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Piercing the corporate veil, (the alter ego doctrine) is a procedure which creditors use when their judgment is against a corporation or LLC which is owned by, or controlled by, a sole shareholder. Usually, the corporation has no assets to collect from, and the goal of the creditor is to go after the shareholder’s personal assets, claiming that the corporation is a sham. In effect, the corporation is the shareholder’s alter ego and the shareholder should not hide behind the corporation. Reverse veil piercing is a newer concept in which a creditor with a judgment against an individual goes after the assets of the corporation which the debtor controls. Sacramento business attorneys seldom see this scenario, as the point of forming an entity (corporation or LLC) is to avoid personal liability in the first place. But in a recent decision, a wealthy developer did some extensive estate planning, probably to shield his assets, and suffered a judgment for personal liability. The court found that reverse piercing could apply.

Sacramento-reverse-veil-piercing-attorneyIn Curci Investments, LLC. v. James P. Baldwin, Baldwin is a wealthy Orange County real estate developer. Baldwin borrowed over $5 million dollars and did not pay it back. After borrowing the money he created eight family trusts for his grandchildren. He formed JPBI LLC, which loaned over $42 million to some partnerships composed of the family trusts. Of course, these loans were not paid back.

Since he didn’t pay the original loan, Curci obtained a judgment against Baldwin personally for $7.2 million. Curci then sought, through reverse veil piercing, to add JBPI LLC to the judgment. This appeal resulted.

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Co-owners of real estate do not always have the same goals, and when they cannot agree, they may need the court’s help. Such is the case in a Partition action; in its original form, it literally meant dividing the land up into parts, and assigning one part to each individual co-owner. Partitioning the land is still the preferred method under California law, but in most cases real estate attorneys argue that it is impractical, would not result in a fair split, and the property should be sold and the money split. When the property is primarily a building or house, it is usually sold. Either owner is allowed to buy the property, essentially making a credit bid of their own equity in the property, plus additional cash which buys out the other owners. There is a third way to partition- by appraisal, but in an odd recent decision the trial court incorrectly called for appraisal. The court of appeals said this was wrong, and explained the options in an action for Partition.

Sacramento-partition-appraisal-attorneyIn Gayle Cummings v. Jennifer Dessel, the parties agreed to buy a property together east of Arcata, CA. Cummings put $80,000 down, they obtained seller financing, and the others were to make monthly payments and rehab the dilapidated residence. The defendants hit hard times and stopped paying the mortgage and working on the property. Plaintiff filed this action. The trial court ordered partition of the property by appraisal – each owner could bid to buy the other owner’s interest, with the minimum bid set by appraisal.

The court of appeals focused on the statutory language, as partition is governed by the California Code of Civil Procedure. Once the judge determines that a partition is called for, it “shall make an interlocutory judgment that determines the interests of the parties in the property and orders the partition of the property and, unless it is to be later determined, the manner of partition.” (§ 872.720, subd. (a))

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I had previously discussed the case of OC Interiors, where the court determined that a void judgment in the chain of title to real property nullifies all subsequent transfers, including a transfer to a bona fide purchaser. That is a frightening prospect for buyers, and a reason to take a close look at the preliminary title report, and consult a real estate attorney if they are not comfortable with what they find. A default judgment may, in some cases, easily be found to be void. In a more recent decision, some other defendants tried to avoid this result by arguing that the void default judgment had the effect of granting quiet title relief, and thus the subsequent transaction was valid. They were disappointed to find otherwise – the action to cancel and instrument did not have the same impact as an action to quiet title.

Sacramento-real-estate-instrument-cancellation-attorneyIn Deutsche Bank National Trust Company v. Alan Pyle et al. Saluto owned property in Rancho Mirage and obtained a loan. She defaulted and began a firestorm of recording documents to screw up the chain of title to presumably prevent foreclosure and eviction. The long list of recorded documents is set out at the end of this post. (I wonder if she paid someone to muddy things up like this- I have done a quiet title in a similar situation, and the hired perpetrator faced Federal criminal charges). A trustee’s sale was held. Saluto then filed an action against the lender to cancel the trustee’s deed and deed of trust and obtained a default judgment. Eventually, the lender got the judgment set aside, the court finding that she had falsified the proofs of service, and that the judgment was void.

The issues on appeal for the court were: (1) whether defendants were entitled to bona fide purchaser or encumbrancer status, and (2) the impact of the void default judgment in the chain of title.

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Slander of title is a false statement related to real property that causes monetary loss. The goal is the protection of the transferability of title. The claim is based on whether the publisher of false information could reasonable expect the false publication to influence the conduct of a third party, such as a lender or buyer. It may be an unsupported claim of an interest in real property that throws “doubt” on its ownership. However, Sacramento real estate attorneys point out to their clients that the false publication may be privileged, which is a statutory defense to a claim for slander of title.

Sacramento-slander-of-title-lawyerIn Raymond A. Schep v. Capital One, N.A., Schlep borrowed $910,000, secured by a deed of trust on his Beverly Hills home. He missed his mortgage payments and a Notice of Default was recorded. Before the Notice of Trustee’s Sale was recorded, someone recorded a “Substitution of Trustee and Full Reconveyance” (the ‘Wild Deed’). The court’s opinion does not specify who did this, but implies that it was the borrower. Subsequently the Notice of Sale recorded, and the property was foreclosed through a trustee’s sale. The Borrower filed this lawsuit claiming slander of title due to the recording of the Notice of Default, Notice of Sale, and Trustee’s Deed. Apparently his argument was that the Trustee had constructive notice of the Wild Deed and the implied competing claim on title.

Sacramento-privilege-slander-of-title-lawyerThe court found that the plaintiff was wrong, because all the documents underlying his claim were privileged. Civil Code section 2924(d) (1) (set out below) provides that the notices required for a trustee’s sale procedure are privileged communications under section 47 (also set out below).

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When there are multiple liens on real property and the senior lien or deed of trust is foreclosed, the junior liens are wiped out, and the junior lienholders have lost their security for the debt. All they have left is the underlying debt, which they can then seek to collect directly from the debtor. These latter parties are termed “sold-out juniors.” Generally, when a debt is secured by real property, the creditor must seek to be paid from the property first (by foreclosure). If the senior lienholder conducts a trustee sale, and the property does not raise enough cash to pay them off, it’s too bad- they cannot go after the debtor personally. However, if they are a junior, once they lose the security, they may go after the debtor for a monetary judgment. But sometimes Sacramento real estate attorneys are confronted by senior and junior loans that are made by, or acquired by, the same individual lender. If the lender forecloses on the first, does it become a sold-out junior as to the second?

Sacramento-one-form-of-action-lawyerIn Black Sky Capital, LLC v. Michael Cobb, plaintiff Black Sky held both the first and second loans (totaling over $11.7 million dollars) on a property in Rancho Cucamonga. Black Sky foreclosed on the first, holding a trustee’s sale. It then filed suit to recover the balance owed on the 2nd junior note, and this appeal was the result.

Section 580d Applies only to the Deed of Trust Foreclosed, and does not apply to a Junior Lien after a Trustee’s Sale on the first – Regardless of whether it is the same lender

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Encroachment, or trespass, is an invasion of real property rights by another. It can be anything, such as a fence, a railroad, landscaping, a parking lot or building. When the owner of the property wants to stop it, they may file an action for a permanent injunction prohibiting the use. Real Estate attorneys frequently see actions for injunction resulting in cross-complaints to establish a right to use the property, such as by adverse possession. However, the decisions regarding the statutes of limitations in such cases vary somewhat unpredictably, due to there being two sets of statutes that may apply –one giving 3 years, the other 5. In a decision by the Third District Court of Appeals (covering 23 counties including Sacramento, Yolo, Placer & El Dorado, full list below*) that has not been agreed with by the Supreme Court or other Districts, the court ruled that enjoining a permanent encroachment should be characterized as an action to recover real property, applying the 5 year statute..

Sacramento-encroachment-attorneyIn Harrison v. Welch, buyers of a vacant lot brought an action against their neighbor to quiet title and to enjoin neighbor’s encroachment on their land. The neighbor, who had placed a woodshed and landscaping on the lot, filed a cross-complaint alleging adverse possession and prescriptive easement. The trial judge ruled that the Buyer was barred by the statute of limitations and that the neighbors had not established adverse possession or prescriptive easement. Nonetheless, the court engaged in an equitable “balancing of the hardships, giving both the plaintiff and the defendant some satisfaction. Both parties appealed.

The statute of limitations issues revolved around two sets of statutes covering different concepts – recovery of real property, vs. stopping an encroachment. The statutes are in two consecutive Chapters of the Code of Civil Procedure-

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In a sales transaction, there is often included a guaranty, where one party guarantees to pay the debt of another. More accurately, a guarantor is “one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor.” (Civil.C. 2787). Thus if you buy a business or real estate, and the seller is concerned that you might not be able to pay for it, the seller may want someone with a stronger balance sheet to guaranty the debt. When a dispute arises, Sacramento business and real estate attorneys question what exactly was guaranteed, and if the guarantor was exonerated. Exoneration can occur if the creditor or seller does something that changes the terms of the deal without the guarantor’s approval. Both issues arose in a recent decision concerning the sale of a motorcycle dealership.

Sacramento-real-esate-loan-guaranty-attorneyIn G&W Warren’s Inc. v. Judson V. Dabney II, the Warrens sold their dealership to Dabney. The paperwork starts with a master “Asset Purchase Agreement.” This incorporated by reference …

– (1) a promissory note in the amount of $1,016,000 signed by Dabney as Maker;

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A court may create an “equitable easement”, on equitable grounds, even though the user is not entitled to an easement on one of the more traditional grounds. The judge balances the rights of the various parties to achieve an equitable solution. Generally, the courts apply a three-part test to determine if such an easement should be legally granted. In most cases there is an existing use, and either one landowner sues to stop the use (they see it as a trespass), or the user sues to legally establish the easement. However, in a recent decision out of Ventura County, the court granted an equitable easement where there had been no preexisting use.

Sacramento-equitable-easement-attorneyIn Hinrichs v. Melton, Hinrichs inherited two adjoining parcels. He used to live in a house on the southern lot, but had lived in Alaska for the past 20 years. He conveyed the southern property to Asquith, which left the northern parcel landlocked – it had no legal access from anywhere. The trial court granted the plaintiff an easement by necessity over the Asquinth parcel, up to the Melton property. Beginning at the Melton property, the court granted an equitable easement under the doctrine of balancing the hardships.

The Equitable Easement

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A fraudulent transfer is a transfer of property by a debtor to a third party with the intent to put that property out of reach of a creditor to satisfy their claim. If found to be a fraudulent transfer, the transfer is voidable as to the debtor. Voidable means that, if the third party took in good faith and gave reasonably equivalent value in exchange for the property, the transfer may not be reversed. If it had been void, the law assumes the transfer did not take place, and the creditor can attach the property. Parties facing a potential liability should consult with an attorney to determine the effect of transferring any assets to avoid a finding that the transfer was fraudulent relative to their creditors. In the decision I discuss today there was a judgment lien against real estate that was transferred and money borrowed, but the title insurer did not alert the lender. The lender in this case lucked out.

Sacramento-fraudulent-transfer-lawyerIn Nautilus, Inc. v. Chao Chen Yang et al., Nautilus is a maker of exercise equipment. It obtained a Judgment for $8 million dollars against Stanley Yang for counterfeiting Nautilus products. Nautilus recorded the judgment in April 2012. Immediately prior to the recording, Stanley and his brother Peter, who were both on title to a house in Fountain Valley, conveyed the property to their father Chao. After the judgment was recorded Chao obtained a reverse mortgage against the property. In the loan process the title Insurer failed to note the Judgment as an exception.

The loan cash was used to pay off the existing liens on the property, and Chao kept the balance of the cash. Nautilus discovered the conveyance and loan, and filed suit to set aside the fraudulent transfer. The trial court found that the lender was a good faith lender for value, and thus Nautilus could not recover damages from the lender. This appeal followed.

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Default judgments occasionally occur, and sometimes they may be set-aside or vacated by the court. There are several statutory grounds for a judgment debtor to get a default vacated. But what happens in the default judgment concerns title to real property? If there is a default judgment in the chain of title, potential buyers need to take notice and may need to consult a real estate attorney. There is a possibility that the judgment could be vacated, and the result would affect the buyer’s title. A question arises – is the potential buyer a bona fide purchaser for value, who may rely on the recorded judgment? And what are the limits to vacating the default? Those are questions learned the hard way by a disappointed buyer in a recent decision.

Sacramento-BFP-lawyerIn OC Interior Services, Inc. (OCI) vs. Nationstar Mortgage Inc., OC purchased real property knowing about a recorded default judgment in the chain of title. The default judgment nullified the appellant’s deed of trust. It started when the original owner obtained a $2 million loan on a property in Silverado, California. He filed a lawsuit to cancel the deed of trust and snuck in a default judgment. OCI paid $750,000 for the property, knowing that it was worth $1.5 million. OCI was aware of the issue; it obtained title insurance for $937,500- over $150 thousand more than the purchase price! Before OCI purchased the property it asked its title insurer “‘what happens if this [default judgment] gets appealed?’ And they said, ‘That’s why you have title insurance.’ ”

The original lender got the default judgment vacated and proceeded to foreclose. OCI filed this lawsuit. OCI claimed that it qualified as a bona fide purchaser for value, relying on the recorded default judgment showing that the deed of trust had been wiped out. The court of appeals did not agree.

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