Articles Posted in Business

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In February I published a blog about a California court that would not take judicial notice of a document on a Federal Agency website. It dealt with the FDIC sale of Washington Mutual mortgage loan accounts to JP Morgan Chase. JPMorgan was conveyed all the assets, but none of the liabilities. That means that JPMorgan could foreclose, but the borrower could not make any claims against JP Morgan that they had against WaMu. In a recent court decision, a different court did take judicial notice of that same document on the website. The difference was due both the difference in the courts’ approaches, plus the borrowers’ attorneys’ arguments. A borrower or lender with questions about the different approaches should contact an experienced Sacramento real estate and business attorney, to be sure they do not get the same surprise.

sacramento real estate attorney judicial notice .jpg “Judicial notice” is the court’s recognition of the existence of a matter of law or fact without the necessity of formal proof. It can be described as a substitute for (formal) proof, a judicial shortcut, doing away with the formal necessity for evidence. Judicial notice is limited to matters which are indisputably true. A request for judicial notice can be defeated by showing the matter is reasonably subject to dispute. In California state court, Judicial Notice is limited by the evidence code, indicating matters which the court must take notice of, and matters which the court may take notice of. Federal Courts have a broader discretion as to what they may take judicial notice of.

In Michael D. Scott v. JPMorgan Chase Bank (2013 WL 1098436), the borrower had a $975,000 construction loan. Washington Mutual acquired the loan, was taken over by the FDIC, and JPMorgan acquired the loan, and foreclosed. Scott filed suit, making several claims against JPMorgan. JP Morgan claimed that it had not acquired WaMu’s liabilities along with the assets, and sought judicial notice of the Purchase and Assumption Agreement, as posted on the FDIC web site.

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Generally, in California to prove a claim for fraud and deceit based on concealment, the plaintiff must prove five elements:

(1) the defendant must have concealed or suppressed a material fact,

(2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff,

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An acceleration clause in a loan document or promissory note is a provision that requires the entire amount of the unpaid principal and interest to become due when the specified event occurs. There are two kinds. First, in a typical Promissory Note, the entire amount may become due in the event of default in payment of an installment, or any other violation of the terms of the loan documents. The other kind, typical in mortgages and real estate loans, may require the entire balance to become due on sale of the property that is security for the debt. Parties with concerns about an acceleration clause should consult with a Sacramento business or real estate attorney to understand how it applies in their own circumstances. It was the first type of acceleration clause that was the subject of a recent decision, in which a lender was surprised that his acceleration clause (and the higher rate of interest it included), could not be invoked.

sacramento business attorney acceleration.jpgIn JCC Development v. Hyman Levy, Levy was a ‘philanthropist’ who was negotiating with JCC to purchase and operate a Jewish Community Center. He deposited $2.7 million into escrow. The negotiations took longer than expected, so the parties agreed that the $2.7 million would be converted to a loan to JCC, secured by a mortgage on the property. The promissory note provided for interest at the rate of 5%. The acceleration clause provided that, on acceleration, interest would increase to the legal maximum. It stated:

“If: (I) Maker shall default in the payment of any interest, principal, or any other sums due hereunder, or (ii) Maker shall default on performance of any of the covenants, agreements, terms or provisions of the deed of trust securing this Note… then, at Lender’s option, all sums owing hereunder shall, at once, become immediately due and payable. Thereafter, interest shall accrue at the maximum legal rate permitted to be charged by non-exempt lenders under the usury laws of the State of California.”

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I had written last week about the right of first refusal common in partnership agreements, and how it may affect the sale of a majority interest in the Sacramento Kings to a Seattle Group. If you are involved in a partnership agreement contemplating a sale of an interest, you should consult with an experienced Sacramento business attorney.

Sacramento business lawyer right of first refusal.jpgThe NBC sports blog ProBasketballTalk has published what it believes is language from the Kings governing partnership agreement. It is as follows:

Section 7.3. Right of First Opportunity.
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A popular topic in Sacramento now is this possibility that the Kings may be bought by a Seattle ownership group, and moved to Seattle. The method this would be accomplished is by the Maloof family selling their majority interest in the Kings partnership to the new group- the minority partners would be stuck with a new majority partner. However, there are multiple investors in Northern California who are expressing an interest in presenting an offer that could result in the Kings remaining in Sacramento. Experienced Sacramento business attorneys know that the Kings limited partnership agreement may give them the opportunity to match the Seattle group’s offer, and possibly for less cash.

Sacramento business attorney 2.jpgPartnership agreements generally have a right of first refusal, which provides that if a partner wishes to sell their interest, and receive a bona- fide offer from a third party, the other partners have the opportunity to match the offer, in which case they would win out over the stranger. When the selling partner accepts an offer, the remaining partners have essentially an option; they can force the sale to them by matching the offer. The idea is partners want to have a say in who their partners will be, and would prefer not to have a stranger step in. They are required to match the offer, however, to be fair to the selling partner. We do not know what this partnership agreement states, but news reports have indicated it has a right of first refusal.

Generally speaking, the offer must be matched perfectly- the existing partners may not vary the terms at all. However, strict adherence to this rule gives the selling partners and third party accomplice the ability to structure an offer in a way that the others could never match. It could provide a security a parcel owned by the third party (the existing partners cannot provide as security a parcel they do not own), or they could name as consideration a valuable race horse which the existing parties could not own. In this case, strict enforcement of the perfect match rule would make the right of first refusal illusory. In such a case, the seller is bound by the standard of a reasonable person and must accept the third partner’s offer if it is the economic equivalent of the offer by the third party. In a recent decision on this subject, the Court concluded that the un-matching offer paid the seller the same net price, and that was good enough. And there’s the rub.

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In California contracts sometimes a party is obligated to use “best efforts” to accomplish a goal of the contract. For example, a contract to buy real estate may be subject to a condition to obtain financing. In such a case, the implied covenant of good faith requires the buyer to exert their best efforts to satisfy the condition. Or, the actual requirement may be in the contract, such as for a holder of water rights to use “best efforts” to maintain the level of water in a reservoir. California courts have never defined best efforts, but look to the specific facts of each case to determine if best efforts were actually made. A party with such an issue is well advised to consult with a Sacramento or Placer real estate and business attorney to determine how far their efforts must extend. A property owner’s associations in Modoc County recently was disappointed that a best efforts provision did not make the other party a fiduciary.

sacramento real estate attorney best efforts.jpgIn California Pines Property Owners Association v. Pedotti, the association owned the land in where the reservoir was, and it had lake-side houses. Pedotti owned a 1700 acre cattle ranch. Both parties had rights to water that enters the reservoir. Pedotti used the water to irrigate his ranch, and the association wanted to keep enough water in the reservoir to maintain its aesthetic value. Pedotti’s water rights required him to use “best efforts” to maintain a full reservoir. The association did not appreciate the low water levels in 2006 through 2008, and sued. It claimed that best efforts means the efforts required of a fiduciary. The court disagreed.

Pedotti had the local Cooperative Extension farm advisor testify as an expert that his flood irrigation technique was typical for ranches in Modoc county, and to change to an enclosed pipe system would cost over a half million dollars. In 2006 through 2008 Pedotti took less water than he was entitled to, and supplemented it from another source.

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“Unclean hands” is a defense used in courts, in which a party claims the other side in not able to obtain relief because he comes to court with unclean hands- he has acted in bad faith or unethically. [Technorati J64A92HRG74M] The rule is sometimes stated “those seeking equity must do equity” or “equity must come with clean hands”. It is a defense to equitable remedies- remedies that are other than the payment of money. Anyone with knowledge of a forged deed should consult with an experienced Sacramento and Placer real estate lawyer. In a recent California 3rd District Court of Appeal decision, it was used against a party who was not following the advice of his attorney when he tried to set aside a forged deed.

forged deed.jpg In Estates of Augustus Collins and Elijah Flowers v. Darcy, there were several characters with unclean hands. Collins and Flowers, who jointly owned their residence, had passed away. Elijah’s son Joseph forged their signatures on a deed granting the property to McIntyre. Andre, another son and Joseph’s half brother, then proceeded to seize control of the house, as follows:

1st- he recorded a mechanic’s lien for $75,000, though he was neither a contractor nor gave notice of the lien, making it defective;

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California construction and contractor law is pretty clear – you have to have a contractor’s license to get paid. If you don’t have a license and the owner does not pay, the courts will not help. The intent of the Contractor’s State License Law is to prohibit unlicensed contractors from being paid, thus discouraging those who have failed to comply with the law from providing unlicensed services for pay, protecting the public from incompetence and dishonesty. In the case of an entity, such as a corporation, it is the entity itself which is licensed. In a recent decision in San Francisco, the court went out of its way rescued one contractor that couldn’t decide if it was a limited partnership or a general partnership. Obviously this contractor had not consulted an experienced Sacramento and Bay Area business attorney.

unlicensed contractor.JPGIn Montgomery Sansome LP v Rezai, the building owner Rezai hired “Montgomery Sansome Ltd. Lp.” (That’s what the contract said.) After doing some work on their apartment building, Rezai fired the contractor. The contractor, calling itself “Montgomery Sansome Lp” (no “Ltd”) sued for $203,000. The owner said they were neither a party to the contract, nor a licensed contractor. Here is the crazy history of this contractor, in chronological order:

1. Montgomery Sansome LP filed a certificate of limited partnership.

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Inevitably, a property or business owner has a problem when someone injures themself at their premises. The ordinary slip and fall involves a dangerous condition which causes someone to fall and hurt themselves. Usually, the property owner must have actual or constructive knowledge of the dangerous condition before they can be held liable for the injury. Sacramento business and real estate attorneys advise their clients that “Constructive knowledge” is what the prudent property owner should have known. The owner may not have knowledge of everything about the property, but a Sacramento business owner was recently surprised by a dangerous condition that may have been created by an employee.

property owner liability.jpgIn Getchell v Rogers Jewelry, the plaintiff was a jewelry repairman who worked as an independent contractor at the defendant jewelry store in Arden Fair Mall. (This made the repairman a “business invitee” as opposed to an employee or customer). He was in the break room of the store (for employees and business invitees only) and slipped and fell when he stepped on a puddle of jewelry cleaning solution. The solution was kept in a five gallon bucket. There was no evidence that the bucket leaked. The only people with access to the cleaning solution and who could or would have used it were the store’s employees. The defendant business and its employees had exclusive control over the break room and the bucket of solution.

premises liability.jpgThe trial court ruled on summary judgment for the defendant jewelry store, finding that the plaintiff had established that the store owner had actual or constructive notice of a dangerous condition. The court of appeals disagreed. It noted that this was not a ordinary slip and fall- the answer turns on whether the dangerous condition was created by the negligence of an employee of the store. Such cases are governed by the doctrine of respondeat superior- the employer answers for the actions of employees, and is presumed to have notice of what the employees know. Here, the evidence shows that a reasonable inference can be drawn that the condition was created by employees of the defendant, and that the defendant is then held to know what the employee knows about the dangerous condition. If the employee was acting within the scope of their employment (doing their job) the owner cannot claim that he had no notice of the dangerous condition.

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California law provides that a contractor or supplier of materials who furnishes labor or materials for construction on real property may record a notice of lien (known as a mechanic’s lien) against the property. (Civil Code 3115) If the contractor is not paid, they then have 90 days from recording to file a lawsuit to foreclose the lien. This gives the contractor a much stronger position than having a mere breach of contract claim, because the lien clouds title, and the owner could actually lose the property. Mechanic’s liens are commonly recorded when there is a problem with payment, as the contractor’s rights can be cut off by passing time. In a recent decision an owner who thought bankruptcy would protect him from enforcement of the lien got a surprise, as the court reviewed the mechanics of mechanics liens in bankruptcy.

mechanic's lien.jpg In Pioneer Construction, Inc. v. Global Investment Corp. (Probably not affiliated with Massive Dynamic Corp.) Pioneer did work on 19 lots owned by Global and recorded a mechanic’s lien for $2.4 million. Global filed bankruptcy, and Pioneer recorded a 2nd lien for $2.6 million. Pioneer then filed a “Notice of Perfection of Security Interest” in the bankruptcy.

The lender on the subject real estate got relief from stay (permission from the bankruptcy court to proceed) and foreclosed on the property, which was sold at a trustee’s sale. Once sold, the property was no longer part of the bankruptcy estate, so Pioneer was not prevented by the automatic stay (11USC 362) from filing suit to foreclose its lien, which it did. The buyers at the foreclosure sale fought back.

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