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.
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.
When purchasing real estate, it is common for the buyer, and the buyer’s attorney, to exam a preliminary title report. The preliminary title report identifies the property, the owner, and liens affecting the property. Decisions are made and actions taken based upon the preliminary title report. It is not until several days or even weeks after the close of escrow that the actual title insurance policy arrives. It is seldom read and often filed away with the property documents.
The title insurance policy, however, contains the actual insuring language and agreements of the title insurer. This language is seldom contained in the preliminary title report. It can come as a surprise to the buyer later on.
In the case of Wolschlager v. Fidelity National Title Insurance Company, 11 Cal. Ap.4th 784 (2003) the title policy provided that all claims would be subject to arbitration. There was no mention of the arbitration provision in the preliminary title report. When Wolschlager sued over a denied claim, Fidelity demanded arbitration. Wolschlager argued that the arbitration provision had not been in the preliminary title report and that he had no practical opportunity to learn of the arbitration clause, or that he was giving up the right to a jury trial. Fidelity argued that the policy said, “copies of the policy forms should be read. They are available from the office which issued this report.” The California Court of Appeal found that this language in the preliminary title report was sufficient to bind Wolschlager and required the case be arbitrated. The lesson learned here is to inspect before the close of escrow the copy of the actual insurance policy to be issued as well as the preliminary title report.
In California, property acquired during the course of a marriage is community property. If one spouse files bankruptcy, all community property becomes property of the bankruptcy estate and is subject to liquidation by the trustee for the benefit of the creditors. However, if property is held by husband and wife as joint tenants, only the interest of the spouse who files a bankruptcy petition becomes property of the bankruptcy estate. This distinction is important when planning to protect the family home from creditors. If a husband and wife own a home with up to $150,000 in equity, the home would be exempt from creditors of one spouse, if it was held in joint tenancy, but not if it was community property.
For example, Harold and Wendy have a young son and own a home worth $450,000. There is a $300,000 mortgage on the home. Harold has $500,000 in debts relating to his business, but Harold and Wendy’s mutual credit card debt is only $20,000. If Harold and Wendy own the home as joint tenants, Harold can discharge all of his business debt by filing a Chapter 7 bankruptcy. The $150,000 equity remaining after a theoretical sale would be split. Wendy would keep a her $75,000. The remaining $75,000 would be protected by Harold’s homestead exemption. Harold and Wendy would keep the house, but Wendy would still be liable for the $20,000 in credit card debt. Note also, that if Harold and Wendy had no other family members in the home, Harold would only get a $50,000 exemption. See: In re McFall, 112 B.R. 336 (9TH B.A.P. 1990).
On the other hand, if the house were owned by Harold and Wendy, husband and wife as community property, the entire $150,000 equity would be part of the bankruptcy estate. Harold and Wendy would have a $75,000 homestead exemption even without other family members at home, but the remaining $75,000 of equity would be available to pay the creditors. In this case, Harold and Wendy would file a joint petition in bankruptcy and discharge both Harold’s business debt and the mutual credit card debt. However, their home would most likely be sold to obtain the $75,000 for the creditors. They would receive $75,000 from the proceeds of the sale to cover their exemption.
Thus, in bankruptcy there is a substantial advantage for debtors who own their home as joint tenants, rather than as community property.
Recently, a bankruptcy trustee attempted to sell a home that was owned in joint tenancy by a debtor and his spouse, who did not file a bankruptcy petition. The trustee argued that, since the home had been purchased with community property funds, it should be considered community property and the entire equity made available to creditors. The Ninth Circuit Court of Appeals, in the case of In re Sumners, 278 Bk.Rptr. 808 (2002), disagreed with the trustee. It held that when property is acquired from a third party in joint tenancy, it cannot be presumed to be community property simply because community property funds were used to purchase it.
The automatic stay provisions of the United States Bankruptcy Code, § 362, are designed to protect a debtor’s property so that it may be reorganized or liquidated by a bankruptcy trustee. If a tenant has a lease that is in default, the Bankruptcy Code gives the tenant or the trustee the opportunity to cure the default and preserve the value of the lease or the tenancy.
However, when there is no lease or default to cure, the delay and opportunity to cure provided by the Bankruptcy Code is pointless. The extra time will never result in the debtor or the trustee preserving any value for creditors, since there was no value to preserve. Nevertheless, many residential tenants, often advised by unlicenced, “eviction advisors,” file bankruptcy to stall the eviction process. Without proper legal advice, many debtors do not understand the long-term consequences of filing a bankruptcy petition. They often do not discharge very much debt while only delaying the eviction process by as little as a week. On the other hand, landlords can be subject to long delays and great expense without the debtor obtaining the relief for which the Bankruptcy Code was designed.
In 1984, Congress attempted to work on this problem by adding Bankruptcy Code § 362(b)(10), which exempted from the automatic stay “any act [to obtain possession] by a lessor … under a lease of nonresidential real property that has terminated by the expiration of the stated term of the lease before the commencement of or during ‛a bankruptcy case.” This solved the problem for commercial leases that had exprired. But It did not address the problem of non payment of rent or residential leases.
Accordingly, the California legislature went further in 1994 by enacting Code of Civil Procedure § 715.50, which provides that “a writ of possession issued pursuant to a judgment for possession in an unlawful detainer action shall be enforced…without delay, notwithstanding receipt of notice of the filing by the defendant of a bankruptcy proceeding.” The California Court of appeal upheld this statute in the case of Lee v. Baca, 73 Cal. App. 4th 1116 (1999). “The unlawful detainer judgment extinguishes the residential tenant’s interest in the property and that a postjudgment bankruptcy filing does not affect the landlord’s right to regain possession of his property–because it is not, at that point, property of the tenant/debtor’s estate.” Thus, the eviction would proceed regardless of the tenant’s bankruptcy.
This all changed in March, 2002, when the Bankruptcy Court for the Central District of California decided the case of In re Buttler 271 Bank.Rptr. 867 (Russell). The Court found the California Code of Civil Procedure § 715.050 was unconstitutional and unenforceable because it was preempted by the federal bankruptcy law. The Court decided that a debtor in possession of real property had an interest that was subject to the automatic stay provided for by the Bankruptcy Code.
That ruling, issued by a single bankruptcy judge in Los Angeles, holds that a landlord is still required to obtain an order from the bankruptcy court if the tenant files a bankruptcy petition before the sheriff can actually remove that tenant from the premises.
However since the ruling has yet to be adopted by an appellate court, it is not president. The Los Angeles County Sheriff is not treating it as the law. Instead the Sheriff is giving landlord’s the option of proceeding with an eviction even if a bankruptcy is filed after a judgment for eviction by a state court. The who landlord elects to proceed with the eviction after the bankruptcy could be exposed to being held in contempt depending upon the Bankruptcy Judge and future appellate rulings.
