Archive for the 'Real Estate' Category

Trust, But Verify

In commercial transactions and litigation, there is a difficult tension to maintain – building and preserving business relationships with preserving legal rights in the case of controversy.  The Russian proverb popularized by Ronald Reagan during the Cold War thaw — Доверяй, но проверяй (doveryai, no proveryai); Trust, But Verify — has served me well in my commercial transactions and litigation practice.  Negotiate terms in good faith and then verify the terms in writing!

Unfortunately, in the heat of business negotiations, I find that many clients enter into many deals by handshake (“Trust”) but forget to properly document (“Verify”) the oral understanding either in the actual language of the contract they sign or document, in writing, any modifications or amendments to an existing written contract.  When a dispute over oral discussions occurs within the jurisdiction of California, the party whose position is consistent with the terms of the written agreement usually prevails at the beginning of a litigation.  Defendants were typically able to dismiss “promissory fraud” cases at the pleading stage relying on the parol evidence rule.  The balance appears to have shifted earlier this year when the California Supreme Court, in Riverisland, joined the majority rule that allows a plaintiff to introduce evidence of fraud, usually in the form of oral statements, despite the existence of a written agreement.  See my colleague Leslie A. Baxter’s article on Riverisland.  

From a litigation perspective, this case breathes life into legitimate fraud claims for clients who trusted but failed to verify their understanding in writing.  From a transactional perspective, where it serves all parties’ best interests (except litigators) to avoid litigation, it is even more important for all parties to verify all oral understandings in writing, including explicit acknowledgment that all signers had the opportunity to review with counsel and confirmed the writing is consistent with their understanding.

 

 

Riverisland Puts Pendergrass Into Cold Storage

by: Leslie A. Baxter

 On January 14, 2013 the California Supreme Court overturned 78 years of precedent and expanded the fraud exception to the parol evidence rule.

 Introduction 

In Riverisland Cold Storage v. Fresno-Madera Production Credit Association (2013) 55 C4th 1169, reported on p 42,  plaintiffs sued  their lender, seeking damages for fraud and negligent misrepresentation, rescission and reformation of a loan.  Plaintiffs (the Workmans,) alleged that the lender’s vice president had told them that they would extend their loan for two years, in exchange for adding two more properties as collateral.  The written contract, however, recited only three months forbearance on the loan (then in arrears) and identified an additional eight properties as collateral.  The Workmans sued after the lender attempted to foreclose under the loan agreement.  The trial court granted the lender’s motion for summary judgment, relying on Bank of America N.T. & S.A. v. Pendergrass (1935) 4 C.2d 258, 263.

 The Pendergrass Rule

The Pendergrass rule is that parol evidence is admissible to establish fraud in the procurement of a contract by an independent fact or representation, but not by a promise that directly varies with the promise in the writing.  4 C2d at 263.  The Court in Pendergrass explained that it would be “reasoning in a circle” to argue by oral testimony that a written agreement is fraudulent. 4 C2d at 263.   The court left open the opportunity to prove that the agreement is invalid due to promissory fraud, through proof that there was no meeting of the minds on the terms of the  agreement because one party fraudulently induced the other to enter into a contract.  See, Riverisland, 55 C4th at 1173, n.3, citing 5 Witkin, Summary of California Law, Torts §781 (10th ed 2005).

California Case Law After Pendergrass

In California, pleading promissory fraud has been a low-yield proposition for plaintiffs attempting to invalidate an integrated, written contract.   Two years ago, with Riverisland  already on appeal to the supreme court,  the court in   Duncan v. McCaffrey Group, Inc. (2011) 200 CA4th 346, 373, overruled in Riverisland, 55 C4th at 1182 (reported at 35 CEB RPLR 57 (Mar. 2012)),  ruled that plaintiff homeowners could not proceed on claims of promissory fraud against the developer.  The Duncan plaintiffs had claimed that the developer promised them that the development would contain only custom homes.   The purchase agreements, however, reserved to the developer the right to build other types of homes.   The allegedly fraudulent representations were directly at odds with the written agreement. The court sustained the demurrer on the fraud claims, allowing plaintiffs to proceed on claims of unfair competition, false advertising, breach of fiduciary duty and constructive fraud.   The court explained that (200 CA4th at 373, quoting Alling v Universal Mfg. Corp. (1992) 5 CA4th 1412, 1436):

“’Promissory fraud’ is a promise made without any intention of performing it. [Citations.] The fraud exception to the parol evidence rule does not apply to such promissory fraud if the evidence in question is offered to show a promise which contradicts an integrated written agreement. Unless the false promise is either independent of or consistent with the written instrument, evidence thereof is inadmissible.”

Before Riverisland, there was often little factual difference between a case which was allowed to go forward on a fraudulent inducement theory and a case terminated by the Pendergrass  rule because the oral representations were at variance with the written contract.  In Pacific State Bank v. Greene (2003) 110 CA4th 375, the court held that Greene, a guarantor for her husband’s debt, could introduce evidence that a bank employee had told her that the scope of her guaranty was limited to less than her husband’s entire debt, even though that verbal assurance contradicted the terms of the written guaranty.   The court reasoned that Greene could allege that there was a misrepresentation of fact over the contents of the document at the time of its execution — the type of ‘independent fact or representation” that fit within the Pendergrass rule and the theory of fraudulent inducement.  The court did not characterize this verbal assurance as a promise at variance with the integrated, written agreement.  110 CA4th at 390.  In contrast, the homeowners in Duncan were not allowed to go forward on their fraud claim (that the developer misrepresented to them that only custom homes would be developed in their tract) because of contradictory language in their purchase agreements.  The facts in Duncan and Greene are quite similar, yet their disparate holdings  highlight the inconsistency that compelled the supreme court to  accept Riverisland for review.

Criticism of Pendergrass

The Pendergrass rule has been roundly criticized.  As the Duncan and Greene cases show, resistance to the rule by some lower courts  has led to inconsistent case law.   As the court discussed in Riverisland,  the Pendergrass rule is inconsistent with the terms of the parol evidence rule (CCP § 1856), which allows evidence of whether the writing is intended as a final expression of the agreement, exclusive of other terms outside the writing. CCP § 1856(d).  The statute also allows evidence of a mistake or imperfection of the writing.  CCP §1856(e).  Without the Pendergrass rule, an oral promise that is inconsistent with the written agreement would likely be admissible to show the  writing was mistaken, imperfect, or contrary to the parties’ agreement.

Practical Implications for Real Property Lawyers

What is the real property lawyer to do in the face of Riverisland?  To guard against claims of fraud after the contract is signed, parties will want to document (in writing)  that the other side has read the contract and understands the deal.  This will safeguard against a claim that the party reasonably relied on an oral statement at variance with the written contract     Representations and warranties in the contract should recite that

  • The parties have read and understood the contract;
  • All of the terms are correct;
  • The parties have had the opportunity to seek legal counsel or other expert advice regarding the contract terms; and
  • All of their questions regarding the terms have been answered.

If there are language barriers, steps to provide translation should be documented as well.

Businesses that typically contract with less sophisticated parties may want to implement pre-contract procedures designed to educate the other party or give them the opportunity to seek independent help and enough time to think about the contract terms.  Of course, integration clauses and representations and warranties will never provide an ironclad guarantee of the enforceability and integrity of the contract.  Whether the reliance on an oral statement was reasonable will usually be a question of fact.   The stronger the contract terms are, the more counterweight they will provide to the reliance element of a fraud claim.

An unintended consequence of Riverisland may be to squelch communication and negotiation leading up to the deal.   Loan officers or real estate agents may be discouraged from ‘thinking out loud” about possible deal terms, lest the other party interpret them as the deal itself.  Stated in a more positive way, the parties will be more careful to  communicate deal points with clarity.

What’s Next?  The Future After Riverisland

Will Riverisland  trigger a flood of litigation by parties seeking to invalidate written contracts by claiming fraud?    It depends.   Many of the cases decided under the Pendergrass rule were decided at the demurrer stage, in favor of the defendant.   Now that the fraud exception has been expanded to include oral evidence at variance with written contract, the analysis will likely shift to the trier of fact, at summary judgment or trial, to determine whether there were pre-contract misrepresentations and whether they were reasonably relied on.

Even though they triggered a sea change in California’s common law regarding parol evidence, the plaintiffs in Riverisland  have not yet prevailed.   The Riverisland action is now remanded to the trial court.  The Workmans admitted that they did not read the contract they signed — a fact the lender is expected to use to show their lack of reliance on the oral assurances.  Attorneys for borrowers and others looking to challenge written contracts through parol evidence should carefully analyze all of the facts in the client’s situation to determine the viability of an action to invalidate the contract.  If there is an attorney fee provision, the economics of a legal attack on the contract must be weighed against the expense of an unfavorable outcome. This should temper the collective impulse of contracting parties and their counsel to run to California courts to undo their written contracts.

New Developments In Real Estate Law

By Phillip Vermont

On July 15, 2011, California Code of Civil Procedures Section 580e was passed by the California Legislature. That section changes the law of short sales for residential properties in two significant ways. First, it expands the protection for a borrower in a short sale scenario, so that if all lenders whose loans are secured by the property approve the short sale, none of the lenders may seek a deficiency judgment against the former borrower.

Also, it adds an additional protection by stating that none of the lenders who approve the short sale may require the former borrower to pay any additional compensation, aside from the proceeds of the short sale, in exchange for the written consent of the sale.

Prior to July 15, 2011, in a short sale situation, the former borrower still had to address a second or third loan, or for that matter, an equity line, recorded against the property. Only the first lender was prohibited from seeking a deficiency judgment.

Next, a significant case was decided in 2011, protecting commercial landlords. In that case, Frittelli, Inc. v. 350 North Canon Drive LP, the California Court of Appeal enforced the landlord’s liability exemptions in a commercial lease at the summary judgment stage of a litigation brought by the tenant alleging that the landlord’s renovation of the shopping center destroyed the tenant’s business. Specifically, the exculpatory clause in the commercial lease had exempted the landlord from liability for breach of lease, breach of the implied covenant of quiet enjoyment, rescission, and ordinary negligence. The lawsuit had arisen from the landlord’s alleged interference with the tenancy in remodeling the shopping center; the clause at issue stated that the landlord had no liability under “any circumstances” for breaches of the lease, and/or negligence for damages or injury arising from any cause in the areas of the shopping center outside the leased premises, or for injuries to the tenant’s business.

The lease was a “net lease”, which the court found ordinarily signals that the parties intended to transfer from the landlord to the tenants the major burdens of ownership of the real property over the life of the lease.

The lease at issue was a standard form agreement entitled “Standard Retail/Multi-Tenant Lease-Net”. While the court’s decision did not specify which form lease was utilized, in the commercial leasing field, it is quite common to use form leases which often contain similar types of exculpatory language.

This is an excellent case for commercial landlords. It is highly unlikely though that these types of exculpatory provisions would apply in a residential lease context.

Conversely, however, a decision of the Court of Appeal in Avalon Pacific – Santa Ana LP v. HD Supply Repair and Remodel LLC reached a decision that was not favorable for the landlord. In that case, the court found that the landlord could not recover costs of repair damages for the tenant’s breach of maintenance and repair obligations when the lease had neither expired nor been terminated. Similarly, the court found that when the lease will be in effect for an extended term, the landlord may only recover waste damages before the lease expiration of termination or a showing of substantial and permanent damage resulting in a reduced market value.

In other words, the court found that the time for a landlord to raise maintenance and repair damages (arising from the condition of the property) is when the lease expired, or was terminated from some action of the landlord, such as in an eviction action.

California Participated in the Multi-Billion Dollar Settlement Over Wrongful Foreclosures

In a press release today, California Attorney General Kamala Harris announced California’s participation in a nationwide settlement with the top five mortgage banks (Bank of America, Wells Fargo, Chase, CitiBank, and Ally) over wrongful foreclosures, robo-signing, and other mortgage servicing misconduct.

Calfornia’s settlement is valued at $18 billion.  Unlike past mortgage crisis relief programs, the five banks have purportedly agreed to make principal reductions for California homeowners of at least $12 billion total.   AG Harris also noted that the California settlement is unique from “the larger multistate agreement, which is enforceable in a federal court in Washington, D.C.,” in that the AG can enforce the settlement agreement in California state court.  Also, the settlement does not include mortgage loans owned by the government sponsored enterprises (“GSEs”) Freddie Mac and Fannie Mae, which make up around 60% of residential mortgages nationwide.

AG Harris also took this opportunity to announce that she will propose “a comprehensive legislative agenda to protect homeowners in the mortgage market…including a single point of contact for mortgage-holders and an end to the unfair and confusing system of dual-track foreclosures.”  These proposals are very relevant to the foreclosure cases I have recently worked on.

In a case before a federal court in San Francisco entitled Sohal v. Freddie Mac, we recently defeated the banks’ motion to dismiss.  The primary issue was whether the foreclosing party, which sold the mortgage to Freddie Mac and merely acted as a servicer, had the standing and authority to foreclose on the property.  Freddie Mac and Fannie Mae do not service loans so the point of contact of the loans they own are the servicers, who also typically originated the mortgage.  While there have been numerous problems in dealing with the servicer, I don’t think a single point of contact will resolve the problem.  The problem lies in the tangled web of  “back-end” contracts from the securitization of the mortgages.  Servicers do not make the actual decisions.  They have to obtain consent from the “investors.”  Any proposed legislation should, instead, focus on properly define the roles, rights, and obligations of all parties in the transaction, including the originator, the servicer, the fictional “nominee” MERS, and the “investors.”

We also have a wrongful foreclosure action in state court involving dual-track.  It’s not necessarily confusing.  However, from the borrower’s point of view, it is certainly unfair that the lender can sue for foreclosure and at the same time go forward with a non-judicial foreclosure sale.  The primary advantage for the lender (in addition to forcing the borrower to incur additional attorneys fees to deal with both proceedings) is that the lender can request the Court to appoint a receiver to collect rents if there is an assignment of rents.  California’s nearly century old non-judicial foreclosure scheme was intended by the legislature to provide a streamlined process while balancing the interests of both the lender and borrower.  The trend has been and continues to be in favor of lenders.  Courts are unlikely to reverse this trend, so ultimately it will be up to legislative action to re-balance California’s foreclosure scheme.  With the public backlash and the revitalized momentum of the recent settlements, foreclosure law should have very interesting year or two.

EQUITABLE EASEMENTS IN CALIFORNIA

An easement is a non-possessory interest for the use of real property that belongs to another for some specific purpose.  The most common easement is for ingress and egress (road access to the property), but easements can also be obtained for utility lines, windmills, logging, hunting rights, and even scenic views.  Easements can be public (granted for public access to beaches or other public areas) or private (granted to a person for individual privileges.)  It is not a fee interest in the land, but it is a right to an ownership interest and has an inherent value (particularly if it runs with the land, i.e. is transferable to future owners.)  Indeed, easement rights are sometimes purchased for valuable consideration.

 There are several types of easements: Continue reading ‘EQUITABLE EASEMENTS IN CALIFORNIA’

Free Speech Considerations in Commercial Real Estate

 Owners and tenants entering into shopping mall or other commercial leases must cover many deal points in the lease documents.   One issue that may get overlooked concerns free speech rights.

The general rule is that shopping malls must allow free speech protests within the visual and aural range of the targeted business, when the mall is open to the public.  Current law requires a shopping mall to provide more access to public expression than stand-alone stores.  This is because malls are more of a public meeting place than stand-alone stores.  One recent court opinion signalled (without holding)  that this rule may change.  In the future, the distinction between malls  and, say, big box stores which provide a public seating area, may blur.  In the future, courts in California   may look at the scope and nature of the public space offered by a store, to determine the scope of public expression.

A mall owner can create lease restrictions on speech and expression, but any restrictions on time, place and manner must be content-neutral.  For example a court recently held that the rules for a Southern California mall unconstitutional; the rules were not content-neutral because they treated labor protests differently from other types of speech.  The mall’s argument that  the rules were constitutional, because they didn’t restrict the content of the labor protests, did not impress the court. 

Retail property owners and tenants would do well to pay attention to free speech and expression rights and restrictions in their leases and rules.  Reviewing the constitutionality of such lease terms and updating problematic language may prevent a constitutional legal battle in the future.   

Leslie Baxter is a Partner at Randick, O’Dea & Tooliatos, LLP; she is an author of “California Real Estate Brokers Law and Litigation,” published by Continuing Education of the Bar. 

Are You a Fiduciary? Are You Sure?

California law describes a broad definition of fiduciary, involving trust, confidence, and good faith between a principal and their agent.  In a recent case, however, the federal bankruptcy court construed fiduciary capacity in a different and significantly narrower manner, with dramatic results. 

In a holding at odds with other bankruptcy cases, a bankruptcy court recently held that a debtor’s status as a California real estate agent was insufficient to show that she stood in a ‘fiduciary capacity.”  That holding allowed the agent, who had filed a Chapter 7 bankruptcy, to discharge a $356,000 state court judgment, awarded to her client, a potential real estate buyer.  The California state court jury had found that the agent negligently and intentionally breached here fiduciary duty to the buyer, by misrepresenting the purchase agreement and falsely informing the seller that the buyer could not satisfy the financing requirements.  While the jury found that the buyer was entitled to the $356,000 damage award, the bankruptcy court said no; under the federal bankruptcy statues, the agent was not acting in a fiduciary capacity because she did not hold property in trust for her client, the buyer.    Thus, a damage award that may otherwise have been nondischargeable in bankruptcy because of the debtor’s fraud was found to be dischargeable.

             Real Estate Agents in Bankruptcy

Under this holding, California real estate agents who negligently or intentionally breach their fiduciary duties may find refuge in bankruptcy court, where they may be able to avoid and discharge judgments against them.  Even if no judgment is rendered, the settlement of high value disputes concerning brokers and agents may be influenced by the possibility that the insolvent wrongdoer will seek to discharge the debt in bankruptcy.   In the future, the holding may extend to other types of fiduciaries as well. 

             Attorney’s Advice Can Maximize Outcomes

Conflicts in the law sometimes arise between federal and state courts.  The law is sometimes  more fluid than solid.  An aggrieved party must look beyond the mere fact that they were wronged and, with competent counsel, broadly evaluate the chances of achieving and collecting a monetary judgment.     

Leslie Baxter is a Partner, practicing Real Estate and Business Law at Randick, O’Dea & Tooliatos, LLP; she is an author of “California Real Estate Brokers Law and Litigation,” published by Continuing Education of the Bar. 



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