Articles Posted in Business

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Often a party to a lawsuit will have great success at trial, resulting in a money judgment. Then the judgment holder tries to collect the judgment, and finds that the debtor is judgment – proof, has no assets, or files bankruptcy to avoid liability for that judgment. Sacramento business attorneys are frequently presented with the problem of an uncollectible judgment. One solution – A judgment may be amended to add additional judgment debtors on the ground that a person or entity is the alter ego of the original judgment debtor; it is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. That happened to a plaintiff in a recent decision, and the court found that the creditor met the test to nail the parties responsible for the damages, who were not originally named defendants.

sacramento business lawyer -judgment debtor.jpgIn Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, Relentless sued Airborne concerning purchase of a French military jet that was not certified for flight. Relentless won a money judgment for damages of one dollar ($1.00), plus was awarded attorney fees of over $174,000 and costs of over $6,000. Airborne limited partnership was a deadbeat, with no assets, so Relentless could not collect its judgment. Relentless the sought to add the husband and wife team behind Airborne, plus their two corporations, as judgment debtors.

The court first reviewed the law concerning adding additional judgment debtors. The theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. The three-part test requires the judgment holder show:

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Letters of Intent are often ambiguous documents in which parties set out certain key terms of a deal, usually with the intent there will be further negotiation and documentation. They may also be called a ‘term sheet’ or “memorandum of understanding,” and are used extensively in California real estate transactions and Leases as well as in business contracts. The parties usually do not intend this document to be enforceable in court – rather, it is intended to guide further discussions and execution of a formal agreement or approval of a third party. A party entering such a letter should consult with a Sacramento business attorney for guidance in drafting it. However, as open ended as the parties may make them, occasionally they are surprised when a court finds such a letter creates enforceable obligations between the parties. It all depends on the court’s view of the intentions and expectation of the parties. Among the issues considered are whether the parties agreed to the material terms, or left some for later agreement, making it an agreement to agree, and whether the parties intended not to be bound until preparation of a more formal agreement. The two decisions discussed below establish two important rules:

A. A Letter of Intent may be enforceable even if you plan to enter a formal contract. If the material terms of the deal are there, as well as intent, the Letter is enforceable; and,

B. A Letter of Intent may create a duty of the parties to negotiate in good faith, and failure to do so can result in damages.

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Standard in most form real estate contracts are provisions for liquidated damages. Not so common is the non-refundable deposit. A “liquidated damages” provision stipulates an estimate of what the damages would be in the event of a breach of a contract. It is generally valid, unless it can be shown that it was unreasonable under the circumstances at the time the contract was entered. A non – refundable deposit is generally not valid in a falling market. But there is an alternative!

nonrefundable deposit.jpgIn Bradford Kuish v. William W. Smith, Jr. There was a purchase contact for plaintiff to buy defendant’s Laguna Beach house for $14 million dollars. The contract required a non-refundable deposit, initially of $800,000; after some amendments to the escrow instructions, the deposit was reduced to $620,000, which was paid by the buyer. The parties extended the escrow a couple of times. Finally the buyer asked that the escrow be cancelled; the seller agreed. They then turned to a backup up offer to sell the property for $15 million, one million more than the plaintiff would have paid. The seller refused to refund the buyer’s $620,000 deposit, claiming that it was “non-refundable.” The buyer sued to recover the deposit.

The court started with Civil Code 3307:

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California generally goes by the American Rule for attorney fees- the parties are generally responsible for their own fees. In situations involving written contracts, however, they parties may provide for payment of attorney fees in the event on a dispute. I have written before regarding attorney provisions in:

—actions on commercial lease deposits;

–the CAR (California Association of Realtors) form & a failure to mediate; and —Promissory Notes and the breach of the implied covenant of good faith and fair dealing.

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Promissory estoppel is a legal argument and cause of action raised when one party makes a promise for which they do not receive any compensation, which the other party relies on in changing their position, such as a promise to modify a mortgage loan. If the promissor had received some consideration, for example ten dollars, then there may be an enforceable contract. However, the promissor in our situation gets nothing in return, but the promise is still enforceable. Sacramento and Yolo business and real estate attorneys argue promissory estoppel as a consideration substitute used when it is required to prevent injustice.

The elements required to show promissory estoppel are (1) a promise, (2) the promisor should reasonably expect the promise to induce action or forbearance on the part of the promisee or a third person, (3) the promise induces action or forbearance by the promisee or a third person (which we refer to as detrimental reliance), and (4) injustice can be avoided only by enforcement of the promise. In a recent California state court decision, lender to a buyer promises involving a trial plan agreement resulted in the court allowing the promissory estoppel claim to proceed.

Sacramento real estate attorney mortgage.jpgIn West v. JPMorgan Chase Bank N.A., West was in default on her Washington Mutual loan. In 2009 Washington Mutual told her that she had approved for a trial plan agreement. The approval letter stated: The approval letter stated: “Since you have told us you’re committed to pursuing a stay-in-home option, you have been approved for a Trial Plan Agreement. If you comply with all the terms of this Agreement, we’ll consider a permanent workout solution for your loan once the Trial Plan has been completed.” West made the required trial payments and Chase (which by now had taken over WAMU) confirmed that it had received her request for a permanent loan modification. Chase then denied the loan modification. They said they would provide her with the net present value calculations; she requested them, and said asked for a recalculation using updated information. Chase never provided the calculations. In a conference Chase allegedly promised West that she could resubmit her updated financial data, and that there was no foreclosure sale scheduled. Suddenly the property was sold at a trustee sale.

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California usury laws restrict charging of interest greater than that allowed under the law. The legislature sees fit to determine what the maximum amount of interest that may be charged for a loan. There are a number of exceptions and considerations to the law. One important exception, provided in the California Constitution, is for “any loans made or arranged by any person licensed as a real estate broker by the State of California and secured in whole or in part by liens on real property.” Determining if a transaction may be usurious and parties may want to consult a Sacramento and El Dorado real estate attorney to be sure whether their deal fits. In decision last week by the Third District Court of Appeal, a disappointed borrower got the bad news that his lender could charge what he wanted. The lender was a corporation; its sole shareholder was a broker, who arranged the usurious loan. The broker did not get a commission, but expecting profits from the corporation was enough to find that he expected to receive compensation.

usury sacramento real estate attorney.jpgThe case is Gregory W. Bock v. California Capital Loans, Inc. Bock, trustee of a trust, needed a loan, and he was put in contact with California Capital. Leo was the sole owner of California Capital, and was also a licensed real estate broker. They made the deal, and Bock borrowed $1.2 million dollars at 15% interest, secured by a deed of trust on real property. Leo did not receive a commission on the loan. There was a default, and California Capital Loans Inc. foreclosed, taking back the property at a trustee’s sale in 2010. Bock sued, claiming, among other things, that the loan was usurious, and therefore the trustee’s sale was void.

The applicable provisions of the California Constitution are implemented by Civil Code section 1916.1. What the code provides in this case is that, for the exception to apply, two things must happen: first is that the broker acts for another or others, not for himself. Secondly, he must receive or expect to receive compensation.

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I have written several times about the finality of Arbitration decisions, and haw they cannot be overturned even if the Arbitrator did not follow the law, or ignored the facts. Also discussed here has been the plight of the unlicensed contractor, and how he is not entitled to be paid, and has the give the money back, no matter how much work he did or how much he spent on the project. In both cases, parties should be sure to understand their situation, and may want to consult with a Sacramento and Yolo real estate and construction attorney. Both issues came together recently in a case were the arbitrator did not require the unlicensed contractor to disgorge his compensation. The court said the Arbitration Award was invalid.

arbitration award sacramento attorney.jpgIn Mouris Ahdout v. Majid Hekmatjah et.al., A Family Limited Partnership and Braum were the sole members and owners of a LLC. They formed the LLC to develop and sell a condominium project on property the had owned. The LLC Operating Agreement specified that the LLC would enter an agreement with BIDI (Braum Investment & Development, Inc.), general contractor, to execute contracts and purchase orders to develop the project. Braum, member of the LLC, owned BIDI. Braum was also designated the manager of the LLC. BIDI did not have a Class B Contractor’s License, required under California law to build a commercial building.

The LLC operating agreement also said that BIDI was not to get any fees for acting as general contractor. However, the profit-sharing allocations under the Operating Agreement gave Braum an additional 25 percent allocation, so BIDI was actually getting paid for acting as general contractor.

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California Courts sometimes reserve jurisdiction over parties or an action after the case has gone to final judgment, for various reasons. Jurisdiction is generally the power to hear and determine the claims of the parties. Some examples of court’s holding on to jurisdiction are to to enforce settlement in an action at the request of parties; or to determine the distribution of a fund of money deposited in court; and to make such other and further orders and decrees as might be deemed proper to carry out the judgment. In fact, there is a specific procedure to have the court reserve jurisdiction to enforce a settlement agreement. Where parties reach a settlement agreement that requires one or both parties to perform some acts that will not be complete within 45 days, they can file a “Notice of Conditional Settlement” per Rules of Court Rule 3.1385. In the Notice, they give the Court a date certain that the suit will be dismissed. Until then, the case becomes inactive, and off the court calendar, but still the court has jurisdiction to enforce the terms of the settlement agreement until the dismissal date.

sacramento real estate attorney option.jpgHowever, there is a limit to how long the court may keep jurisdiction over the parties. In Stump’s Market, Inc., v. Plaza De Santa Fe Limited, LLC, Stumps had rented space for a grocery store in a shopping center from Plaza. The relationship had lasted several years. They negotiated a modification granting Stump five additional five-year options. The rent included a calculation of the percentage of sales (percentage rent). There was some water damage in the parking garage below Stumps grocery store. Plaza said it was caused by condensation from Stump’s freezer. Stump disagreed, claiming that it was due to a leak that Stump had informed Plaza about.

They did not agree on what caused the damage, but they agreed that Stump would go ahead and repair the damage. They apparently did not agree (at least in writing) if, and how, they would split the cost. They got into a dispute as to paying for the repairs, calculating percentage rent, and Stump’s exercise of the next option. The lawsuit ensued.

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California real estate transactions usually have provisions requiring that the parties arbitrate any dispute, rather than file a lawsuit. Sometimes they file suit anyway, and an opponent in the real estate contract dispute makes a motion to the court to order the parties to arbitrate, rather than litigate. The Code of Civil Procedure (1281.2) generally requires the court to order arbitration if there is a binding agreement to do so. However, there is an exception when:

“A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.”

sacramento real estate arbitration.jpgQuestions of conflicting rulings are occasionally seen by Sacramento & Yolo real estate attorneys. Some defendants in a real estate lawsuit in Southern California were surprised recently when the court refused to compel arbitration. In Gohar Barsegian v. Kessler & Kessler, Barsegian was the buyer of a $3.7 million dollar property. A dispute arose, and the buyer sued her attorney and the seller. In a switch from the usual facts, The buyer’s contact with the attorney contained an arbitration provision; the seller was not a party to that agreement. Apparently there was not such a provision in the real estate contract. The complaint claimed that the seller recommended the attorney to the buyer, and that the seller and attorney had a longstanding relationship, and the attorney was secretly representing the seller as well as the buyer.

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The business judgment rule is a policy under California law which protects directors of corporations in certain circumstances. It contains two parts. The first part is statutory, which protects directors from personal liability if they act, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

The conditions are that-

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:

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