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

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

E-Mail Privacy and Attorney-Client Privilege

By Blog, Employment Law, Litigation

Employees should realize that they should not use the company’s e-mail account for personal, private matters, yet most continue to do so – everyone seems to assume that e-mail is private, no matter who owns the account. This may not be true, however, and anyone using a company e-mail account for his or her private messages could be in for a rude awakening – disclosure of the contents – if not careful.

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