Fresno Lawyer – Randolf Krbechek

The California legislature has been tinkering with the foreclosure rules since the mortgage crisis started in 2007.  One of the laws enacted was Civil Code section 2923.52.  This section says that a lender must add three months to the normal 90-day waiting period for recoding a notice of sale (i.e., double the waiting time for a notice of sale) “if all of the following conditions exist:

“(1) The loan was recorded during the period of January 1, 2003, to January 1, 2008, and is secured by residential real property;  (2) The loan at issue is the first mortgage or deed of trust; and (3) The borrower occupied the property as the borrower’s principal residence at the time the loan became delinquent.”

In the recent case of Vuki v. Superior Court (October 29, 2010) 189 Cal.App.4th 791, the borrowers alleged that the foreclosure sale of their house was invalid because the lender failed to provide them with the additional three-month “renegotiation” period.  The court swept aside the argument, finding that a violation of the statute was a matter for the regulators to enforce, not an aggrieved borrower.

Here are the all-to-common facts.  “Lucy and Manatu Vuki lost their Buena Park home to foreclosure. The sale took place October 7, 2009, with their erstwhile lender, HSBC Bank USA (HSBC), as the buyer at the foreclosure sale . . . On April 6, 2010, the Vukis filed this state court action against HSBC for, among other things, statutory violation of Civil Code sections 2923.52 and 2923.53.”

The court was essentially compelled to rule against the borrowers because “of the operation of section 2923.54.  Subdivision (b) of that statute is clear that: ‘Failure to comply with Section 2923.52 or 2923.53 shall not invalidate any sale that would otherwise be valid under Section 2924f.’”

That’s a shame, because we have a legislative mandate to protect borrowers from over-reaching, but no effective manner of recourse.  Still, the borrowers should have been able to maintain an action for wrongful foreclosure, even if they could not invalidate the sale.

As the court held, “This argument fails since any claim which the Vukis might have to invalidate the foreclosure sale based on sections 2923.52 and 2923.53 necessarily entails a private right of action which the statutes do not give them.”

Explained the court, “Civil Code section 2923.52 imposes a 90-day delay in the normal foreclosure process . . . After the enactment of section 2923.52, at least for certain loans, another 90 days must be included ‘in order to allow the parties to pursue a loan modification to prevent foreclosure.’”

The court explained that “the requirements are a matter of a general program, evaluated by regulatory commissioners . . . Everything in the exemption process, in short, is funneled through the relevant commissioner, [to wit] (1) The Commissioner of Corporations for licensed residential mortgage lenders and servicers and licensed finance lenders and brokers;  (2) The Commissioner of Financial Institutions for commercial and industrial banks and savings associations and credit unions; and (3) The Real Estate Commissioner for licensed real estate brokers servicing mortgage loans.”

In the court’s analysis, the statute could not be enforced by the debtor.  “Section 2923.54 first imposes a requirement that a notice of sale give information about whether the servicer has, or has not, obtained an exemption from the 90-day delay provisions of section 2923.52.”

“But then section 2923.54 makes clear that whatever else is the case as regards actual compliance or noncompliance with sections 2923.52 and 2923.53, it will not invalidate any otherwise valid foreclosure sale”

The court conclusively ruled against the debtors, stating that “The argument fails because, as shown above, any noncompliance with sections 2923.52 and 2923.53 is entirely a regulatory matter, and cannot be remedied in a private action. The statutory scheme contains no express or implied exceptions for any lender who buys property knowing that it may not have complied with sections 2923.52 and 2923.53.”

I’m not keen on all the legislative tinkering with the foreclosure process.  It’s just sticking a finger in the dam – it doesn’t address the underlying problems, including the apparent wilful failure of lenders to renegotiate loans in good faith.

Yet, if there’s going to be a statutory right to an additional three-month “negotiation” period, then there has to be a private enforcement mechanism, or the law serves no useful purpose.  Which point was driven home by this court.

Vuki v. Superior Court (October 29, 2010) 189 Cal.App.4th 791

In the recent decision in Holmes v. Summer (Oct. 6, 2010) 188 Cal.App.4th 1510, the court discussed the fiduciary obligations owed by a real estate broker in a sales transaction.  The facts were not difficult.

The broker represented the seller.  According to the opinion, “the buyers and the seller agreed to the purchase and sale of a residential real property for the price of $749,000 . . . The counter offer did not disclose that the property was subject to three deeds of trust totaling $1,141,000 . . .  Unbeknownst to the buyers, the property was subject to a first deed of trust in the amount of $695,000, a second deed of trust in the amount of $196,000 and a third deed of trust in the amount of $250,000, for a total debt of $1,141,000.”

Thus, the amount offered was $392,000 less than the debt encumbering the property.  When the sale did not close for the price in the listing agreement, the buyer’s sued the listing agent.

Stop here.  How could the buyers have any expectancy damages?  The debt was $1.1 million, while the offer was $750,000.  The buyers expected to pay $750,000, while the debt was $1.1 million.  The buyers did not lose the benefit of their bargain, as they did not offer enough to purchase the property.

Instead, the buyers could claim only reliance damages, being amounts they reasonably expended in reliance on the contract.  “According to the buyers, after they signed the deal with the seller, they sold their existing home in order to enable them to complete the purchase of the seller’s property.  Only then did they learn that the seller could not convey clear title because the property was overencumbered.”

However, didn’t the buyers receive a preliminary title report listing the encumbrances?  If so, how could the buyers claim reasonable reliance, when they had full disclosure of the encumbrances, albeit from a third party?  From the opinion, it seems that the court feels that the broker is on the hook, regardless of future information learned by the buyer.

According to the opinion, “The case before us presents the interesting question of whether the real estate brokers representing a seller of residential real property are under an obligation to the buyers of that property to disclose that it is overencumbered and cannot in fact be sold to them at the agreed upon purchase price unless either the lenders agree to short sales or the seller deposits a whopping $392,000 in cash into escrow to cover the shortfall.”

OK, that’s one way to frame the issue, although the court will proceed to explain that brokers are required to police the real estate market.  “Under the facts of this case, the brokers were obligated to disclose to the buyers that there was a substantial risk that the seller could not transfer title free and clear of monetary liens and encumbrances.”

Duties of Agent

As explained by the court, “It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. When the seller’s real estate agent or broker is also aware of such facts, he [or she] is under the same duty of disclosure.”

The court continued.  “Despite the absence of privity of contract, a real estate agent is clearly under a duty to exercise reasonable care to protect those persons whom the agent is attempting to induce into entering a real estate transaction for the purpose of earning a commission.”

“The allegation here is that the brokers had a duty to disclose the liens before the buyers signed the agreement.  Only then could the buyers weigh the risks of entering into an agreement, and preparing their finances and related affairs to facilitate completion of the purchase, considering there was a significant possibility the transaction would fall through.  Disclosing the liens only after the buyers had entered into the escrow failed to protect them in this context.”

“Here, the buyers say that they sold their existing home in order to purchase the seller’s property and were damaged when the seller failed to convey title . . . To impose a duty on the brokers here to disclose information alerting the buyers that the sale was at high risk of failure would be to further the purpose of protecting buyers from harm and providing them with sufficient information to enable them to wisely choose whether to enter into the transaction.”

Reliance by the Buyers

“The buyers expected, based on the standard form documents they signed, as representative of industry standards, that they would receive a preliminary title report after their offer was accepted and escrow was opened.  They were given no reason to believe that they needed to pay for a title search before even making an offer on the property.”

“Just because a purchaser has constructive notice of a matter of record, this does not eliminate all of the duties of disclosure on the part of a seller or its agents.  In the matter before us, assuming a title search would have revealed the existence of deeds of trust against the property, this does not mean that constructive notice of those recorded deeds of trust would necessarily preclude an action based on the alleged breach of a duty to disclose.”

“The rule we articulate in this case is simply that when a real estate agent or broker is aware that the amount of existing monetary liens and encumbrances exceeds the sales price of a residential property, so as to require either the cooperation of the lender in a short sale or the ability of the seller to put a substantial amount of cash into the escrow in order to obtain the release of the monetary liens and encumbrances affecting title, the agent or broker has a duty to disclose this state of affairs to the buyer, so that the buyer can inquire further and evaluate whether to risk entering into a transaction with a substantial risk of failure.”

Duty of Confidentiality

“Turning now to moral blame, we observe that California cases recognize a fundamental duty on the part of a realtor to deal honestly and fairly with all parties in the sale transaction.  Surely a sense of rudimentary fairness would dictate that buyers in a case such as this should be informed before they open escrow and position themselves to consummate the same that there is a substantial risk that title cannot be conveyed to them . . . Both the policy of preventing future harm and considerations of moral blame compel the imposition of a duty on the part of a realtor never to allow a desire to consummate a deal or collect a commission to take precedence over his fundamental obligation of honesty, fairness and full disclosure toward all parties.”

“At a minimum, the brokers did not act fairly towards these residential buyers when signing them up for a real estate purchase the brokers had reason to know was a highly risky proposition. Since the brokers had a duty to act fairly towards the buyers, and fairness under the circumstances dictated disclosing that either lender approval or a substantial seller payment was required to close escrow, the portion of Civil Code section 2079.16 upon which the brokers rely did not exempt them from the duty to disclose.”

“To recapitulate, in balancing the factors [ ], we conclude that the brokers in the matter before us had a duty to disclose to the buyers the existence of the deeds of trust of record, of which the brokers allegedly were aware . . . so the buyer can make an informed choice whether or not to enter into a transaction that has a considerable risk of failure.”

“By so holding, we do not convert the seller’s fiduciary into the buyer’s fiduciary. The seller’s agent under a listing agreement owes the seller a fiduciary duty of utmost care, integrity, honesty, and loyalty.”  Although the seller’s agent does not generally owe a fiduciary duty to the buyer, he or she nonetheless owes the buyer the affirmative duties of care, honesty, good faith, fair dealing and disclosure, as reflected in Civil Code section 2079.16, as well as such other nonfiduciary duties as are otherwise imposed by law.

Holmes v. Summer (Oct. 6, 2010)  188 Cal.App.4th 1510

In the recent decision in Estate of Hastie, the court invalidated a transfer of real property made several years before Mr. Hastie’s death.  In a matter of first impression under Probate Code section 21350, the court held that the gift to a caretaker was could be challenged years after the deed was recorded.  This, surely, was not the result that Mr. Hastie wanted, as the property instead passed to relatives who had no dealings with Mr. Hastie in the years before his death.

According to the decision, “For decades there was a close relationship between [Mr. Hastie] and defendant Bingham Liverman.  Liverman had a real estate background including some probate matters.  A fiduciary relationship developed when Hastie granted Liverman power of attorney in October 1999 and existed continuously at all times relevant to this action, up to and including the date of Hastie’s death.”

Here’s the first bad fact for Mr. Liverman.  The court finds that he was tainted because of his undefined “real estate background.”

The dispute concerned the real property located at 3712 Anza Way, San Leandro.  The trial court found that “in 2001, Liverman suggested that Hastie transfer an interest in the Anza Property to Liverman’s granddaughter by executing a joint tenancy grant deed in her favor.  Hastie executed the deed on June 13, 2001.  It was recorded on March 29, 2002.”

Here’s the second bad fact.  The property was deeded to Mr. Liverman’s granddaughter.

The court continued.  “In 2006, Liverman suggested that Hastie, while in the hospital a few weeks prior to his death, transfer his remaining interest in the Anza Property to Liverman’s grandson.  Liverman drafted a quit claim deed from Hastie in favor of Timothy.  Hastie executed the deed in June 2006.  Appellant did not pay anything to Hastie in exchange for the interest in the Anza Property.”

That’s the third bad fact.  A conveyance made while in the hospital, again to a grandchild.  Mr. Liverman should have left well enough alone and stood on the deed recorded in 2002.

At trial, Mr. Liverman’s sole defense was his assertion that the administrator’s action was barred by the statute of limitations.  Explained the court, Probate Code section 21350 lists “seven categories of persons who cannot validly be recipients of such donative transfers, including, inter alia, any person who has a fiduciary relationship with the transferor who transcribes the instrument or causes it to be transcribed; a care custodian of a dependent adult who is the transferor; and a relative of such fiduciary/transcriber or care custodian.”

This statute opened the door for the relatives to challenge the deed.  “Once it is determined that a person is prohibited under section 21350 from receiving a transfer, section 21351 creates a rebuttable presumption that the transfer was the product of fraud, duress, menace, or undue influence. . . In order to rebut the presumption, the transferee must present clear and convincing evidence, which does not include his or her own testimony, that the transfer was not the product of fraud, duress, menace, or undue influence.”

That’s double handicap for the recipient, who must meet this heightened standard based on the testimony of other persons, only.

Now the court turned to the heart of the matter. “An action to establish the invalidity of any transfer described in Section 21350 can only be commenced within the periods prescribed in this section as follows:

“(a) In case of a transfer by will, at any time after letters are first issued to a general representative and before an order for final distribution is made.

“(b) In case of any transfer other than by will, within the later of three years after the transfer becomes irrevocable or three years from the date the person bringing the action discovers, or reasonably should have discovered, the facts material to the transfer.”

Stated the court, “We are called upon to interpret section 21356 to determine whether the administrator’s action was timely filed.  The parties have not cited, nor have we found, any cases considering this statute.

In the court’s analysis, “The three-year period starts to run either from the date the transfer becomes irrevocable or from the date ‘the person bringing the action’ learns, or should have learned, of the material facts.  Importantly, the section provides that the three-year period runs from the later of these two dates.”

According to the court, “Since the transfer became irrevocable while Hastie was still alive, the later date is three years from when the person bringing the action (the administrator) became apprised of the facts.”

In opposition, “Appellant emphasizes the fact that Steven never had any relationship with Hastie, his family or friends, and asserts that he is the respondent in this matter only because the McCartys hired his brother, George, to represent their interests.”

That strikes me as a solid argument.  The court allowed strangers to interfere with the transfer, when Mr. Hastie was looking out for the persons who cared for him for years.

Even more, the court ignored the rule that the recording of a deed creates constructive notice to the whole world of the transfer.  This long-standing principle was not considered by the court.

Thus, the court concluded that “it is abundantly clear that ‘the person bringing the action’ pursuant to section 21356, subdivision (b), can be the administrator of the estate following the death of the transferor and that this person might well be a stranger to the decedent.  The McCartys, as children of Hastie’s predeceased spouse, were entitled to be appointed administrator and were also free to nominate another person, whether known to Hastie or not, to serve in that capacity.”

This is a difficult decision to reconcile, as strangers to the decedent were permitted to overturn a conveyance that had been made years before decedent’s death.

Estate of Hastie (First Appellate District) July 22, 2010

The overlap between real property law and trust law reaches back centuries, as early trust law was concerned with the conveyancing of real property.  Similarly, Prof. Maitland in his famous (and tremendously readable) “The Forms of Action at Common Law” (1909) teaches that eviction law, known as “unlawful detainer,” also reaches back hundreds of years.

Here is an important rule, arising from the wave of foreclosures which we are now witnessing – a judgment in a simple unlawful detainer lawsuit has the effect of validating, and thereby eliminating any objections to, a prior foreclosure by a lender.

To start, an unlawful detainer action is concerned with the narrow question of the right to “possession” of real property.  The law holds that almost all other issues cannot be raised in the summary proceeding known as unlawful detainer.

Yet, a federal case from last fall reminds us that the property owner has the right to contest the validity of a foreclosure sale in defense to an action for unlawful detainer.  In Nyugen v. LaSalle Bank, C.D. Cal. Case No. 09-0881 (Order entered October 13, 2009), the court held as follows:

“Defendant LaSalle brought suit against Plaintiffs in Orange County Superior Court for unlawful detainer following the foreclosure sale.  There, Nguyen (Plaintiff herein) urged that LaSalle’s foreclosure was improper and alleged multiple affirmative defenses. The state court entered judgment in favor of LaSalle, finding that LaSalle’s evidence established all elements of its claim”

“Plaintiffs urge that by alleging fraud, undue influence, and breach of covenant of good faith and fair dealing, that res judicata does not bar their claims. However, as discussed below, Plaintiffs’ allegations not only fail herein, but were also rejected in the unlawful detainer proceeding.”

Held the court, “Although most issues unrelated to possession can be raised in a subsequent action between the parties, the issue of the irregularity of the foreclosure or execution sale is barred by a judgment in an unlawful detainer action.”

That is a powerful statement of law.  And correct, also.  The federal court cited to Freeze v. Salot (1954) 122 Cal.App.2d 561, which held as follows:

“The municipal court had jurisdiction of the action between Aguilar and plaintiff.  We must conclude from the allegations with respect to the averment of the complaint in the municipal court action that it was a proceeding in unlawful detainer.”

OK, so we know the court is reviewing the judgment in an unlawful detainer action.  Note that the judgment was entered by default, which means that the defendant did not appear in the action, and did not contest the claim of unlawful detainer.

The court continued.  “The facts [pled in the new lawsuit alleged] that plaintiff was not in default under the deed of trust, that the note had been fully paid on November 6, 1948, and that she had no notice that the property was to be sold, were available to her as a defense in that proceeding.  The question is whether the judgment of the municipal court [in the eviction lawsuit] is res judicata in this action.”

Reviewing the decision in Seidell v. Anglo-California Trust Co., 55 Cal.App.2d 913, the court ruled in favor of the lender.  Stated the court, Seidell “was a suit to set aside a trustee’s deed to realty for alleged fraud and irregularities in the foreclosure proceeding. The question on appeal was whether a judgment which was rendered in a former proceeding in unlawful detainer was res judicata. The purchaser at the trustee’s sale had conveyed the property prior to the proceeding in unlawful detainer.

“The judgment in the unlawful detainer suit bars the appellants from now contending the trustees’ deed to the real property was void on account of the alleged irregularities of procedure in the foreclosure of the deed of trust.”

“In this case the challenged unlawful detainer judgment determined issues tendered by these appellants in their answer which constituted legal defenses of alleged specific violations of the statute in failing to give the notice of sale required by section 2924 of the Civil Code, lack of consideration for the note secured by the trust deed, and other asserted defects going to the validity of the trust deed and note secured thereby, and to the proceedings on the sale of that property under the provisions of the deed.”

“All of those issues of law, as distinguished from equity, affecting the legality of the note, deed of trust and the sale were properly determined against the defendants in that unlawful detention suit.”

To drive the nail home, the court held that “Plaintiff’s failure to appear in the municipal court action was a confession that all the material facts alleged in the complaint in that action were true.  A judgment by default is a complete adjudication of all the right of the parties embraced in the prayer of the complaint and stands on the same footing as a judgment after answer and trial with respect to issues tendered by the complaint.”

A powerful lesson, 50 years on.  A homeowner must contest the validity of a foreclosure in a subsequent action for unlawful detainer whereby the lender seeks a judgment for possession of the real property.  Failure to do so waives all defenses, both state and federal, relating to irregularities regarding the foreclosure.

Professor Brent T. White from The University of Arizona Law School has followed up his report issued last fall regarding troubled loans.  Prof. White personally communicated with more than 350 individuals regarding their mortgage problems.

His new report raises a number of troubling issues, but none more so than the dissembling tactics of lenders.

Writes Prof. White, “The reason that many strategic defaulters struggle so long before deciding to default is that fear and anxiety are not typically enough in isolation to cause them to stop making payments.  Rather such anxiety more frequently serves as a call to action, driving homeowners to try to do something about their situation – such as contacting their lender to try to work out a loan modification or a short sale.

“In fact, not a single strategic defaulter in the 356 accounts reviewed for this article reported having stopped paying their mortgages without first contacting their lender . . . Many underwater homeowners who seek help from their lenders, however, are turned away at the door. As one homeowner explains, ‘I called my lender and ask if I could discuss a loan modification and they said absolutely not.’  Lenders give numerous reasons for this, most commonly that homeowners are current on their mortgages.”

If you are current on your loan, regardless of the financial struggles to maintain the loan, you will never get your loan modified.  “The fact being a ‘responsible’ borrower is the surest way not to get a loan modification can be a rude awakening for many homeowners.”

Prof White continues.  “This is because most lenders don’t modify mortgages or agree to short sales for homeowners who might continue making their payments absent such accommodation. The best predictor that a homeowner will continue making payments is a good credit score and a past history of making their payments.  Homeowners with such characteristics thus have little chance of getting help unless they first miss some payments, and they are frequently told this by the loan servicing personnel who take their calls.”

Worse yet, “The loan modification process turns out, however, to be immensely frustrating[.]   Homeowners are frequently unable to reach anyone to discuss their applications’ status[.]  Their paperwork is ‘lost’ repeatedly[.]  They are treated rudely and lied to[.]  Worse, after months of frustration, most homeowners learn that their lender is not willing to work with them after all.”

Prof. White is not exaggerating.  I have yet to meet a borrower with anything positive to say about the loan modification process.  As a society, we are not serious about helping borrowers with troubled home loans.

Brent T. White, Take this House and Shove it: The Emotional Drivers of Strategic Default (May 2010)

The diverse use of trusts is represented in a recent case from the federal Fifth Circuit Court of Appeals.  In Gale v. Carnrite, 559 F.3d 359 (5th Cir. 2009), the dispute involved tax liabilities arising from the sale of membership interests in a Nevada limited liability company.  The underlying facts were as follows:

In 1999, Gale expressed interest in purchasing a condominium unit located in San Jose Del Cabo, Baja California Sur, Mexico.  The condominium was owned by Villa Rayos Del Sol, LLC, a Nevada limited liability company.

After inquiring about the purchase, the Gales learned that legal restrictions affected the transaction.  Specifically, as explained in the decision, “under Article 27 of the Constitution of Mexico, only Mexicans by birth or naturalization or Mexican companies may acquire direct ownership of lands or waters within the zone of 100 kilometers along the frontiers and 50 kilometers along the shores of the country.”

The condominium unit was located within such a restricted area.  In order to proceed with the purchase, the Gales were informed that they could not acquire the condominium directly.  Per the decision, “Instead, they would be required to purchase the outstanding membership interests in the limited liability company (Villa Rayos), which was the beneficial owner of the leasehold interest in the condominium under a Mexican Bank Trust arrangement known as a “fideicomiso.”

The court explained that “a fideicomiso is a property-ownership arrangement complying with Article 27 of the Mexican Constitution under which a Mexican Bank Trust obtains legal title to a piece of real property within the prohibited zone, and a foreigner, as the beneficiary of the trust, enjoys the beneficial interest in the property, including all the usual rights of ownership.”

The limited liability company’s sole asset was the beneficial interest in the condominium.  The only purpose of the limited liability company was to serve as the beneficiary of the fideicomiso.

As to the history of the entity, “Villa Rayos was formed in 1996.  Its original members and owners were the Sonenshine Family Trust.  [The Sonenshines] previously purchased the beneficial interest in the fideicomiso from the condominium’s developer in 1991 for $715,000, and subsequently transferred the beneficial interest [in the condominium to the limited liability company] in 1996.  In February 1999, [defendant] Carnrite purchased all of the outstanding membership interest in [the limited liability company] for $1,725,000.”

In December 1999, the Gales purchased all of the membership interests in the limited liability company from defendant Carnrite.  The purchase price was $2,125,000.  The seller warranted that at the close of escrow, “the LLC has and will have no liabilities of the any nature, including without limitation tax liabilities due or to become come due.”

The sale closed in January 2000.  “Neither [the seller] nor anyone else reported the transaction to the Mexican government; no Mexican income or capital gains taxes were paid on the transfer.”

In September 2005, the Gales sold their interest in the limited liability company to a third party for $2,400,000.  According to the case, “a substantial Mexican capital gains tax liability resulted, determined by using the basis of the fideicomiso from 1991.”

The trial court found that the seller breached the warranty made to the Gales in 1999, on the grounds that “at the time of closing, Villa Rayos had a built-in capital gains tax liability equal to the difference between the Gales’ purchase price and the original adjusted basis.”  At trial, experts presented evidence regarding interpretation of the Mexican tax code.

The court of appeal reversed the decision, holding in favor of the seller.  The court assumed that (i) the 1999 transaction was a taxable event and (ii) “any tax liability initially fell on [defendant] Carnrite.”  The question addressed by the court of appeal was “whether, under Mexican law, the LLC was obligated to pay taxes on the 1999 transaction.”

In holding for the defendant, the court held that “the Gales did not show that [the seller’s] failure to pay such taxes resulted in a liability for [the limited liability company].”

The focus of the appellate decision was whether the individual defendant’s “failure to report or pay taxes on the transfer created a tax liability for [the limited liability company].”  Explained the court, “both under [the experts’] analysis and the language of the [contract] itself, the individual defendants’ failure to pay resulted in a tax liability for the Gales (the buyer), not [the limited liability company].”

The court further explained that, “the warranty provision covered only the tax or other liabilities of the LLC.  [However, limited liability company] was neither the buyer nor the seller in the transaction.  The 1999 transaction altered the ownership of the membership interest of Villa Rayos, but there is no factual or legal basis shown by this record that [the limited liability company, i.e.,] Villa Rayos itself became liable for anything or that it would become liable at the default of others.”

The court added that, “by contrast, in 2005 transfer, [the limited liability company] itself sold the beneficial interest in the fideicomiso to [the new purchaser.  In the disputed transaction], Villa Rayos was the seller.”

The court concluded that, “the seller provided a warranty that the asset being transferred did not itself have any liabilities.  If the act of transferring created liabilities or passed on a pre-existing liability of the seller, that risk was not covered by the warranty.

“A warranty that the buyer was not getting any liabilities of any nature from any source would be a valuable one.  We conclude, though, that this war they did not provides comprehensive protection.  Because Carnrite’s failure to pay taxes for 2000 is the only breach the Gales allege, Carnrite is entitled to judgment on the breach of contract claim.”

The decision seems to apply a narrow interpretation of contract law.  However, it illustrates the thorny tax issues that can arise when trust assets are transferred.