or (ii) [Lender] is furnished with a substitute hostage of equal or better class, quality, usefulness, and value of the deceased  [Borrower].
END OF THE WORLD.  Upon the occurrence of the end of the world before full payment of the Indebtedness, the Indebtedness, at [Lender]’s option, will become immediately due and payable in full and may be enforced against [Borrower] by any available procedure. For remedial purposes, [Lender] will be deemed aligned with the forces of light, and [Borrower] with the forces of darkness, regardless of the parties’ actual ultimate destinations, unless and until [Lender] elects otherwise in writing.

Thomas B. Jacob, Real Estate Group

Non-refundable Deposits May Be Refundable After All

By Blog, Litigation, Real Estate Law

The recent California appellate court case of Kuish v. Smith (10 CDOS 1928, February 3, 2010) has reminded us that in the world of California real estate law, the concept of “nonrefundable” deposits is sometimes very illusive.
In this case, Mr. Kuish entered into a contract to purchase Mr. Smith’s waterfront home in Laguna Beach for $14 million. Under the contract and various amendments, Mr. Kuish deposited $620,000 into escrow, with $400,000 of the deposit released to the seller, and the balance held in escrow. The purchase agreement clearly specified that the deposits were to be “non-refundable.” After numerous extensions of the closing date, Mr. Kuish finally cancelled the escrow. That must have been a happy day for Mr. Smith, who then promptly sold the house to a back up buyer for $15 million and refused to return Mr. Kuish’s “non-refundable” deposits.
Mr. Kuish decided he really didn’t mean it when he agreed that the deposits would be non-refundable, and he sued Mr. Smith for return of the deposits. The trial court sided with Mr. Smith, holding that non-refundable meant non-refundable, particularly in this case where “both parties are ‘big boys,’ that is, sophisticated business people [who] understood all the ramifications of their actions in freely negotiating to make the deposits non-refundable.” The appellate court disagreed, however. Based on an earlier California Supreme Court decision, it held that retention of the deposit under these circumstances would constitute an invalid forfeiture under California law, regardless of whether the parties agreed that the deposit would be non-refundable.
The parties might have been able to make the deposits truly non-refundable in a couple of ways. The agreement could have been structured as an option to purchase the property, with the deposits designated as the consideration for granting the option. However, most sellers want to have a binding purchase agreement with their buyer, rather than granting an option. Alternatively, the purchase contract could have included an enforceable liquidated damages clause. To be enforceable in any contract for the sale of real property, a liquidated damages clause requires that the clause be reasonable under the circumstance existing at the time the contract is entered into (the actual damages in the event of default must be difficult to ascertain at that time), (ii) the clause must be separately signed or initialed by both parties, and (iii) if a pre-printed contract form is used, it must be in at least 10 point bold type. In a residential contract, each separate deposit must have its own liquidated damages clause signed by the parties at the time the deposit is made, and the clause is only valid to the extent the deposit is actually paid, and is “reasonable.” Whether a residential deposit is reasonable as liquidated damages depends not only upon the circumstances existing at the time the contract was entered into, but also upon the price and other terms and circumstances of any subsequent sale of the same property if the sale (or contract to sell) is made within six months of the buyer’s default. This last requirement might have prevented Mr. Smith and Mr. Kuish from making the deposits truly nonrefundable even if they had used a liquidated damages clause.
So, don’t rely upon simply providing that a deposit is non-refundable in your purchase agreements; always include a liquidated damages clause. And if you are dealing with residential property be sure to understand that a deposit may be refundable even if a liquidated damages clause is used, particularly in a rising real estate market (if and when such a market returns).
Thomas B. Jacob, Real Estate Group

"Kin Care" and the California Supreme Court

By Blog, Employment Law

The California Supreme Court has just decided that an employee’s right to use accrued sick leave to attend to the illness of a child, parent, spouse or domestic partner does not apply to all employer sick leave policies.  (McCarther v. Pacific Telesis Group Ct. No. 164692, 2/18/10)).  Whatever one may think was the intent of the legislature in passing Labor Code section 233, which requires employers who provide sick leave to allow employees to use a specified portion of that sick leave to attend to the illnesses of others described in the statute, the Supreme Court found that the words of the statute do not apply to a broad sick leave policy that provides for uncapped, compensated sick leave.
The plaintiffs in the Supreme Court case originally brought their lawsuit against their employer because they claimed they were denied the right to use any of their paid sick leave for the purposes intended by the statute.  Pacific Telesis’ sick leave policy did not provide for “accrual” at a specified rate.  Instead, employees were entitled to uncapped paid sick leave for a variety of purposes but there were limits on how much could be used at any one time (five days).  The policy was generous for employees, but it had never been used in connection with an employee caring for a sick parent, child, spouse or domestic partner.  In addition, because there were no caps, or an accrued “bank” of earned sick days, the number o days available was unlimited, subject to the utilization rules.  Even though the plaintiffs were not disciplined in any way for their absences to care for others, the employer’s policy on absenteeism might apply against someone taking leave days to care for another.
The Supreme Court analyzed and interpreted the words of the statute very carefully and concluded, in short, that because the employer’s policy was uncapped, there were no specific “accrued and available” sick leave days under its policy. The legislation was not intended, therefore, to cover all sick leave policies – only those that provide for an accrual of a specified number of days, thus providing means to the words of that allow an employee to use sick leave that “would be accrued during six months at the employee’s then current rate of entitlement.”  The Court explained its decision:
“Employers are not required to provide sick leave. Many employers elect to do so, and many do so in the form of an accrual-based system. Employers may choose to refuse employees the right to use uncapped sick leave to care for relatives, although employers are certainly not precluded from doing so. Indeed, defendants offer compensated personal days off, which may be taken to care for ill relatives — a policy of which plaintiff Huerta availed himself to receive one day of compensated leave to care for his ill mother. There are employers, like defendants, that elect to provide an uncapped compensated sick leave policy. We conclude that section 233 does not apply to those types of policies.”
The practical effect of the decision may be very limited:  since the statute did not apply to the generous, uncapped policy, the employer could restrict the right to use the sick leave days for specific purposes or specific periods of time, despite the guarantee in the statute.  On a broader level, the court determined that the legislature did not intend to have the statute apply to all sick leave policies, so its words were interpreted accordingly, and logically.  The legislature may reexamine what its intent was.  Pending further legislative developments, the rights granted under Labor Code section 233 are not available to employees who are entitled and subject to a policy providing uncapped, paid sick leave.
Stephen C. Gerrish, Employment Group