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It is a general rule of California real estate law that the possessor of property, whether as owner (with a loan against the property), or tenant, not to commit waste. Waste is any act, omission, or neglect that materially reduces the market value of the property. When you take out a loan to buy property, the deed of trust requires that you do not commit waste, and provides that waste can be a default under the terms of the loan. An experienced Sacramento and El Dorado real estate attorney will advise that the reason is that the property secures the debt. Theoretically, the lender gave you an amount equal to or less than what the property is worth, and if you cause the property to become worth less than the loan, the lender is at risk. You seldom see this issue come up in real estate loans, but it did in a surprising way in a recent Sacramento decision.

real estate waste.jpg In Fait v. New Faze Development, Inc., a Sacramento developer purchased two lots containing a church and other small building in 2005. The plan was to redevelop it into a mixed use property. They evicted the tenants and demolished the property in 2006. The economy tanked and the developer defaulted, resulting in a foreclosure sale of the bare land. The lender then sued for bad faith waste and intentional impairment of security- demolishing the building reduced the value of the property, and thus what the lender got on the foreclosure sale.

The trial court threw out the bad faith waste claim, finding that there was no evidence of recklessness and intent to despoil the property. But the court of appeals reversed – evidence of recklessness and intent to despoil is not required, based on the 1975 California Supreme Court decision in Cornelison.

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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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It is common knowledge in California that real estate brokers have a duty to perform a reasonably diligent inspection and to disclose material findings with the prospective purchases. This applies to both seller and buyers agents. The Transfer Disclosure Statement (Civil § 1102.6) requires both the Seller & Buyer agents conduct a “reasonably competent and diligent inspection” and to disclose their finding. Section 2079 of the civil code specifies a broker’s duty to inspect. However, A two year statute of limitations applies to 2079, after which lawsuits cannot be pursued against the broker. However, in a recent decision in the Third District (Sacramento), a dual agent was surprised to learn the two year period applies only to the seller’s broker.

broker duty to inspect.jpg In William L. Lyon v. Sup. Ct., The Lyon brokerage was a dual agent, representing both the sellers and the buyers on sale of a residence in Rocklin, CA. The buyers signed a buyer-broker agreement which affirmed that, as a dual agent, the broker is obligated to disclose known facts affecting the value of the property. The buyers soon discovered construction defects and filed suit, alleging that the sellers know of water related problems and painted the house dark brown to cover them up. While the house was listed, rain caused the covered problems to reappear, so they painted over them again. The buyers sued, naming the seller and the brokers.

The broker argued that all their claims were barred by the two-year statute of limitations in 2079.4, applicable to the duty expressed in 2079. Importantly, the buyers sued Lyon as broker for the buyer; one half of the dual agency equation. The court pointed out that 2079 established a duty only for brokers representing the seller. That statute states that it applies-

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I wrote in March about the loan guaranties and how the guarantor can waive antideficiency protections. A recent decision out of Sacramento concerned a commercial loan where, because of the drop in property value, the lender did not bother to foreclose but went directly to the guarantor, and was successful.

Loan Guaranty.jpgIn Gray1 LLC v. Kolokotronis, in 2006 Kolokotronis was the Guarantor of a $17.7 million dollar loan to Sheldon Terrace LLC, a real estate project the Guarantor had set up. By 2008 the value of the real estate had crashed. The loan had a provision providing that if the value of the security was far less than the balance of the loan, it was a default and the lender could call the loan due. That happened here, and neither the borrower or the Guarantor cured the default or paid off the loan. So, the lender sued the Guarantor.

First, the guarantor argued that language in the guaranty describing debt “due or not due” suggests that the instrument was a demand note, not a guaranty. The court said no; in this context the phrase meant nothing more than part of the broad definition of the borrower’s obligations that the guarantor is guaranteeing. A guaranty relates to a future liability of the principal. Civil Code section 2814.

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The economic crisis and the subsequent foreclosures resulted in the California legislature enacting a number of laws to assist homeowners and tenants of houses in trouble. One such law, Civil Code section 2923.5, requires that the foreclosing party must first contact the borrower, assess their financial condition, and explore options for the borrower to avoid foreclosure. A California court recently ruled that borrower can allege failure to follow the requirement gives the borrower the right to make a claim in court.

foreclosure Civil 2923.5.jpgThe borrower in Skov v. U.S. Bank National Association borrowed $1.5 million in 2003, secured by her residential property in Saratoga. She stopped making payments, and a Notice of default was recorded in June 2009. (This is not the usual case, housing price inflation was not rampant in 2003) Skov filed suit; it is not clear from the opinion, but looks like suit was filed before the foreclosure sale (good move) and Skov probably got a preliminary injunction.

One of the plaintiff’s claims was that U.S. Bank did not follow the requirements of Civil Code section 2923.5. It was claimed that U. S. Bank never contacted Skov before recording the notice of default. She hired attorneys who telephoned and sent letters to U.S. Bank which were unanswered. U.S. Bank failed to evaluate her finances or explore options to avoid foreclosure. U.S. Bank did not contact her until a month after it recorded the Notice of default.

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California real estate purchase contracts often include mediation provisions. Such a provision provides that, in the event of a dispute, the parties either may, or must, attempt a mediated solution before extended litigation. If the provision requires that they must, there is a penalty for refusing to mediate. In a new decision from Calaveras County a party who thought they were able decline mediation under the provision turned out to be wrong.

mediation provision.jpgIn Cullen v. Corwin, the parties agreement , a standard form purchase agreement, provides for the prevailing party in any dispute to recover legal fees. However, this right is subject to a condition precedent that reads,

“If, for any dispute . . . to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after [the making of] a request . . ., then that party shall not be entitled to recover attorney[] fees . . . .”

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In my last post I discussed how a designed officer / broker, who places their real estate license with a corporation, is not liable to third parties for failing to supervise the corporations employees as required under the Business and Professions Code. Another argument used by experienced Sacramento and Yolo real estate litigation attorneys is to claim that the broker is liable under traditional agency law. In this case, however, something more is needed.

principal agent agency.jpgIn Sandler v Sanchez the plaintiff was trying to make the corporation’s designated officer – broker liable for misrepresentations of a salesman. The plaintiff also argued that the designated officer/broker could be held vicariously liable, under principal -agent law, for failure to supervise the salesman. Generally, a corporate employee acts on behalf of the corporation, and not its owner or officer. But here the plaintiff argued that, though the salesman was not the broker’s employee, he was his agent, and on that basis there could be liability. The plaintiff directed the court to federal court decisions (which the state court does not need to follow), saying that a right to directly control the salesman allows liability to third parties. However, the U.S. Supreme Court has held that aright to control, by itself, does not create a principal – agent relationship that would make the principal (here, the designated officer) vicariously liable for the salesman’s conduct. There need to be additional factors to create this liability.

The federal court case involved a designated officer/broker and the offending salesman. There was evidence in that decision that decision that the broker intended to turn the real estate business over to the salesman so the broker could pursue another career, and “it was agreed” that the broker would remain the designated officer/broker until the salesman got his own broker’s license. Although the broker understood that he remained personally responsible to supervise the real estate salespeople, he agreed to delegate that duty to the salesman so that the salesman could continue to run the corporation as a real estate brokerage. Also, the evidence established that the salesperson agreed to this arrangement. This is much more that the broker’s simply abandoning the statutory duty to supervise.

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A corporation can be a licensed California real estate broker. All that is required is that an individual who is a licensed broker “place their license” with the corporation, by being the corporation’s designated officer/broker. State law assigns a duty to the designated officer to supervise the corporation’s salespeople. Experienced Sacramento and El Dorado real estate attorneys frequently see the designated officer named as an additional defendant in lawsuits against the corporation. A recent decision concluded that the designated officer does not owe a duty to the third party claimant under state law, nor through vicarious liability.

broker corporation principal officer.jpgIn Sandler v Sanchez, Sandler was a lender who claimed that misrepresentations were made by the real estate sales licensee as to the value of the property the loan was secured by. Sandler wanted also to assess liability on the designated broker. The plaintiff pointed to Business and Professions code section 10159.2, which makes the designated officer/broker responsible for the supervision and control of the activities of the corporation’s salespeople. They claim that, because the designated officer did not supervise the salesperson who made the misrepresentations, the designated officer was liable for those misrepresentations.

The court first looked at the statute, which does not say anything about liability to third parties such as this plaintiff. It noted that, prior to the enactment of this statute, courts had decided that the duty to supervise was only to the corporation, and not anyone else. So, while the corporation could sue the designated officer, third parties could not. It the reviewed the history of the statute, and concluded that it was intended to clarify that the duty was owed to the corporation, not third parties. This plaintiff had no claim against the designated officer under the statute.

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I have written before about binding, erroneous arbitration awards and how arbitration awards are unappealable. I’ve also written about whether the trustee or the trustee is the party, the issue that disappointed a recent plaintiff. This plaintiff, Portico Management Group, entered a real estate purchase contract to buy an apartment building in Carmichael, CA owned by the trustees of the HC Trust and a partnership. One of the selling parties refused to sign the deed and closing documents, and the buyer sued, correctly naming the trustees of the trust as defendants.

trustee of trust.jpgThe purchase contract required arbitration, so the court ordered the case to arbitration. The arbitration resulted in an arbitration award of more than $1.6 million to the plaintiff. The arbitration award, however, was not against the trustees, but against the trust itself, and the partnership. The arbitrator found that the trustees “are not personally liable for their acts as trustees.” Anyone in such a situation should consult an experienced Sacramento and Carmichael real estate litigation attorney, because this is where the problem arose.

The plaintiff went back to court and got a judgment confirming the arbitration award and tried to collect against the trust. They got nowhere because a trust is not an entity and therefore could not hold title to any property; the judgment was unenforceable. The buyer then went back to court to amend the judgment, but failed. The court ruled that, though the arbitrator made a mistake, the arbitrator’s decision was not subject to review.

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Real estate brokers in California usually know the importance of a written agreement with their clients. First off, the statute of frauds requires there be a written agreement promising to pay a commission in order for them to be entitled to get paid. The agreement has to be signed by the client, unless it is ratified by the client. But there are other details to be included in an agreement between a broker and their principal, and to avoid ambiguity they should consult with an experienced Sacramento and El Dorado real estate lawyer. One such ambiguity recently landed a broker in court.

real estate broker agreement.jpgIn Duncan v McCaffrey Group, the defendants were licensed California real estate brokers as well as developers. The developer-brokers marketed a project as a custom home development, in which only large custom homes would be build. The plaintiffs were a number of people and trusts who had bought lots in the development. They claim that they paid a premium price because it was to be an exclusive custom home development. However, they also claim that the broker at all times intended to build small tract homes in the subdivision (the developer actually amended the CC&Rs after they bought the lots to allow for smaller houses). As a result of building the tract homes, the values of the plaintiffs’ lots plummeted.

Critical Language

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