Fresno Lawyer – Randolf Krbechek

This is the second part of an analysis of Starr v Starr (Sept. 30, 2010) 189 Cal.App.4th 277.  The court held that a house acquired during marriage in the name of the husband only was actually community property, even though the wife signed a quitclaim deed in favor of the husband.

Explained the court, “Evidence Code section 662 creates a presumption that title is actually held as described in a deed . . .The law, from considerations of public policy, presumes such transactions to have been induced by undue influence.  When that presumption arose, it trumped the competing presumption created by Evidence Code section 662.”

The court then shifted to an analysis of undue influence, explaining that California law recognizes three forms of undue influence.

1.  Undue influence is a contract defense based on the notion of coercive persuasion.  Its hallmark is high pressure that works on mental, moral, or emotional weakness, and it is sometimes referred to as over persuasion.

2.  Undue influence is statutorily defined as taking unfair advantage of another’s weakness of mind, or taking a grossly oppressive or unfair advantage of another’s necessity or distress.

3.  There is another type of conduct that amounts to undue influence: the use of confidence or authority to obtain an unfair advantage.  This is triggered by one party’s breach of a confidential relationship.

In reviewing prior case law, the court explained as follows.  “Brison I and II are significant for three reasons.”

“First, they announced the overarching principle that constructive fraud due to breach of a confidential relationship amounts to undue influence, terminology that was adopted by other courts.”

That is a clean, efficient statement of the law.

“Second, they differentiated such constructive fraud from the other forms of undue influence based on acts of coercion or over persuasion.”

Also helpful.

“Third, they established a paradigm fact pattern of constructive fraud arising from one spouse’s conveyance of property to the other spouse based on an unfulfilled promise by the other spouse to reconvey.  This fact pattern has been applied by our courts many times in cases involving spouses and other persons in confidential relationships.”

Similarly, “In action to quiet title and void deed from father and one son to other son based on breach of fiduciary duties, judgment affirmed; undue influence is a species of constructive fraud and depends on the facts and circumstances of each case.”

The court distinguished another similar holding.  “It is easy to see why Ron relies on Mathews.  The factual setting seems virtually identical to this case, with the added bonus of Martha’s testimony that she signed the quitclaim deed freely and voluntarily.”

“There is a critical – and we believe fatal – distinction, however.  In Mathews, the wife said she merely assumed she would be added onto the title after escrow closed, while Martha testified that Ron told her he would do so.  The importance of this distinction is tied up in both section 721 and its statutory predecessor, and the sometimes confusing use of the term undue influence’ by decisions interpreting those provisions.”

Stated the court, “As we have seen, the failure to add Martha onto the title is constructive fraud under section 721, and constructive fraud is presumed to be undue influence, which means the transaction was not free and voluntary.  When the trial court found Martha did not act freely and voluntarily, it necessarily found that she quitclaimed her interest in the house as the result of undue influence.”

Now comes the interesting part of the decision.  The court outlines a defense to a claim of breach of confidential relationship, aka constructive fraud, aka undue influence.  This is a point well worth considering.

To overcome a claim of breach of confidential relationship, “the husband had to show that the deed was freely and voluntarily made, and with a full knowledge of all the facts, and with a complete understanding of the effect of the transfer.”

Stated otherwise, “an interspousal transaction that benefits one of the spouses creates a presumption of undue influence, requiring the husband who obtained his wife’s quitclaim deed to the family home to show that the deed was freely and voluntarily made.”

That’s a quite profound statement, as it sets up a defense to a claim of undue influence or breach of confidential relationship.

Starr v Starr (Sept. 30, 2010) 189 Cal.App.4th 277

In Starr v Starr (Sept. 30, 2010) 189 Cal.App.4th 277, the court was confronted with division of assets at the time of divorce.  In an excellently-reasoned opinion, the court found in favor of the wife, and held that she was entitled to a 50% interest in the family residence, even though title was held in the husband’s name.

Interestingly, the court also may have interposed a defense to a claim of undue influence (which defense did not help the husband).

The court reviewed the law thoroughly, and its analysis is worthy of a two–part review.

Here is the issue before the court.  “Ron Starr appeals from the judgment entered after the family law court found that the house he bought in his name only while married to former wife Martha Starr was community property and ordered him to convey the property to them both as tenants in common.”

The holding, in a nutshell.  “The evidence shows that Martha quitclaimed her interest in the house based on Ron’s promise to put her on title after the purchase was completed, but that Ron failed to do so.  As a result, the evidence supports a finding that the house was community property based on Ron’s violation of his fiduciary duties to Martha.”

Ron’s claim was based on record title. “Ron testified that the house was bought in his name only because the $50,000 down payment came from his separate property funds, and he and Martha intended all along that the house would be his separate property.  In accord with that plan, Martha quitclaimed her interest in the house before escrow closed.  Property taxes and mortgage payments came from community property earnings, Ron testified.”

Not so fast, said the court.  Husbands and wives owe fiduciary duties to each other. “Under Family Code section 721, Ron had the burden of proving that the quitclaim transaction satisfied his fiduciary duties to Martha.  She testified that because of her poor credit history, the lender recommended she agree to the quitclaim so she and Ron could qualify for a better interest rate.”

Martha testified that, “The loan broker told Martha and Ron they could add Martha back onto the title by way of a quitclaim deed within 45 days of the close of escrow.  Martha had a discussion with Ron about adding her onto the title, and he said he would do that.  Martha said she and Ron jointly offered to buy the house, and that the deed to Ron was mailed to them both after it had been recorded.”

The critical fact, at least as it relates to the fiduciary relationship.  “Although Ron never added Martha onto the title, she never worried about it because ‘He’s my husband.  I just don’t . . . mistrust him.  You know, it was our house.’  She signed the quitclaim deed freely and voluntarily.”

The trial court stretched to rule in favor of Martha. finding that “Ron did not meet his burden of proof that Martha’s quitclaim deed was signed freely and voluntarily.  The reason Martha did not sign the quitclaim deed freely and voluntarily was because the intent of the lender controlled title to the house when the lender suggested that Martha’s name be left off of the mortgage for the purposes of financing, and Martha agreed to execute the quitclaim deed based on the lender’s suggestion.”

Well, that doesn’t sound like the husband overreached in his dealings with Martha.  Rather, Martha took action (i.e., signed the quitclaim deed in favor of Ron) based on information she received from the lender.  The court of appeal dismantled that argument.

Explained the court of appeal, “Although spouses may enter transactions with each other, such transactions are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other.”

Thus, transactions between spouses arise in the context of a confidential relationship. “This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other.  This confidential relationship is a fiduciary relationship subject to the same rights and duties of unmarried business partners, including the right of access to records and information concerning their transactions.”

“Because of this, our courts have long held that when an interspousal transaction advantages one spouse, public policy considerations create a presumption that the transaction was the result of undue influence.  A spouse who gained an advantage from a transaction with the other spouse can overcome that presumption by a preponderance of the evidence.”

See part 2 for the conclusion of this case.

Starr v Starr (Sept. 30, 2010) 189 Cal.App.4th 277

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

Professor Thomas Schoenbaum from George Washington University has written a paper discussing the worldwide financial crisis.  His paper entitled “Saving the Global Financial System: International Financial Reforms and United States Financial Reform, Will They Do the Job?”, identifies 12 factors as triggering the financial crisis.

The second six are as follows (the first six are discussed in part 1).

7. Irresponsible Behavior and Fraud by Wall Street Professionals. Investment abdicated their traditional roles as financiers for the business world, and instead decided to make money using new models, which profited from their good names.

“In creating and profiting from new types of derivatives securities, such as CDO’s and CDS’s, Wall Street professionals were taking full advantage of a permissive and inadequately policed system that encouraged sharp practices and provided large rewards for excessive greed.  Of course, fraudulent activity also played a part: for example, Goldman Sachs, perhaps the most respected name on Wall Street, has accepted a civil fine of $550 million (about two weeks worth of profits) to settle a fraud case brought by the SEC accusing the firm of selling derivative investments to customers that were secretly designed to fail.”

8. Confused and Inconsistent Accounting Standards.  A 2000 statue was supposed to establish the Public Company Accounting Oversight Board, whose job is to regulate the accounting industry.

Says Prof. Schoenbaum, “Regretfully, this Board has been very slow to act, prevented from getting off the mark by alleged conflicts of interest and litigation begun with the intent to destroy it all together . . . For whatever reason, the Board has not done its job and accounting miscues and inconsistences contributed to the Global Financial Crisis.  For example Lehman Brothers was able to use accounting rules to remove tens of billions of dollars from its balance sheet according to an examiner’s report.”

We’ve been hearing about this for years.  The investment banks were permitted to restate income and to circumvent the accounting rules with a wink and a nod from the government.  You can’t have a level playing field unless the rules are uniformly enforced.

9. The U.S. Federal Reserve’s Botched Monetary Policy.  “After the bursting of the high-tech bubble in 2001, the Greenspan-led Federal Reserve lowered interest rates to levels not seen in a generation.  These low rates persisted too long [, ] contributing to the asset bubble that sparked the Crisis.  Then, too late, the Fed rapidly raised rates.  Making up for lost time to kill the asset bubble.   Both polices were badly mistaken.”

In the early 200s, the Fed wanted to propel a recovery from the dot-com bust.  Low interest rates encouraged the growth in mortgage-backed securities; lack of oversight allowed the mortgage-backed securities to flourish in an atmosphere free from realistic oversight.  The economy overheated, and the conductor failed to apply the brakes before the train crashed.

10. U.S. Government Housing Policy.  “The U.S. government is far too involved in private housing market.  In a misguided effort to make every citizen a property owner, the U.S. government has skewed the housing and mortgage markets as well as the prices for homes in the United States.  There is simply too much government interference in housing.”

The author cites the Community Reinvestment Act as a contributor to bad lending decisions, stating “this is not the appropriate role for government, which should enforce anti-discrimination laws but should not pressure banks to make loans to certain groups of people.”

11. Repeal of the Glass-Steagall Act.  “The Glass-Steagall Act, which was enacted during the Great Depression, functioned to insulate banks from the risks inherit investment banking.  This law was repealed [in 1999], which permitted consolidation of commercial banking, investment banking, and insurance companies . . . The repeal of Glass-Steagall was a reason why the Crisis infected the whole U.S. financial system, not just investment banks.”

Many warned against the repeal of Glass-Steagall, but the warnings were ignored.  Hey, if we haven’t had a banking crisis in 70 years, we must have eradicated the problem, right?  Wrong.  Glass-Steagall served an admirable purpose, and must be reinstated.

12. Global Current Account Imbalances.  A final global factor is that, “during the period leading up to the Crisis the U.S. experienced record trade in current account deficits.  In 2006 the U.S. current account deficits was $811 billion; in 2007 it was $738 billion.  In 2008 the deficit declined slightly to $706 billion, and because of recession a further decline was recorded in 2009 to $409 billion”

Such deficits cannot be sustained.  “During the boom years before the Crisis, record U.S. trade deficits were equal to approximately 2/3rds of the trade surpluses of the rest of the world.   While trade and current account deficits are not inherently bad, when they become chronic and balloon out of proportion they are a sign of structural problems that should be corrected.”

“In the case of the U.S. the current account deficits represents inadequate savings and over-consumption.  In the case of China, the growing and chronic surpluses represent lack of adequate domestic demand and too much saving . . . This imbalance cannot continue without threatening the stability of the international monetary system.”

Uniform Commercial Code Law Journal, Vol. 43, No.1 (October 2010) page 479.

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Professor Thomas Schoenbaum from George Washington University has written a paper discussing the worldwide financial crisis.  His paper entitled “Saving the Global Financial System: International Financial Reforms and United States Financial Reform, Will They Do the Job?”, identifies 12 factors as triggering the financial crisis.

The first six are as follows (the second six are discussed in part 2).

1. The diminished authority of the United States Securities Exchange Commission.  This constituted a regulatory failure.  States Prof. Schoenbaum,  “beginning in the 1980’s, the once-feared SEC became largely toothless due to rule-revisions, exceptions, and leaders that discouraged fraud investigations and enforcement actions.”

Such failure continued for two decades, but not without warning.  “One of the most egregious of SEC failure occurred on April 28, 2004, when the SEC voted to exempt investment companies from the SCC’s net capital rule . . . During this meeting, Harvey Goldschmid, one of the Commissioners, remarked, ‘If anything goes wrong, its going to be awfully big mess.’”

2. Failure to Regulate the Derivatives Market.  Another regulatory failure.  The derivative market is enormous, yet it operated for years without effective oversight.   Again, there were warnings.  The Commodities Futures Modernization Act of 2000 specify exempted derivatives and swaps from supervisory oversight by the Commodity Futures Trading Commission, “despite warning from its chairman that unregulated derivatives “could threaten our regulated markets or, indeed, our economy without any Federal agency knowing about it.”

3. Lax Regulation of Financial Institutions.  Here, the author cites the Federal Reserve and the Comptroller of the Currency as failing to exercise proper oversight of the U.S. banking industry.  Thus, “the persons in charge of bank regulations were totally obvious to the dangers of the extensive use of derivatives such as MBS’s.  Accordingly, the use of MBS’s allowed financial institutions to profit from transactions that involved unreasonably low capital requirements.”

This point could be stated in slightly different terms.  The players in the financial markets, especially in derivatives, were permitted to gamble with other people’s money.  The oversight in the banking industry was absent in the derivatives market.  Such easy access to such excessive leveraging encouraged Wall Street to take unreasonable and dangerous – desperately dangerous – risks.

4. Financial Institutions That Took on Too Much Leverage.  The authors cites this factor as a private sector abuse,  stating “a key cause of the Crisis was the fact that key financial institutions, especially the investment banks, took on far too much leverage, risking vast qualifies of borrowed capital so that they were unable to withstand a down turn in asset prices.”

What kind of leveraging was going on?   “After the SCC exempted investment banks from the ‘net capital’ rule in April 2004, leverage increased dramatically to levels in excess of 40 to 1.”  This meant the investment banks could make a $40 bet with only $1 in actual assets.  Is this a recipe for disaster?  You bet it is.

5. Mismanagement by Bond and Securities Ratings Agencies.  As explained by Prof. Schoenbaum, “hearings in the Congress and the European Union have established a sloppy and misleading ratings practices that causes most of the now ‘toxic’ derivatives to be given triple A ratings.  Only after the Crisis began did the ratings agencies downgrade these securities.  The credit ratings agencies were among the enablers of the Crisis.“

See, the vast tradings in the investment banking world were really a shadow financial system, running parallel to the banking industry.  The banks were heavily regulated and were backed by the FDIC.  The investment banking world had no such official guarantees, so they invested the insurance provided by companies such as AIG.  At present, “AIG has benefitted for governmental largesse amounting to a total of $182.5 billion.  None of this funding has been repaid.”

That means that the U.S. taxpayers bailed out the bets that were made by Goldman Sachs and other investment banks to the tune of $182 billion that has never been repaid.  It’s one thing to take risks with your own money; it’s entirely different when the government steps in to save private industry in the amount of $182 billion.  Oversight and accountability must be established, otherwise the taxpayers just gave away $182 billion to the bankers.

6. Low Saving Rates and High Borrowing by American Consumers.  This is a social factor.  Explains the author, “as of 2007, the U.S. savings rate touched zero, which means that as a group Americans were spending every penny of income.  Moreover, many Americans were deeply in debt, now only for home mortgages but on credit cards and other consumer loans.  The American economy was overheated and riding for a fall.”

Part 2 follows next week.

Uniform Commercial Code Law Journal, Vol. 43, No.1 (October 2010) page 479.