Fresno Lawyer – Randolf Krbechek

The recent decision in Tribeca Companies, LLC v. First American Title Insurance Company (Aug. 26, 2015) ___ Cal.App.4th ___ reaches an unsurprising result – an escrowholder is not liable for damages when it delivers money to the owner of the funds.

If you continue to the end of the decision, however, you’ll find a peculiar analysis of the “fiduciary” obligations of an escrowholder, a relationship that is better defined by reference to the obligations of a bailee.

The facts were as follows.  “Tribeca is a California limited liability company formed in October 2005 by William Faidi, its sole shareholder. It is a San Francisco-based private equity investment firm that makes investments in ‘distressed’ real estate by purchasing and foreclosing on defaulted mortgage loans.”

An escrow was opened at First American.  Explained the court, “Tribeca and First American engaged in extensive negotiations regarding the form and content of the [escrow] instructions.  The negotiations continued for more than a month.”

Memo to litigants – If the contract you helped write is unclear, don’t expect the court to reform it in your favor.

The transaction fell through and First American returned the funds on hand to the person who deposited them.  A lawsuit followed.  “Tribeca’s claim of damages was based entirely on its contention that First American’s failure to transfer the escrow funds pursuant to its instructions, and to instead refund the money to Grishin, caused Faidi to lose the $1 million in liquidated damages.”

After reviewing the liquidated damages, the court turned to the escrowholder’s duties.  The key to the decision was a finding that “damages would not have been recoverable from the First American escrow account because, again, Grishin maintained ownership over those funds.”

More to the point, “the deposit of moneys in the escrow does not alter or change the ownership thereof.  First American held Grishin’s money in trust for his benefit, and no other party had any claim to his funds because he never designated another party as the beneficiary.

“Because Grishin retained ownership, he was entitled to withdraw the money regardless of whether another party contended he was liable in damages for failure to consummate a transaction.  It is established law that on failure of escrow the funds deposited with the escrow holder are returnable to the respective depositors.”

Query:  Why is this escrow described as being “fiduciary” in nature?  It more resembles a bailment than a fiduciary relationship.

Further straining its analysis, the court stated that “The breach of fiduciary duty can be based upon either negligence or fraud, depending on the circumstances.”  That’s a peculiar analysis of breach of fiduciary duty – to require the injured party to show negligence or fraud.

Tribeca Companies, LLC v. First American Title Insurance Company (Aug. 26, 2015) ___ Cal.App.4th ___

Here’s a thorny problem.  The trial court found that the seller of a house lied to the buyer.  The buyer sought the remedy of rescission.  The trial court denied relief, in part because of events that occurred with the passage of time.

The court of appeal disagreed in Wong v. Stoler (June 23, 2015) __ Cal.App.4th ___, saying that equity favored the buyers.  The case will embolden aggressive plaintiffs’ attorneys.  Read on.

Let’s start with the facts.  The buyers purchased a 4,400 square foot house in May 2008 for $2.35 million.  The house was located at 2 Sudan Lane, San Carlos.  The sellers misrepresented the sewer hookup, and did not disclose that it was not a city connection.  The buyers first learned of the private sewer system in November 2008.

Here’s an important fact.  “By this time, much of the home was down to the studs as a result of the demolition work.”  By the time of trial, “the court reasoned that the [sellers] had purchased a new home over four years ago and had spent $100,000 in improving it, and the [buyers] had spent $300,000 improving the property and had removed a significant amount of the original landscaping.”

The court found that the sellers acted with reckless disregard in negligently misrepresenting the material facts about the true nature of the sewer system. “The court further found that the misrepresentations affected the property’s value and that the [buyers] would not have bought the property if they had known about the private sewer system.”

Nonetheless, the trial court determined that, given the “burden that rescission would place on the [sellers],” rescission was neither a fair nor appropriate remedy.

The court of appeal saw no reason not to handle the sellers with rough hands.  Explained the court,”Under California law, negligent misrepresentation is a species of actual fraud and a form of deceit … Thus, a single misstatement as to a material fact, knowingly made with intent to induce another into entering the contract, will, if believed and relied on by that other, afford a complete ground for rescission.”

Now comes the hammer. “Where defendant has been guilty of fraudulent acts or conduct which have induced the agreement between him and the plaintiff, courts of equity are not so much concerned with decreeing that defendant receive back [ ] identical property [ ] as they are in declaring that his nefarious practices shall result in no damage to the plaintiff.”

“Persons who attempt to secure profits by deceitful means may not confidently expect to receive special consideration from courts of equity … If his fraudulent acts have resulted in disastrous financial consequences to himself, it is no one’s fault but his own, and he must sustain the necessary inconveniences thereby entailed.”

Ouch.  “We recognize that changes have been made to the property and years have transpired.  But the changes in the property were commenced before the [buyers] learned of the [sellers’] misrepresentations, and much of the time that has elapsed has been due to the [sellers] contesting the rescission … While untangling the deal may not be easy, we are unaware of any insurmountable obstacles.”

“Thus, we remand the case to the trial court to effectuate the Wongs’ rescission … The trial court’s goal [ ] in fashioning this remedy must be, to the extent possible, to restore the Wongs to their status quo ante.”

Is this practical?  The transaction occurred in May 2008.  The trial court judgment was entered in early 2013, and the decision of the court of appeal was entered in June 2015.  How is the trial court going to be able to unwind seven years?  How are the parties going to unwind seven years?  Should we simply refer to the property as “Bleak House”?

In early English society, rent was paid by way of labor or other services.  Only gradually did rent became an item paid in money.  Consider this analysis by Oxford Prof. A. W. B. Simpson.

“At the time of the Conquest [in 1066] large parts of the country were not cultivated, and those that were, were not farmed by individual farmers acting independently of each other, each relying on his own resources, but by a communal system of agriculture which depended for its success upon the co-operation of all the members of a small village community, formed an economic unit which was largely self-supporting.”

“The lands occupied by such a community would be partly cultivated and partly waste land … In this arable land the inhabitants of the manor had individual holdings, often consisting of scattered strips, each unfenced from those of his neighbor. The great open fields which were the result of this practice were cultivated and cropped uniformly in accordance with local custom.”

Comment – Note how joint tenancies, which carry with them the joint right of possession of property, fit neatly into this ancient system.

“Feudalism [ ] imposed upon each lord the duty to administer justice to his tenants, and to hold a court in which they might litigate … The Royal justices, when, in Glanvil’s time [he died 1190] were working out the embryonic land law, took a momentous decision. They decided that the Royal courts would concern themselves only with persons who held their lands by free tenure.”

“If we are to understand who these unfree tenants were, and what were the marks of their curious status, we must look at the history of that manorial system of economy which prevailed over a large part of England in the Middle Ages, and which, in some isolated instances, has lasted even up to the present day.”

“Before 1066 a high proportion of these communities had fallen under the domination of powerful individuals, but the precise relationship between such lords and the inhabitants of the manors varied enormously … A large proportion of the humbler cultivators were men who were personally free, but who were bound by custom [ ] to perform services of an agricultural nature or supply produce to the lord.”

“The agricultural services would usually take the form of a duty to cultivate the lands which the lord farmed as his own – the demesne lands, as they came to be called … After the Conquest the personal status of many of these landholders tended to be depressed, and many of those whose ancestors in Anglo-Saxon times had been free men came to be reduced to some form of personal subjection to their lord.”

“Such men, the villeins of medieval law, came to occupy a curious position in consequence of the way in which the early lawyers worked out the legal implications of their status.  Broadly speaking they became only relatively unfree.”

“In most manors there was to be found a class of tenants who were undoubtedly free men. Some such men might hold their lands by services obviously appropriate to free men alone – by knight service for example.”

“In many cases, however, they might be bound to perform services which did not differ noticeably from those owed by villeins … In the end this forced the courts to alter their attitude to such tenants, but this was not to happen until the very end of the fifteenth century.”

“Though there would be oppressive lords, and villeins whose complaints have not come down to us, yet in general the services due from a villein tenant were as rigidly
fixed and probably as generally observed as those due from free tenants.  They were defined by local custom, which was thought to be binding on lord and tenant alike.”

“In practice the villein tenant was frequently as well off as the tenant who held by free tenure.  His services were fixed and recorded, and so were the various incidents of his tenure … In the course of the fourteenth century the practice of commuting rents and services in kind for money payments became widespread, and the process continued in the fifteenth and sixteenth centuries.  Various factors have been selected by historians as being the causes of this phenomenon.”

“In some manors commutation was probably introduced because it led to more efficient estate management …The Black Death destroyed a large proportion of the villein tenants of manors, and the ensuing competition for labour amongst manorial lords brought into being a class of labourers prepared to hire out their services to the highest bidder they could find.”

“By the middle of the fifteenth century the mass of villein tenants no longer laboured for their lords, but paid him a fixed rent for their holdings in lieu of personal service … The commutation of services naturally enhanced the social status of tenants in villeinage, and, at the same time as it becomes common, we find the name villein tenure giving way to the more modern name of copyhold tenure … The court roll itself became a sort of register of titles to copyhold land, for since all transactions were recorded upon the roll, it provided conclusive evidence of a copyholder’s rights.”

“Throughout the course of the Middle Ages the number of villeins declined, and the class became extinct by the beginning of the seventeenth century: the law tended to encourage liberty, and there were many ways in which a villein could become free …The last reported case is Pigg v. Caley (1618). The disappearance of villein status is still rather a mystery; there were still a considerable number in Elizabeth’s reign.  The status of villeinage was never formally abolished.”

A. W. B. Simpson, An Introduction to the History of the Land Law (Oxford University Press 1961), pages 146-151.

A study of the ancient English common law begins, for many points, with the law that developed after 1066.  The history of inheritances of land is certainly curious, as we inevitably find it tied to the duties owed in a feudal, agricultural society.

Here is an excellent analysis from Oxford Prof. A.W.B. Simpson.

“The medieval law did not recognize the validity of a will of lands. In Anglo-Saxon times [i.e., before the Norman invasion in 1066] it is clear that ‘bookland’ – land held by written charter – could be devised [i.e., transferred at death by way of a will], and this power of devise was the chief peculiarity of such land.”

“After the Conquest a power of testamentary disposition of land continued to be recognized for a while in the post obit gift.  In the twelfth century this power was discountenanced by the Royal court.”

Pause here.  Prof. Simpson states, and he is supported by many learned writers, that the courts in the 12th century did not recognize the transfer of real property at death by way of a will.  Consider also that jurisdiction over wills and testaments was found in the ecclesiastical courts, to wit, the courts organized under the auspices of the Catholic Church, then the predominant religion in England.

Comment – A “testament” is a written document that transfers ownership of personal property at death.  In contrast is a “will,” which is a written document that transfers ownership of real property at death.

Prof. Simpson continues.  “Once it became clear that (in general) a gift of land required a delivery of seisin, a gift to take effect upon the donor’s death and not before could hardly be accepted, for the gift lacked the essential requirement of livery of seisin. Thus the post obit gift as such was doomed by ordinary principle.”

“But the line between a deathbed gift (perhaps accompanied by livery), a gift inter vivos to take effect on death (the post obit gift), and a will which ‘makes an heir’ is not easy to draw, and it does not seem that the Royal court in the twelfth century indulged in any subtle analysis; rather it condemned anything in the nature of a testamentary disposition, whatever form it took.”

So we find the law in England, at least into the time of Henry II, the king who helped establish the great tradition of the common law.

Adds Prof. Simpson, “In the thirteenth century the attitude changed …Quite why it was adopted is a difficult question; perhaps a desire to prevent disherison of heirs, coupled with a desire to prevent the loss of feudal incidents, influenced the Royal judges.”

Two more points from Prof. Simpson.  First, the desire to avoid taxes runs deep in English legal history.  Notes Prof. Simpson, “Consider a gift to A, with a remainder to his heir in fee simple. The remainder is contingent, but this is not the only possible objection to such a limitation …”

“This is simply a tax-dodging trick, and early contingent remainders were often tainted by connexion with evasion of this kind. One can well see that the courts were predisposed to treat them with caution, and the learned Littleton regarded them as always invalid, though Littleton’s view was hardly law in his own day, and did not prevail after his time.”

And a final comment on the power of the courts, which was as true in the year 1300 as it is today:

“But this need not surprise us, for the loss which is suffered when a judgment goes unsatisfied through the defendant’s lack of means is not in the nature of things remediable by the courts.  It would be odd in any branch of the law to question the validity of a judgment simply upon the ground that the losing party was penniless or landless.”

A.W.B. Simpson, An Introduction to the History of the Land Law (Oxford University Press 1961), pages 96-131.

A recent case illustrates the need for a beneficiary to exercise care when making a bid at a trustee sale.  In Biancalana v. TD Service Company (Oct. 31, 2011) 2011 DJDAR 15972, the secured debt was $219,105.  However, due to error by the beneficiary, the trustee was instructed to make an opening bid of only $21,894.  “The auctioneer was not instructed by TD to make any further because of the property over above the opening bid.”

The buyer made a successful bidder $21,896.  A day later, the beneficiary discovered the error, and instructed the trustee not to issue a trustee’s deed to the buyer.  The buyer sued to compel the trustee to issue a deed for the sales price.  The court of appeal held in favor of the buyer, rejecting the beneficiary’s argument that there had been a “procedural defect” in the sale.

The Court of Appeal explained the nonjudicial foreclosure process as follows.  “The purposes of this comprehensive scheme are threefold: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.”

The court rejected the argument that the sale was not “bona fide” because of the substantial difference between the fair market value for the property and the opening bid.  (The successful buyer was the only bidder at the sale.)   “Mere inadequacy of price, absent some procedural irregularity that contributed to the inadequacy of price of otherwise injured the trustor, is insufficient to set aside a nonjudicial foreclosure sale.”

The court distinguished the decision in Millennium Rock Mortgage, Inc. v. T.D. Service Co. (2009) 179 Cal.App.4th 804.  In Millennium Rock Mortgage, the auctioneer was set to sell two properties on the same street in Sacramento. “The script prepared for the 13th Avenue auction contained the proper trustee sale number and legal description of the property, but due to a clerical error, listed the address for the Arcola Avenue property, rather than the 13th Avenue property.”

The Millennium Rock Mortgage sale was reversed for the following reasons.  “”The auctioneer called out the legal description and credit bid applicable to one property, while announcing the street address of a different property.  This created a fatal ambiguity in determining which property was being auctioned.  Due to the contradictory descriptions of the property, the auctioneer’s mistake went to the heart of the sale.  Since irregularity, gross inadequacy of the price, and unfairness were all abundantly present, the sale was voidable at the option of the trustee.”

No such facts were present in Biancalana.  “The beneficiary’s servicing agent miscalculated the amount owed on the subject property … This error, which was wholly under the agent’s control and arose solely from the agent’s own negligence, falls outside the procedural requirements for foreclosure sales described in the statutory scheme.”

“In the instant case, TD was acting as the beneficiary’s agent in preparing the property for the foreclosure sale.  It submitted the incorrect credit bid to the auctioneer, and twice confirmed the incorrect bid when the auctioneer called to inquire just prior to the sale.”

“Consequently, the mistake was made by TD in the course and scope of its duty as the beneficiary’s agent, not by the auctioneer as in Millennium Rock. The auctioneer simply announced the bid submitted by TD. The error was wholly under TD’s control and arose solely from its negligence … As a result, there was no procedural irregularity in the foreclosure sale and TD’s motion for summary judgment should have been denied.”

The moral of the story – a beneficiary should always be diligent to confirm the proper amount of the opening bid at a foreclosure sale, or suffer the loss.

Biancalana v. TD Service Company (Oct. 31, 2011) 2011 DJDAR 15972

A recent case reinforces the necessity to comply with the technical requirements for prosecuting an unlawful detainer complaint in California. [Commonly known as an eviction.]  Specifically, the issue at trial was whether the three-day notice had been served properly.  The trial court held that service was defective.  This was reversed on appeal, based on the statutory presumption arising from service by a registered process server.

The take away rule is that you should always have a registered process server serve the three-day notice.  If you do not, make sure that the person who effected service of the three-day notice is present in court to testify on behalf of the landlord.

The situation in Palm Property Investments, LLC v. Yadegar (2011) 194 Cal.App.4th 1419 involved years of unpleasant litigation.  In 2002, the “penthouse apartment” was been leased out for $3,500 per month.  The rent was later increased slightly, followed by a third addendum in 2003 which reduced the rent to $32,000 per year, subject to rent being prepaid one year in advance.

The prior owners had engaged in bitter litigation with the tenant.  The landlord was not successful in its prior eviction lawsuit, and was ordered to pay $109,062 in attorney’s fees to the tenant.  The landlord took that matter up on appeal, lost, and was ordered to pay a further $70,770 in attorney’s fees to the tenant.

[No, I am not exaggerating.  These are the dollar amounts recited in the appellate decision.]

Not surprisingly, the tenant applied the judgment amount to offset future rent payments.  Thereafter, the property went into foreclosure and was sold to a third party, who then sought to enforce the lease against the tenant.  The new owner filed an unlawful detainer action, asserting that the property was held on a month-to-month tenancy, with rent payable amount of $3,500 per month.

The new owner lost at trial.  Specifically, the “the trial court sustained the [tenant’s] objection to the admission of the proof of service of the three-day notice and found that appellant failed to meet its burden to show that the notice was properly served.”

As discussed below, this decision was reversed on appeal.  The appellate court made the following observations regarding the unlawful detainer process in California.

“Unlawful detainer is a unique body of law and its procedures are entirely separate from the procedures pertaining to civil actions generally … An unlawful detainer action is a statutory proceeding and is governed solely by the provisions of the statute creating it.  As special proceedings are created and authorized by statute … the statutory procedure must be strictly followed.”

Importantly, “proper service on the lessee of a valid three-day notice to pay rent or quit is an essential prerequisite to a judgment declaring a lessor’s right to possession under section 1161, subdivision 2.  A [landlord] must allege and prove proper service of the requisite notice.  Absent evidence the requisite notice was properly served pursuant to section 1162, no judgment for possession can be obtained.”

In the case on appeal, the three-day notice had been served by a registered process server.  The appellate court cited to Evidence Code section 647, which provides that “the return of a process server registered pursuant to Chapter 16 [] of Division 8 of the Business Professions Code upon process or notice establishes a presumption, affecting the burden of producing evidence, of the facts stated in the return.”

The court then reversed the trial court for the following reasons.  “Where service is carried out by a registered process server, Evidence Code section 647 applies to eliminate the necessity of calling the process server as a witness at trial.  This conclusion is consistent with the purpose of the unlawful detainer procedure to afford a relatively simple and speedy remedy for specific landlord-tenant disputes …

“The trial court erred by failing to apply the evidentiary presumption afforded by Evidence Code section 647.  The excluded proof of service established that a registered California process server served the three-day notice …

“As explained in Evidence Code section 604, ‘the effect of a presumption affecting the burden of producing evidence is to require the trier of fact to assume the existence of the presumed fact unless and until evidence is introduced which would support a finding of its nonexistence, in which case the trier of fact shall determine the existence or nonexistence of the presumed fact from the evidence and without regard to the presumption. Thus, the [tenants] were required to come forth with evidence – beyond their answer – in order to overcome the presumption …

“The [tenants] offered no evidence to show that they were not properly served and instead relied on their answer and appellant’s asserted failure to satisfy its burden of proof.  On retrial, they will have the opportunity to present evidence to rebut the presumption afforded by Evidence Code section 647 … [The landlord] is awarded its costs on appeal.”

Always be careful with your three-day notices.  Make sure they comply with the requirements established by law, and make sure that they have been properly served on the tenant.  Otherwise, the landlord will not prevail at trial.

Palm Property Investments, LLC v. Yadegar (2011) 194 Cal.App.4th 1419

I am reading a series of lectures delivered in 1972 by S.F.C. Milsom and collected in The Legal Framework of English Feudalism (Cambridge University Press 1976).  The text is difficult, as it frequently refers to rights, remedies, and procedures that long ago ceased to be relevant in the law of English-speaking nations.

Still, as I read along, I can see contours develop that explain how the law evolved from the year 1200 forward.  The lecturer concentrates on legal writings from the early 1200s, when England was still operating under a feudal system.

Scholars tell us that the law of real property and the law of descent (i.e., succession to real property) were closely connected, at least through 1850.  So intimately connected that both topics were covered in one treatise, which focused on grants in real property.

Considering the feudal roots of English law, this connection makes sense.  The feudal system was dependent on duties and obligations owed by the holder of a tenement to his lord.  (Note that I did not say “tenant” – this word implies a more modern relationship.)

Feudal duties were greater than those relating to (i) payment of rent and (ii) the maintenance and use of the real property, which are the predominant issues in contemporary landlord-tenant relationships.

Obviously, the lord wanted to have control over the person in possession of his property, so that he could obtain proper satisfaction of the obligations owed in connection with the land.

Listen to Prof. Milsom’s explanation.  “Conveyance, inheritance, litigation:  for us these are distinct processes transferring or determining abstract rights.  The ancient reality, preserved into later times only in the formalities of copyhold, saw all three as preliminaries to what mattered: the lord’s acceptance of this tenant …

“The lord must consent lest he be forced to receive homage for his fee from an enemy or some otherwise unsuitable person … Only the lord’s acceptance can make a tenant.”

When you consider the feudal obligations, and the impact that the death of the tenement holder would have on the discharge of these obligations, you can understand why real property law and the law of inheritances were closely connected.  

Another matter of interest is the shift from trial by combat to trial by jury.  Again, with consideration to the substantial impact of the law real estate law as it pertains to a feudal society, the procedural shift (who is the trier of fact?) makes sense.  In a dispute between a tenant and his lord, the lord always could be expected to produce a better, stronger champion for his cause.  Thus, the deck was stacked against the tenant, and preservation of fairness required that the dispute be resolved by recourse to peaceful means, such as a jury.

This writer has commented regularly that the modern estate planning trust is a legal fiction.  A convenient legal fiction, mind you, but still a legal fiction.

The estate planning trust (also known by the unfortunate term, “living trust”) is a merely a will substitute.  It takes effect – meaning, it provides a benefit to a third party – upon the death of the settlor.  That’s precisely what a will does – it transfers property at death.  The difference is, the administration of a decedent’s will is subject to the jurisdiction of the probate court, whereas many estate planning trusts operate extra-judicially.

Remember the essential legal premise of an estate planning trust – one person (sometimes a married couple) acts simultaneously as the settlor (trustor), trustee, and beneficiary.  The same person retains the full power to amend or revoke the trust, and/or to withdraw all of the assets for his or her own benefit.

Enter the merger doctrine.  The merger doctrine is conventionally considered a principle of real estate law.  It holds that temporary (or partial) interests in real property become joined – unified – when held by one person.  The legal doctrine (whether or not intended) causes the partial interest to merge into the greater fee interest.

Thus, when one person is both the tenant and the landlord at the same time, the lease “merges” into the fee ownership, and ceases to have legal significance.

Likewise, when the owner of real property is simultaneously the beneficiary of a deed of trust encumbering the property, the beneficial interest under the deed of trust merges into the fee ownership, and is no longer independently enforceable.

One more common example.  If the same person holds a fee interest in real property and also holds an easement against the property, the easement will merge into the fee ownership, and cease to function for legal purposes as an easement (at least while the ownership is unified).

Why doesn’t the same result occur with estate planning trusts?  We know that real estate trusts have their genesis in real estate law, starting in about 1250 in England.  (Other Continental legal systems do not recognize trusts.)

When one person is simultaneously the grantor, the grantee, and the beneficiary, why don’t the legal interests merge so that the trust is disregarded?  That’s an interesting question: a recent case brushes against it, but fails to consider the full impact of this analysis.

Thus, we find the following discussion in Weinberger v. Morris (2010) 188 Cal.App.4th 1016:

“Robert’s argument implicates the ‘merger doctrine,’ which may be summarized as follows: when the sole trustee of a trust and the sole beneficiary of the trust become one-and-the-same person, the duties of the person, in his or her role as trustee, and the interests of the person, in his or her role as beneficiary, ‘merge,’ meaning that the trust terminates as a matter of law, and the trust’s assets irrevocably vest in the beneficiary. (See Ammco Ornamental Iron, Inc. v. Wing (1994) 26 Cal.App.4th 409, 417.)

“The determination whether the duties of a trustee and the interests of a beneficiary have become united in a single person is a question of law resolved by construction of the trust instrument.”

(Interesting observation by the court of appeal.  Why isn’t the legal construction of the document an issue of law to be resolved by the court?)

Continued the court.  “In the current case, the trial court rejected Robert’s claims for the following stated reasons: ‘The Sue Weinberger Trust did not terminate upon Sue Weinberger’s death. The merger doctrine does not apply.  In interpreting Sue Weinberger’s intent, as expressed in the Sue Weinberger Trust, the Sue Weinberger Trust continued until there was a final distribution of the assets of the Sue Weinberger Trust …

“Upon Sheila Weinberger’s death the real property continued to remain in the Sue Weinberger Trust and was distributed by Lee Davis acting as trustee of the Sue Weinberger Trust to himself.  Upon Lee Davis’ distribution of the real property, the Sue Weinberger Trust terminated.”  Based thereon, the court concluded that the trust interests had not merged at an earlier time.

To me, that’s a legal conclusion: it’s not a matter for resolution strictly by factual reference to the decedent’s estate planning trust.  The reality is that conventional trust law is applied carelessly in the case of estate planning trusts, because the round peg doesn’t fit the square hole.  We advance the fiction of estate planning “trusts,” with the result that probate administration is avoided.  We need a coherent body of law controlling the treatment of estate planning trusts, because the Restatement of Trusts does not fit well.

In Weinberger, the court offered no analysis as to why the merger doctrine did not apply, as a matter of law.  The question is profound, and worthy of further thought.

Weinberger v. Morris (2010) 188 Cal.App.4th 1016

The trend in the courts has been to reduce the legal theories available to persons who suffered losses during the mortgage meltdown.  Traditional theories based on breach of contract, fraud, and promissory estoppel, remain viable causes of action.

Yet the more exotic theories seeking to impose liability have been narrowed and often eliminated.  Such is the case in Bank of America v. Superior Court (Paul Ronald) (August 25, 2011) 2011 DJDAR 12942.  In the Paul Ronald action, the plaintiff sought to hold Bank of America, as successor-in-interest to Countrywide Mortgage, liable for the general decline in property values triggered by Countrywide’s bad lending practices.  The court would have none of it.

According to the complaint, “Countrywide’s founder and CEO, Angelo Mozilo determined that Countrywide could not sustain its business ‘unless it used its size and large market share in California to systematically create false and inflated property appraisals throughout California.  Countrywide then used these false property valuations to induce Plaintiffs and other borrowers into ever-larger loans on increasingly risky terms.’

The complaint continued.  “Mozilo knew ‘these loans were unsustainable for Countrywide and the borrowers and to a certainty would result in a crash that would destroy the equity invested by Plaintiffs and other Countrywide borrowers.  Mozilo and others at Countrywide ‘hatched a plan to ‘pool’ the foregoing mortgages and sell the pools for inflated value.  Rapidly, these two intertwined schemes grew into a brazen plan to disregard underwriting standards and fraudulently inflate property values.’”

Unfortunately, those allegations describe the general problems that swept through the mortgage industry.  “This writ petition relates solely to plaintiffs’ cause of action for fraudulent concealment.”

The trial judge noted the scope of the issue presented to it.  On January 11, 2011, the matter came on for hearing.  At the outset, the trial court indicated, “the issues presented by the many plaintiffs in this case as against their current mortgage lender and/or loan servicer are part of a larger socioeconomic problem that confronts our society in California and all of the other states in this union, an issue of great concern to the U.S. Congress, state Legislature, and the bank regulators, given that in our banking system the banks are insured by the full faith and credit of the United States government for all intents and purposes, so the continued solvency of the banking industry as a whole is a matter of intense interest to the U.S. Congress as well as the central bank.”

That’s the real problem.  This is not a matter that should be dumped into a trail court.  Our entire justice system has shrugged its shoulders and refused to impose liability on anyone for the manipulations that developed into the mortgage crisis.  Shame on us.

It seems there are some 20 cases rolling around in Los Angeles and Orange Counties based on the same charging allegations.  As explained by the court of appeal, “We conclude the plaintiffs/borrowers cannot state a cause of action against Countrywide for fraudulent concealment of an alleged scheme to bilk investors by selling them pooled mortgages at inflated values, the demise of which scheme led to devastated home values across California.”

Explained the court, “we conclude that while Countrywide had a duty to refrain from committing fraud, it had no independent duty to disclose to its borrowers its alleged intent to defraud its investors by selling them mortgage pools at inflated values.”

More specifically, “Due to the generalized decline in home values which affects all homeowners (borrowers of Countrywide, borrowers who dealt with other lenders, and homeowners who owned their homes free and clear), there is no nexus between Countrywide’s alleged fraudulent concealment of its scheme to bilk investors and the diminution in value of the instant borrowers’ properties.”

Further, the court noted that the complaint embraced a general decline in property values across the state.  “Irrespective of whether a homeowner obtained a loan from Countrywide, or obtained a loan through another lender, or whether a homeowner owned his or her home free and clear, all suffered a loss of home equity due to the generalized decline in home values.  That being the case, there is no nexus between the alleged fraudulent concealment by Countrywide and the economic harm which these plaintiffs/borrowers have suffered.”

The final holding – “We merely conclude plaintiffs failed to state a cause of action against Countrywide for fraudulent concealment of its alleged scheme to bilk investors by selling collateralized mortgage pools at an inflated value, the demise of which led to a generalized decline in California residential property values.”

This writer is as upset about the mortgage debacle, and the refusal of governmental authorities to take action, as anyone else.  But the right place for action is the Department of Justice, or the Securities and Exchange Commission, not a trial court.

Most commendable is the speed at which the court issued this decision.  The lawsuit was filed in March 2009.  The trial court issued its order dismissing the claim for fraudulent concealment on January 11, 2011.  This writ proceeding was resolved by decision entered on August 25, 2011.  Justice is not always delayed.

Bank of America v. Superior Court (Paul Ronald) (August 25, 2011) 2011 DJDAR 12942

The Delaware Supreme Court recently decided William Penn Partnership v. Saliba, a case in which there are no winners.  In the case, one of the members breached his fiduciary obligations, but his conduct caused no damage.  Nonetheless, the court awarded attorneys’ fees as an “equitable remedy.”  In this author’s view, the award distorts the law of equitable remedies, creates uncertainty in the law, and rewards fruitless litigation.

The facts were as follows.  The parties were members of a limited liability company called Del Bay Associates, LLC.  Del Bay built the Beacon Motel in Lewes, Delaware in 1987, with 66 guest units.  Later, some of the members (the Lingos) wanted to “end their business relationship” with the other members.

The Lingos concocted a story about their need to dissolve the limited liability company and sell the motel to fulfill obligations under a section 1031 tax-deferred exchange.  Explained the court, “On June 10, 2003, the Lingos convinced Hoyt to sign the contract immediately so they could present it to the JGT board. The Lingos told Hoyt that if he did not sign the contract, JGT might back off.”

The court found that the representations were not true.  Instead, the Lingos controlled both sides of the transaction – seller and buyer.  For example, “The Lingos manipulated the sales process through misrepresentations and repeated material omissions such as (1) imposing an artificial deadline justified by ‘tax purposes;’ (2) failing to inform Saliba and Ksebe that they were matching their offer by assuming the existing mortgage; [and] (3) failing to inform Saliba and Ksebe that they had already committed to selling the property to JGT, an entity the Lingos controlled.”

So, we have a transaction in which one member abused his fiduciary duties to the other members.  More bluntly, “The Lingos here acted in their own self interest by orchestrating the sale of Del Bay’s sole asset, the Beacon Motel, on terms that were favorable to them.  By standing on both sides of the transaction – as the seller, through their interest in and status as managers of Del Bay, and the buyer, through their interest in JGT– they bear the burden of demonstrating the entire fairness of the transaction.”

Such proof of “entire fairness” was a burden the Lingos could not meet.  “The concept of entire fairness consists of two blended elements: fair dealing and fair price.  Fair dealing involves analyzing how the transaction was structured, the timing, disclosures, and approvals.  Fair price relates to the economic and financial considerations of the transaction.  We examine the transaction as a whole and both aspects of the test must be satisfied; a party does not meet the entire fairness standard simply by showing that the price fell within a reasonable range that would be considered fair.”

In fact, the price did fall with “a reasonable range.”  The buyer paid $6,625,000 for the Beacon Motel, while the trial court found that the “retained appraisal valued the property at $5,480,000.”  Thus, the price paid by the buyer was greater than the fair market value for the motel, meaning that the non-controlling members suffered no compensable injury.

The court found that this result was not satisfactory.  “Merely showing that the sale price was in the range of fairness, however, does not necessarily satisfy the entire fairness burden when fiduciaries stand on both sides of a transaction and manipulate the sales process.”

OK, but we have no basis on which to award damages.  “Saliba and Ksebe were left without a typical damage award because the Court’s appraisal of the property came in at a value lower than the sale price.”

What to do?  This court decided to award attorneys’ fees to the non-controlling members.  “The Chancellor concluded it would be unfair and inequitable for Saliba and Ksebe to shoulder the costs of litigation arising out of improper prelitigation conduct attributable to the Lingos that amounted to a violation of their fiduciary duties.”

Although there was no statutory or contractual basis for an award of attorneys’ fees, the Delaware Supreme Court held that “The Chancellor’s decision to award attorneys’ fees and costs was well within his discretion and is supported by Delaware law in order to discourage outright acts of disloyalty by fiduciaries.  Absent this award, Saliba and Ksebe would have been penalized for bringing a successful claim against the Lingos for breach of their fiduciary duty of loyalty.”

Which perhaps would have been the better result.  This litigation was surely driven by the attorneys, not by the injured parties, with substantial attorneys’ fees.  The court’s award of attorneys’ fees on equitable grounds will only foster litigation in the future, which is hardly an optimal result.

William Penn Partnership v. Saliba (Del. Supreme Court Feb. 9, 2011) 2011 Del. LEXIS 91