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24th Annual Real Property Law Retreat
April 30, 2005
THE LAW PROFESSORS’ ROUNDTABLE:
IMPORTANT RECENT DEVELOPMENTS
IN REAL PROPERTY LAW
Roger Bernhardt, Golden Gate University
Raymond R. Coletta, McGeorge School of Law
Jon P. Dwyer, Boalt Hall University of California (Emeritus)
Dale A. Whitman, University of Missouri-Columbia
Raymond R Coletta is Professor of Law McGeorge School of Law in Sacramento. Following undergraduate and masters work at Colgate University, Columbia University, and the University of Chicago, Professor Coletta served two tours in the Peace Corps, in India and Afghanistan. Graduating from the University of California, Boalt Hall School of Law, Professor Coletta practiced with the law firm of Squire, Sanders & Dempsey, specializing in real property and corporate law. Professor Coletta has taught at McGeorge School of Law since 1987. He was the Director of McGeorge’s Minority Support Program, a founder and co-editor of the California Land Use Law and Policy Reporter, and the Ninth Circuit Editor for the American Bar Association Land Use Regulation Newsletter. Professor Coletta is a founding member of the Society for Evolutionary Analysis in Law, a member of the Planning and Programming Committee of the Gruter Institute for Law and Behavioral Research, and has been named as a Gruter Institute Research Fellow. He has written extensively in the field of real property law and is the author of an upcoming book on estates and future interests.
John Dwyer is the John H. Boalt Professor of Law, Emeritus, at the University of California, Berkeley. He is the co-author of a first-year casebook, Property Law and Policy (Foundation Press), California Environmental Laws Annotated (West Publishing Co.), Federal Environmental Laws Annotated (West Publishing Co.), and Our Town: Race, Housing, and the Soul of Suburbia (Rutgers University Press), as well as numerous articles in environmental law and policy. He is also the co-editor of an electronic journal for environmental law articles. He currently practices law in the area of land use and environmental law.
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.
1. Chevron USA, Inc. v. Lingle (9th Cir. 2004) 363 F.3d 846, cert. granted (2004) __ U.S. __, argued Feb. 22, 2005
The gasoline industry in Hawaii is highly concentrated, with only two refiners and six wholesalers. To keep gasoline prices down, the state enacted a rent control statute setting the maximum rent an oil company may collect from gasoline dealers who lease service stations owned by the oil company. The statute set the cap at 15% of the dealer’s profit on gasoline, plus 15% of the dealer’s gross sales on other products, plus a percentage increase equal to any increase the oil company may be required to pay on its ground lease.
Chevron sued on the ground that the rent control was a takings because it failed to “substantially advance a legitimate state interest.” On a motion for summary judgment, the District Court found a takings under that standard, and the Ninth Circuit affirmed the standard, but remanded for trial, holding there existed a triable issue of fact. After a trial, the District Court held the statute constituted a takings and found that the statute could cause an increase in the retail price of gasoline.
The Ninth Circuit reaffirmed that the correct standard was the “substantially advances” test rather than the more deferential “rational basis” test normally applied to economic legislation. The court of appeals explained that its test—which required a “reasonable relationship” between the state’s legitimate purpose and the means to achieve that purpose—was more stringent than “rational basis” and less stringent than “rough proportionality” in the exaction cases of Nollan and Dolan.
The Ninth Circuit then held that the evidence admitted at trial showed that (1) because wholesalers would raise prices to offset loss of rents, retailers would raise retail prices, (2) that lessee-retailers would be able to sell their leaseholds at a premium (because of the benefits of rent control) that would not be passed on to consumers, and (3) the net result would be an increase in gasoline prices. These findings were sufficient to conclude the statute did not substantially advance the state’s goal to keep gasoline prices down.
Judge Fletcher dissented on the ground that the court should have applied the “rational basis” test and not the “substantially advances” test.
The Supreme Court granted certiorari on two questions:
1. Whether the Just Compensation Clause authorizes a court to invalidate state economic legislation on its face and enjoin enforcement of the law on the basis that the legislation does not substantially advance a legitimate state interest, without regard to whether the challenged law diminishes the economic value or usefulness of any property.
2. Whether a court, in determining under the Just Compensation Clause whether state economic legislation substantially advances a legitimate state interest, should apply a deferential standard of review equivalent to that traditionally applied to economic legislation under the Due Process and Equal Protection Clauses, or may instead substitute its judgment for that of the legislature by determining de novo, by a preponderance of the evidence at trial, whether the legislation will be effective in achieving its goals.
2. The San Remo Hotel, L.P. v. San Francisco (9th Cir. 2004) 364 F.3d 1088, cert granted (2004) __ U.S. __, argued March 28, 2005
A San Francisco ordinance restricts an owner’s ability to convert residential hotel rooms to tourist use. The San Remo Hotel sued in federal claiming a takings. The federal court abstained, sending the issue to state court for resolution of state takings claims. The Hotel specifically reserved its right to return on the federal claim. The federal court was required to send the case to state court because, inter alia, the case was not ripe—under Williamson a federal takings plaintiff must first show that he could not get compensation in the state system. The California Supreme Court eventually found no takings under state law.
When the Hotel returned to federal court to litigate its federal takings claim, the District Court held the federal claim was barred under the doctrine of “issue preclusion.” Because the federal and state issue were substantially equivalent—according to the state Supreme Court, California takings law was at least as broad as federal takings law—the federal issue was “actually and necessarily” decided by the state court. In other words, a plaintiff who is forced under Williamson first to go to state court to litigate his state takings claim has no right to go to federal court to litigate his federal takings claim if the state and federal claims are substantially equivalent.
The Supreme Court granted certiorari on one question:
Is a Fifth Amendment Takings claim barred by issue preclusion based on a judgment denying compensation solely under state law, which was rendered in a state court proceeding that was required to ripen the federal Takings claim?
3. Kelo v. New London (2004) 268 Conn. 1, cert. granted (2004) __ U.S. ___, argued Feb. 22, 2005
The City exercised its power of eminent domain to condemn land for redevelopment. The redevelopment was projected to create jobs, increase tax revenues, and revitalize parts of the city. The plan included a park, marinas, 80 residences, hotel and conference center, a museum, office space, and retail space.
The property owners—many of whom were long-term homeowners—sought injunctive relief on the ground, inter alia, that the eminent domain was not for a “public use” as required by the federal and Connecticut constitutions. The trial court denied injunctive relief as to one parcel, and granted it as to another.
The Connecticut Supreme Court held that economic development is a public use under state and federal constitutions even though the property would be transferred to private owners who would not provide a public service, and even though the condemned property was not blighted. “[E]conomic development projects . . . that have the public economic benefits of creating new jobs, increasing tax and other revenues, and contributing to urban revitalization, satisfy the public use clauses of the state and federal constitutions.” In Hawaii Housing Auth. v. Midkiff (1984) 467 U.S. 229, the Supreme Court held in effect that public use was whatever the state or local legislature said it was: Judicial review is “extremely narrow” and a court will not substitute its judgment “unless the use be palpably without reasonable foundation.” “Judicial deference is required because . . . legislatures are better able to assess what public purposes would be advanced by an exercise of the taking power . . . Thus, if a legislature . . . determines there are substantial reasons for an exercise of the taking power, courts must defer to its determination that the taking will serve a public use.” Based on the facts of this case, the state supreme court held the condemnations were for “public use.”
The Supreme Court granted certiorari on one question:
What protection does the Fifth Amendment’s public use requirement provide for individual whose property is being condemned, not to eliminate slums or blight, but for the sole purpose of “economic development” that will perhaps increase tax revenue and improve the local economy?
4. Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979
This non-real estate case raised the following issue: whether the economic loss rule, which in some cases bars a tort action in the absence of personal injury or property damage, applies to claims for intentional misrepresentation or fraud in the performance of a contract. The Court held it does not bar tort recovery.
A helicopter manufacturer ordered sprag clutches—which are necessary safety devices—for its helicopters. The manufacturer did not provide sprag clutches built to specification, and they eventually cracked and needed to be replaced. The helicopter owner sued for breach of contract, breach of warranty, and intentional misrepresentation and was awarded $1.5M in compensatory damages and $6M in punitive damages on the intentional misrepresentation claim. The sprag clutch manufacturer appealed on the ground that the economic loss rule barred recovery in tort.
Generally speaking, where a purchaser’s expectations are frustrated because the product he bought is not working properly, and he suffered no personal injury or property damage, his remedy is solely in contract. Previous cases held that purchasers could not bring claims for either strict liability or negligence.
The California Supreme Court, however, held that the sprag clutch manufacturer’s affirmative misrepresentation that the clutches were built to specification violated a separate duty from the contractual obligations, and thus the economic loss rule did not bar the fraud and intentional misrepresentation claims in this case.
Although the majority claimed that its holding was limited to instances in which an intentional misrepresentation exposed the plaintiff to risk of liability for personal damage (e.g., a helicopter crash), Justice Werdegar pointed out in dissent, “deceit by nondisclosure is a tort independent of any breach, just like deceit by misrepresentation. If so, every litigator can be expected to attach such a piggyback tort claim to each breach of contract claim, and every breach case can be expected to focus on when a party learned it was in breach and why it failed to disclose that fact to the other side.”
Although not a property case, Robinson Helicopter may have an impact in, in construction defect cases. In Aas v. Superior Court (2000) 24 Cal.4th 627, the Court rejected a negligence claim brought by homeowners against the developer and contractor for construction defects. The Court held that absent property damage the only cognizable claim was based in contract. Robinson Helicopter, however, seems to open the door to fraud and intentional misrepresentation claims in construction defect cases. Although newly enacted Civil Code §§895-945.5 exclusively governs construction defect claims in new homes—allowing recovery of cost of repairs and potentially lost income—§943(a) seems to permit an independent cause of action for fraud. Further, the statute does not apply to commercial construction, and so the holding in Robinson Helicopter, allowing recovery for fraud in commercial construction defect cases, would apply.
5. Bakersfield Citizens for Local Control v. City of Bakersfield (2004) 124 Cal.App.4th 1184
The City approved two large shopping centers less than 4 miles apart in the southwestern portion of Bakersfield. Each was designed to have large stores, including Wal-Mart Supercenters. The City prepared and approved Environmental Impact Reports for each shopping center.
The Bakersfield Citizens for Local Control (BCLC) challenged the EIRs as inadequate on several grounds, including that the EIRs failed to consider the impact of the shopping centers on other stores in the downtown section of the City—namely forcing them out of business—that may lead to urban decay or deterioration. As real parties in interest, the developers took the position that such effects were both a part of the normal economic cycle and in any event were economic and social effect that were not subject to analysis under CEQA.
Both the Superior Court and the Court of Appeal rejected this argument. Although CEQA regulations exclude from CEQA review purview an analysis of economic and social effects, the EIR must analyze reasonably foreseeable secondary or indirect consequences to the physical environment. Thus, the Court of Appeal reasoned, if predicted economic or social effects—such as driving smaller competitors out of business—may lead to adverse physical changes—such as boarded up stores an, urban decay in the city center—CEQA requires disclosure and analysis of these physical impacts.
The Court of Appeal was careful to state that a proposed new shopping center does not trigger a conclusive presumption of urban decay, but enough evidence existed in this case to require such an analysis in these EIRs. “Many factors are relevant, including the size of the project, the type of retailers and their market area and proximity of other retail shopping opportunities.” BCLC had submitted both a commissioned study and anecdotal evidence that the economic and social effects of the shopping centers may lead to urban decay or deterioration. The study showed the shopping centers would create significant excess capacity that may force 29 retailers out of business, resulting in “permanent or long-term vacancies of retail space,” deterioration of buildings, blight-like conditions, and adverse visual and aesthetic impacts. BCLC also submitted other studies of other cities that found similar impacts from new super stores. This evidence was enough to require the City to analyze these issues.
6. Villa de las Palmas Homeowners Ass’n v. Terifaj (2004) 33 Cal.4th 73
Civil Code §1354(a) of the Davis-Sterling Common Interest Development Act permits equitable enforcement of CC&Rs “unless unreasonable. In Nahrstedt v. Lakeside Village Condominium Ass’n (1994) 8 Cal.4th 361, 382, the Supreme Court interpreted this provision to mean that CC&Rs are presumptively enforceable “unless they are wholly arbitrary, violate a fundamental public policy, or impose a burden on the use of affected land that far outweighs any benefit.” The Nahrstedt case upheld a prohibition on pet dogs and cats that had been included in the association’s original declaration and recorded before conveyance of any condominiums. Specifically, the Court held the prohibition was rationally related to health, sanitation, and noise concerns.
In Villa de las Palmas, the Court considered the validity of a no-pet restriction that had been duly adopted to the CC&Rs after a homeowner acquired her condominium. The Court held that under §1354(b), an amendment to the declaration is valid and enforceable against current (as well as subsequent) homeowners so long as the association follows procedural requirements—namely, notice is given to homeowners, a simple majority approves the amendment, and the amendment is recorded—and the amendment meets the substantive standard articulated in §1354(a) and Nahrstedt. That is, the amendment is presumptively reasonable (and enforceable) “unless they are wholly arbitrary, violate a fundamental public policy, or impose a burden on the use of affected land that far outweighs any benefit.” The Court rejected a less deferential standard of validity for subsequently adopted amendments.
Although §1360.5—which after January 1, 2001, bars new CC&Rs from prohibiting owners from having at least one pet—limits the impact of the decision on no-pet restrictions, the holding will have a much broader impact on a wide variety of amendments. The key point is that if the association follows prescribed rules for making amendments to the CC&Rs, property owners are generally bound by those amendments, even if they wholly contradict the CC&Rs in place when the property owner acquired his or her interest.
7. Auburn Woods I Homeowners Ass’n v. FEHC (2004) 121 Cal.App.4th 1578
Government Code §12927(c)(1), of the Fair Employment and Housing Act, requires landlord and homeowner associations to make “reasonable accommodations in rules” when necessary to afford a disabled person equal opportunity to use and enjoy a dwelling. Despite the existence of a no-dog restriction when they purchased their condominium, the Elebiaris sought permission to have a pet dog because they suffered from serious depression and having a dog helped to alleviate the symptoms of depression. The Elebiaris filed a claim with the Fair Employment and Housing Commission (“FEHC”), which found in their favor, and the association petitioned for administrative writ of mandamus, which the superior court granted. The court of appeal reversed.
The case was largely decided on the burden of proof, i.e., whether the association could show prejudicial abuse of discretion—namely, whether the FEHC failed to follow procedures or whether its finding was not supported by substantial evidence. To establish discrimination (i.e., refusal to make reasonable accommodations), a party must show (1) he suffered a disability, (2) the discriminating party knew or should have known about the disability, (3) an accommodation was necessary to afford equal opportunity to use the dwelling, and (4) the discriminating party refused to make a reasonable accommodation. In the facts of this case, the Elebiaris (and FEHC) readily met the criteria to establish discrimination.
The court emphasized that its holding was not a per se rule that pets are always a reasonable accommodation for persons with mental disabilities; each case is a fact-intensive inquiry about the criteria.
8. Avila v. Jado Props., Inc., 112 Cal. App.4th 405, Cal.Rptr.3d 141 (2004)
Guests at a birthday party in a restaurant sued the restaurant alleging premises liability and negligence for failing to provide adequate security for guests who were attacked by gang members on a public sidewalk and street directly outside the entrance of the restaurant. The trial court granted summary judgment for the landowner, finding that it had no duty to these guests because the actions of the third-party attackers occurred on a public sidewalk and public street and because the shootings were not foreseeable.
The Court of Appeal found that the trial court erred in granting summary judgment because there were triable issues of material fact regarding (i) whether the landowner breached its contractual duty to provide security in a nonnegligent manner, and (ii) whether there was a substantial link between the alleged breach and the injuries the guests suffered. While acknowledging that a business owner is required to maintain its premises in a reasonably safe condition, the court noted that the business owner is required only to take reasonable steps to prevent foreseeable criminal acts of third parties that are likely to occur in the absence of such precautionary measures. The requisite degree of foreseeability rarely can be proven in the absence of prior similar incidents of violent crimes on the landowner’s premises. But in present case, the court of appeals found that the appropriate focus was not on the landowner’s general duty of maintenance, but on the landowner’s contractual duty, since the landowner had agreed to provide security for the event. The court noted that business owners can be responsible for crimes on public property over which it exercises some control. Here there was some evidence that the landowner assumed responsibility for some security on the public sidewalk and street (security personnel checked the area as part of their routine and patrons used the sidewalk to chat and smoke). Thus, the landowner was not entitled to judgment as a matter of law merely because the conduct at issue occurred on public property.
Similarly, because the landowner’s duty to provide security was contractually based, the critical issue was whether the landowner nonnegligently performed its promise to provide security, not whether the criminal conduct was foreseeable. The court found that there was a triable issue of material fact regarding whether adequate security for the event could have prevented the shootings. A jury could have concluded that the alleged failure of security delayed the discovery of the gang members to a point where it was no longer possible to deter them or deescalate the situation.
9. Yuzon v. Collins, 116 Cal. App.4th 149, 10 Cal.Rptr.3d 18 (2004)
A guest of a residential tenant was bitten by the tenant’s dog. The guest sued the landlord, alleging that the landlord had negligently maintained the premises and had failed to warn or guard against the tenant’s dangerous dog. The trial court granted summary judgment for the landlord specifically finding that the landlord did not have actual knowledge of the dangerous propensities of the dog that bit the guest and therefore had no duty to prevent the harm.
The court of appeal affirmed, concluding, as a matter of law, that the evidence failed to support an inference that the landlord had actual knowledge of the dog’s vicious propensities. Under California law, a landlord owes a duty of care to his tenant’s invitees to prevent injury from a tenant’s vicious dog only if the landlord has actual knowledge of the dog’s dangerous propensities. Because the harboring of pets is such an important part of our way of life, actual knowledge of the dangerous propensities, and not mere constructive knowledge of them, is required for liability. While the landlord knew that the tenant had dogs and had visited the tenant’s unit, he observed only normal canine behaviors, such as the dogs’ jumping against the door and barking at neighbors. Although actual knowledge may be shown by circumstantial evidence, there was no evidence that the landlord had seen the dogs behaving aggressively. Furthermore, the landlord’s request to have the dogs confined while an insurance inspector looked in the backyard did not support a reasonable inference that the landlord had actual knowledge of the dog’s vicious manner.
So it is OK to know the T has a dog, so long as you don’t know the dog is dangerous? Is there any duty to other Ts to ask the T if his dog bites? Does LL have the requisite knowl if another T complains of a bite? A snarl? His fears? If LL fears that he has the knowl, what is he supposed to do? Can he evict T if T has lease? If lease is silent on pets? If there is rent control just cause? If T doesn’t leave, must L sue to evict? While action is pending, is LL liable? What if T claims he needs dog to cure his depression?
Liability depend on where the bite occurred?
10. Titus v. Canyon Lake Prop. Owners Ass’n, 118 Cal.App.4th 906, 13 Cal.Rptr.3d 807 (2004)
A drunk driver ran into a tree, killing a passenger in his car. The accident occurred in a private residential community. The surviving minor child of the passenger brought a premises liability action against the homeowner’ association in the housing development where the death occurred and against the company which provided the private security for the association.
The drunk driver resided in the community with his father and had a history of intoxication and reckless driving. He also had been previously ticketed for speeding by the private security company of the association. The complaint alleged that the association and its security company did nothing to curtail or prevent this conduct, thereby breaching a duty to affirmatively act to protect others from the risks created by allowing the individual to drive within the community. The trial court sustained the demurrers of the association and security company without leave to amend. It noted that the complaint failed to allege any facts showing that the homeowners association or security company (i) had any knowledge of the party on the night of the accident, or (ii) had the ability or duty to stop the individual from driving.
The court of appeal affirmed, holding that there was no special relationship between the defendants and the drunk driver or the defendants and the passenger who was killed; and thus there was no duty of care on the part of the association or security company. The court stressed that the resolution of the issue about whether a special relationship exists (which gives rise to a duty to protect or warn) involves the same factors underlying any duty of care analysis. Here the defendants’ connection to the injury-producing event was minimal, foreseeability of the injury was low, and the association’s CC&R’s did not create a special relationship. Neither the association nor the security company created the peril, provided the driver with either the car or the alcohol, or encouraged the passenger to get into the car. Thus, there was no special relationship which would give rise to a duty of care to prevent him from driving in the community or to eject him from the community.
Additionally, even assuming that the security guards had observed the driver driving recklessly, the imposition of a duty to eject the individual from the association would be undesirable for the community and contravene public policy. Even if the security officers had the authority to make arrests and detain individuals for violating the CC&R’s, this did not create an affirmative obligation to do so whenever they suspected someone was violating , or may violate, the community rules. As the court noted, even if an ejectment action were permissible and successful, it would result in the court-ordered separation of family members, which would not be favorable as a matter of public policy.
Different result if Dft were a conventional LL? Are HOAs held to same duties as LLs are? Eg liable if one owner has pit bull? (What if Terifaj’s dog bit someone?) Or brings in drug dealers? If HOA is liable, what is effect on indiv owners? Can they be sued also, if incident occurred in common area? How should atty for indiv owner advise her to protect herself.
11. Caloroso v. Hathaway, 122 Cal.App.4th 922, 19 Cal.Rptr.3d 254 (2004)
A pedestrian tripped over a crack in the landowner’s walkway. The pedestrian and her husband brought an action based on premises liability and loss of consortium. In the complaint, the pedestrian alleged that the individual concrete slabs of walkways were cracked, constituting a dangerous condition, and that the landowner’s failure to repair the crack or warn about it caused the injuries. The landowner sought summary judgment on the ground that he did not owe the pedestrian a duty because the defect in the sidewalk was trivial. Noting that the crack in the walkway was less than one-half an inch in elevation, the trial court granted the summary judgment, ruling that the private landowner owned no duty to pedestrians to either warn them of the trivial defect or to repair it.
The court of appeals affirmed, holding that a crack of less than one-half inch was trivial as a matter of law. It is well established that a property owner is not liable for damages caused by a minor or trivial defect in property. While courts have referred to this principle as the “trivial defect defense,” it is not an affirmative defense but rather an aspect of duty that a plaintiff must plead and prove. In determining whether the defect was dangerous as a matter of law, the court noted that one must consider all surrounding circumstances such as whether the walkway had broken or jagged edges, whether there was debris or water concealing the defect, or whether the accident occurred at night in an unlighted area. Also, the court found no foundation for an expert’s opinion that noncompliance with certain building codes made the crack dangerous, since the expert failed to establish that these codes had been accepted as the proper standard in California for safe sidewalks.
12. Vasquez v. Residential Invs., Inc., 118 Cal.App.4th 269, 12 Cal.Rptr.3d 846 (2004)
A jealous boyfriend broke into the apartment of his estranged girlfriend and murdered her. The survivors of the murdered victim brought an action for wrongful death alleging that the owners of the apartment building were negligent by not replacing a missing pane of glass in the apartment’s front door used by the murderer to obtain entry. The owners moved for summary judgment, contending that a property owner has no duty to make his property crime-proof or take precautions against third party criminal conduct that the owner had no reason to anticipate. The trial court granted summary judgment and held that the incident was not sufficiently foreseeable to give rise to a duty on the owners to prevent the boyfriend from entering the apartment.
The court of appeal reversed. Beginning with the threshold question of how to define the scope of a landowner’s duty to protect tenants against risks of harm, the court described two primary considerations when addressing the question of duty: the foreseeability of the harm and the burden on the landlord created by the duty to protect. The court emphasized that facts existed which supported the imposition of a duty on the apartment owners: the burden on the owners of replacing the glass was minimal and the degree of foreseeability of a criminal intruder was sufficiently high in light of complaints made to the manager about the missing pane and reports of crimes in other apartments in the building.
The court then suggested an analytical approach to evaluate the threshold question of duty: first, the court must determine the specific measures the plaintiff asserts the defendant should have taken to prevent the harm (this frames the issue for the court by defining the scope of the duty); second, the court must analyze how financially and socially burdensome these proposed measures are to the landlord; and third, the court must identify the nature of the third party conduct that could have been prevented had the landlord taken the proposed measures, and assess how foreseeable it was that this conduct would occur. After independently assessing the burden and foreseeability, they can be compared in determining the scope of the duty the court imposes on any given defendant landlord.
Comparing the minimal burden on the landowners to replace the missing windowpane and the slight likelihood that an intruder might seek to enter the apartment, the court concluded that the landlord might have had a duty to take the minimally burdensome steps to restore the integrity of the front door. The court also noted that foreseeablitlity depends not on whether a particular injury was foreseeable, but instead on whether the conduct created a foreseeable risk of a particular kind of harm.
13. Lewis v. Chevron USA, Inc., 119 Cal.App.4th 690, 14 Cal.Rptr.3d 636 (2004)
A subcontractor’s employee was injured when a hot water pipe burst while he was performing electrical work at a laboratory. The employee alleged that the prior owner created the defect that led to his injuries. The employee argued that the prior owner had negligently soldered pieces of copper pipe, affixed them to the laboratory building, and then sold the defective building to the current owner. The trial court granted the prior owner’s motion for summary judgment, noting that the prior owner had sold the premises to the current owner eight years prior to the accident and had not exercised any control over the premises since that time.
The court of appeal affirmed, concluding that, absent concealment, a prior owner of real property is not liable for injuries caused by a defective condition on the property long after the owner has relinquished ownership and control. The court found that the employee did not offer any evidence that the prior owner knowingly concealed a dangerous condition. Citing to the Restatement Second of Torts, the court explained that it would not depart from the existing rules restricting liability of predecessor landowners; rules which emphasized the importance of possession and control as a basis for liability. Here the prior landowner, once it had given up ownership, had no ability to inspect the pipe, test it, warn workers about it, take precautions to prevent injuries, or obtain insurance. In the absence of any showing that the prior owner knew of the condition and deliberately concealed it, the prior owner would not be liable. The court observed that this rule is applicable whether the defect was latent or patent.
14. American Financial Services Association v. City of Oakland, 104 P.3d 813 (2005).
In 2001 the California legislature adopted a comprehensive statute regulating “predatory lending” – a series of mortgage lending practices considered unfair to consumers, and prevalent mainly in the “subprime” mortgage market. Eight days before the Governor signed the statute into law, the City of Oakland adopted its own predatory lending ordinance, which covered many of the same practices. In the instant case, the California Supreme Court held that the state statute occupied the field and preempted the Oakland ordinance.
The statute contains no statement one way or the other on the subject of whether preemption was intended by the legislature. Financial industry lobbyists worked hard to get an express preemption clause into the final act (so that they would not have to re-fight the issues before multiple city councils), and consumer interests battled just as strongly for a statement that no preemption was intended. It appears that key legislators expressly decided to keep the act silent on the point, fearing that a statement in either direction would imperil passage of the act.
Tests for preemption. The court held that despite the legislature’s silence on the issue, implied preemption would exist if “the subject matter has been so fully and completely covered by general law as to clearly indicate that it has become exclusively a matter of state concern.” Conflict between the statute and the ordinance would be indicated if “the ordinance duplicates or is coextensive therewith, is contradictory or inimical thereto, or enters an area either expressly or impliedly fully occupied by general law.”
Comprehensiveness. The court was impressed by the comprehensive nature of the statute, which “delineates at length what mortgages are covered, what lending acts are prohibited, who can be held liable for violations * * *, the various enforcement mechanisms available, who may invoke such enforcement mechanisms, and defenses to such violations.” It also noted that regulation of mortgage lending was traditionally a state responsibility, with little or no prior regulatory activity by city governments. Finally, it noted that because mortgages (including subprime mortgages) are so widely sold on the secondary market, the existence of a host of inconsistent city-based regulations would impose a severe burden on that market and might tend to dry up available financing.
Conflicts. The court noted that the Oakland ordinance regulated most of the same practices as the statute, but often in a different way. For example:
! The ordinance applied its penalties to secondary market purchasers of mortgages, while the statute does not do so.
! The ordinance required either mandatory counseling of borrowers or a written waiver, while the statute merely encourages counseling.
! The ordinance imposed civil penalties for violations of up to $50,000, while the statute’s maximum penalties were $25,000.
! The ordinance stated a different standard than the statute for the imposition of punitive damages.
Because of these and other differences, the court concluded that the ordinance disturbed the careful political balance that the legislature had worked out between lender and consumer interests. It was, in effect, “a line item veto of those policy decisions by the Legislature with which the City disagrees.” While the City argued that it had a particularly high incidence of predatory lending, the court concluded that did not justify it in adopting an ordinance conflicting with the state statute.
What makes a loan predatory? Why do we need legislation to deal with these rather than just letting the market take care of them? If a loan is predatory, what does the statute do to it? What would the ordinance have done differently? Should the statute have attacked the secondary market like the ordinance tried to do? What would be the impact on leading if secondary market purchasers were made subject to the statute? What happens to these loans if they get sold out of state? Are we likely to see federal preemption of all these regulations?
15. Wolski v. Fremont Inv. & Loan, 25 Cal.Rptr.3d 500 (Cal. App. 4th Dist. 2005).
The California predatory lending statute, at Fin. Code § 4970(b)(1)(B), provides that a loan is covered by the statute if the amount of the loan is under $250,000 and "[t]he total points and fees payable by the consumer at or before closing for a mortgage or deed of trust will exceed 6 percent of the total loan amount."
Wolski obtained a such a loan; the points and fees were below 6 percent unless the yield spread premium of $3,700, received by his mortgage broker from the funding lender, was counted. The court recognized that a YSP represents the fact that the borrower has agreed to pay an interest rate over the life of the loan that is higher than the base rate demanded by the funding lender. The lender advances the present value of the higher payments to the broker as compensation to the broker for bringing the loan to the lender. Thus, the broker is compensated immediately. However, the borrower pays the YSP only indirectly by paying a higher interest rate over the loan’s term.
This last fact is the key to the court’s holding. The borrower may pay the YSP indirectly, but he does not pay it “at or before closing;” to the contrary, all of the borrower’s payments toward the YSP (in the form of higher interest) are paid after closing. The statutory language was clear, the court held, and hence no inquiry into legislative intent was required. The borrower asserted that one of the purposes of the predatory lending statute was to eliminate “broker kickbacks.” However, the court found nothing in the history of the statute to support this assertion.
The court concluded, “we may safely infer the Legislature was aware of the mechanics of YSP's and understood that they are paid by the lender with a concomitant higher interest owed by the borrower. Had it intended that a YSP be included as "points and fees payable by the consumer at or before closing," it would have included appropriate language.” In reaching its decision, the court on rehearing considered, but rejected, a letter from the Chief Legal Officer of the Department of Real Estate that reached the opposite conclusion. The Department, it noted, has no statutory authority to issue binding interpretations of the predatory lending law.
The court’s conclusion seems supportable as a matter of policy. Presumably the statute’s objection to high “points and fees” is that it is difficult for the typical borrower to calculate (or even to appreciate) the impact they have on the loan’s effective interest rate. But in the case of the YSP, the fee is automatically built into the borrower’s interest rate, making its impact readily comparable with alternative loans the borrower may be considering.
What happened to all the class actions filed against wholesale lenders over YSPs a few years ago? (RB thinks YSPs were good things; if you think they were bad, we could have a debate – let me know.
Just because YSPs are counted in determining whether a loan is predatory doesn’t make it safe from attack, does it? Can it still violate federal law? (Dale, should we talk about your role at HUD & the guaranteed mtg package?)
Are markups equally safe?
16. Aozora Bank, Ltd. v 1333 N. California Blvd., 119 CA4th 1291, 15 CR3d 340 (2004)
Aozora Bank (Bank) lent $73 million to 1333 North California Boulevard, a limited partnership. After the partnership defaulted, Bank sued it for bad faith waste. A jury found that the partnership committed waste by failing in bad faith to pay an installment of taxes on the property, and Bank was awarded $394,713 in compensatory damages. Bank moved for an award of attorney fees under Civil Code §1717, and the trial court awarded Bank attorney fees of $1,434,212, including a 1.5 multiplier for "the complex and cutting edge nature of the issues litigated."
The court of appeal reversed the order awarding attorney fees, because the nonrecourse loan documents provided that the partnership was liable only "to the extent that" it committed waste. Stating that Bank's entitlement to fees hinged entirely on the terms of the parties' contracts, the court noted that bad faith waste was a "carve-out" of personal liability in the nonrecourse loan. The court concluded that the language of the carve-out did not implicitly encompass attorney fees in prosecuting a waste action, and that those fees were recoverable only from the collateral. Because borrower liability for the lender's attorney fees incurred in enforcing such a nonrecourse carve-out is usually a key concern of the lender in negotiations, it was unlikely that the carve-out would be silent on attorney fees if they were intended to be included.
Under current deed of trust forms, attorney fees are recoverable for just about every kind of litigation related to the loan or the security, and this decision should not generate any need to redraft those clauses. However, carve-out provisions-i.e., exceptions to the nonrecourse limitation-in nonrecourse loans, which tend to be more tailor-made and negotiated, may need to be reconsidered in light of this decision.
Is this just a drafting problem or can lenders ever get contractual attorneys fees for torts committed by borrowers.
On purchase money loans or in trustee sale proceedings, can lenders provide for atty fees? Do the printed form clauses in PM & TES cases do any good?
17. The Frances Kenney Family Trust v. World Savings Bank, 2005 WL 106792 (N.D.Cal.)
This case involves an entity called Capital Creation Resource (CCR). It is, however, only one of numerous entities linked in obscure ways. As its web site proclaims, “CCR is the Marketing Agency for DTE Financial, which is a Broker for the Dorean Group, who is the provider of the Mortgage Elimination service.”
CCR’s web site (http://www.ccresource.net/about-us.html) claims to be able to eliminate, and obtain a legal discharge of, any home loan without the necessity of paying off the loan. The legal theory on which this is predicated is impossible to explain rationally; it is apparently that, since lenders are generally funding their lending operations with either depositors’ funds or by secondary market sale or securitization of the mortgages, they are not really loaning their own money, and that the notes and mortgages they obtain are “without consideration” and hence fraudulent and void.
The scammers preyed on homeowners already struggling with mortgage default, promising them that they would establish that their lenders' loans were invalid. The scammers extracted up front fees of up to $8000 in order to launch a paper attack on the lenders. They then created family trusts for the homes and obtained an assignment of the borrower's rights in these properties for purposes of attacking the lender.
According to the court's report, the attack consisted of a series of bizarre and incomprehensible devices, including payment of the defaulted note by a bond secured by an alleged letter of credit drawn on a Swiss trust company with $800 million in assets. Acceptance of such a payment, however, was designed to commit the lender to admissions or responsibilities that made the payment worthless to the lender. (You can read their “explanation” at http://www.ccrsolution.com/step-by-step.html.)
The second step apparently involved burying the lender with a lengthy set of allegations which, according to the terms of the scammers' communications, the lenders admitted to by failing to respond. Then the scammers would concoct a power of attorney from the lender (also allegedly authorized by silence), which the scammers used to execute releases of the mortgages in question. Borrowers were then urged to seek new loans against the property for the maximum possible amount. Apparently some lenders actually sucked in on such loans, relying upon the fraudulent title as cleared by the forged power of attorney.
The proceeds of these new loans went largely to the scammers, but the homeowners got $50,000 and a promise from the scammers that their homes were now "free and clear," despite the fact that they now were encumbered by the new mortgage loan and, of course still encumbered by the old mortgage loan. Apparently the scammers’ notion that the properties were free and clear was based on the notion that the new loans, as well, were carried out by wire transfer. (Of course, if the borrowers indeed were "free and clear" of loans paid by wire transfer, they wouldn't have needed to give the scammers all that money in the first place. Some desperate people will believe anything. )
Ultimately, the scammers in fact did back up their claims by filing lawsuits against some of the lenders. It is not clear whether these were motions filed in connection with bankruptcy petitions filed by the trusts or straight lawsuits, but they all alleged that the lenders' claims were invalid because funded with "vapor funding." It also is not clear whether the lenders were all the original lenders or whether some were later lenders who relied on the forged powers of attorney.
This case involves attorneys' fee claims in a number of these lawsuits. Faced with such claims, the scammers in fact had dismissed their lawsuits and their attorney had resigned. The court concluded here that even with dismissed lawsuits, it still had jurisdiction to award attorneys' fees to the various lenders. It commented: " The Court here has seen the scam at work. Greater bad faith would be hard to imagine. Plaintiffs and their counsel have employed a smokescreen to burden various lending institutions and impose upon them litigation costs in hopes of extracting settlements."
The court awarded fees to the victimized lenders in a total amount of about $50,000. From all appearances, the scammers would have obtained quite a bit more money than that from their prey. As the court suggests, this is really a matter for criminal prosecution. One lender did make a bar complaint against the scammers' attorney, but then dismissed it when it was paid $10,000. The court ordered that copies of its order be sent to the California State Bar and the U.S. Attorney.
18. Kearns v. Transamerica Home Loan, 314 B.R. 819 (9th Cir BAP 2004)
In November 1995, the Kearns obtained a consumer loan of $34,658 from Transamerica. Transamerica obtained two separate liens as security, one in an automobile and the other a deed of trust on real estate. The Transamerica liens survived the Kearns' 1996 bankruptcy. When the Kearns defaulted, Transamerica repossessed and sold the automobile collateral. In 1998, the Kearns sold the real estate on which Transamerica still had a recorded deed of trust. Transamerica placed a demand in escrow and received $17,398 of the sale proceeds after it refused to reconvey the deed of trust. The Kearns sued Transamerica in bankruptcy court, contending that the real property lien was satisfied by the vehicle repossession. The bankruptcy court awarded Transamerica summary judgment, ruling that it had not violated the one-action rule of CCP §726.
The Ninth Circuit Bankruptcy Appellate Panel affirmed, holding that the exercise of the nonjudicial remedy against the personal property collateral did not render Transamerica's lien on the real property unenforceable. The court determined that Transamerica did not offend the "one-action" rule of CCP §726 when it nonjudicially took and sold the automobile, because Transamerica did not resort to anything other than its security. It held that the nonjudicial remedy of repossession and sale of the vehicle was not an "action" within the meaning of the statute.
The court also explained that, under California law, when two items of collateral secure a single debt, the creditor may resort to the additional security following a nonjudicial foreclosure. Under either CCP §726 or Com C §9604 (which regulates enforcement of rights when one loan is secured by both real and personal property), the sequence in which the security is foreclosed is irrelevant.
Did the fed ct get our state law right? If TA had held 2 RE mtgs, could it have sold under the 2d after a sale under the 1st? Could it have gotten a money judgment after the second sale? Could it have gotten a money judgment after the 1st sale? What changes when one asset is personalty instead?
19 Coldwell Banker Residential Brokerage Co., Inc. v Superior Court, 117 CA4th 158, 11 CR3d 564 (2004).
Coldwell-Banker, real estate broker for the seller of a house, was sued for violating its statutory obligation to diligently inspect it and thereby discover that it was contaminated by toxic mold. However, since the plaintiff – who was suing for the asthmatic condition that he developed as a result of the mold – was not the purchaser of the house, but was rather her minor son, the broker’s demurrer to the complaint should have sustained on the ground that the duty of inspection and disclosure imposed by ran only to the “prospective purchaser” (the phrase used in Civil Code section 2079) or to the “transferee” (the term employed in the Transfer Disclosure Statute, Civil Code section 1102.13. Since that statutory duty by its terms ran only to the purchaser and not to her child, and since he could not be deemed to be an intended third party beneficiary of the information that should have been supplied, there was no basis for imposing negligence liability upon the broker for his injuries.
This lack of any duty could not be corrected by showing that the broker knew that the buy would be living in the house with his mother, since foreseeability is not a substitute for legal duty. Nor could the broke be held liable under a theory of intentional concealment of the mold, since any such concealment would have been from the plaintiff’s mother, not the plaintiff himself. The court of appeal issued a writ of mandate directing the trial court to sustain the demurrer without leave to amend.
20. Burnett v Chimney Sweep, LLC, 123 Cal.App.4th 1057, 20 Cal Rptr 3d 562 (2004).
Commercial tenants who occupied 470 square feet operating a gift shop in the defendant’s hotel were forced to move out because of mold infesting the premises which contaminated its inventory and caused them personal injuries. Thereafter they filed suit against the lessor for under theories of premises liability, negligence and breach of contract. The trial court rendered judgment on the pleadings in favor of the lessor and its property manager based upon certain exculpatory provisions in the lease.
The lease provided:
Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise, or other property of Lessee, . . . whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. . . . Notwithstanding Lessor’s negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee’s business or for any loss of income or profit therefrom.
The court of appeal reversed, holding that the language quoted did not completely insulate the lessor from liability under the circumstances. The clause was not invalid as violative of public policy because it concerned a commercial lease, which is a matter of private contract between lessor and lessee. It is however, to be strictly construed, and the first sentence of the clause did not refer to “negligence” and therefore, under traditional rules of construction did not cover liability for active or affirmative negligence. (The court held that, with regard to that issue, active negligence was alleged here by virtue of the lessor refusal to remediate the infestation, which may have migrated from other parts of the lessor’s hotel.) While the second sentence did mention “negligence” it only insulated the lessor from liability for lost income and profits, not from liability for the personal injuries and property damage that the tenant alleged.
The court also held that clause did not protect the property manager, since it was neither a party to the lease nor a third party beneficiary of it. Noninclusion of the property manager as a party to the lease also meant that it could not be sued for breach of that lease, but still could be held liable in tort.)
21. Andrews v Mobile Aire Estate, 125 Cal.App.4th 578. 22 Cal.Rptr.3d 382 (2005)
Tenants in a mobile home park sued the park owner, for breach of lease following an assault committed by a neighboring tenant, claiming that the failure to have responded to their earlier complaints about the assailant constituted a breach of the covenant of quiet enjoyment. They claimed that the covenant was both implied (from Civil Code section 1927) and express (by virtue of a provision in the rental agreement that said “We will try to maintain the peace and quiet . . . . We will do what we can if you cannot get others to understand your complaints.” Other causes of action sounding in tort against the owner, the park management company and its onsite mangers alleged negligence on failing to exercise reasonable care in managing the park. The trial court granted summary judgment in favor of the defendants, ruling that they had no duty to evict the troublesome neighbor under either tort of contract theories.
The court of appeal reversed on the contract issue holding that there was a triable issue of fact as to whether the park owner had breached its obligations pf quiet enjoyment to the plaintiffs. That covenant can be breached by conduct of a another tenant of the landlord, for which breach the tenant may recover damages from the landlord, which may include compensation for all the detriment likely to flow from the breach. The Mobilehome Residency Law not only authorizes eviction of a tenant whose behavior constitutes a substantial annoyance to his neighbors. Civil Code section 798.6 but also permits the park owner to obtain injunctive relief against him.
Summary judgment for the defendants on the negligence claim, on the other hand, was proper, since there was no foreseeability of harm in this case. The neighbor’s prior troublesome behaviors did not include assault or battery – even his driving his car in a way to force the plaintiffs off the road could be construed as merely careless driving.