The Speakers

 

Roger Bernhardt is Professor of Law at Golden Gate University in San Francisco. He has written: Cases and Statutes on Real Property, Real Property in a Nutshell, The Black Letter Law of Real Property (all for West), and also Cases on California Real Estate Finance (Carolina). He is also the author of California Mortgage and Deed of Trust Practice, and Bernhardt’s California Real Estate Cases (Continuing Education of the Bar) and is the Editor of CEB’s California Real Property Law Reporter.  His other publications include Bernhardt’s California Real Estate Codes and Deskbook of Federal Real Estate Laws.  He is Advisor to the California State Bar’s Executive Committee of the Real Property Section, Chair of the American Bar Association’s Legal Education Committee of the Real Property Probate and Trust Section, and a member of the American Law Institute, the American College of Real Estate Lawyers, and the American College of Mortgage Attorneys.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. .

Dorothy J. Glancy is Professor of Law at Santa Clara University School of Law in Santa Clara, California.  A graduate of Harvard Law School and Wellesley College, Professor Glancy practiced law in Washington, D.C. and later served as counsel to the United States Senate Judiciary Subcommittee on Constitutional Rights during the Watergate investigations.  She was a Stevens Traveling Fellow as well as a Harvard University Fellow in Law and Humanities before teaching at Santa Clara Law School.  She also served in the Office of General Counsel of the United States Department of Agriculture.  Professor Glancy has chaired the Association of American Law Schools’s Sections on Property and on Environmental Law, and was a member of the Executive Committee of the Environmental Law Section of the State Bar of California and of the Council of the American Bar Association’s Section of Natural Resources, Energy and Environmental Law.  A Life Member of the American Law Institute, Professor Glancy was an adviser to the Restatement, Third, of Property: Servitudes.  She serves on the State of California Judicial Council Court Technology Advisory Committee.  A selection of some of her published works regarding historic preservation, intelligent transportation systems, co-ownership and other topics are available at her web page www.scu.edu/law/FacWebPage/Glancy/.


Dale A. Whitman is the James Campbell Professor of Law at the University of Missouri in Columbia MO.  He received his B.E.S. degree in Electrical Engineering from Brigham Young University in 1963 and his law degree from Duke University in 1966.  After practicing for a short period with the firm of O'Melveny and Myers in Los Angeles, Whitman began his academic career at the University of North Carolina in 1967.  He was a member of the original faculty when the Brigham Young University law school was founded in 1973.  He has since been a faculty member at the University of Washington (where he served as associate dean) and the University of Missouri-Columbia (where he served as dean from 1982 to 1988.  Whitman's principal fields of interest are property and real estate finance.  He is a co-author of five books and numerous articles in these areas.  He was co-reporter, with Professor Grant Nelson of UCLA, of the American Law Institute's Restatement (Third) of Property (Mortgages), published in 1997, and was the reporter for the Uniform Power of Sale Foreclosure Act, approved in 2002. He was a member of the Executive Committee of the Association of American Law Schools from 1994 through 1997, and was its president for the year 2002.

 

 

 

LANDLORD & TENANT

 

 

1. Annod Corp. v. Hamilton & Samuels, (2002) 100 CA4th 1286.   Partnership draws by partners in dissolved law firm were not in fraud of creditor landlord’s claim against the law firm for unpaid rent.

A law partnership, facing financial reverses, stopped paying rent on the firm’s leased office space.  The landlord’s judgment for $839,000 in unpaid rent against the firm remained uncollected after the firm dissolved.  Three years after the firm dissolved, the landlord sued the individual partners for avoidance of fraudulent transfers ($400,000 in partnership draws) and for damages for conspiracy to defraud creditors.  The trial court granted the former partners’ motions for summary judgment.

The court of appeal affirmed.  The partners’ showing that the partnership draws were made in good faith and for reasonably equivalent value constituted a complete defense.  The nonrecourse lease specified that the individual partners were not liable for rent.  Moreover, the court found that, without receiving the draws which amounted to less than the partners’ previous compensation, the lawyers would not have continued to work and to generate firm revenue.  The court of appeal also ruled that the trial court had properly refused to infer fraudulent intent from factors such as the timing of the draws, and such “badges of fraud” as the facts that the draws were payments to insiders, that there was pending lease litigation against the firm and that the firm was insolvent.

 

 

 

2. Cobb v. San Francisco Residential Rent Bd., (2002) 98 CA4th 245.  Landlord’s acceptance of rent from former sublessee rendered inoperable vacancy decontrol provisions of Costa-Hawkins Rental Housing Act.

A landlord increased rent on an apartment to $1500 as of November 1999.  A year earlier the tenant and landlord had orally agreed to $600 rent.  For more than a dozen years before that, the apartment had been rented by the tenant’s mother for $440 per month.  The son moved in with his mother and stayed on after his mother moved out in May 1998.  In June 1998 the son began to pay the $440 rent to the landlord.  When in November 1999 the landlord demanded an increase in rent to $1500 per month, the son petitioned the rent board for arbitration.  The landlord defended the rent increase on the basis of the vacancy decontrol provisions of the Costa-Hawkins Act.  The rent board found that the son’s base rent was $440 per month, the amount accepted by the landlord from the son after his mother moved out and the son began making the rent payments.  The trial court agreed with the rent board and denied the landlord’s Costa-Hawkins Act claims.

The court of appeal affirmed.  Under Costa-Hawkins, the applicable “initial rental rate” was established in May 1998 when the landlord’s acceptance of rent from the son created a new tenancy.  Negotiation between the new tenant (the son) and the landlord resulted in an increase in rent as of October 1998.  The son was not a subtenant or assignee of his mother.  Rather, a new tenancy began when the landlord accepted rent from the son in May 1998.  There was no later vacancy decontrol that would have justified the $1500 per month rent demanded by the landlord in November 1999.

 


 

3. Harbor Island Holdings v. Kim,  (2003) 3 Cal.  Daily Op.  Serv.  2902, 4th DCA, 4/2/03.  Double-rent provision in an extension of a commercial lease held unenforceable as an unreasonable penalty, rather than liquidated damages, for tenant’s failure to maintain leased premises.

 

At the end of a three-year commercial lease, the tenant’s planned move to new premises was delayed because the new premises were not completed.  The landlord under the original lease grudgingly agreed to extend the tenant’s lease at triple the previously agreed monthly rent, with a provision for forgiveness of half of the tripled monthly rent if the tenant performed all of its amended lease obligations.  The result was a three-month lease extension that provided for double rent if the tenant breached the lease.  The tenant was still unable to move after the three month extension and another two months’ extension was agreed to.  The landlord sued for rent and damages.  The tenant cross-complained for return of the security deposit.  The judge ruled that, as a matter of law, the double-rent provision was unenforceable as an unreasonable penalty.  After a jury trial, the landlord was awarded damages for the tenant’s failure to maintain the premises and the tenant was awarded the amount of its security deposit, less the damages awarded to the landlord for the tenant’s failure to maintain or repair.  In other words, the landlord’s recovery was limited to the landlords actual damages.  The tenant received its security deposit back, net of the landlord’s actual damages.

 

The court of appeal affirmed.  The liquidated damage provisions of Civil Code section1671 applied to invalidate the provision that would have more than tripled the originally agreed rent if there were any breach of the lease during the extension.  The court found no waiver of objections to this penalty as a result of characterizing the tripled rent as the tenant’s voluntary agreement to accept the potential increase in rent as a condition on the landlord’s extension of the lease.  The court affirmed the application to commercial leasing of public policy concerns about penalties that would forfeit money or property out of proportion to the actual damage suffered. The court found the commercial leasing context and the arms-length bargaining of the parties to be irrelevant in finding the increased rent provision an illegal penalty.

 


4. Syufy Enters., LP v. City of Oakland,  (2002) 104 CA4th 869.  Movie theater subtenant’s rights were terminated when sublessor’s master lease was deemed rejected in bankruptcy.

A movie theater owner subleased land from a sublessor that eventually filed for bankruptcy.  Because the sublessor was in breach of its master lease, that master lease was deemed rejected by the bankruptcy trustee.  The City (Port of Oakland), which was the landlord on the master lease, then evicted the sublessee from the subleased movie theater premises.  The trial court found that the movie theater owner had no relationship with the City/landlord on the master lease.  The sublessee’s rights were entirely derived from its sublessor.  So when the master lease was rejected by the sublessor’s trustee in bankruptcy, the basis for the sublessee’s possession was eliminated.  The trial court dismissed all claims by the sublessee and granted a nonsuit.

The court of appeal affirmed.  The sublessee lost all rights to possession of the leased property when the master lease was “deemed rejected” by the sublessor in the course of the latter’s bankruptcy.  Despite the fact that the movie theater owner was an intended third-party beneficiary of the master lease, as a sublessee it had no rights that survived the elimination of the master lease.  Under 9th Circuit bankruptcy decisions, the debtor’s rejection of the lease is treated as a breach of the lease, rather than a termination.  The impact of the breach of the lease on the rights of subtenants is governed by California law, which terminates the rights of subtenants when the sublessor relinquishes possession.

 

5. Albertson’s, Inc.  v.  Young, (2003) 107 CA4th 106.  Supermarket in small privately owned shopping center not a public forum under PruneYard.

On the walkway outside the entrance to an Albertson’s supermarket, a group of individuals gathered signatures to place initiative measures on election ballots.  Albertson’s tried unsuccessfully to stop this activity and then sued for injunctive and declarative relief.  The signature-gatherers cross-complained that Albertson’s was violating their constitutional rights to free speech.  Finding that the store was not the equivalent of the public forum, the trial court enjoined the signature gathering.

The court of appeal affirmed the injunction.  Applying the California Supreme Court’s rulings in PruneYard v. Robbins (1979) and in Golden Gateway Center v. Golden Gateway Tenants Assn. (2001), the court of appeals ruled that the Albertson’s store was not a public forum.  The Albertson’s supermarket was in a small privately owned commercial strip that did not serve as a town center or otherwise serve as a public forum.

In a thought-provoking concurring opinion Justice Sims concurred in the result, but disagreed with the majority’s reasoning.  Although he agreed that the particular Albertson’s market involved in the case was not shown to be a public forum, Justice Sims argued that supermarkets often do function as public forums.  Accordingly, not all supermarkets, even those in small commercial centers, should be allowed to exclude persons exercising free speech rights in gathering signatures on initiative petitions.  The free-speech guarantees of the California Constitution and the importance of the initiative process combine to require more room to solicit and gather signatures than that provided under the reasoning of the majority opinion.  Justice Sim’s view that even smaller commercial centers, including supermarkets, can constitute public forums invites further probing of the majority’s distinction between large shopping centers that are public forums and small commercial centers that are authorized to limit free speech.


REAL ESTATE FINANCE

6. In re Emery,  317 F3d 1064. Mortgage lender not entitled to demand funds recovered by trustor from contractor in construction defect litigation so long as loan is not in arrears.

The trustors sued and later settled with their contractor for some $535,000 for defects in the original construction. Their attorneys disbursed $335,000 to them and retained $200,000 for attorneys fees. The trustors then defaulted on the loan and filed bankruptcy. The lender, ultimately foreclosed and, when it learned of the construction litigation and settlement,  claimed that the trustors’ attorneys had converted funds that belonged to it under its deed of trust.

The Ninth Circuit rejected the lender’s claim. The deed of trust assigned to the lender only “any amount that I may owe to Lender”, which was zero at the time of the settlement, since the trustors were not then behind in their loan payments, unlike other clauses in the instrument which assigned condemnation and insurance awards to cover “all sums secured”, and therefore did not depend on arrearages. Thus there was no conversion because there was nothing of the lender to convert. Similarly, the law firm did not convert the lender’s cause of action against the contractors since the deed of trust provision did not assign that to the lender but only gave it the option to sue in its own name, which was not lost by the bringing of the trustors’ lawsuit.

The failure to inform the lender of the construction litigation might support an action against the trustors for breach of contract, but not against their lawyers for con version.

 

 

 

7. Norwest Mortgage Inc. v State Farm Fire & Cas. Co., 97 Cal. App. 4th 571; Track Mortgage Group v Crusader Insurance Co., 98 Cal. App. 4th 857.  Full credit bids held against insurance claims of lenders.

In each of these cases, the lender’s ability to recover from the trustor’s insurance company was limited by the amount the lender had bid at its trustee sale.  In Track Mortgage the credit bid was $472,500 against an unpaid debt of $528,400, and recovery was held limited to $55,900 (the difference between the two sums) despite there being $878,000 of insured property damage; the insuror had been found to have acted in bad faith but its conduct had not been the cause of the lender’s overbidding.

In Norwest Mortgage the lender made a full credit bid ($81,700), but rescinded the sale when its insuror denied its claim because of that bid. It then held a second sale but the foreclosure company mistakenly made another full credit bid, and that sale too was rescinded. Finally, it bid $11,500 at a third sale bit it still lost its claim against the insuror because a trustee sale cannot be rescinded  merely because the lender has mistakenly bid too much at it.


 

8. In re Stanton (Beeler v Jewell), 303 F3d 939. Optional further advances made to debtors’ corporation remain secured by debtors’ deed of trust despite their bankruptcy.

 

Debtors who had guaranteed their wholly owned corporation line of credit and secured the guaranty with a deed of trust on their residence thereafter filed bankruptcy, but the lender continued advancing funds to the corporation itself. The trustee in bankruptcy sold the residence and disputed the right of the lender to claim those funds. The Ninth Circuit held that the further advances were not in violation of the automatic stay,  since the corporation was not in bankruptcy, and related back to the original lien, rather than creating a new lien on the property after the bankruptcy filing. However, since these were optional advances and made with actual notice of the bankruptcy, the were junior in priority to the trustee’s claims under Washington law. On rehearing, . . . .

 

 

 

9. Storek & Storek v Citicorp Real Estate, 100 Cal. App. 4th 44. No good faith duty to continue funding project when specific provisions in loan contract are to the contrary.

The construction lender refused to continue funding development on the ground that various conditions in the loan agreement – including its determination that the project budget be in balance - had not been met, and thereafter foreclosed. The borrowers brought this action for breach of the implied covenant of good faith and fair dealing, and were awarded $900,000 by the jury (the amount of undisbursed loan funds). The award was reversed because the project budget requirement was specifically stated in the loan agreement and the covenant of good faith cannot contradict express terms of the contract.  Determination of that budget balance fact was to be tested by an objective standard of reasonableness rather than a subjective one of good faith, meaning that there was no independent requirment of good faith to support a cause of action for its breach (or for fraud based upon such a duty).

 

 

 

10. Schuetz v Banc One Mortgage Corp., 292 F3d 1004; Bjustrom v. Trust One Mortgage Corp., 322 F.3d 1201. Yield spread premiums upheld.

The Ninth Circuit has joined other Circuits in holding that the payment of yield spread premiums from lenders to mortgage loan brokers do not constitute illegal kickbacks under the Real Estate Settlement Procedures Ac 12 USC §§2601-1617. These fees, paid to brokers for loans brought to them at better than current par rates are valid so long as they are for services that were actually performed amd the total compensation paid was reasonably related to the facilities, goods and services provided.


11. Uniform Nonjudicial Foreclosure Act Approved by Commissioners on Uniform Laws.

 

The Uniform Nonjudicial Act contains many concepts that are consistent with California deed of trust foreclosure practice.  However, it also contains some new concepts that could be quite attractive to California lenders and borrowers.

 

The Act provides for three methods of foreclosure and permits the secured creditor to elect the method to be used.  The first is conventional foreclosure by means of an auction sale, conducted by a representative of the foreclosing creditor, similar to a trustees sale under a California deed of trust.

 

The second method is foreclosure by negotiated sale.  Such a sale will be consummated in much the same way as other real property sales; the property will probably be listed by the lender with a real estate broker and advertised extensively.  The creditor notifies the debtor and junior lien holders of the foreclosure amount that it is willing to offer for the property, and they can simply disapprove the sale if they are dissatisfied with that amount.  If the amount is reasonable, and is more than the debtor and junior lienors could expect to recover from an auction sale, they have every reason to permit the sale to proceed. If one or more of them disapproves, the foreclosing creditor has three choices: (1) to discontinue the negotiated sale and resort to a different method of foreclosure; (2) to exclude the objecting party from the effect of the foreclosure, so that the objector will be unaffected by the foreclosure; or (3) to pay off the objecting party, if that person holds a lien. This last alternative is likely to be employed only when the objecting partys lien is for a minor amount.

 

The third foreclosure method authorized by the Act is foreclosure by appraisal.  This method leaves the property in the hands of the secured creditor, who will have the burden of liquidating it after the foreclosure is completed.  In a sense, foreclosure by appraisal is similar to common law strict foreclosure, but in the Act it is surrounded with much more extensive safeguards to protect the interests of the parties who are being foreclosed and to ensure the integrity of the appraisals result.  The lender selects the appraiser, but the appraiser must meet reasonable professional standards of qualification and may not be an employee of the lender or servicer of the loan.  As with foreclosure by negotiated sale, the secured creditor notifies the debtor and junior lien holders of the foreclosure amount that it is willing to offer for the property.  Any debtor or junior lienor who is dissatisfied with the amount can simply disapprove it and, as with a foreclosure by negotiated sale, the foreclosing creditor must either exclude the objector from the foreclosure, pay off the objector, or discontinue the foreclosure by appraisal and employ a different method of foreclosure.

 

In a foreclosure by negotiated sale or by appraisal, the foreclosure amount is, in effect, an offer by the creditor.  That offer need not be identical to the propertys selling price (in the case of a negotiated sale) or the propertys appraised value (in the case of a foreclosure by appraisal), but it must be at least 85 percent of that amount.  The 15% margin is intended to allow the creditor ample latitude to cover the expenses of holding and marketing the property.


12. Krzalic v. Republic Title Co., 314 F.3d 875 (7th Cir.2002).  A home mortgage lender that marks up a charge for a service from a third party provider does not violate RESPA.

 

Republic made a charge of $50 to record the Krzalics mortgage, while the charge made by the county recorder was only $36.  The Krzalics sued Republic, arguing that the $14 markup was a violation of RESPA Section 8.

 

Section 8 is an antikickback statute.  It provides that no person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. The difficulty with the plaintiffs claim is that Republic did not split the fee or pay any part of it to anyone else.  They simply charged the borrower more than the service cost them to obtain.

 

However, HUD had issued a Policy Statement taking the position that section 8(b) is not "limited to situations where at least two persons split or share an unearned fee." HUD, Real Estate Settlement Procedures Act Statement of Policy 2001‑1, 66 Fed.Reg. 53052, 53057 (Oct. 18, 2001).  Under the HUD view, Republics action would have violated Section 8 even though Republic did not split the $14 overcharge with anyone else.  When a statute administered by a federal agency is unclear and the agency is authorized to interpret it, the agency's interpretation, unless unreasonable, may bind a reviewing court in accordance with Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842‑44, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).

 

The court concluded that Chevron deference was not appropriate here, in part because the HUD position was only a Policy Statement and not a regulation adopted after public notice and comment, and in part because the court believed that the HUD position was simply wrong.  Republic * * * received no part of a fee charged by someone else. The plaintiffs' beef is that the county recorder did not charge $50 to record their mortgage; and so he could not have divided it with Republic. Recall, too, that the statute forbids the giving as well as the receiving of any portion, split, or percentage. On the plaintiffs' understanding, they themselves violated the statute because they gave Republic a portion of the fee charged by the county recorder!

 

The court concluded, if the practice of repricing incidental charges is a fraud or market failure or abuse of some sort, still it is not a market failure that section 8(b) can reasonably be thought to address, and so a reading of the section that leaves the failure uncured is not a reading that creates a loophole. If RESPA were a price‑control statute a loophole would be opened if the firms subject to the statute were allowed to mark up cost items in their bills to whatever height they wanted. It is not a price‑control statute.

 


13. HUDs RESPA Proposals:  The Homebuyer Bill of Rights. HUD has proposed to amend its regulations implementing the Real Estate Settlement Procedures Act.

 

The HUD proposals (found at 67 Fed. Reg. 49,134 (July 29, 2002)) stem from the conviction that RESPA has been largely ineffective in that Good Faith Estimates are often exceeded by wide margins, and do not effectively inform home buyers and borrowers of their expected costs, and RESPA disclosures have not resulted in effective shopping for settlement services, with the result that such services are often priced above market levels.

The Improved Good Faith Estimate. HUD has proposed to improve the Good Faith Estimate (GFE) to make it more binding on lenders, to facilitate shopping and to prevent unexpected charges at settlement.  Under the proposal, the GFE must be delivered 3 days after application and would be valid for a minimum of 30 days from when the document is delivered or mailed to the borrower.  The GFE would consolidate all costs into major cost categories with a single estimated total for each category. It is hoped that this will eliminate or reduce junk fees.

The Guaranteed Mortgage Package. As an alternative to the use of the Improved GFE, HUD would allow packagers (probably lenders in most cases) to offer a Guaranteed Settlement Package (GMP).  The GMP would be quoted as an interest rate plus a lump sum (front-end fee) price for loan origination and virtually all other lender-required settlement services, including application fee, origination, underwriting, appraisal, pest inspection, flood and tax review, title insurance, and mortgage insurance.  The interest rate would be locked for 30 days after issuance of the GMP, but could fluctuate in accordance with an external index.  No itemization of prices for the individual services would be given.  If the package did not include pest inspection, appraisal, or lenders title insurance, that fact would have to be disclosed.  Items that depend on the borrowers choice would not be included in the package:  hazard insurance, per diem interest, and optional owners title insurance.  Any entity offering a GMP would be exempt from RESPA Section 8, which prohibits kickbacks and unearned fees.  Hence, the packager would be free to make financial arrangements with providers of other services without concern about Section 8 liability.

Lender Resposibility For Appraisals.  HUD has also proposed a rule that makes lenders strictly accountable for the quality of appraisals performed on an FHA loan. Lenders that have accepted bad appraisals would be subject to administrative and financial penalties under the proposal.  See 68 Fed. Reg. 1766 (Jan 13, 2003).

 


14. Wells Fargo Bank v. Arizona Labors, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 38 P. 3d 12 (Ariz. Sup. Ct. 2002) Construction lenders must disclose Borrower information to takeout lenders.

 

Wells Fargo Bank made the construction loan the build the Mercado Project. During the construction period, the borrowers financial condition deteriorated. (Former Arizona Governor Fife Symington was one of the borrowers principals.)  Wells Fargo made no mention of this fact to the Pension Fund, the takeout lender, which had entered into a tripartite agreement to accept an assignment of the loan when construction was completed.  The Pension Fund funded the takeout loan, which subsequently went into default.  The Fund then sued Wells Fargo from breach of its duty of good faith and fair dealing.

 

The court held that even though the bank had no common‑law duty to disclose the borrowers worsening condition, it could still be liable for an intentional tort or for breach of contract. Under the contract, Wells Fargo had an obligation to furnish information to the Fund during construction of the project, such as existence of the liens, only if the Fund made a reasonable request for such information. The bank also agreed to inform the Fund of any default under the construction loan, or any intention by the bank to foreclose on that loan.  None of these conditions applied.

 

However, during construction the borrower went into default on a different project (Alta Mesa) on which Wells Fargo was also the construction lender.  Despite the default, the bank did not foreclose that loan, and instead extended it past the date when the Pension Fund was to purchase the loan on the Mercado project.  The court stated: . . . If simple nondisclosure were the essence of this case, the Bank would not be liable. * * *  But, as discussed, simple nondisclosure is not the claim the Funds make. The real questions are the propriety of the Banks affirmative decision not to institute foreclosure proceedings against Alta Mesa, the forbearance, the failure to report Symingtons false statements to federal authorities, and whether these intentional actions or omissions interfered with the Funds right to receive from Symington information material to their decision to fund the Mercado loan.


 

CO-OWNERSHIP

 

 

 

15. Bono v. Clark, (2003) 103 CA4th 1409.  Pro tanto recovery of community property funds used to improve spouse’s separate property.

 

During their 17 years of marriage that ended in separation, Virginia and John lived in John’s trailer which they gradually expanded from a 600 square foot space to a 1920 square foot home, with a new water well, electricity and a number of other improvements.  Four years after their separation, John died.  Eventually Virginia made community property claims against her estranged husband, John’s estate.  Among these community property claims was a demand for part of the value of the home they had built out of John’s separate property trailer.  The trial court ruled against Virginia’s claim to community property invested in improving John’s separate property.

 

After rehearing, the court of appeals reversed and remanded.  The court ruled that each spouse has a community property claim to a pro tanto portion of the increased value of an asset which was enhanced by investment of community property funds.  In so ruling, the court applied the Moore/Marsden rule that when community property is used to reduce the balance of a mortgage on one spouse’s separate property, the community acquires a pro tanto interest in the mortgaged separate property.  Both the Third District Court of Appeal (In re Marriage of Wolfe) and the Second District Court of Appeal (In re Marriage of Allen) had earlier applied the pro tanto rule to community expenditures for improvements on separate property.  In this decision the Sixth District Court of Appeal, not only adopted the pro tanto rule to improvements to separate property with community assets, but detailed the formula to be used in ascertaining the pro tanto amount of community property claims against separate property assets.  The precise instructions on remand required factual findings with regard to the original purchase price of the asset, the amount of premarital (or preimprovement) appreciation, the amount of community improvements.  The separate property purchase price plus separate-property appreciation would then be divided by the total investment in the property to establish the ratio of separate property interest, the reciprocal of which is the ratio of community property interest.  That ratio of community property interest multiplied against the appreciation of the property during the marriage would establish a total of community property, half of which would belong to each spouse.

 


 

16. In re Marriage of Lange, (2002) 102 CA4th 360.  Special fiduciary relationship between husband and wife rendered promissory note and deed of trust in favor of wife unenforceable.

A husband and wife owned their family residence in joint tenancy.  The wife contributed some of her separate property to acquire and improve the residence, but required her husband to execute a promissory note secured by a deed of trust for her separate property contributions.  After filing a petition to dissolve their marriage, the wife brought a foreclosure action against her husband on the note and deed of trust.  The trial court held that, although the note and deed of trust were valid and not executed under duress, they were unenforceable under sections 721 and 2640 of the Family Code because they provided one spouse with a financial advantage and were presumed to have been obtained through undue influence.

The court of appeal affirmed.  Family Code section 721 declares spouses to be fiduciaries in interspousal transactions and gives rise to a rebuttable presumption of undue influence.  Under Family Code section 2640, the wife would be entitled to reimbursement of her separate property contributions to community assets, but was not entitled to a pro tanto or any other percentage of the appreciation of such assets.  These Family Code provisions limit the extent of any rights one spouse might seek to acquire against the other spouse through mortgage or other aspects of property law.

 

 

17. United States v. Craft, (2002) 535 U.S. 274.  Federal tax lien attaches to husband’s rights to Michigan tenancy by the entirety, including rights of use, of income, of transfer with wife’s consent and of survivorship.

After an almost half-million dollar federal tax lien was filed against a Michigan husband, he quitclaimed to his wife his interest in Michigan property held in tenancy by the entirety.  After the wife sold the property a few years later, the Internal Revenue Service asserted its lien and only agreed to release the tax lien to permit the sale if half of the proceeds of sale were held in escrow with rights to the funds to be determined.  The wife sued to quiet title to the escrowed portion of the sale proceeds.  The district court ruled that the federal tax lien attached to husband’s half interest in the property when he quitclaimed his interest to his wife, so that the government was entitled to the escrowed half of the proceeds.  The Sixth Circuit Court of Appeals reversed on the grounds that the husband never had any separate interest in tenancy by the entirety property.

The United States Supreme Court reversed the court of appeals and ruled that under federal tax lien law each spouse’s undivided interest in tenancy by the entirety property is answerable for federal taxes.  The Supreme Court ruled that a spouse’s tenancy by the entirety rights under Michigan law are rights to property that can be levied upon to satisfy obligations to pay federal taxes.

Although tenancy by the entirety is not a form of marital property in California, the United States Supreme Court’s ruling is important in establishing that federal law governs whether something is or is not property for the purposes of federal tax liens.  Moreover, among the state-law defined rights of tenants by the entirety which the United States Supreme Court held to be subject to federal tax liens are rights of survivorship, which are now available to married persons in California, both in the form of joint tenancies and in the form of survivorship community property under Family Code section

750 and Civil Code section 682.1.