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“Equitable subordination” is used to correct equitable wrongs in the priority of liens on real property. If fairness requires, a first lien or deed of trust can be subordinated, or reduced in priority below, a second lien, swapping their positions. (Civ. Code, §§ 2876, 2903, 2904. A lengthy description by the Supreme Court is copied below). When, through fraud or mistake, a party finds that his lien does not have the priority he bargained for, they should consult with a Sacramento real estate attorney to discuss equitable subordination. Such a lawsuit may result in the judge reclassifying the respective liens to make them fair. In a recent decision the court granted equitable subordination on behalf of two deeds of trust where there was both broker fraud (in forging signatures) and escrow negligence in failing to carry out instructions and reconvey a deed of trust.

Sacramento equitable subordination of loan.jpgIn Elbert Branscomb v. JPMorgan Chase Bank N.A., Navjot owned property on Canal Street in San Rafael. He had three loans; 1st, from Washington Mutual Bank; 2nd with MMB; and 3rd, a $500,000 loan from plaintiff Branscomb. All were secured by deeds of trust. However, Banscomb’s 3rd DOT only indicated that I the loan was for $100,000, due to the broker’s negligence. Navjot refinanced with WaMu, and Modified the MMU loan. Conditions of both were that the lenders were to keep their respective first & second positions. When the escrow officer asked Branscomb’s broker for a payoff of the third, he replied that it was zero, and signed a request for reconveyance. (Yikes, it was $500,000! This broker was bad news. He was also found to have forged his client’s signature on a number of documents. He had done this before, but Branscomb continued to work with him. They deserved each other.) Compounding the broker’s error, the escrow officer was negligent in not reconveying the Third deed of trust. When the first & second refinances recorded, Branscomb moved to 1st, and the other two dropped to 2nd & 3rd. This lawsuit for equitable subordination resulted.

Knowledge of the Plaintiff’s Lien Did Not Prevent Subordination

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Parties can provide in their contracts that any dispute be resolved by “general reference.” A general reference directs a referee to try all issues in the action. The hearing is conducted under the rules of evidence applicable to judicial proceedings. In a general reference, the referee prepares a statement of decision that stands as the decision of the court and is reviewable as if the court had rendered it. This results in a trial by a referee and not by a court or jury. “Judicial reference,” on the other hand, differs in that in that it involves sending a pending trial court action to a referee for hearing, determination and a report back to the court. The BIG DIFFERENCE between reference and arbitration is that a judgment obtained by reference can be appealed, but an arbitrator’s may not be appealed, regardless of how flawed it is. Sacramento real estate and business attorneys know that all the CAR forms have arbitration provisions, which are usually initialed by the parties without truly understanding them. I have railed before about how arbitrators are not held accountable for erroneous rulings.

The general referee’s statement of decision “stands as the decision of the court,” and once the statement of decision is final and filed by the referee, judgment must be entered thereon “in the same manner as if the action had been tried by the court.” After judgment is entered, the losing party may make post-trial motions for a new trial, and/or to vacate the judgment. The judgment entered on the general referee’s statement of decision may be appealed like any other judgment.

SACRAMENTO CONTRACT DISPUTE ATTORNEY.jpgIn a recent decision the court enforced a general reference provision that did not include an explicit waiver of a jury trial. In O’Donoghue v. Superior Court (Performing Arts LLC), a developer obtained a $20 million dollar construction loan for condos at 973 Market Street in San Francisco. Several individuals signed personal guarantees for the loan; the guaranty instrument had a general reference provision. Default occurred, a lawsuit filed, and the court enforced the reference, appointing a referee. The reference provision did not include a jury waiver; the guarantors appealed.

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I recently described a decision that overruled the rule that a borrower may not make a claim for fraud based on the other party misrepresenting what the contract will say (The Pendergrass Rule). In the past borrowers who claimed that their mortgage broker or lender made promises about their loan that were not true. Where these promises are in direct conflict with the terms of the written agreement, the parole evidence rule as described in Pendergrass prohibited allowing evidence of these statements in court. The California Supreme Court decision in Riverisland concluded that evidence of the false promises may be admitted as evidence of fraud. Another decision went a little farther in clarifying the new rule, finding that even sophisticated parties who engaged in extensive negotiations were not subject to the Pendergrass rule, and evidence of fraudulent statements could be admitted.

sacramento real estate contract fraud attorney.jpgIn Julius Castle Restaurant Inc. V. Payne, the parties entered a lease agreement, as well as purchase of the fixtures, of a restaurant in San Francisco. The lease agreement stated:

“Tenant acknowledges that as of the date of this Lease, Tenant has inspected the Premises and all improvements on the Premises and that the Premises and improvements are in good order, repair, and condition… This instrument constitutes the sole agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to Tenant, and the specified lease term, and correctly sets forth the obligations of Landlord and Tenant. Any agreement or representations respecting the Premises or their leasing by Landlord to Tenant not expressly set forth in this instrument are void.”

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A Deed of Trust in California can be used to secure contract obligations other payment of money. Usually, the primary obligation secured is the repayment of the loan. There are ancillary duties usually set out in the deed of trust, such as keeping the property in good repair, maintaining insurance, etc. However, in some cases the other obligations may be a primary secured obligation. Enforcement, by judicial foreclosure or nonjudicial trustee’s sale, essentially provides a dollars remedy through a foreclosure sale. Thus, the obligation being secured must be capable of liquidation (i.e. determining a specific monetary value) before enforcement. The contract may include a liquidated damages provision, which specifies how to calculate that monetary value. Whether a liquidated damages clause is enforceable is not always clear, and interested parties may want to consult with a Sacramento real estate and business attorney for clarification. Otherwise, without liquidated damages, determining the amount of damages would likely require a judicial foreclosure, in which monetary damages will be determined.

yolo and sacramento real estate attorney.jpgA dilemma arises when the property owner pays off the loan, but has not yet completed full performance of other obligations secured by the deed of trust. Usually, on paying off the loan, the borrower wants the lender to record a reconveyance of the deed of trust, effectively removing the ‘lien’ from the record. However, courts have found that reconveyance was not required. Such was the case in Dieckmeyer v. Redevelopment Agency of the City of Huntington Beach, where the plaintiff bought a condo through an affordable housing program. The program included restrictions on household incomes, and on future buyers. The deed of trust securing the purchase loan stated that it secured repayment of the note, future advances or obligations of the borrower, and…

“[p]erformance of each and every obligation, covenant, promise or agreement of Trustor contained herein in the Loan Agreement between Beneficiary and Trustor … and in that certain Affordable Housing Agreement [the CC & R’s] currently recorded on the property….”

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According to the California Legislature, the vast majority of joint tenancies in California are used as a will substitute among family members. In a joint tenancy, the survivor among the title holders “inherits” the property. This is different from holding the property as tenants in common, in which case each party owns a percentage interest in the property; if one passes, their percentage would go to the deceased person’s heirs. Real estate lawyers are reluctant to suggest joint tenancy because of the risks involved (though escrow officers suggest it). A joint tenancy requires a great amount of trust in the co-parties, because any joint tenant may sever the joint tenancy at any time by recording a deed. Thus, John Doe, joint tenant, could deed his interest to himself as John Doe, tenant in common, at any time, and the other owners of the property would never know. The result would be that the parties are no longer joint tenants, but are now tenants in common. Sacramento real estate attorneys commonly see this happen with estranged couples who bought property as joint tenants. One unexpected result of this problem surprised two Marin County brothers in a recent court case, when one brother deeded his interest to himself as tenant in common. This triggered reassessment, and they got hit with a huge tax bill.

Sacramento joint tenant attorney.jpgIn Benson v. Marin County Assessment Appeals Board, Mom was joint tenant with good son. After mom died, good son owned the property outright. He put his ungrateful brother on title as joint tenants. Ten years later Ungrateful severed the joint tenancy by recording a grant deed in which he granted to himself his interest as a tenant in common. The County Assessor felt this triggered the reassessment provisions, the assessed value of the house went up, and the property tax increased an additional $2,683 per year. Ungrateful brought this lawsuit claiming that severing the joint tenancy did not constitute a change in ownership for reassessment purposes, but was merely a change in the way title was held..

El Dorado deed attorney.jpgUnder Proposition 13 real property tax is based on “full cash value,” meaning “the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. Generally, any sale or transfer of property results in a change of ownership.
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A landlord or lessor does not have any possessory interest in the property during the term of the lease. That is the nature of a lease – the owner transfers the right to possession to the lessee. But what if, during the lease term, a third party trespasses on the property, in a way that may create a prescriptive easement?

Under California real estate law a prescriptive easement requires the trespasser showing that they have used the property “for the statutory period of five years, which use has been (1) open and notorious; (2) continuous and uninterrupted; (3) hostile to the true owner; and (4) under claim of right.” In this situation, the issue is the five year period. Real estate attorneys advise owners that the way a property owner cuts off a possible prescriptive easement is by filing a suit for trespass or ejectment. But an action for trespass is designed to protect possessory –not necessarily ownership–interests in land from unlawful interference. As the landlord does not have a right to possession during the lease term, he may not bring an action for trespass.

El Dorado trespass lawyer.jpgThis was the problem presented in a recent decision, where the court found that numerous lease terms ended of the course of the prescriptive period; in one instance the property did not have a tenant for over a year. If the owner never had a possessory right during the prescription period, he had a defense to the prescriptive easement claim. However, in this case, the lessor / owner did not have a tenant the entire period, so the court concluded it should have taken action to prevent the trespassing use. Parties in such situtations may want to consult an experienced Sacramento and El Dorado real estate attorney.

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The Marketable Record Title Act (MRTA, Civil Code section 882.02+) was enacted so that ‘ancient mortgages’ would not last forever. Prior to the act, lost or forgotten mortgages and deeds of trust would continue to be a cloud on title. The MRTA became law in 1982 to put an outside limit on the number of years that the power of sale in a deed of trust may be executed. The MRTA provides that if the “evidence of indebtedness” recorded with the county recorder contains a reference to the maturity date of the secured debt, the right to foreclose by private trustee’s sale will expire 10 years after maturity. If no date of maturity is provided, the limit is 60 years after recordation of the deed of trust. The trustee’s deed must be recorded before the time is up. The limit to conduct a judicial foreclosure, however, is much different. Civil Code section 2911 provides that a lien is extinguished by the lapse of time within which, under the provisions of the Code of Civil Procedure, an action can be brought upon the principal obligation. Generally, this means four years after maturity or breach of a written note.

marketable title attorney.jpgThe beneficiary can extend the time by recording a “notice of intent to preserve interests” prior to the expiration of the prescribed time period. If this notice is timely recorded, the period is extended until 10 years after the notice is recorded. Civil Code section 880.310(a), 880.020(a)(3). If one has a concern about the limitations of their deed of trust, they should consult a Sacramento and Yolo county real estate attorney.

Prior to a 2006 amendment, the statute required the maturity date be “ascertainable from the record…”. This resulted in an issue which had been raised several times, and courts have had varying opinions about, namely, what happens if a Notice of Default is recorded? One decision found that this triggered the 10 year statute. Another court has said it did not. A third decision, from the Third District Court of Appeal (which includes the greater Sacramento area), found that it did not trigger the 10 year statute. The statute was amended in 2006 to resolve this issue, essentially providing that a Notice of Default does NOT trigger the limit. The discussion which follows concerns the 3rd District decision, and why interpreting the older language to allow the NOD to trigger the limit would be preposterous.

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When California real estate is bought or sold, there is always a period of time between signing the purchase and sale contract, and when the title is transferred. With commercial properties the period could last for months, as the buyer completes their due diligence. But what happens if the building burns down in the interim? Does the buyer still pay full price? Is the contract cancelled? When it comes to allocation of this risk, The more detailed the sale contract, the better. Residential purchase agreements rarely provide for this issue, and rely on the California Civil Code. Commercial Sale agreements often contain provisions that covers the topic, and some in great detail. parties concerned about this issue should consult with a Sacramento and El Dorado real estate attorney to ensure that they are protected, as there are can be some surprises for both buyers and sellers.

Sacramento real estate catastrophe.jpgThe Civil Code

California Civil Code §1662 (the Uniform Vendor and Purchaser Risk Act, or “UVPA”) provides that in sale contracts;

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When a debtor files bankruptcy, an “automatic stay” arises by operation of law which prohibits all actions by creditors to collect, such as foreclosure, repossession, or lawsuit against property of the bankruptcy estate, the debtor, and the debtor’s property (11 U.S.C. (the Bankruptcy Code) §362). Real Estate attorneys frequently see a filing intended to thwart actions against the property, such as foreclosure. Operating like a “blanket injunction,” the stay continues until a court order lifting the stay has been entered or the stay has expired. Actions taken in violation of the stay are void.

Property ceases to be property of the estate if it is sold or abandoned. The trustee may abandon property if it is burdensome or of inconsequential value. (§554) Unless the judge orders otherwise, the property is abandoned back to the debtor. Often, the debtor is behind on their mortgage and the lender, wanting to foreclose, consults a real estate attorney. A recent decision in the 9th Circuit BAP points out just what that means- as property of the debtor, it is still protected by an automatic stay, and a foreclosure is void. The lender should have made sure that the abandonment order included lifting the stay so it could proceed with the sale, or otherwise sought relief from stay..

relief from stay sacramento.jpgIn re Gasprom, Inc. involved abandonment of a gas station in Oxnard, the principal asset of the debtor. The gas station was subject to a deed of trust securing a debt of over $1 million dollars. The trustee brought a motion to abandon the property. Gasprom objected (to prevent its creditors from exercising their state law rights and remedies, bu the court approved the abandonment. The Abandonment order was silent as to the automatic stay, and the secured creditor held a trustee’s sale later that day. Sixteen days later the case was closed. The trustee’s sale was in violation of the automatic stay -if they waited another 16 days, they would have been in the clear.

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California commercial tenants sometimes need to sublease their premises, or assign the lease. Without fail, they remain liable to the property owner for the lease, in the event that the subtenant does not perform. Breach of the lease does not automatically terminate it – the owner must exercise its right to terminate the lease. But what happens if the sublessor files for bankruptcy protection? In bankruptcy the bankrupt sublessor has 60 days to “assume” the lease. (Bankruptcy Code section 365(d)(4). In the 9th circuit Federal Court (covering California), if the lease is not assumed, the bankrupt owner’s right to possession under the lease ends. (In re Lovett 757 F.2d 1035) The master lease no longer exists, extinguishing all subordinate rights, such as a Sublease. Suddenly, the sub-tenant no longer has a lease, and is out in the cold. The California Court of appeal decision discussed below adopts this rule. Parties considering a sublease may want to consult with a Sacramento real estate attorney. A solution to the disappearing sublease may be, at the time of entering the sublease, for the subtenant to enter a non-disturbance agreement or option to enter a new lease with the property owner.

sacramento sublease attorney.jpgIn 366-386 Street LP v. Superior Court (Monro), Paem was the assignee of the lease for Rosebud’s English Pub on Geary in San Francisco. In the assignment transaction, Paem gave to the assignor a note and deed of trust, secured by the business. Paem filed Chapter 11. The bankruptcy court rejected the lease, and thus the debtor (and trustee) no longer had any right, title, or interest in the lease. This extinguished the assignor’s security interest in the lease.

The Assignor then filed a state court action, seeking relief from forfeiture of its security interest under Code of Civil Procedure section 1179. This section provides that The court may relieve a tenant against a forfeiture of a lease whether or not the tenancy has terminated, and restore him or her to his or her former estate or tenancy, in case of hardship, as provided in Section 1174.

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