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California anti-deficiency laws provide that on foreclosure the lender only gets the home- they can not get the balance of the loan from the homeowner.  The purpose is to place the risk of inadequate security on the lender, whether due to overvaluation or market decline.  It is intended to discourage speculative land sales and the overvaluation of properties.

When faced with foreclosure, the homeowner needs to consider several issues that may impact whether they will have personal liability.  What follows are five steps to follow in determining how the  anti-deficiency laws apply in your case.  They are the five most common issues that arise.  For our purposes, reference to “foreclosure” includes exercise of the power of sale in the deed of trust.

Disclaimer: The content of this comment contains general information based on California law and is provided for informational purposes only, and should not be construed as legal advice on any subject matter.  You will require specific legal advice and should not rely on general information provided here.  You should consult with an attorney to discuss the matter and for any specific legal advice.

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California law provides a scheme for pre-lawsuit resolution of construction defect claims from new home buyers (Civil Code section 895+).  It requires the builder to provide documentation of the law, and also give the buyer a name and address upon whom to make claims.  If the builder follows these rules, the procedure requires the buyer to make a written claim as to construction defects, and provide the builder an opportunity to repair.  If the Builder does not provide this information as required, the buyer can go directly to court.

In a recent case the buyer went directly to court, simply claiming in their lawsuit that the builder had not complied, but did not explain in what manner, at what time, or with respect to which of those duties the builder failed to comply.  The builder had the suit stayed (stopped) until the buyer gave notice and opportunity to repair.  The buyer appealed.

The court of appeals first noted that this was a mandatory procedure for builders and buyers.   The provision that allows the buyer to go directly to court if the builder did not comply was an exception.  The party seeking to rely on an exception to a general rule (here, the buyer) has the burden of proving the exception.  Thus, the buyer must do more then generally state that the builder did not comply.  They must go back to the trial court and  present evidence to show that the builder did not comply.

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It is common for people to hold their investment properties in their revocable family trust. In a Southern California decision, two trustees, Tepper & Presta, entered several partnership agreements to invest in real estate. The partnership agreement provided “upon the death of a Partner, the Partnership shall purchase the interest of the deceased Partner.”

Mr. Tepper died, and Presta wanted to buy out his interest, but his widow refused, claiming that the Trust itself was the partner, and the trust was still alive.

The court looked at the language of the agreement, which states that it is entered by Presta as Trustee of trust P and Tepper as trustee of trust T. It found that the mistake in the widow’s argument was to treat the trust as an entity, like a corporation. But, it is established under California law that a trust of this type is merely a relationship by which one person holds property for the benefit of some other person. An ordinary trust is not an entity separate from its trustees. A trust can neither sue nor be sued in its own name; it is always the trustee who is the party. Thus, in this case, the individual men were the partners, and the widow had to sell her interest.

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In a recent California decision, the trustee was holding a sale of a Sacramento property. The auctioneer read from a script which had all the correct information, including the legal description of the property, but gave an Arcola Avenue street address, which was not the same property. The Arcola sale should have had an opening bid of over $300,000, but the bid here started at $50,000. A buyer seeking the Arcola property won the auction, thinking it got a great deal on the property; the Court said no.

Under California law, trustee’s sales are required to strictly follow statutory procedure. Inadequacy of price alone will not justify setting aside the sale. However, gross inadequacy, plus even slight unfairness or irregularity is sufficient to set aside the sale.

Here, the auctioneer announced the legal description and starting bid for one property, while announcing the street address of a different property, which the court found created a fatal ambiguity in determining which property was for sale. Thus, it should be set aside.
(Millennium v. TD Service Co. (2009) Cal 3DCA C059875)

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Under California law, the Uniform Fraudulent Transfer Act allows defrauded creditors to reach property in the hands of a third party, if a debtor transfers an asset with the intent to prevent a creditor from reaching that interest to satisfy its claim.”

In a recent California decision, Gordon owed his ex-wife over $70,000 in spousal support. She obtained a judgement and recorded it so it would be a lien against any real estate that he owned. Gordon and his girlfriend refinanced their house which was in both their names, at which time the debt should have been paid, but the title insurance company missed it, so they had to pay the ex-wife, and then recorded a new lien against Gordon. Gordon then fraudulently conveyed his half interest in the property to his girlfriend so the title company couldn’t get to it.

The court looked at how much money could be raised for the creditor if the house was auctioned. Gordon’s half of the equity in the property was only about $9,400. But, as it was his residence, he was also entitled to an automatic (undeclared) homestead exemption of $50,000. This exemption protects the debtor when the creditor seeks a court-ordered sale of the house. If the judge finds that the sale price will not be greater than all liens, plus the homestead exemption, there will be no sale. That was the case here, and the title company could not get the house sold.

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Robbins was licensed both as a real estate broker and as an attorney. On January 23, 2001, he pled nolo contendere (no contest) and was convicted of three misdemeanor building code violations.

The DRE filed an action to revoke his license, based on this conviction plus a history of conviction for 50 prior violations. He also had been disciplined by the state bar. The broker argued that there was not showing of intent, and that the crimes did not involve moral turpitude.

Unfortunately for the broker, In 2008 the Legislature amended the statute to allow for revocation of a license without the need to prove moral turpitude. The court here pointed out that the law does not require a failure of honesty or truthfulness for the crime to be related to the broker’s fitness as a licensee. It also noted that the legislature found that a no-contest conviction is strong enough indicator of guilt to warrant discipline. His intent? It was to make money, and that was intent enough. His license was revoked.

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The commercial landlord is increasingly faced with non-paying tenants who file bankruptcy. The following is a simple outline of the procedure for getting paid and getting possession of the property.

1. The Automatic Stay. If the lease term is still running when the tenant files bankruptcy, the lease is part of the estate and all landlord actions are stayed. That means the landlord can take no action without an order from the court. To obtain “relief from stay”, the landlord must show that it is not “adequately protected” or that the property is not necessary for an effective reorganization. Adequate protection can include cash payments for the use of the property, a lien on other property, or the equivalent.

2. The Trustee Decides. The bankruptcy trustee has 120 days to assume or reject the lease. If the trustee assumes the lease, the lease continues, and the trustee is then obligated under its terms. The trustee must “cure” defaults under the lease, or provide “adequate protection.” Adequate protection can mean a cash deposit, pre-paid rent, a lien on other property, or anything else the judge agrees protects the landlord.

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The California state bar has weighed in on deposits in attorney trust accounts. Agreeing with my prior post, the state bar, in a question and answer format, provides it’s opinion:

“Is it a violation of Civil Code Section 2944.7(a)(1) to collect an advance fee, place that fee into a client trust account, and not draw against that fee until the services have been fully performed?
Yes. The statutory language of the prohibition uses the word “receive” and the plain meaning of that term is broad enough to encompass a lawyer’s receipt of advance fees into a trust account. “

There used to be many good intentioned attorneys providing a useful service in assisting clients deal with modifications. I doubt that there are many left.

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I have noted in a prior post how difficult it is to have a court review legal errors in an Arbitrator’s decision. A recent Federal Court Ninth Circuit decision nails the coffin closed under the Federal Arbitration Act.

The FAA provides that a court may vacate an award “where the arbitrators exceeded their powers.” Arbitrators exceed their powers when they express a “manifest disregard of law.” For this to be shown, court’s have concluded that it must be clear from the record that the arbitrator recognized the applicable law and then ignored it.’

In this case regarding a lawsuit between limited and general partners, the Arbitrator awarded the GP $1.5 million damages, plus $20 million in punitive damages.

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Mike Kelly of Sonoma recently reported in his blog that an unnamed executive with Bank of America told him that B of A will be using Equator (REOTrans) to manage their Short-Sale negotiations nationwide. This task oriented web portal means that they are getting serious about Short-Sales.

This move gives borrowers 24/7 access to a portal through which they can provide the necessary information to process a short sale and receive real-time status updates electronically. As reported in DSNews, it also automates decision making for the lender, handles approvals for faster turnaround, provides quick fulfillment, and assures full compliance with government programs.

This is a good thing. It’s no secret that Lenders have not been responding to short sale deals. Whether they chose to be understaffed or not, the workload has been an obvious problem. Automating the process, like their standard mortgage procedure, indicates the belief that short sales are no longer an aberration, but rather a new portfolio. The more lenders that take this approach, the better.

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