Fresno Lawyer – Randolf Krbechek

There’s an old saying – “You can’t fight city hall.”  In the case of a homeowners association, the saying should be, “You can’t afford to fight a homeowners association.”  Because the deck is stacked against the homeowner.

In the recent case of Rancho Mirage Country Club Homeowners Ass’n v. Thomas B. Hazelbaker (Aug. 8, 2016) ___ Cal.App.4th ___, the stakes for the homeowner were dramatically low.  “Defendants made improvements to an exterior patio, which plaintiff Rancho Mirage Country Club Homeowners Association contended were in violation of the applicable covenants, conditions and restrictions (CC&Rs).”

What was the original dispute? “The agreement called for defendants to make certain modifications to the patio, in accordance with a plan newly approved by the Association; specifically, to install three openings, each 36 inches wide and 18 inches high, in a side wall of the patio referred to as a ‘television partition’ in the agreement, and to use a specific color and fabric for the exterior side of drapery.”

It seems the defendants had a burr under their saddle regarding the modifications.  “Subsequently, the parties reached [a modified] agreement … instead of three 36-inch-wide openings, two openings of 21 inches, separated by a third opening 52 inches wide, were installed in the wall, and a different fabric than the one specified in the mediation agreement was used for the drapery.”

Oy vey.  Someone went to court over this issue?  “While the lawsuit was pending, defendants made modifications to the patio to the satisfaction of the Association.  Nevertheless, the parties could not reach agreement regarding attorney fees.”

In the end, the fight was over attorney’s fees.  Here’s a big hint – never go to trial if the only issue in dispute is attorney’s fees.  Figure out how to settle.

According to the court, the Association prevailed in the litigation.  “The analysis of who is a prevailing party [ ] focuses on who prevailed on a practical level by achieving its main litigation objectives … The Association wanted defendants to make alterations to their property to bring it in compliance with the applicable CC&Rs, specifically, by installing openings in the side wall of the patio, and altering the drapery on the patio.  The Association achieved that goal.”

Another hint – The homeowner, as a practical matter, will never achieve a complete victory in litigation.  Any relief to the Association tips the attorney’s fees statute to the Association.

Held the court, “Once the trial court determined the Association to be the prevailing party in the action, it had no discretion to deny attorney fees.  The magnitude of what constitutes a reasonable award of attorney fees is, however, a matter committed to the discretion of the trial court.  As noted above, in reviewing for abuse of discretion, we examine whether the trial court exceeded the bounds of reason.”

And, to rub salt in the wound, “The Association correctly asserts that if it prevails in this appeal it is entitled to recover its appellate attorney fees …

“The judgment [for $18,991 in attorney fees, plus $572 in costs] is affirmed.  The Association is awarded its costs and attorney fees on appeal, the amount of which shall be determined by the trial court.”

Rancho Mirage Country Club Homeowners Ass’n v. Thomas B. Hazelbaker (Aug. 8, 2016) ___ Cal.App.4th ___

The recent decision in Janice H. v. 696 North Robertson, LLC (July 14, 2016) ___ Cal.App.4th ___ addressed the always difficult question of premises liability.  More specifically, When is the operator of real property liable for an injury to a guest in a unisex bathroom?  The court’s answer – a resounding, It depends.

The facts were somewhat lurid, or as we might say, Only in LA.  “On a Sunday in March 2009, Plaintiff drank with a friend at bars in Pasadena and then in West Hollywood.

“Plaintiff went to Here Lounge to wait for her friend. At the time, Here Lounge was a very popular West Hollywood dance club and bar … Here Lounge also fostered a sexually charged atmosphere by permitting bartenders to wear nothing but underwear.”

Comment – The Dept of Alcoholic Beverage Control later closed the club, which was described as a gay bar, based on “allegations of lewd conduct by go go dancers.”

From the Here Lounge (now closed).

Explained the court, “Here Lounge designed the bar to have a common restroom area accessible to both men and women.  On busy nights, a long line of patrons waited to use the restrooms …

“Plaintiff went into an ADA restroom stall and shut the door.  As was common among patrons of Here Lounge, Plaintiff did not lock the door.”

Comment – How in the world was this fact proven – That it was “common” for patrons at the club to leave the door to the bathroom stall unlocked?

While in the bathroom stall, plaintiff was assaulted by a “man [ ] later identified as Victor Cruz, a bus boy at Here Lounge … The assault, which caused Plaintiff to lose her virginity, lasted about five minutes and ended with Victor ejaculating on Plaintiff’s dress.”

The jury found in favor of plaintiff, and awarded $5.42 million in damages.  The verdict was affirmed on appeal, because, frankly, jury verdicts are always affirmed on appeal.

Here’s how the court handled the issue of premises liability.  “The issue is whether Here Lounge owed a duty to use reasonable care in securing the restrooms for its patrons … A possessor of land owes a duty to an invitee to make the property reasonably safe for the intended use by the intended user.  Thus, the property holder only has a duty to protect against types of crimes of which he has notice and which are likely to recur if the common areas are not secure.”

The club owner argued that it was not liable because there had been no prior assaults.  This argument was unavailing.  “Here Lounge argues it has no duty unless and until it experiences a similar criminal incident.  We disagree.  While a property holder generally has a duty to protect against types of crimes of which he is on notice, the absence of previous occurrences does not end the duty inquiry.  We look to all of the factual circumstances to assess foreseeability.”

Comment – Great.  It’s always a “facts and circumstances” question.

“In this case, Here Lounge promoted a sexually charged atmosphere and designed an open restroom area allowing unrestricted entry for men and women.  It designed the larger ADA stalls with full length walls shielding the occupants from view.

“Here Lounge knew that sexual activity in the restrooms and elsewhere in the club was an ongoing issue … There was testimony that sexual activity in the club increased towards the end of the night and tended to occur in the ADA bathroom stalls, like the stall where Plaintiff was raped, because the full length doors shielded the occupants from view.  The owner also admitted that an employee once observed a woman performing oral sex on a man at the club and ignored it …

“This evidence [ ] made the risk of harm to intoxicated and vulnerable patrons reasonably foreseeable, regardless whether the club was on notice of a prior similar incident.  Knowing the potential serious harm of non-consensual sex, a reasonable person managing the property would have posted a guard in the restroom area whenever the club was open to the public, even when attendance tapered off.

“The burden for monitoring the restroom area during business hours was small, requiring only a change in policy to eliminate the guards’ individual discretion to leave the restroom area and roam the premises when patronage dwindled.”

Result – Judgment for plaintiff affirmed.

Janice H. v. 696 North Robertson, LLC (July 14, 2016) ___ Cal.App.4th ___

The remedy of unlawful detainer is available in three situations under California law, most commonly when a tenant holds over after termination of the lease, or when the tenant continues to occupy the property after breach of the lease.

Less commonly, unlawful detainer is available to an owner “against an employee, agent, or licensee whose relationship is terminated,” and in the third situation, to a purchaser at a foreclosure sale against the former owner and other occupants.

In Taylor v. NU Digital Marketing, Inc. (2016) 245 Cal.App.4th 283, the parties entered into a hybrid contract.  Although styled a contract for sale, the court held that the contract actually was a lease, seemingly tied to an option to purchase, such that the remedy of unlawful detainer was available to the owner.

Note to potential purchasers: An unrecorded “contract of sale” that does not include a deed from the owner to the purchaser is an invitation for trouble.  The court will want to fit the contract into one of its traditional modes of analysis.  As the following decision shows, the court might view the document as a lease, with potentially disastrous consequences to the purchaser.  Be careful when you try to be creative in making a grant of real property.

Now to the facts.  In August 2012, the parties entered into an agreement entitled “Contract of Sale Residential Property.”  The contract provided that “plaintiffs (designated ‘Seller’ in the agreement) agreed to sell a piece of property to defendant (designated ‘Buyer’ therein) for $1.25 million subject to the following terms and conditions:

“Paragraph 1 required defendant to ‘consummate’ the purchase ‘within 60 months of the execution date of the agreement’ by making ‘payment’ of the purchase price, i.e.,  $1.25 million through [escrow].”

Comment: That sounds like an option, exercisable in 60 months.  An option to purchase is not the same a contract for sale.  The option must be exercised by act of the grantee, while the contract for sale is enforceable per se.

“Paragraph 2 purported to divide the purchase price into five components: (1) a grant of equity in defendant corporation (referred to as the ‘Equity Grant’); (2) payment of all property taxes and insurance costs from the move-in date; (3) payment of all homeowners association fees and any related penalties or special assessments; (4) the ‘Down Payment’; and (5) ‘Probationary Installment’ payments of $2,300 per month for 60 months (also referred to as ‘Probationary Payments’).”

The dispute arose when “the probationary installment payments increased to $4,216.48 in accordance with the provision allowing for an upward adjustment of such payments to match plaintiff’s adjustable rate mortgage payment.”

Now the conflict comes into sharper focus.  If you “rented” a property, with a fixed purchase price, and paid 100% of the owner’s mortgage payments plus property taxes plus homeowners association fees, then you might believe you had purchased the property.  But this court did not agree – “In addition to awarding possession to plaintiffs, the court awarded damages in the amount of $31,683.68 and declared the agreement forfeited.”

The court started by explaining that “Unlawful detainer actions are authorized and governed by state statute.  The statutory scheme is intended and designed to provide an expeditious remedy for the recovery of possession of real property … Unlike the foregoing situations, a vendee in possession of land under a contract of sale who has defaulted in the payment of an installment of the purchase price, is not subject to removal by the summary method of unlawful detainer.”

Held the court, “The relationship created by the agreement must be characterized by reference to the rights and obligations of the parties and not by labels … While defendant also agreed to purchase the property within the lease term, possession of the property was conditioned upon payment of the probationary installments, which entitled defendant only to continued possession, and were therefore rent.”

“Probationary payments” in a real estate contract?  I never heard of such a thing, and neither had the court.  Taylor v. NU Digital Marketing, Inc. (2016) 245 Cal.App.4th 283

In a lawsuit based on a contract, one party can seek relief based on the theory of rescission.  Rescission can be considered an equitable judicial remedy.  Under California Civil Code section 1689, rescission supports “extinction” of the obligation.

Rescission can be pled as a basis for affirmative relief, or it can asserted as defense to a claim based on contract.  Which is what happened in Ferguson v. Yaspan (2015) 233 Cal.App.4th 676 – the defendant asserted rescission as a defense to a contract lawsuit.

The dispute in Ferguson v. Yaspan arose between an attorney (defendant) and his former client (plaintiff).  In 1995, the plaintiff sold defendant an interest in a London flat owned by plaintiff.  Later, the Fergusons sought to set aside the written agreement.

Here’s the interesting part of the decision.  The court opined on rescission as a defense, holding that such a defense was not subject to the statute of limitations.  Explained the court

“The invalidity of a contract may be asserted either as a basis for affirmative relief or as a defense.  When a litigant seeks affirmative relief, her claim may be barred if filed outside the statute of limitations period.

“However, where invalidity is raised solely as a defense, there is no limitations period because statutes of limitations are designed to ‘act as a bar to actions or proceedings’ –  not to individual claims or defenses.”

Thus, a defense based on a claim of rescission is not subject to being struck as pled outside the statute of limitations.

California law now prohibits the practice of “dual tracking,” whereby a lender simultaneously pursues a default while also engaging in loan modification negotiations with the borrower.  The question concerns the remedy available when there is a violation of the dual tracking law.

The court in Kazem Majd v. Bank of America, N.A. (Jan. 14, 2016) 243 Cal.App.4th 1293 held that a lender’s violation of the loan modification requirements established by the federal government in the HAMP program, and/or violation of the dual tracking prohibition, could give rise to a claim for wrongful foreclosure against the lender.

The court also made important findings about the HAMP program.  Rejecting “a statement found in an unpublished federal district court decision, which decision in turn repeated a statement found in other unpublished district court decisions,” the court explained that, under “the relevant United States Department of the Treasury guidelines[,] where a borrower satisfies the relevant criteria, ‘the servicer MUST offer the modification.’”

Even more, the court held that the “tender requirement” does not apply when a plaintiff states a claim for wrongful foreclosure based on violation of the dual tracking statute.

Explained the court, “the whole point of Civil Code section 2923.5 is to create a new, even if limited, right to be contacted about the possibility of alternatives to full payment of arrearages … The purpose of the modification rules is to avoid a foreclosure despite the borrower being incapable of complying with the terms of the original loan.  It would be contradictory to require the borrower to tender the amount due on the original loan in such circumstances.”

But can such violation also support a claim to set aside the foreclosure sale?  Only in limited circumstances.  The case holds that the additional remedy of setting aside the foreclosure sale would only lie against the purchaser if the purchaser was not a “bona fide purchaser for value.”

In Majd v. Bank of America, the purchaser of the foreclosure sale was the secured lender.  But when the purchaser is a third-party, who had no reason to know that the lender had engaged in wrongful dual tracking, the remedy of setting aside the foreclosure sale would not be available.

Overall, Majd v. Bank of America offers important protections to homeowners whose rights have been violated by the lender’s unlawful “dual tracking.”

The law of evictions – titled as “unlawful detainer” in California – is a technical area. The law has statutory roots as far back as the Forcible Entry Act of 1381, which prohibited the use of self-help to retake possession of real property.

That remains an important concept in an action based on the unlawful detainer statutes.  The principal objective in an action for unlawful detainer is a judicial determination whether the plaintiff or defendant is entitled, at that time, to possession of the property.  Unlawful detainer does not focus on ownership, and case law holds that the issue of plaintiff’s title to the property cannot be litigated in an unlawful detainer proceeding.

So, the objective is up to obtain a judgment for unlawful detainer, coupled with issuance of a writ of possession.  By law, the writ of possession is delivered to the sheriff, who has the responsibility to serve and enforce the writ of possession, ultimately using the sheriff’s office to restore possession to the plaintiff.

Remember – no self-help.  The court issues a judgment for possession, together with a writ of possession.  The sheriff enforces the writ of possession and restores possession to the plaintiff.

Now mix in issues arising under bankruptcy law.  In In re Perl, __ F.3d __ (Jan. 8, 2016), the plaintiff in an unlawful detainer action obtained judgment and the court issued a writ of possession.  The writ was delivered to the sheriff.  Then, before the sheriff effected service, the tenant filed for bankruptcy.  Does the Sheriff’s actions in enforcing the writ of possession violate the automatic stay created under bankruptcy law?

“The question in this case is whether Perl had any remaining legal or equitable possessory interest in the property after … the state court fully adjudicated in the unlawful detainer proceedings.”  According to the 9th Circuit, the answer is No.

More specifically, “We conclude that under California law, entry of judgment and a writ of possession following unlawful detainer proceedings extinguishes all other legal and equitable possessory interests in the real property at issue.”

In so doing, the court overruled the decisions in In re Di Giorgio, 200 B.R. 664 (Bankr. C.D. Cal. 1996) and In re Butler, 271 B.R. 867 (Bankr. C.D. Cal. 2002).

It gets more interesting when the court reviewed the statutory scheme.  The court found that “Pursuant to Code of Civil Procedure § 415.46, no occupant of the premises retains any possessory interest of any kind following service of the writ of possession.”

Comment – Look up CCP § 415.46 for yourself.  It deals with the prejudgment claim to possession that can be asserted by third parties in possession of the property.  The court’s analysis is not supported by statute.

Thus, the court concluded that “The unlawful detainer judgment and writ of possession entered pursuant to California Code Civil Procedure § 415.46 bestowed legal title and all rights of possession upon Eden Place.  Thus, at the time of the filing of the bankruptcy petition, Perl had been completely divested of all legal and equitable possessory rights that would otherwise be protected by the automatic stay.  Consequently, the Sheriff’s lockout did not violate the automatic stay because no legal or equitable interests in the property remained to become part of the bankruptcy estate.”

Comment – I can’t agree.  Possession could be restored only by the sheriff acting pursuant to the writ of possession issued by the court.  As possession was restored by enforcement of a court order, I believe the act of restoring possession necessarily impacted the bankruptcy stay.

Strange how an idea that was once old can become new again.  Roscoe Pound, Dean of the Harvard Law School, was a prolific legal writer in the 1920s and 1930s.  From my perspective, his best work concerned the development of the American legal system from 1850 through 1900, as America reached the end of its Western expansion.

Writing in 1938, Dean Pound discussed why legislation was not effective to address rapidly-changing areas of the law.  Here is Dean Pound’s analysis:

“It would seem that while legislation has proved an effective agency of ridding the law of particular institutions and precepts which have come down from the past and have not been adapted or were not adaptable to the needs of the time, it has not been able, in our legal system, except in rare instances, to do much of the constructive work of change in eras of growth.  So far as everyday relations and conflicts of interests are concerned, it has not been able to anticipate new demands nor to move fast enough when they made themselves felt through litigation.”  Roscoe Pound, The Formative Era of American Law (Little, Brown and Company 1938), pp. 44-45.

At the same time, I was reading a new law review article by Professor Mark Burge, discussing the future of the law of payment systems.  Once upon a time, the law of payment systems dealt principally with bank drafts, checks, and bills of exchange.  These days, the law of payment systems also encompasses credit cards, debit cards, ETF’s, Apple Pay, and Bitcoin.

As is apparent, payment systems is a rapidly developing area of the law.  In his article, Prof. Burge discusses why efforts at codification via the Uniform Commercial Code have failed, in large part because opponents of consumer protection provisions have “spiked the cannon” (my words, not his).  Note Professor Burge’s analysis of legislative action in this area:

“Public law should presumptively not be the governing device for payments, although the presumption is a rebuttable one … Experience provides three interrelated reasons to err on the side of private governance.

“First, private law is more capable of adapting to technological change in a meaningful timeframe … Public legislative or regulatory process is not nimble enough to keep up with the times. That fact is not a design flaw in deliberative democracy; it is an intentional feature where the intention dates at least as far back as the United States Constitution …

“Second, after bright-line public law protections of system users are in place, the remaining incentives will be for system operators to conduct themselves in a manner that produces the most social benefit.

“Finally, the parties operating a payment system are in the best position to determine allocation of risks unaccounted for by limited public law, and also to handle a limited collection of risks that public law should impose.”

Although separated by 80 years, Prof. Burge’s analysis is not far off the mark from Dean Pound.  Reminding us that everything old is new again.

Mark Edwin Burge, Apple Pay, Bitcoin, and Consumers: the ABCs of Future Public Payments Law, forthcoming in 67 Hastings L.J. (2016)

Here is a recent decision that is not a surprise under a traditional agent-principal analysis.  Even so, it has to sting, because the corporation loses twice – first, when it was defrauded by the former president, and second when the corporation was sued by shareholders for the diminished value of their securities.

The fact pattern is straightforward.  “ChinaCast founder and CEO Ron Chan embezzled millions from his corporation and misled investors through omissions and false statements – textbook securities fraud.”  These were not small losses: “From June 2011 through April 2012, Chan ‘transferred’ $120 million of corporate assets to outside accounts that were controlled by him and his allies.”

There’s your background.  The corporation, recognized by law as a separate “person,” lost millions of dollars through embezzlement by the former CEO.  At the same time, the former CEO made false representations on behalf of the corporation, which false representations caused damage to investors in the corporation.

Explained the court, “Throughout 2011, Chan signed SEC filings on behalf of ChinaCast and never disclosed the $120 million in transfers and other fraudulent activities afoot.”  (Of course Chan made false representations – otherwise, he would of been admitting his wrongdoing.)

The corporation brought forth a common-law defense: “The adverse interest doctrine may prevent a court from imputing knowledge of wrongdoing to an employer when the employee has abandoned the employer’s interests, such as by stealing from it or defrauding it.”

“The sole question on appeal is a purely legal one and an issue of first impression in this circuit:  Can Chan’s fraud be imputed to ChinaCast, his corporate employer, even though Chan’s looting of the corporate coffers was adverse to ChinaCast’s interests?”

The Ninth Circuit held that the corporation could be sued by investors based on the false representations, even though the corporation suffered its own separate injuries.  Explained the court, “we conclude that Chan’s fraudulent misrepresentations – and, more specifically, his scienter or intent to defraud – can be imputed to ChinaCast.

“Significantly, imputation is proper because Chan acted with apparent authority on behalf of the corporation, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business.”

That’s certainly a difficult result.  Everyone suffered from the wrongful acts of Chan.  In an earlier time, the law probably would have allowed the losses to rest where it found them.  In our increasingly urban society, the law reaches out to protect injured persons, even when the defendant has already “paid once” for the injury.

In re ChinaCast Education Corporation Securities Litigation, __ F.3d __ (9th Cir. Oct. 23, 2015)

The federal bankruptcy courts publish detailed statistics on bankruptcy filings.  California has four federal judicial districts, with Fresno located in the Eastern District.

The 2011-2015 bankruptcy filings for the Eastern District of California continue to show a substantial decline, as shown in this table:

Truly, the overall decline from 2011 to 2015 is astonishing, and suggests that our economy is improving.

As the jurisdiction of small claims court has increased (now up to $10,000), attorneys are called on more frequently to assist on appeal.  (Ground rule – attorneys are not permitted to assist at the original trial, only on appeal.)

In Dorsey v. Superior Court (Oct. 22, 2015) __ Cal.App.4th __, “The small claims court dispute [ ] arose out of a condominium lease, which contain[ed] a prevailing party attorney fee provision.  [The trial court] entered judgment in favor of the tenants [ ] against the landlord [ ] in the principal amount of $1,560.”

This is where it gets interesting.  “After judgment, [the tenant] sought $11,497.50 in attorney fees as the prevailing parties under the attorney fee provision in the lease.  [The landlord] opposed the motion, asserting Code of Civil Procedure section 116.780(c) trumped the contractual attorney fees provision, limiting any award to $150.  The superior court awarded Crosier $10,373.”

Fort Sumter

Explained the court, “Small claims court exists so people with meritorious claims for small amounts may have those claims adjudicated without spending more on attorney fees than the claims are worth.”

Note – English law has recognized “small claims” jurisdiction for at least five centuries.  As the court discussed, “The small claims court system has been refined over hundreds of years with recurring attention from the courts, legal commentators, and the Legislature.”  It’s not like California invented small claims court.

Continued the court, “Section 116.780(c) reflects a legislative determination that a small claims appeal should require no more than minimal attorney time.  The small claims appeal procedure was intended to be integral to the legislative scheme for expeditious and cost-effective resolution of small claims.

“Therefore, as we explain, section 116.780(c) must be construed to override contractual attorney fee provisions and limit the attorney fee award here to $150.”

The court also discussed the unusual procedure of the case.  “The superior court’s judgment on a small claims appeal is ‘final and not appealable’ … However, if law is to be made settling a significant issue of small claims procedure, ‘the appellate courts must have jurisdiction to entertain petitions for extraordinary review in appropriate circumstances.’  Writ relief is appropriate here to review this significant issue in small claims law and to ensure uniform interpretation of the governing statutes.”

Bottom line – The court can award attorney’s fees up to $150.00 in small claims court.  Dorsey v. Superior Court (Oct. 22, 2015) __ Cal.App.4th __