Coming into effect on January 1, 2010, the homestead exemption protecting a homeowner’s equity from judgment creditors has been increased by $25,000 across the board to $75,000 for individuals, $100,000 for married couples or family units as specified, and $175,000 for persons over 65 years, disabled, or over 55 years with limited income as specified. (Assembly Bill 1046)
Another law signed by Governor Schwarzenegger on October 11, 2009, which does not become effective until January 1, 2010, makes Mortgage Fraud a State Crime (Senate Bill 239). As of January 1, 2010, anyone who deliberately makes any misrepresentation or omission during the mortgage lending process with the intent of influencing that process will be guilty of mortgage fraud under California law. A violation of this law is a crime punishable by one-year imprisonment. Under existing federal law, loan fraud against a federally-insured lender is a crime punishable by a $1 million fine, plus one-year imprisonment (18 U.S.C. section 1014).
Over the past year I have been asked by many clients about renegotiating their home mortgage. They assume that because I specialize in bankruptcy and real estate that I possess the secrets that will help them get a good deal from their lender. Unfortunately this is not true for the average case. You need a lawyer only if there is a real dispute.
Lenders are as interested avoiding foreclosures as are borrowers. I recently spoke with the regional head of the renegotiation department of a major bank. He said that he was expected to renegotiate as many loans as possible. He only heard from upper management when his department was not renegotiating enough loans. He found that most loan renegotiation consultants got in the way, and they never negotiated a deal better than the homeowner could have received had they dealt directly with his department. Lenders know what they are willing to do and what government help might be available, better than anyone else. They are the experts on their own loans and truly want to work with you. If you meet the requirements for a renegotiation, they are more than happy to let you do it. Renegotiation is good for everyone.
If you do not meet the requirements, the Lender is not going to budge. Lawyers and threats of litigation are unlikely to help get the best deal. Thus, a borrower in trouble is best advised to consult directly with the lender. There may be some issues dealing with the lender’s bureaucracy, but most with some patience, can cut through a lender’s red tape. The most often complaint I hear from clients is the trouble they are having getting the lender on the telephone or getting any response.
For those who cannot deal directly with their lender, there are consultants who are less expensive than lawyers. They can assist you in getting your financial information together and making calls, but that is about it. If you really need a consultant, finding a good one is very difficult. There are many people who profess to be experts and make promises. They ask for advance payments of $3,500 or more. At best consultants get the borrower the deal they could have received had they simply called the lender. At worst the consultant does nothing and takes the money. Personally, I do not have anyone to whom I can refer a client. I usually talk my clients into dealing directly with the lender. Bank representatives tell me that any consultant that is charging more than $1,000 is probably not earning the money.
Fraudulent mortgage renegotiation consultants have become such a problem that the legislature recently passed an emergency law that was signed by Governor Schwarzenegger on October 11, 2009 and went into effect immediately. It prohibits anyone from claiming any compensation for negotiating or arranging a loan modification until after that person fully performs each and every service as promised. Aimed at combating loan modification scams, this ban applies to upfront fees collected by real estate agents and attorneys. The ban expires on January 1, 2013. Also effective immediately, anyone who negotiates or arranges a loan modification must give the borrower a specified notice that paying a third-party for loan modification services is unnecessary.
These new requirements apply to mortgage loans secured by residential property up to four units, with certain exceptions for lenders and loan servicers acting on their own behalf. Violations can be penalized by, among other things, a $10,000 fine plus one-year imprisonment for individuals, or a $50,000 fine for businesses. Real estate brokers with existing Advance Fee Loan Modification Agreements reviewed by the Department of Real Estate can no longer, as of October 11, 2009, enter into these agreements or collect advance fees. Agreements entered into and advance fees collected before October 11, 2009 are not affected.
Many landlords are aware that a tenant can defend an eviction proceeding by claiming that a rental unit is uninhabitable. Violations of building codes for things such as lack of heat, leaky ceilings and faulty electricity which go to the habitability of a unit and can be used as evidence by a tenant to have the Court declare the premises uninhabitable. If the Court finds that the premises are uninhabitable, then the landlord may not evict the tenant. Instead, the Court determines the reasonable rent for the premises. The tenant has an opportunity to pay the lower rent and avoid eviction.
On the other hand, if the landlord does not have a certificate of occupancy, he cannot collect any rent. In the case of Espinoza v. Calva 169 Cal. App. 4th 1393 (2008) a landlord sued for eviction and back rent. The Trial Court found the premises were uninhabitable and reduced the rent finding that the landlord was owed $2,350 for three months back rent.
The Court of Appeal reversed the monetary award. It ruled that since the landlord did not have a Certificate of Occupancy, the lease was an illegal contract and the tenant did not owe any money.
In another case, the Court of Appeal found that a tenant can sue a landlord for maintaining a public nuisance by allowing tobacco smoke in the common areas. In Birke v. Oakwood Worldwide 169 Cal. App. 4th 1540 (2009) the tenant was allowed to sue for damages and punitive damages because of alleged harmful effects suffered from second hand smoke in the common areas of an apartment complex.
Landlords are often cautioned against representing the square footage of premises to a tenant. Accurate measurement is difficult; and there are many different ways to measure square footage. Thus, most listings for rental space described the square footage as “approximate.” The American Industrial Real Estate form lease, which is one of the most often used forms for California for commercial leases, goes even further. Paragraph 2.1 states:
“… Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less.”
Paragraph 2.4 further provides:
“Lessee acknowledges that: (a) it has been advised by Lessor … to satisfy itself with respect to the condition of the Premises … , and their suitability for Lessee’s intended use, [and] (b) Lessee had made such investigation as its deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises … .”
Kelly McClain’s lease with her landlord contained those paragraphs and described the leased premises as “approximately 2,624 square feet.” So when Ms. McClain sued her landlord alleging that her premises was not 2,624 square feet, it was no surprise when the trial court said she did not have a case.
However, the California Court of Appeal thought otherwise. In McClain v. Octagon Plaza, LLC, 159 Cal. App. 4th 784 (2008) the Court pointed to California Civil Code Section 1668 which states:
“All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”
The Court concluded:
“[T]he terms of the lease—including the exculpatory provisions in paragraph 2.1—do not bar McClain from asserting her fraud claim or showing that the misrepresentations reasonably induced her to accept the lease…. [T]he fact that Paragraph 2.1 put McClain on notice that the [Lessor’s] representations of size were approximations does not preclude her from showing that they were, in fact, materially and unreasonably inaccurate…. McClain alleges that the [Lessor] exaggerated the size of her unit by 186 square feet, or 7.6 percent of its actual size, and increased her share of the common expenses by 4 percent through a calculation that understated the size of the shopping center by 965 square feet, or 8.1 percent of its actual size…. [T]hese discrepancies … cannot be regarded as de minimis or necessarily “near to” the actual sizes as a matter of law.”
The lesson learn: Landlords should be certain to be as accurate as possible when making representations about square footage, or not do so at all. Everyone should understand that a contract cannot exempt a party from his or her own fraud or willful injury.
When a seller reneges on a contract to sell real estate, the aggrieved buyer can tie-up the property in court until the dispute is resolved. In fact, whenever there is a lawsuit involving title or the right to possession of real property, the plaintiff may record a “Notice of Pendency of Action” with the County Recorder. This notice, which is usually referred to as a lis pendens, gives constructive notice to the world of the pending legal action. Anyone who takes a legal interest in the property is deemed to have notice of the pendency of the action and is subject to the judgment of the Court. The lis pendens severely affects the owner’s ability to sell or encumber the property. Since every piece of real property is unique, the lis pendens is essential to protect the rights of persons who have been, or might be, deprived of title or possession of the real property.
If someone has a real property claim, it is important to file a law suit and record a lis pendens as soon as possible to prevent the defendant from selling, or otherwise encumbering, the property before the case is resolved in court. Many lawyers and their clients think that as soon as the lis pendens is recorded, the real property claimant is protected. California Code of Civil Procedure § 405.24 provides:
“From the time of recording the notice of pendency of action, a purchaser,
encumbrancer, or other transferee of the real property described in the
notice, shall be deemed to have constructive notice of the pendency of the
noticed action….”
Reading this section alone is misleading and can give a real property claimant false confidence. Once a document is deposited with the county recorder, it must be indexed so that others can locate it in a proper search of the records. Real property purchasers and mortgagers can “be charged only with notice of those documents which are located by search of the proper indexes.” Hochstein v. Romero, 219 Cal. App. 3d 447, 452 (1990). In the recent case of Dyer v. Martinez, 147 Cal. App. 4th 1240 (2007) the California Court of Appeal found that “a lis pendens does not import constructive notice until it has been indexed.” In that case, Kristina Dyer claimed to have a contract to purchase a house from Mr. & Mrs. Rojas. When the Rojas’ refused to close the sale, Ms. Dyer filed suit and recorded a lis pendens on September 9th. However, the county recorder did not index the lis pendens until September 14th. On September 9th, the Rojas’ deeded the house to the Martinezes who had no knowledge of the pending lawsuit. Further, the Martinezes financed their purchase of the property with a mortgage which was also recorded on September 10th.
The Court found that the lis pendens did not affect the Martinezes’ title or the liens of the mortgages, even though it was recorded first. “Because the lis pendens could not have been located through diligent search…the purchaser’s had no constructive notice of the pending action at the time they closed escrow.”
In Los Angeles County, as in many other counties, documents are not indexed for at least five business days after they are recorded. The five day rule is only applicable to documents that are “walked-in.” If the document is mailed to the recorder, it is not indexed for nine weeks. If a real property claimant waits to file suit until just before a defendant sells or encumbers real property, the recording of the lis pendens may not be effective to protect the property. To be certain that the real property claimant’s rights are protected, a plaintiff should file suit promptly and attempt to give actual notice to any potential adverse interest. This might entail faxing, and/or personal delivery of the lis pendens to any known potential buyers and pending escrow. Keep in mind that the county recorder is considered the agent of the person recording the lis pendens. Therefore, the responsibility for properly recording and indexing, falls upon the person recording the lis pendens.
It is not unusual for a landlord, particularly in a commercial situation, to allow a tenant to remain in possession after an eviction for a limited time, or a limited purpose. Even without the landlord’s consent, a tenant can remain in possession for the time of the judgment until the sheriff locks the tenant out. Having the tenant in possession after a judgment for eviction is risky. It can expose the landlord to additional liability and problems.
When a tenant fails to pay rent, or otherwise breaches a lease, the landlord gives the tenant a notice to pay rent or quit or a notice to cure covenant or quit. If the tenant fails to pay the rent or cure the covenant, or leave, within the time allowed, usually three days, the landlord can file an unlawful detainer suit to evict the tenant. If the landlord has followed all the procedures correctly, it will get a judgment restoring possession of the premises to the landlord. This usually takes about two months from the time of the default.
The tenant often vacates the premises within this time and before the sheriff forces the eviction. Sometimes, however, the tenant tries to make a deal with the landlord to delay the actual lock out by the sheriff. The tenant may promise to cure all the back rent and pay expenses within a short time to salvage its tenancy. The tenant may pay some money for a little extra time to move. There is no shortage of hard luck stories or benevolent landlords who are willing to soften the harshness of an eviction.
By cutting a deal with the tenant, a landlord may be getting more than he or she bargained for. First, by accepting money or other consideration, the landlord may be creating a new tenancy with the tenant. This new tenancy could be deemed to be an oral or implied agreement which does not give the landlord any of the protections of the prior written lease. When the tenant fails to abide by the new agreement, the landlord would have to start the entire eviction process over again, beginning with the notice to pay rent or quit.
Moreover, once the landlord has been restored possession of the premises, he becomes liable for injuries occurring on the premises. In the case of Stone v. Center Trust Retail Properties, Inc., 146 Cal. App 4th 1435 (2007), a restaurant continued to operate following the court’s order restoring the landlord to possession and before the arrival of the sheriff. Ten days after the order of eviction, Ms. Stone was injured at the restaurant. The court found that while the landlord was not liable for the restaurant’s negligence before the order restoring possession, after the order, the landlord had a duty to inspect the premises and insure that it was safe:
“It is one thing for a landlord to leave a tenant alone who is complying with its lease. It is entirely different, however, for a landlord to ignore a defaulting tenant’s possible neglect of property. Neglected property endangers the public, and a landlord’s detachment frustrates the public policy of keeping property in good repair and safe. To strike the right balance between safety and disfavored self-help, we hold that Center Trust’s duty to inspect attached upon entry of the judgment of possession in the unlawful detainer action and included reasonable periodic inspections thereafter. Upon entry of judgment, a tenant’s incentive to maintain a property dissipates because continued maintenance likely benefits only the landlord. To protect the public, the incentive to maintain the property must not be an orphan abandoned by a tenant and ignored by a shortly reoccupying landlord.”
Accordingly, the landlord was found liable for the plaintiff’s injuries. The lesson learned is that once the decision to evict has been made, landlords need to complete their evictions promptly and without any delay.
If a seller of real property reneges on a contract to sell, the buyer can sue for “Specific Performance.” This means that the buyer can ask the court to order the seller to convey the specific property that is the subject of the contract. The aggrieved buyer can elect this remedy because the failure to obtain title to a specific parcel of property may not be compensable with monetary damages.
In practice this remedy is almost always requested by aggrieved buyers because it allows them to record a lis pendens which clouds title to the property and makes it difficult for the defendant seller to sell or encumber the property until the litigation is resolved. This is exactly what the Plaintiffs did in the case of Behniwal v. Mixs, 147 Cal.App 4th 621 (2007). However, after the lis pendens was recorded, the defendant sellers were still able to obtain loans secured by the property. The sellers borrowed almost all of the equity with three loans, including one from World Savings. The lenders reasoned that even if the seller lost the litigation, the buyer would have to pay the agreed purchase price to obtain specific performance which was sufficient to pay the loans. In other words, by loaning after the recording of the lis pendens the lenders knew that their loans would be subject to a possible court order sale of the property but assumed that they would be paid from the proceeds.
Like most contracts for the sale of real property, the contract between the Behniwal’s and the Mix’s provided that if litigation was necessary to enforce it, the prevailing parties would be entitled to an award of their attorneys’ fees. Thus when the court found that the buyers were entitled to specific performance, it awarded them more than $250,000 in attorneys’ fees. Originally, the trial court said that the Behniwals could reduce their purchase price of $540,000 by this award. This would not have left enough cash to pay the loans secured by the property. With the house being sold to the Behniwals, the lenders would have lost their security. Since the Mix’s had few other assets from which to repay the loans, it was unlikely the loans would be repaid.
The Court of Appeal reversed holding that the award of attorneys’ fees cannot be used as a credit against the purchase price. The buyers would have to try to collect their attorneys’ fees after paying the full agreed price for the property. Again, as the Mix’s had no assets, the attorney fees were unlikely to be collected.
Buyers can try to protect themselves by making special provisions in the contract for sale. The court of appeal in Behniwal v. Mix said that the attorneys fee award was pursuant to an independent contractual provision and therefore was not incident to the judgment for specific performance. Accordingly, buyers need to specifically provide for an adjustment in the purchase price for any attorneys’ fees incurred enforcing the contract of sale. Only by tying the attorneys’ fees to the purchase price can a buyer be hopeful of collecting them should an insolvent seller renege on conveying property as agreed.
In civil disputes getting a judgment often is only half the battle. Collecting a civil judgment can be very expensive, time consuming, and fruitless. Just ask Fred Goldman who has yet to realize anything from his $34 million judgment against O.J. Simpson.
The simplest, and least expensive, way to collect a judgment against a party that owns real property, is to record an abstract of that judgment. For an $15.00 clerk fee and a $9.00 recording fee, a judgment creditor can obtain and record an abstract judgment which creates a lien against any real property owned or later acquired by the judgment debtor. After the abstract is properly recorded, the judgment creditor need do nothing except sit back and renew the judgment every ten years. It may take a while, but if property owned by the judgment debtor ever changes hands or is used as collateral to secure a loan, the judgment creditor will get an urgent call from an escrow agent that is very eager to secure a quick release of the lien by paying the judgment in full plus 10% interest.
The abstract is a simple form and the procedure so easy, there has to be a catch; and there is. The form has to be filled out properly and accurately. Recently the bankruptcy appellate panel for the 9th Circuit in the case of Alcove Investment, Inc. v. Conceicao, 331 B.R. 885 (2005) affirmed a ruling by the bankruptcy court to deny a $50,200 secured claim because the judgment creditor failed to put the judgment debtor’s social security number on its recorded judgment. California Code of Civil Procedure §674(a)(6) requires an abstract of judgment to contain the social security number and the driver’s license number of the judgment debtor, if known. The Bankruptcy Appellate Panel did not agree with the judgment creditor’s contention that this was a mere technicality. Rather, the court held, it was a statutory requirement that helped prevent confusion of judgment debtors.
In the case of Keele v. Reich, 169 Cal.App.3d 1129 (1985) the judgment creditor thought it would be easier simply to indicated that the social security number was unknown. When it was later shown that this was a misrepresentation, and that the judgment creditor in fact knew the social security number, the California Court of Appeal refused to recognize the judgment lien.
The lesson to be learned is that the social security number and drivers license number are important to success in litigation. If you did not get that information when you entered into a transaction, it is absolutely necessary to get the information early in discovery when litigation begins. Drivers License number is an optional questions (2.03) on the approved California Form Interrogatories. A special interrogatory should be used to get the social security number. While an opposing party may object on the grounds of privacy, the court should overrule the objection because of the requirements of California Code of Civil Procedure §674.
The volume of digitally stored information created by business organizations is growing at an exponential pace. Recent studies report that 93% of all information is stored electronically and that 70% is never reduced to writing. Discovery practices directed at electronically stored information have become a part of almost all civil litigation. This fact is highlighted in the new Federal Rules of Civil Procedure (FRCP) which will go into effect December 1, 2006. FRCP 34 will deal with computer based information and other digitally stored data as Electronically Stored Information (“ESI”).
Failure to comply with these rules in litigation could result in an opponent gaining court ordered access to your computer systems. Even before litigation begins, there should be planning and procedures in place. To avoid the huge cost of attorney review, businesses need to adopt prior to litigation a systemized internal process to handle ESI and the eventual discovery related to it. An effective ESI management plan has five factors which address the new rules.
1. Have in place an electronic discovery and litigation readiness program. FRCP 26 will require that ESI issues be addressed as soon as practicable after initiation of litigation and at least 21 days before the first Court hearing. Waiting and dealing with ESI problems that may arise in litigation is no longer a practical option. A business cannot establish a procedure for collecting, culling and preserving its ESI after litigation is initiated. This must be a part of its regular business practices. At the commencement of litigation, there should be a procedure to search, identify and preserve relevant ESI.
2. Deletion in a normal course of business. Probably the most important provision to keep in mind is the “safe harbor” provision of FRCP 37(f) which provides, “absent exceptional circumstances, a court may not impose sanctions . . . on a party for failing to provide electronically stored information lost as a result of routine, good faith operation of an electronic information system.” For a party to establish that the deletion of ESI resulted from the routine and good faith operation of their electronic information system, a party must be able to demonstrate the existence of an established, well documented and systemized electronic records management process. Having a plan, is not enough. To be in good faith, a company must adhere to its plan. The failure to do so could result in a company being required to not just preserve, but process and review large amounts of information in the event of litigation.
3. The production of native files as part of ESI. FRCP 34(b) provides that “Electronically Stored Information be produced as it is “ordinarily maintained” or in a “reasonably usable” form. It “should not be produced in a form that removes or significantly degrades this feature.” This may require that the software necessary to effectively access and search the ESI be provided as well. Numerous recent court decisions hold that file metadata contained within ESI must be preserved and produced.
4. Preservation of relevant information. Preserving huge amounts of ESI through litigation can be quite costly. The notes to FRCP 26(f) recognizes that requests for ESI can be limited to topics or key words and date ranges, allowing other ESI to be destroyed. The key words and the date ranges should be agreed upon by counsel or the subject of a protective order before any party actually destroys ESI . The new rules are inspiring a large growth of new technology companies that specialize in efficient and consistent data collection from large computer systems.
5. The threat of an opponents access to the information systems of an opposing party if not in compliance is established. FRCP Rule 34(a) expressly permits a party to seek access to the opposing party’s computer system for inspection and copying. However, the advisory note said this should not be a routine right. Since the last thing any business needs is to have an opponent’s expert running searches on its company’s computers, it is important that a company have a policy in place that can provide an opponent with the appropriate electronic data without such a search.
Only by having planning and procedures in place before litigation begins, can a company hope to effectively deal with its ESI once litigation begins. Clients must partner with their attorney and proactively prepare systems for dealing with ESI, including implementing and uniformly enforcing a records retention program.
