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Thoits Law Blog – Terms of Use

By Blog, Uncategorized

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CAN-SPAM Business Compliance and Penalties

By Blog, Business Law

E-mail spam is a part of our business and personal lives.  Do you think everyone else is getting away with spam, so you can too?  Think again.  The federal CAN-SPAM Act of 2003 is alive and well.  When you’re evaluating whether or not your business needs to be concerned about complying with Spam Laws, keep in mind that each separate violation of the federal CAN-SPAM Act is subject to penalties of up to $16,000 and California violations are $1,000 each.  If you need more evidence to become convinced, just ask Facebook about the $873,277,200 judgment they won against a Canadian spammer who used the social networking service to illegally advertise his wares.  It would seem that California Judge Jeremy Fogel wanted to send a powerful deterrent message to illegal spammers.  To read more about this case, click HERE.
Shortly after the federal Can-Spam legislation was adopted in 2003, Delaware and California adopted similar Anti-Spam Legislation.  They were the first two states to do so.  Under the California legislation Cal Bus & Prof §17529, it is illegal to send unsolicited commercial e-mail from California or to a California e-mail address.  The law applies to senders and advertisers on whose behalf messages are sent, so be aware that you cannot contract away your obligation to comply with state and federal Spam Laws.
Federal and state anti-spam laws are directed at commercial communications and are not strictly limited to e-mail or advertisements.  If a message contains only commercial content or its primary purpose is commercial (even if it is an order confirmation or other relationship communication), then it must comply with applicable anti-spam laws.
Here are some tips for helping ensure that your commercial communications comply with anti-spam laws:

•    Begin with Opt In (your e-mail should be addressed to visitors to your own site who request to be added to your mailing list; don’t use e-mail addresses that have been harvested from other web sites. If you purchased an e-mail list from a third-party, ensure that the e-mail addresses were on an “Opt-In” list related to your topic).

•    Provide an easy and clear Opt Out option (so recipients can avoid receiving unwanted communication in the future).
•    Honor Opt Out requests promptly (once someone Opts Out, you cannot continue to send them future messages).
•    Use an accurate source e-mail address (so recipients can identify who sent the message).
•    Use accurate and descriptive subject lines (so recipients are not mislead or tricked into opening e-mails).
•    Include your contact information in the body of your message (so recipients can discover how to contact you).

You can report being spammed to the Federal Trade Commission. Send a copy of the unwanted or deceptive messages to spam@uce.gov or call 1-877-FTC-HELP.
Kathryn Andrews, Business Group

Importing Gray Market Goods: An Overview of U.S. Trademark Law

By Blog, Intellectual Property Law, Litigation

“Gray market” is the phrase used to describe the sale of new, used, surplus and refurbished products through unauthorized resellers or channels. Gray market goods, also commonly referred to as “parallel imports,” may be considered unlawful when imported to the United States and sold in competition with authorized U.S. distributors.
The general rule followed by the courts is that identical goods sold in an unauthorized manner are not genuine for purposes of the Lanham Act, which regulates U.S. trademarks.  For instance, in Caterpillar, Inc. v. Nationwide Equipment, 877 F. Supp. 611 (M.D. Fla. 1994), the court placed particular emphasis on a manufacturer’s inability to maintain quality control over an unauthorized distributor’s sale of its products.  In Caterpillar, the defendant sold, without authorization, products manufactured using Caterpillar’s components and trademarks.  Defendants obtained certificates of origin from Caterpillar for the component parts of the machinery but used those certificates to represent falsely that the machines were Caterpillar. The court determined that the wide variance in quality control in the manufacturing process contributed to a presumption of customer confusion. The defendant’s deceptive business practices did not help its cause.
To minimize the risk of liability a gray marketer must minimize the likelihood customer confusion over whether the goods sold are backed by an authorized dealer’s good will and the manufacturer’s warranty. Gray marketers should advise prospective purchasers that the goods being offered are not simply the same goods offered by authorized dealers, but at lower prices, and that the product is not covered by any applicable warranties.  Gray marketers should also avoid procuring goods and redistributing them in territories that are already covered by exclusive distribution agreements – the existence of the exclusive agreement is strong evidence that the manufacturer never intended that the goods be resold in these territories. Under these circumstances, gray marketers may face related tort claims for knowingly interfering with or circumventing existing distribution agreements.
The range of “unauthorized” conduct that can turn the resale of otherwise genuine goods into a Lanham Act violation or other liability is great.  To the extent that gray marketers engage in deceptive practices in addition to committing the mistakes described above, courts will likely interpret the Lanham Act more liberally to impose liability.
Andrew P. Holland, Litigation Group

California Legislation Threatens Tax-Free Exchanges

By Blog, Business Law, Real Estate Law

California’s anticipated $20 billion budget shortfall is well-known and legislators are understandably scrambling for solutions.  Newly proposed AB 2640 was introduced in the California Assembly on February 19 and would raise revenues immediately.  In fact, its terms are retroactive to January 1, 2010.
Among other provisions, AB 2640 would tax gain from certain exchanges that are tax-free under federal law.
For example, Section 1031 of federal tax law provides that no gain or loss is recognized when business or investment property is exchanged for property of a “like kind.”  California has long-respected this non-recognition provision, but AB 2640 would require that those gains, exempt from federal tax, be taxed in California.  While 1031 exchanges apply to many types of property, they are most commonly used for real estate, allowing gains from the sale of one investment property to be rolled over into another investment property so long as the entire proceeds of the sale of the original property are used for the purchase of new property.  If AB 2640 is enacted into law, gain on the transaction will be taxed at California’s rates and, in order to qualify for the full federal tax exclusion, anyone wishing to complete a 1031 exchange will have to pay the California taxes from funds other than the proceeds of the sale of the original property.
AB 2640 also takes aim at two valuable corporate non-recognition provisions.  Currently, when a corporation issues its stock, whether in a public or private offering, it does not recognize gain or loss.  Section 1045 of the Internal Revenue Code also allows gain to be rolled over if a taxpayer sells “qualified small business” stock and rolls over the proceeds to another “qualified small business” stock within 60 days of the sale.  These two provisions allow corporations to effectively raise capital and favor investment in small businesses.  Both of these provisions will be eliminated with AB 2640, causing corporations to pay tax on stock issuances and discouraging additional investment in small businesses.
There are a number of other exclusions AB 2640 would eliminate, including the exclusion of gain on transfers between spouses when they are divorcing, non-recognition provisions that apply if property is destroyed or condemned and other provisions that relate to exchanges of insurance policies and corporate securities.
It seems unlikely that AB 2640 will become law with its sweeping changes.  It will, however, only require a majority vote in the California legislature to enact it.  The bill does not create any new taxes (which would require a 2/3 majority to enact), it simply removes some existing exemptions and exclusions.  It would certainly generate current revenues and alleviate the present budget crisis.  Over the long term, however, it does not increase overall revenues but accelerates them to the present.  The Legislative Counsel of the State of California allows you to track the bill’s progress at http://www.leginfo.ca.gov/bilinfo.html by entering “AB 2640” into the search line.
Anne E. Senti-Willis, Business Group

Green Construction Contract Checklist

By Blog, Real Estate Law

Implementing a sustainable, energy efficient construction project involves many considerations encompassing the full range of development activities: site selection, design, construction, operation, maintenance and demolition. Every owner must consider a wide variety of implications, including cost, availability of materials, schedule and quality. Among the first issues to be addressed is the content of
the design and construction contracts. What follows is a checklist of issues to consider when negotiating and drafting contracts with architects, contractors and others involved in the project.

1. Should a certified green professional be retained? A design professional who has obtained accreditation in green design and construction will be recognized as an “Accredited Professional.”

2. If a specified standard of construction is required, be sure it is specified clearly, and with reference to the revision date of the applicable standard. A number
of organizations offer certification standards and ratings, including the LEED Green Building Rating System, Living Building, Green Globes, Green Point Rated and the National Association of Home Builder’s Green Building Program.

3. Be aware of changes in the law, especially local ordinances, relating to the requirements for any element of green design and construction.

4. Plan for extra time, and potentially extra cost, for delivery of materials.

5. Incorporate any applicable “performance” standards for the project, such as energy savings, air and water quality, water usage and recycling.

6. Watch for exculpatory provisions and disclaimers of responsibility at every stage. For example, a particular material requirement may draw a disclaimer of liability from an architect or contractor, who might not have confidence in the product. This may lead to extended negotiations over indemnities
and damage waivers.

7. Watch for, or give thought to clauses that require a particular standard of care that might be higher than customary. Such clauses may trigger insurance exclusions, thereby negating coverage from professional liability insurance or complicate bonding.

8. Consider extending any payment retention until the required certification is obtained. In addition, require that all documents related to the green requirements are created, maintained and turned over as part of the certification.

9. Reexamine how the green requirements may impact standard construction clauses, including such matters as delay, indemnities, consequential damage waivers, change
orders, insurance and substitutions.

10. Implement job-site recycling/waste
management requirements, if not already contemplated by a particular standard that is applicable.

Some of the standard forms of design and construction contracts include provisions that promote consideration of sustainability issues, but typically those are general and not mandatory. As with any contract, the parties need to identify exactly what their expectations are and specifically provide for the accomplishment of those goals in the contract.

Stephen C. Gerrish, Real Estate Group

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.
Remember:
“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