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25th Annual Real Property Law Retreat
April 29, 2006
Huntington Beach, California
THE LAW PROFESSORS’ ROUNDTABLE:
IMPORTANT RECENT DEVELOPMENTS
IN REAL PROPERTY LAW
Roger Bernhardt, Golden Gate University
Daniel B. Bogart, Chapman University
Susan F. French, University of California, Los Angeles
Florrie Young Roberts, Loyola Law School
Peter T. Wendel, Pepperdine University
Roger Bernhardt is Professor of Law at Golden Gate University in San Francisco. He is the author of two California Continuing Education of the Bar books: California Mortgage and Deed of Trust Practice, and Bernhardt’s California Real Estate Cases. He is also the Editor (and commentator) of CEB’s California Real Property Law Reporter. His other publications for attorneys include Bernhardt’s California Real Estate Codes and Deskbook of Federal Real Estate Laws. In addition to these books for attorneys, Professor Bernhardt has also authored or coauthored for law students: Real Property in a Nutshell, The Black Letter Law of Real Property, for West, and Casebook on Real Property and Casebook on California Real Estate Finance for Carolina Press. He is Advisor to the Executive Committee of the Real Property Section of the California State Bar, Chair of the Legal Education Committee of the Real Property Probate and Trust Section of the American Bar Association, and a member of the American College of Real Estate Lawyers, the American College of Mortgage Attorneys, and the American Law Institute.
Daniel B. Bogart received his B.A. (1982), J.D. (1986) and M.A. in Economics (1986) from Duke University, and served as Note Editor to the Duke Law Journal. Professor Bogart practiced law in Atlanta, Georgia, specializing in real estate transactions, commercial development, and bankruptcy law. In 1990, he was named to the faculty of the Drake University Law School where he taught courses in Property, Modern Real Estate Transactions, Commercial Lease Law, Debtor/Creditor Law, Economic Analysis of the Law, and Agency/Partnership. Professor Bogart joined the Chapman Law School faculty in 1998. He has been named outstanding teacher at both the Drake and Chapman Law Schools. Professor Bogart's articles have appeared in the UCLA Law Review, the Arizona State Law Journal, and the Pittsburgh Law Review, among others, and he is the co author of Estates in Land and Future Interests, Problems and Answers (2004). In 1995, Professor Bogart received the Editor's Prize of the American Bankruptcy Law Journal for his article evaluating the fiduciary duties of directors of Chapter 11 corporations. Professor Bogart is Editor of the "Keeping Current - Property" column of Probate and Property, the bi-monthly magazine of the Real Property, Probate and Trust Law section of the American Bar Association. Professor Bogart is Secretary to the Real Estate Transactions Section of the Association of American Law Schools, and is a past Director of the American Board of Certification, a non-profit organization authorized by the ABA to certify bankruptcy practitioners as specialists.
Susan F. French, Professor of Law at UCLA since 1989, was the Reporter for the American Law Institute's Restatement of the Law of Property, Servitudes (2000). She is co-author of casebooks on the law of Property and Community Associations and has served as a consultant to the California Law Revision Commission on powers of appointment, the probate code, and revising the Davis-Stirling Act. She also serves as an adviser on the Restatement (Third) Donative Transfers project. A graduate of Stanford University and the University of Washington Law School, Prof. French practiced law for eight years before beginning her teaching career at UC Davis Law School. She is the author of numerous articles on property and trusts and estates law subjects and has participated as an expert in a variety of cases involving easements, covenants, wills, trusts, and powers of appointment.
Florrie Young Roberts is a Professor of Law at Loyola Law School in Los Angeles. She has taught Property for over twenty years and also regularly teaches Remedies and Pretrial Civil Procedure. Professor Roberts received her B.A. from Stanford University and her J.D. from the University of Southern California where she graduated Order of the Coif and was a member of the Law Review. Prior to her teaching career, Roberts was a partner in the Los Angeles law firm of Beardsley, Hufstedler & Kemble specializing in business litigation. She has volunteered her time as a judge of the State Bar Court, a Judge Pro Tempore of the Los Angeles Municipal Court, and an Attorneys Fees Arbitrator. Roberts is the author of a chapter on constructive trusts and equitable liens in the book California Real Property Remedies and Damages (Continuing Education of the Bar). Her most recent articles in the field of Property law concern common law and statutory disclosure duties and "as is" clauses. She has also published articles in the areas of good faith settlements, discovery, and pretrial sanctions. Roberts is a member of the Real Estate section of the state bar and serves on the Steering Committee of the General Real Estate Section of the Los Angeles County Bar Association.
Peter Wendel is a Professor of Law at Pepperdine University School of Law where he regularly teaches the first year Property course, Wills & Trusts, and Law & Economics. He was born and raised in St. Louis, Missouri. He received a B.A., cum laude, in Political Science from the University of Chicago; an M.A. in Urban Affairs from St. Louis University; and a J.D., cum laude, from the University of Chicago. He practiced law for four years before starting teaching in 1987 as a Bigelow Instructor of Law at the University of Chicago. From 1988 to 1991 he taught at St. Louis University School of Law. He joined the Pepperdine faculty in the fall of 1991. He has also had the privilege of being a visiting professor at UCLA, Loyola Law School, the University of Augsburg, Germany, and next year he will be visiting at Santa Clara School of Law. He is the author of A Possessory Estate & Future Interest Primer, but if no one has read it, does is count as a publication?
1. A claim for the imposition of an equitable lien as security for money damages, and an improperly pleaded claim for a constructive trust, do not support recording of a lis pendens.
Campbell v. Superior Court (2005), 132 Cal. App. 4th 904, 34 Cal. Rptr. 3d 68
This case follows the line of reasoning previously articulated in Urez v. Superior Court (235 Cal. Rptr. 837) that claims seeking an interest in real property merely “for the purpose of securing a claim for money damages” are not “real property” claims sufficient to support the recording of a lis pendens.
Campbell, as trustee of his father’s trust, filed a complaint against real party in interest, La Barrie, alleging that she exercised undue influence against his now deceased father, persuading him to spend $200,000 in trust funds to pay for the remodeling of La Barrie’s house. Campbell’s complaint requested the imposition of both a constructive trust and an equitable lien on La Barrie’s house. He also recorded a lis pendens. The trial court expunged the lis pendens on La Barrie’s motion. Campbell sought a writ of mandate.
Code of Civil Procedure section 405.20 allows a lis pendens where a party asserts a “real property claim”. Section 405.4 (a) defines a “real property claim” as “the cause or causes of actions in a pleading which would, if meritorious, affect … title to, or the right of possession of, specific real property.” If the pleading filed by the claimant does not properly plead a real property claim, the lis pendens must be expunged upon a motion under CCP 405.31. Campbell contended that his claims seeking the imposition of a constructive trust and an equitable lien on La Barrie's house constituted real property claims sufficient to support the recording of a lis pendens.
The court first examined the issue of an equitable lien and held that plaintiff’s request for the imposition of an equitable lien did not support the recording of a lis pendens. The court acknowledged a split in authority in California on this issue and followed the majority of courts which have concluded that a claim that seeks an interest in real property merely for the purpose of securing a money damage judgment does not support the recording of a lis pendens. The California Supreme Court has not decided the issue.
The Campbell court found further support for its decision in the historic purpose of the lis pendens which was to ensure that courts “could render enforceable judgments in actions whose object was to obtain an interest in a particular parcel of unique property.” Allowing a lis pendens for the purpose of securing a monetary interest would be an unwarranted expansion of the use of lis pendens beyond its historical purpose.
The court did not specifically decide whether a claim for a constructive trust would support a lis pendens because it held that a constructive trust had not been sufficiently pleaded. Allegations that money was used for improvements of a property do not support the imposition of a constructive trust when that property is not initially owned by the plaintiff.
2. A lis pendens is improper when based on a general dissolution of marriage petition which does not allege an interest in specific real property.
Gale v. Superior Court (2004), 122 Cal. App. 4th 1388, 19 Cal. Rptr. 3d 554
A petition for dissolution of marriage which does not allege a community interest in a specific piece of real property does not state a “real property claim” and therefore cannot support the filing of lis pendens. Allowing the filing of a lis pendens based on such a general dissolution petition would be contrary to the language of the lis pendens statutes and would defeat their purpose.
Husband was the owner of 99 percent of the voting rights in a management firm that owned and managed three homes in Newport Beach. Wife was involved in the daily management of the properties and drew salary from the firm. In 2002, Wife filed a petition for dissolution of the marriage. The petition did not mention either the management firm or the three properties. Rather, the petition followed the common practice of not listing any specific assets as community or separate property. Instead it only stated that there were such community assets "as may be discovered at a later date; the right to amend being reserved." When the firm was in the process of selling one of the properties for a price lower than what Wife thought proper, she filed a notice of lis pendens on the property. The trial court denied Husband’s motion to expunge.
In holding that the lis pendens must be expunged, the court of appeals reasoned that the dissolution petition did not constitute a “real property claim” within the requirement of the lis pendens statutes. Section 405.20 of the Code of Civil Procedure authorizes the filing of lis pendens when a party to an action “asserts a real property claim.” Section 405.4 (a) defines “a real property claim” as a cause of action, which would, if meritorious, affect “title to, or the right to possession of, specific real property.” Here Wife’s petition did not identify any specific property. Her claim that the holding company was at least part community was not even mentioned, much less was there any attempt to specifically identify the property which it might arguably hold on behalf of the community.
Allowing a lis pendens in this case would defeat the purpose of a lis pendens. Lis pendens are meant to give constructive notice of legal proceedings affecting title to a specific property. A potential buyer of the property would be able to go to the courthouse and find the pleadings in the court proceedings which might affect title or possession to the real property he/she is thinking of buying. However, Wife’s dissolution petition is too general to accomplish that purpose. A buyer would already have to be familiar with the relevant marital property estate to even guess what real property might, or might not, be affected by the proceedings initiated by the petition.
3. A lis pendens filed by a claimant who lost at the trial level must be expunged pending appeal unless the trial court finds that its own decision will “probably” be reversed on appeal.
Mix v. Superior Court (2004) 124 Cal. App. 4th 987, 21 Cal. Rptr. 3d 826
This case concerns the proper standard to use in a motion to expunge a lis pendens after the trial court substantively rejects the recording party’s underlying claim. The court concluded that if a claimant loses at trial, the lis pendens must be expunged unless the trial court is willing to find that there is a probability that its own decision will be overturned on appeal.
Sellers of a condominium unilaterally terminated escrow with the buyers. The buyers filed a suit seeking specific performance. They also recorded a lis pendens on the property. The trial judge found for the sellers, agreeing that their failure to personally sign the sales agreement allowed them to unilaterally terminate the escrow. A different judge, however, refused to expunge the notice of lis pendens based on the premise that expungement was impossible prior to the expiration of the time for the buyers to file an appeal. The denial was based on a test articulated in Peery v. Superior Court that if a claimant could show that a substantial issue exists for appeal, a motion to expunge must be denied even though the claimant had already lost at the trial level.
The court of appeal concluded that the Peery test is inapplicable based on the current expungement statutory scheme. The Peery test was based on former section 409.1 which stated that a lis pendens should not be expunged if “the party recording the notice has commenced or prosecuted the action for a proper purpose and in good faith.” Under this standard which pointed to the claimant’s subjective state of mind in recording the notice of lis pendens, the standard was easy to meet and hence the lis pendens was likely to stay on the property for the duration of any appeal. In 1992, however, the legislature repealed section 409.1 and enacted instead 405.32, which provides a much stricter standard: “[t]he court shall order that the notice be expunged if the court finds that the claimant has not established by a preponderance of the evidence the probable validity of the real property claim.” The code comment also makes it clear that this section was intended to require judicial evaluation of the merits on a motion to expunge.
The court concluded that the 1992 legislation requires nothing less than that the trial court grant a motion for the expungement of lis pendens pending appeal in the wake of the defeat of the claimant in the trial court.
There is but one very unlikely exception inherent in the statutory language of probable validity: If the trial judge himself or herself is willing to find on the record that the trial court's ruling will "probably" be overturned on appeal, then the trial court should deny the motion. The court noted that it is going to be a rare case indeed where the trial court will be willing to state on the record that its decision in a case will "probably" be reversed. “Ninety-nine-point-ninety-nine percent” of the time expungement will be required.
The court pointed out an important safeguard for recording parties in cases where reversal may indeed seem probable to the appellate court. In such cases, the aggrieved claimant may ask for a stay under rule 56(c) in connection with a petition for writ of mandate taken pursuant to section 405.39.
4. An order granting or denying a motion to expunge a lis pendens is not an appealable order.
Woodridge Escondido Property Owners Ass’n v. Nielsen (2005) 130 Cal. App. 4th 559, 30 Cal. Rptr. 3d 15
The dispute in this case arose after a homeowner constructed a wooden deck that encroached over an easement. Plaintiffs, the managing association of the residential development, brought an action for injunctive and declaratory relief seeking an order requiring the homeowner to remove the encroaching portion. Plaintiffs also recorded a lis pendens.
This case contains two interesting aspects regarding a lis pendens. Although not an issue in this opinion, the court referred to an unpublished opinion in the litigation where the court granted a writ overturning the trial court’s expungement of the lis pendens. In the unpublished opinion the court held that plaintiffs had asserted a “real property claim” against the homeowner because he had encroached on an easement. Whether or not the encroaching structure, a deck, was labeled personal property was irrelevant.
Additionally, the court held that an order granting or denying a motion to expunge a lis pendens is not an appealable order under CCP section 405.39. Thus, the court had no authority to review its own prior writ decision on appeal. Furthermore, the defendant’s attempt to challenge the appellate court’s earlier unpublished ruling reinstating the lis pendens was rejected by the California Supreme Court. Therefore, the lis pendens must remain on record while the appeal of the case is taken.
CONTRACTUAL JURY TRIAL WAIVERS
5. Contractual provisions waiving jury trials are unenforceable.
Grafton Partners LP v. Superior Court (2005) 36 Cal. 4th 944, 32 Cal. Rptr. 3d 5
Grafton Partners had retained PricewaterhouseCoopers (PwC), to perform an independent audit. A dispute later arose and Grafton sued PwC. Grafton demanded a jury trial, and PwC moved to strike the demand based on a jury trial waiver clause in the engagement contract. The trial court granted the motion, and the Court of Appeal issued a writ of mandate directing the trial court to enter an order denying the motion to strike the demand for a jury trial. The California Supreme Court affirmed.
The Court held that a predispute agreement that any lawsuit between the parties would be adjudicated in a court trial, and not by jury trial, was unenforceable. Predispute jury trial waivers (waivers entered into before the parties are engaged in litigation) violate the California Constitution. The Constitution (article I, section 16) provides that a jury trial may be waived only as prescribed by the legislature. The legislature enacted Code of Civil Procedure section 631 which contains the only methods to waive a jury trial. A predispute contractual waiver is not one of the methods set forth in section 631. Therefore, because the legislature has not authorized jury trial waivers by contract, a court cannot enforce them.
The Grafton decision expressly resolved a split in authority and overruled Trizec Properties, Inc. v. Superior Court in which the Second Appellate District enforced a predispute jury waiver provision contained in a commercial lease reasoning that predispute waivers can be enforceable even without statutory authorization.
The Court also rejected a contention that predispute jury trial waivers are valid under 631 (d) (2), which provides that a party may waive a trial by jury “by written consent filed with the clerk or judge.” The real party in interest contended that a predispute contractual waiver would constitute such a written waiver as long as one party filed it with the clerk or judge upon becoming a party to the relevant litigation. However, the Court reiterated its position in Madden v. Kaiser Foundation Hospitals that section 631 applies only after litigation has commenced and thus only persons who already are parties to a pending action may enter into a jury trial waiver.
The Grafton court also distinguished contractual provisions providing for arbitration from predispute jury waivers. Predispute arbitration provisions are expressly authorized by statute. Additionally, arbitration provisions represent an agreement to avoid a judicial forum altogether.
Although not a case involving real property, the Grafton decision means that jury trial waivers in leases, loan documents, and other contracts, will no longer be enforced.
COMMON INTEREST DEVELOPMENTS
6. Association can be compelled to levy assessment to pay judgment creditor; special assessments are not covered by Civ. Code § 1366(c) exemption.
James F. O’Toole Co., Inc. v. Los Angeles Kingsbury Court Owners Ass’n, 126 Cal. App. 4th 549, 23 Cal. Rptr.3d 894 (2d Dist. Div. 1, 2005)
Order appointing receiver and compelling association to levy an emergency assessment to pay plaintiff O’Toole’s judgment affirmed.
O’Toole, an insurance adjuster, obtained $140,000 judgment against association for breach of contract to pay him 10% of proceeds paid by its insurer for Northridge earthquake damage. Judgment also awarded for prejudgment interest of about $60,000 and post-judgment interest at about $80/day.
O’Toole obtained writ of execution, recorded abstract of judgment, and by motion, sought an order directing association to assign to him both regular and special assessments paid by members. Association filed claim for exemption, claiming that all assessment income was needed for essential services and exempt under Civ. Code. §1366(c).
The trial court agreed that Association’s claimed expenses were essential and that regular assessments were exempt from execution. However, it held that O’Toole’s judgment was an extraordinary expense within meaning of §1366(b) and that the Association had the power to levy an emergency assessment to satisfy the judgment. Reasoning that the association’s duty to maintain the property included a duty to meet its legal obligations, the trial court concluded that the association was required to levy a special emergency assessment to raise the money. It ordered the association to hold a meeting of the owners “to consider and provide for a meaningful emergency assessment” to satisfy the judgment.
The association held a meeting, but its members refused to impose an emergency assessment. The trial court then granted O’Toole’s motion for appointment of a receiver to levy and administer a special emergency assessment, but stayed its order to permit the association to pursue this appeal.
Section 1366 provides:
(a) Except as provided in this section, the association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this title. …
(b) Notwithstanding more restrictive limitations placed on the board by the governing documents, the board of directors may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year without the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election of the association.... This section does not limit assessment increases necessary for emergency situations. For purposes of this section, an emergency situation is any one of the following:
(2) An extraordinary expense necessary to repair or maintain the common interest development or any part of it for which the association is responsible where a threat to personal safety on the property is discovered.
(3) An extraordinary expense necessary to repair or maintain the common interest development or any part of it for which the association is responsible that could not have been reasonably foreseen by the board in preparing and distributing the pro forma operating budget under Section 1365....
(c) Regular assessments imposed or collected to perform the obligations of an association under the governing documents or this title shall be exempt from execution by a judgment creditor of the association only to the extent necessary for the association to perform essential services, such as paying for utilities and insurance. In determining the appropriateness of an exemption, a court shall ensure that only essential services are protected under this subdivision...." (Emphasis added.)
On appeal, the court first concluded that the association had the power to levy a special assessment to pay O’Toole’s judgment:
The Association retained O'Toole as the first step in arranging for the repairs necessitated by the Northridge earthquake. O'Toole performed his part of the bargain, and his judgment establishes that he is entitled to be paid for the work he performed for the Association. Although it is true, as the Association contends, that section 1366 does not expressly obligate it to impose a special emergency assessment to satisfy O'Toole's civil judgment, the statute most assuredly permits such an assessment in an "emergency situation," including a "situation" where an order of a court is entered in aid of enforcement of a judgment arising out of an extraordinary and unforeseeable expense necessarily incurred to repair the common areas following the Northridge earthquake. …
Quite plainly, the Legislature did exactly what it set out to do--it protected regular assessments to the extent necessary to insure that homeowners were not deprived of essential services, and at the same time protected the rights of judgment creditors (such as O'Toole) by allowing them to execute against an association's special emergency assessments and, where available, an association's excess (non-exempt) regular assessments. That is precisely what happened in this case, where the trial court granted the Association's request for an exemption covering all of its regular assessments and limited O'Toole's right of recovery to a fund to be created out of a special emergency assessment.
Finally, the court rejected the association’s argument that its refusal to impose a special emergency assessment was a business decision to which the court must defer under Lamden v. La Jolla Shores Clubdominium Homeowners Ass’n, 21 Cal.4th 249, 980 P.2d 940, 87 Cal.Rptr.2d 237 (1999): “Generously construed, the Association’s refusal . . . is a simple refusal to pay a final judgment long since due. . . . [I]t is not one to which a court must defer by refusing to enforce a valid judgment.”
7. Unbuilt condominium units in pre-1984 project are subject to assessment; lien covers later assessments.
Bear Creek Master Ass’n v. Edwards, 130 Cal. App. 4th 1470, 31 Cal. Rptr.3d 337 (4th Dist. Div. 2, 2005) review denied Oct. 19, 2005
In December, 1997, Edwards acquired eight unbuilt condominium units in Phase IV of the Country Club Villas subassociation area of the Bear Creek master development. Phase IV was designed for sixteen condominiums, eight of which had been built. Edwards claimed that the association could not charge assessments on unbuilt units. The trial court found in Bear Creek’s favor on both the judicial and equitable foreclosure causes of action and gave judgment in the amount requested. It also found that as prevailing party, Bear Creek was entitled to attorney fees. Affirmed.
Three issues were addressed:
1. Validity of assessments. Edwards argued that because Bear Creek’s CC&R’s were recorded before the 1984 amendment to Civil Code § 783 (which changed the definition of condominium from space in a “building,” to space “the boundaries of which are described on a recorded . . . condominium plan”), assessments on unbuilt units were invalid. Held: Davis-Stirling Act, into which the changed condominium definition was incorporated, applies to common interest developments created before the 1985 adoption of the act. See Civ. Code § 1352.
2. Notice. Edwards argued that Civ. Code § 1367’s requirement that “the association shall notify the owner in writing by certified mail” of a delinquency before filing a lien was not met because his attorney, to whom the notice was properly sent, refused to sign the certified mail receipt. The notice had also been sent by first class mail, which was not returned. Held: the certified mail requirement “cannot be defeated by the simple expedient of refusing to sign the return receipt.”
3. Inclusion of later assessments. The court rejected Edwards’ argument that the amount of the lien is limited to the amount initially stated in the notice, holding instead that Civ. Code §§ 1366-1367 provide that the lien shall include subsequent delinquencies. The court reasoned that condominium associations are required to assess fees to maintain the complexes; assessments are important to proper functioning of condominiums; and the Legislature, recognizing this importance has “created procedures for associations to quickly and efficiently seek relief against a nonpaying owner” (citing Park Place Estates Homeowners Assn. v. Naber, (1994) 29 Cal. App.4th 427, 432, 35 Cal. Rptr. 2d 51).
Adopting Edwards’ position would seriously undermine the purpose of providing for a quick and efficient means of enforcing the CC&Rs. “A successive recordation requirement would impose a heavy—and needless—burden upon homeowners’ associations, fraught with risk to the association, and undue windfall to the delinquent homeowner, should any installment be overlooked. . . . Both delinquent homeowners and the public at large are placed on notice, with the recordation of the initial assessment lien, that subsequent regularly and specially levied assessments, if they continue unpaid, will accrue in due course. The purpose of the lien notice and recordation will have been served, and the association’s remedy justly preserved, by the initial recordation of the lien.” At pp. 1489, 353.
8. Civil Code § 1366.1 does not prevent association from hiring for-profit management company or other service providers.
Brown v. Professional Community Management, 127 Cal. App. 4th 532, 25 Cal. Rptr. 3d 617 (4th Dist. Div. 3, 2005)
A homeowner cross-complained against her homeowners association and its property management company, claiming among other things, that they violated Civil Code §1366.1 by passing along to her the fees charged by the management company for collecting delinquent assessments. That section provides:
An association shall not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied.
The court upheld a judgment dismissing the cross-complaint against the management company. Civil Code §1366.1 applies only to the association; it does not apply to management companies, or other service providers hired by the association. The association cannot make a profit in the fees it charges homeowners, but it can employ profit-making entities to provide services needed by the association.
9. Homeowner entitled to attorneys fees as prevailing party; post-settlement-offer payments made by association, added to amount of jury award, exceeded settlement offer.
Arias v. Katella Townhouse Homeowners Ass’n, 127 Cal. App. 4th 847, 26 Cal. Rptr. 3d 113 (4th Dist., Div. 3, 2005)
Homeowner sued association alleging that its failure to maintain and repair common areas caused toxic mold to develop in and around her unit. Pursuant to CCP §998, the association offered to pay her $50,001 to settle the case. The settlement offer provided that each side was to bear its own costs and attorney fees.
Homeowner refused and proceeded to trial. Subsequently the parties entered into a stipulation in which the association admitted it had breached duties owed to the homeowner under the CC&Rs and Civil Code §1364 by failing to maintain the common areas and to repair damage to plaintiff’s unit cause by common area sources. The stipulation also set forth that the association had agreed to pay plaintiff $88,939.75 for clean up and repairs and other costs attributable to the mold damage. The stipulation was read to the jury.
The jury awarded plaintiff $3900 for past economic loss and $2500 for future economic loss. The parties then filed dueling motions for attorney fees and costs. The question was whether plaintiff homeowner obtained a judgment more favorable than the settlement offer. The trial court concluded that she did by adding the association’s post-offer payments in the amount of $88,939.75 to the jury verdict of $6400. The association claims that the post-offer payments should not be considered in determining the amount of the judgment secured by plaintiff. HELD: Trial court correctly determined that plaintiff obtained a more favorable judgment than the association’s offer and did not abuse discretion in awarding her attorney fees in the amount of $98,777.50.
10. New Jersey court holds that homeowners association is a “constitutional actor” for purposes of the state constitution’s protection for freedom of expression, but not for purposes of allocating voting rights.
Committee for a Better Twin Rivers v. Twin Rivers Homeowners’ Association, 383 N.J. Super. 22, 890 A.2d 947 (App. Div. 2006)
Twin Rivers is a planned unit development (a common interest development in California terms) covering about 1 square with a population of approximately 10,000 people occupying 2700 residences, located in the Township of East Windsor, New Jersey. The development includes some property devoted to commercial uses and some public facilities, including schools, a library and a fire house.
This lawsuit was brought by some dissident members of the Twin Rivers community represented by Frank Askin of the Rutgers Constitutional Litigation Clinic, who has long sought to establish governmental-type limits on common interest community associations. The case may prove to have national importance. The opinion includes a fairly extensive discussion of the increasing importance of homeowner-association-controlled developments in American housing and the risks they create for abuse of their members.
The complaint included nine counts, but the primary thrust of the suit was to establish that Twin Rivers should be subject to the constitutional limitations imposed on governmental bodies. Plaintiffs did not argue that Twin Rivers is a state actor, but that it is a “constitutional actor required to respect fundamental constitutional rights protected by the New Jersey Constitution when exercising dominion over persons residing within its borders.”
The court agreed with plaintiffs, recognizing the distinction between state actors and constitutional actors. It held that the association cannot deprive its members of fundamental rights to free speech, although it may subject them to reasonable time, manner and place restrictions. The court drew on Marsh v. Alabama (company town) and New Jersey decisions holding that shopping centers are subject to constitutional limits on excluding persons desiring to exercise expressive rights. It remanded the case for determination whether the association’s limits on sign-posting, use of common meeting space, and access to placing articles in the community newsletter meet constitutional standards.
Plaintiffs also challenged the allocation of voting rights, which were based on property ownership and weighted by value, and the denial of voting rights to members who were not current in payment of assessments. Plaintiffs argued both that residents should be given the vote, even if not owners, and that owners’ votes should be equal rather than based on the amount of investment in their property. Defendants responded by arguing that the voting system was authorized by the New Jersey Nonprofit Corporations Act, and New Jersey’s Planned Real Estate Development Act, which specifies one-unit one-vote as the default voting system if the bylaws do not provide some other system. The court refused to hold that anything other than one person one vote for election of association boards is unconstitutional. It held that the validity of association vote allocations is properly judged as a matter of contract and statute, not by constitutional standards.
Finally, with respect to disputes over access to records, modes of dispute resolution and association voting criteria (denial of votes to members with delinquent fines or assessments), the court held that the association’s actions were properly assessed under the business judgment rule. “The arguments advanced by plaintiffs import to elections in community associations the standards heretofore applied only in public sector elections. Without a basis in legislation, it is beyond our authority to effect such a change in the relationships between community associations and their members.”
Interestingly, the opinion does not cite the Restatement (Third) of Property, Servitudes (2000), which reaches the same result with respect to fundamental constitutional rights, but via the common law of servitudes, rather than by extension of constitutional law.
Restatement § 3.1 provides that a servitude that “unreasonably burdens a fundamental constitutional right” is invalid because it violates public policy. Comment h explains:
h. Servitudes that unreasonably burden fundamental constitutional rights are invalid. The term “constitutional rights” is used in this context to identify certain important rights that raise public policy concerns when adversely affected by servitudes. The importance accorded by the federal constitution to protection of these rights against governmental action suggests that there is also a public interest in protecting them against private action. When a servitude inhibits the exercise of rights that are important to the public good, like participation in political debate, for example, public harm results that may justify invalidation of the servitude. Similarly, when a servitude deprives citizens of rights that are fundamental to personal security or well‑being, public harm may result that justifies invalidation. . . .
Fundamental constitutional rights include freedom of speech, press, religion, privacy, and association. They include rights to be free from unreasonable searches, excessive penalties, and expropriation of property. They also include rights to procedural fairness in the administration and enforcement of servitudes. ….
The question whether a servitude unreasonably burdens a fundamental constitutional right is determined as a matter of property law, not of constitutional law. Constitutional law decisions may be useful, but are not controlling, in determining when a servitude goes too far. When private parties create and enforce servitudes they are not governmental actors, and, except where state action is found under Shelley v. Kraemer, see Comment d, supra, they are not subject to the limits placed on government by the Fourteenth Amendment. One factor to consider in determining whether private parties should be permitted to create servitudes that would be forbidden to governmental bodies is the geographical scope of the private party’s power to impose servitudes on an unwilling purchaser compared to that of the government. . . .
Chapter 6 of the Restatement is devoted to residential common interest communities. It provides, inter alia, a common law of association powers, duties to members, various governance issues, and duties of developers to the community and the association. Even for states with extensive statutory schemes, like California and New Jersey, the Restatement can provide useful common law back up.
ARCHITECTURAL CONTROL IN STANDARD SUBDIVISION
11. Developer of standard subdivision is not required to turn over control of architectural control committee to home owners
Property Owners of Whispering Palms, Inc. v. Newport Pacific, Inc., 132 Cal. App. 4th 666, 33 Cal. Rptr. 3d 845 (4th Dist. Div. 1, 2005)
Whispering Palms is a mixed use (condominium and single-family detached) housing development in Rancho Santa Fe, that includes 3 standard single-family home subdivisions, Greens Nos. 1, 2, and 3, each with its own CC&Rs. The Greens are not common interest developments within the meaning of the Davis-Stirling Act. The owners in Greens No. 1 elect their architectural control committee, but the developer has retained control of the committees for Greens Nos. 2 and 3, and the developer’s consent is required to amend the CC&Rs.
In 1971, residents of the three Greens subdivisions formed Property Owners of Whispering Palms, Inc. to “provide a mechanism . . . [to] collectively solve social welfare problems facing them as property owners in the Whispering Palms development . . . .”
The developer refused several requests to give the owners in Greens Nos. 2 and 3 control of their architectural committees despite their dissatisfaction with how the CC&Rs were being enforced. Finally the Association filed suit. After several rounds of pleading, the Association’s complaint sought a declaration that Regulation 2792.28, which requires that a developer of a common interest development make reasonable arrangements for delivery of control over the subdivision to homeowners, applies to standard subdivisions. In addition, the complaint sought relief for breach of fiduciary duty, breach of an implied covenant of good faith and fair dealing, breach of agreement, quiet title, and accounting.
The trial court sustained a demurrer to the claim that Regulation 2792.28 applied and granted summary judgment to the developer on the other claims on the ground that the Association lacked standing because its membership was not limited to owners in Greens Nos. 2 and 3, but included some owners from Greens No. 1.
The Court of Appeal reversed on standing and upheld the demurrer as to Regulation 2792.28.
1. Standing. Citing Hunt v. Washington State Apple Advertising Comm’n (1977) 432 U.W. 333, 97 S. Ct. 2434, and Warth v. Seldin (1975) 422 U.W. 490, 95 S. Ct. 2197, the court held that an association has standing when “its members, or any one of them, are suffering . . . injury as a result of the challenged action of the sort that would make out a justiciable case had the members themselves brought suit. . . . [T]he fact that the Association's membership includes residents of Greens No. 1 does not prevent the Association’s standing to bring this action on behalf of residents of Greens Nos. 2 and 3.” At 673, 849-850.
2. Applicability of 2792.48. The Subdivision Map Act requires subdividers to obtain a “public report” from the California Real Estate Commissioner before selling or leasing interests in subdivisions. To obtain the report, a subdivider must file a notice of intent and complete a questionnaire on a form prepared by the Commissioner. The notice must include “A true statement of the provisions, if any, limiting the use or occupancy of the parcels in the subdivision.” Cal. Bus. & Prof. Code § 11010(b)(8).
Cal. Bus. & Prof. Code § 11018(d) requires the Commission to find as to common interest developments that “Reasonable arrangements have been made for delivery of control over the subdivision and all offsite land and improvements included in the offering, to the purchasers of lots, apartments, or condominiums in the subdivision.”
Regulation 2792.28 provides standards for determining whether reasonable arrangements have been made for architectural and design control. It requires that the developer turn over design control to the property owners association when 90% of the subdivision interests have been sold or 5 years have passed since issuance of the public report, whichever occurs first.
The Association argued that “for policy reasons” the protection of § 11018.5(d) and Regulation 2792.28 should be extended to standard subdivisions. Without discussing the policy reasons, the court concluded that it should defer to the Commissioner’s authority to determine the rules and regulations “necessary to accomplish the legislative purpose underlying the Act.” It thus “decline[d] the Association’s invitation to interpret the Commissioner’s regulations to say something they do not.”
Nothing in Regulation 2792.28 says that its application is limited to common interest developments, or that it does not apply to standard subdivisions in which CC&Rs impose architectural controls. The court did not discuss the question whether there is any meaningful difference between the need of homeowners in a common interest development and those in standard subdivisions for protection against developers who refuse to relinquish control, basing its decision instead on the statutory and regulatory scheme which imposes less regulation on the developer of a standard subdivision.
Result: The case was remanded for further proceedings on the causes of action that related generally to unfair enforcement of the CC&Rs in Greens Nos. 2 and 3.
12. Easements for public highway granted after enactment of 1872 statute include right to construct telephone lines, including fiber optic cables
Anderson v. Time Warner Telecom of California, Inc., 129 Cal. App. 4th 411, 28 Cal. Rptr. 3d 289 (5th Dist. 2005) review denied July 27, 2005.
Plaintiffs own property subject to easements for public highways owned by Kern County. One easement was established by an 1892 statute providing the public with a right to travel, and the other by a 1953 deed granting an easement for the “sole purpose of a public highway.”
Fiber optic cables were installed in the easements pursuant to encroachment permits issued by the county in 1997 and 1999. Time Warner, holder of a certificate of public convenience and necessity to provide and resell local exchange telecommunications services, owns the fiber optic cables.
Plaintiffs sued for trespass and ejectment claiming that the use for fiber optic cables exceeds the scope of the easements. Plaintiffs claim that, “despite the modern trend to construe public rights of way to accommodate technological advancements” the “technological developments must further the particular purpose of the easement, which in this case is highway travel, not telephone communications.
The court rejects this argument, holding that Public Utilities Code § 7901, formerly civil Code § 536, grants telephone companies the right to use the public highways to install their facilities. The predecessor of this statute was enacted in 1872 and thus controls the rights granted by the 1892 statutory easement and the 1953 deed.
The court held that fiber optic facilities and telephone companies are within the natural evolution of the technology that existed when the easements were created. (Civil Code § 536 as enacted in 1872 covered only telegraph companies; telephone companies and telephone lines were added in 1905).
This statute applies without regard to whether the property is rural or urban. The court thus decided that it did not need to determine which of California’s two lines of cases on scope of public road easements controls—the Gurnsey v. Northern Cal. Power Co. (1911) 160 Cal. 699, 117 P. 906 line (rural highway easements are for passage only) or the Montgomery v. Railway Company(1894) 104 Cal. 186, 37 P. 786 line (urban street easements include many uses).
13. Neighbors not entitled to intervene in action challenging proposed opening of public access easement on adjacent property.
City of Malibu v. California Coastal Comm’n, 128 Cal. App. 4th 897, 27 Cal. Rptr. 3d 501 (2d Dist. Div. 1, 2005)
City of Malibu and David Geffen sued California Coastal Commission, California Coastal Conservancy, Access for All, and others seeking to invalidate offers to dedicate easements signed by Geffen in 1983, 1991, and 2000 to obtain permits to develop four beachfront lots Geffen owned in the Carbon Beach area of Malibu. The easement offered to the People of the State of California, or the Coastal Commission’s designee was to be located within an 18-foot wide corridor lying along the westernmost portion of the Geffen property. The Heidts, who sought to intervene, own the property immediately west of the Geffen property.
The Heidts argued that their property would be directly affected by use of the easement and more so than the Geffen property. The Heidt home looks directly at the easement and gate and is located less than 20 from it. They also argued that they were at risk from trespasses by the public as there were not lifeguards, restrooms, parking or other public facilities for the beach. By contrast, the Geffen property is sheltered from the easement by a substantial wall.
The court rejected the Heidts’ argument that their interest was direct and immediate, entitling them to intervene:
If defendants prevail in this case and the public accessways are opened, there are no immediate consequences because the Heidts can only speculate that members of the public will trespass and litter on the portion of the beach that the Heidts own and thereby ultimately affect the quiet enjoyment of their property. Indeed, if such speculation provided a basis on which intervention could be required, the Heidts's neighbors to the west, Geffen's neighbors to the east, and the neighbors of those neighbors would be in a position to demand intervention because persons using the vertical accessway on Geffen's property (as well as vertical accessways that apparently exist approximately 1,000 feet to the east and 2,000 feet to the west of the accessway on Geffen's property) would likely walk along the beach beyond the Heidt and Geffen residences and might trespass and litter on these properties as well. But the possibility of what some ill-mannered citizens might do cannot create an entitlement for landowners up and down the Malibu coast to interject themselves into every dispute regarding the right of public access to the beach.
. . . [T]he Heidts and Geffen have identical interests in preventing members of the public from accessing areas adjacent to their properties. And the Heidts have not claimed that Geffen has failed to pursue any available legal theory in this regard. To the contrary, it may readily be gleaned from the record on appeal that Geffen has been an able advocate of his and the Heidts's position in attempting to prevent public use of Geffen's easements.
The Heidts further assert that they "have a direct interest in enforcing [the 'privacy buffer'] provision and in how it gets interpreted." This interest does not support intervention. Inasmuch as there is nothing in the record to indicate how the provision will be interpreted in protecting the Heidts's privacy, the Heidts's interest is once again not immediate because they can only speculate that they will be dissatisfied with the interpretation. It is also significant that the Heidts's concern about the privacy buffer is specific to them. Thus, inclusion of this issue would necessarily enlarge the litigation.
14. Where Tenant abandons Premises, Landlord’s mitigation of damages must be measured against the fair market rental value of the property.
Lu v. Grewal (2005), 130 Cal. App. 4th 841, 30 Cal. Rptr. 3d 623
Under California Civil Code Section 1951.2, Tenant’s abandonment of the Premises operates as a termination of the lease giving rise to a claim for lost rent. In addition to rent accrued but unpaid prior to termination, Section 1951.2 allows a Landlord to recover an amount equal to the unpaid rent “which would have been earned after termination until the time of award” less the amount of such “rental loss the lessee proves could reasonably have been avoided.”
The facts are unsympathetic to the Tenant. The Tenant, Grewal, signed a lease for a gas station for a ten year term. Seven years after commencement of the lease, Lu purchased the property from the original Landlord and took over Landlord’s position. Landlord received only one month’s rent from Tenant before discovering that Tenant had abandoned the Premises. By the time Landlord discovered the abandonment, it was too late: the property had been thoroughly vandalized. According the opinion, the gas pumps were gone, computer controls for the underground tanks had been removed and “everything inside the convenience store was missing.” Lu and his wife responded by occupying and repairing the Premises, and by operating the business. Lu apparently “became manager and … worked at the business operating … 24 hours a day, seven days a week.” Lu attempted to sell or relet the property, but with no luck. At one point, Lu signed a listing agreement and even entered escrow to sell, but the sale did not close. Lu operated the business the entire remaining term of the lease.
The lease contained language typical of this arrangement. Tenant was required to maintain the property, and indemnified Landlord against all claims arising from Tenant’s use of the Premises. Tenant assumed all risk of property damage and personal injury associated with the Premises.
Landlord lost at trial level, notwithstanding Tenant’s apparent breach of the lease. The trial court held that Landlord’s operating profits were greater than rentals that would have accrued under the lease after termination, and therefore the Landlord was not damaged. Tenant received an offset for Landlord’s operating profits from the business. Making matters even worse for Landlord, the trial court awarded Tenant costs in the amount of $214,322.
The Court of Appeals reversed. To the extent that an abandoning Tenant is entitled to an offset representing Landlord’s obligation to mitigate damages, this offset must be measured by the fair rental value of the property.
At no point did the Tenant contest the breach; it attacked only the claim for damages. The Court of Appeals determined that Landlord’s damages must include amounts for lost rentals, as well as for “special damages incurred as a proximate result of the breach,” quoting Sanders Construction Co. v. San Joaquin First Fed. Sav. & Loan Assn., 186 Cal. Rptr. 218 (Cal. App. 1982). Special damages in Grewal included the costs of repair and reconstruction of the gas station. The total damage award would be reduced by “any amount in mitigation that lessee proved.”
The court repeats the well known adage that Landlord will not be compensated for damages that it could have reasonably avoided. But in this case, Landlord took reasonable steps to avoid loss.
The court states that it would be wrong to “punish” the Landlord for bringing the property back to life, and that Landlord’s obligation to mitigate damages does not require it to operate an abandoned business.
15. Except in very limited circumstances, Landlord is liable to Tenant in a commercial lease for tort damages only to the extent that Landlord violated a duty independent of its obligations under the contract.
Butler-Rupp v. Lourdeaux (2005), 134 Cal.App.4th 1220, 36 Cal. Rptr. 3d 685
Tenant was in the business of designing and manufacturing clothes and leased 900 square feet of space in an office complex operated by Landlord. Tenant signed a succession of one year lease agreements. Rental rates for the Premises rose significantly year by year.
After several years of hard work, Tenant’s clothing business began to take off, helped in large part by her participation in a New York fashion show. Tenant ultimately employed 26 individuals and surpassed gross sales of $1 million.
With success came the need for additional space. Tenant encountered problems with heating that were never adequately met by Landlord, and she considered moving to alternative space. However, Landlord successfully persuaded Tenant to remain in the Premises, and to sign a lease with a five year term. To accommodate Tenant’s growth, Landlord agreed to lease additional areas of the building to Tenant. These areas included a suite that Tenant used as a showroom, and a bare basement area to be used as warehouse. Landlord also agreed to convert some of the leased space into a kitchen.
Most importantly, Landlord represented that he would correct the heating problems in the showroom space, and that he would install a heating system in the warehouse space.
Landlord breached the Tenant’s lease in numerous ways. Inspection by the Tenant revealed that the showroom space could not be adequately heated by the existing system, and the Landlord simply failed to heat the warehouse. In a bizarre twist, Landlord’s manager engaged a practice of unannounced and uninvited entries into the Premises, including the areas used by Tenant for manufacturing. As the relationship soured between the parties, Landlord presented Tenant with a bill for operating expenses, even though the lease did not require Tenant to pay such charges. At one point, Landlord scheduled electrical maintenance for the building at a time that would interfere with critical annual shipments of merchandise.
The trial court instructed the jury on seven causes of action, including “breach of contract, promissory fraud, and negligent misrepresentation, interference with tenant’s quiet enjoyment, intentional infliction of emotional distress and negligent infliction of emotional distress.” The jury found Landlord liable on all causes, except fraud and intentional infliction of emotional distress. As to the contract claims, the jury awarded Tenant $855,000 in damages, and as to the tort claim, the jury awarded a total of $580,000. The court denied Tenant an award of attorney’s fees.
The Court of Appeals reversed in part and affirmed in part. It affirmed the award of contract damages. However, Landlord succeeded in reversing the award of tort damages, but this victory was moderated (and perhaps, depending on the bill, obliterated) because the Tenant succeeded in obtaining attorneys fees.
The behavior of Landlord (and its trespassing agent) certainly seems offensive enough to qualify as a tort, at least in a layman’s book. Normally the damage remedy for breach of contract is limited to contract damages. The Court of Appeals quotes the earlier case of Erlich v. Menezes, 87 Cal. Rprt. 2d 886 (Cal. 1999), stating that “conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law.” The Erlich court identified limited scenarios in which a tort will be held to occur. These include a breach of contract that results in physical injury to the Tenant, a breach that results from fraudulently induced contract or a violation of some fundamental public policy. In this case, the Tenant never alleged that she suffered a physical injury.
Limiting parties to contract damages for actions that emerge from a breach of contract seems reasonable enough. California adheres to an “economic loss rule,” limiting the non breaching party to economic damages where the other party to the contract has failed to meet its contract expectations. However, in Butler – Rupp, the behavior of Landlord, and particularly of its agent, borders on stalking and harassment. At some point, non physical behavior may be almost as bad as the physical. The set of jury instructions delivered by the court (and presumably drawing from proposed instructions from Tenant’s lawyer) never asked jurors whether Tenant was subject to physical injury or a fear of physical injury. With some tweaking, the jury might have provided an answer that would have more readily fit the Erlich requirements.
16. Landlord has a duty to Tenant to help prevent reasonably foreseeable injury resulting from gang related violence.
Castaneda v. Olsher (2005), 132 Cal. App. 4th 627, 33 Cal. Rptr. 3d 827
As a general matter, California property owners are required to maintain their property in a reasonably safe condition. In this premises liability suit, the Court of Appeals reversed the trial court and held that Landlord has a duty “to attempt to protect tenants from gang violence attributable to the known presence of gang members and gang activity on landowner’s property.”
The Landlord in Castaneda was the owner of a mobile home park. Tenant’s 17 year old grandson was standing on the steps of the mobile home in which he lived when he was hit by a stray bullet during a gang related confrontation.
Landlord employed two individuals to manage the mobile home park. These two employees “walked around the Park each day to identify and correct safety problems and other maintenance issues, and to paint over graffiti.” In addition to painting over graffiti, there was other evidence indicating that Landlord knew of gang problems in the mobile home park. One of the employees identified several specific mobile homes as homes of likely gang members. Guns were fired in or near the mobile home park on more than one occasion. The Landlord’s employees instructed the Landlord that they had witnessed drug deals, and that at least one resident was under DEA surveillance. Eventually, rowdy gang members began to congregate at an empty mobile home lot, and would antagonize and scare other residents of the mobile home park. When the Landlord’s employees disclosed these activities to Landlord, the Landlord allegedly responded that “because the parents of these suspected gang members paid rent to [Landlord] in a timely manner, [Landlord] was not interested in evicting them.”
One tenant circulated a petition regarding safety issues. Few tenants were willing to sign the petition, however, because they were afraid of gang retaliation. Castaneda’s grandmother complained to Landlord’s employee about gang activities, and was told the following: “Well, guess what? We got one more batch moving in. This will be the fifth batch of gang members and they are moving right across from you.”
The Court of Appeals’ careful recitation of facts is central to its determination that the Landlord should have reasonably foreseen that injury might result from gang related activities at the mobile home park. Prior California case opinions suggest that forseeability of the criminal activity mush be weighed against the burden imposed on the Landlord. To impose a significant burden on the Landlord, the Tenant must show “heightened forseeability.” In order to meet this standard, the Tenant, [or in this case, Tenant’s grandson] must demonstrate either “prior similar incidents of violent crime or other indications of a reasonably foreseeable risk of violent criminal assaults in that location.” In Castaneda, Castaneda did not show similar incidents of criminal assaults, –no one was actually previously shot. However, he could show “other indications of a reasonably foreseeable risk.” In other words, after drug busts, gun shots and tenant complaints, Landlord is subjected to a duty. The court distinguished the Castaneda fact pattern from a scenario that would not entail liability; the latter involves “random criminal acts by an otherwise random and transient third party.”
The question then becomes: what is the nature of this duty? In Castaneda, the court held that Landlord is “under a duty to attempt to protect tenants from gang violence attributable to the known presence of gang members and gang activity.” This duty may require Landlord to enforce strict rules on the property, increase the security presence or warn residents of “troublesome areas” of the property. One should note that the court does not impose a strict liability obligation to prevent violence. Rather, Landlord is under a duty to “attempt” to prevent violence. One should also note that normal rules of negligence otherwise apply to this fact pattern, including causation.
17. Commercial Tenant is not obligated to replace a dilapidated roof, where the lease agreement requires Tenant to “maintain” the roof, but does not expressly require Tenant to restore or replace the roof.
ASP Properties Group v. Fard, Inc. (2005), 133 Cal. App. 4th 1257, 35 Cal. Rptr. 3d 343
Affirming the trial court’s judgment for Tenant, the Court of Appeals reinforces a basic principle of contract law requiring the lease to expressly obligate Tenant to replace a roof.
In ASP Properties, Tenant signed a ten year lease for commercial space in La Mesa, California. Although there was some confusion about the actual date of Tenant’s occupancy, facts at trial suggested that the roof of two buildings leased were past their useful life and in need of repair at the time of lease execution. The lease provided only that Tenant would “maintain at his sole expense and without contribution from Landlord, the Premises in good and safe condition.” Three years after signature of the lease, Landlord and Tenant executed an amendment to the Lease. The amendment provided for a reduction in rent to the tune of $40,000 over the remaining lease term, and substituted a new Repairs and Maintenance provision. The new provision required Tenant to “maintain at his sole expense and without contribution from Landlord , the Premises in good and safe condition, including, but not limited to … the roof.” The amendment to lease also required Tenant to correct certain Code violations.
The Court of Appeals relied on a number of basic rules of contractual construction, some of which appear in California code. These rules require contracts to be read against the party responsible for the ambiguity in the contract. California Code Section 1643 provides that “a contract must receive such an interpretation as will make it lawful, operative, definite, reasonable and capable of being carried into effect.”
The Court of Appeals held that “although Landlord [assumed] the Amendment allowed it to require … replacement of the roofs, Landlord does not show that the language of the Amendment is reasonably necessary to that interpretation.” The court evaluated extrinsic evidence, but held that this evidence did not support the Landlord’s contention. This evidence included statements of parties who negotiated the original lease transaction (Landlord had purchased the property after execution of the lease.) Landlord argued that $40,000 represented the cost of replacing the roof. Tenant argued that the rent reduction was attributable to Tenant’s agreement to correct code violations, and further, that the parties could not have intended for Tenant to replace the roof if it was already past its normal life span on the date the lease was signed.
The careful modifications to the lease agreement indicate that the parties could have drafted the lease to more specifically require restoration of the roof.
18. Beneficiary Deeds: Should California adopt “beneficiary deeds” as a means of conveying real property at time of death through nonprobate means; and if so, what should be the scope of the doctrine?
California Stats. 2005, c. 422 (A.B.12)
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. (a) The California Law Revision Commission shall study the effect of California's nonprobate transfer provisions and shall study statutes in other states that establish beneficiary deeds as a means of conveying real property through nonprobate transfers. The objective of the study shall be to determine whether legislation establishing beneficiary deeds should be enacted in California. The commission shall report all of its findings to the Legislature on or before January 1, 2007. If the commission recommends that the Legislature adopt a statutory scheme establishing beneficiary deeds as a means of conveying real property, the commission shall recommend the content of the proposed statute.
(b) The commission shall address all of the following in the study described in subdivision (a):
(1) Whether and when a beneficiary deed would be the most appropriate nonprobate transfer mechanism to use, if a beneficiary deed should be recorded or held by the grantor or grantee until the time of death, and, if not recorded, whether a potential for fraud is created.
(2) What effect the recordation of a beneficiary deed would have on the transferor's property rights after recordation.
(3) How a transferor may exert his or her property rights in the event of a dispute with the beneficiary.
(4) Whether it would be more difficult for a person who has transferred a potential interest in the property by beneficiary deed to change his or her mind than if the property were devised by will to the transferee or transferred through a trust or other instrument.
(5) The tax implications of a beneficiary deed for the transferor, the transferee, and the general public as a result of the nonprobate transfer, including whether the property would be reassessed and if tax burdens would shift or decrease
19a. “Quick Take” Eminent Domain: When, if ever, is it appropriate to change the date of valuation under the California “quick take” eminent domain proceeding from the date the “probable compensation” is deposited to a later date (date of trial) to ensure the property owner receives just compensation?
Mt. San Jacinto Community College Dist. v. Superior Court, (2005) 24 Cal.Rptr.3d 328, review granted, May 18, 2005.
In October 2000, Mt. San Jacinto commenced an eminent domain action against Azusa Pacific, a private educational corporation, seeking to condemn approximately 30 acres of vacant land in the Menifee area of Riverside County. On December 15, 2000, Mt. San Jacinto deposited $1.789 million as probable compensation for the property. In February 2002, Azusa Pacific petitioned the trial court to increase the deposit of probable compensation from $1.789 million to $4.2 million, on the ground the property was worth $4.2 million on December 15, 2000. (§ 1255.030.) The trial court denied the petition, and determined that the value of the property on December 15, 2000, and the amount of Azusa Pacific's probable compensation, was $1.789 million.
At trial, Mt. San Jacinto argued that the date of valuation should be December 15, 2000, as the “quick take” statutory provisions required. Azusa Pacific argued that the date of valuation should be the date of trial on the compensation issue, because the property had substantially increased in value since December 15, 2000 and the constitutionally mandated principle of just compensation warranted changing the date of valuation, and the trial on the compensation issue was not going to be held within one year of the commencement of the proceeding. (§ 1263.130.)
The court of appeals ruled that California’s “quick take” statutory scheme and valuation date was consistent with the constitutionally mandated requirement of just compensation. Providing an initial deposit upon commencement of the ‘quick take” proceedings adequately ensures that the party will receive just compensation for the takings.
19b. San Diego Metropolitan Transit Development Bd. v. RV Communities, (2005) 26 Cal.Rptr.3d 593, review granted, July 30, 2005.
The San Diego Metropolitan Transit Development Board (MTDB) needed to acquire a portion of property owned by RV Communities (RV - the property) for construction of a trolley line. MTDB initiated eminent domain proceedings on September 12, 2001, and, pursuant to the “quick take” statutory provisions, deposited $79,357 on September 27, 2001, based on the declaration of its real estate appraiser, as to the probable amount of the just compensation as of that take for the taking of RV’s property.
Trial was delayed until February 28, 2003. Shortly before the start of trial, RV filed a motion seeking to increase MTDB’s deposit to $300,000 and to change the date of valuation from the date of deposit, September 27, 2001, to the date of trial, February 28, 2003. MTDB responded, in part, by increasing its deposit by an additional $220,623. The trial court ruled in favor of RV’s motions, resetting the valuation date to the date of trial. At trial, the jury found the fair market values for the interests being taken by MTDB totaling just under $ 2.4 million.
MTDB appealed, arguing in part that the trial court committed reversible error in changing the date of valuation. The court of appeals responded first by noting that the initial valuation deposit was based upon a valuation date of April 26, 2001, a date months before the actual deposit date. Under the “quick take” statutory scheme, the deposit is to be based on a probable valuation for the date of the probable compensation deposit. The court of appeals also noted that both the United States Supreme Court and California courts have recognized that strict adherence to the statutory valuation date in an eminent domain action is improper if the resulting compensation to the property owner falls substantially short of constitutionally required "just compensation." Although MTDB argued that this principle applied only where there is no deposit of reasonable compensation, the court of appeals rejected this proposed limitation on the just compensation principle.
As applied to the facts of the case, the court of appeals concluded that MTDB’s initial deposit was based on the wrong valuation date and it fell short of the statutory requirement that the deposit be probable compensation. Accordingly, the proper valuation date was the start of trial because the issue of compensation was not brought to trial within one year of commencing the eminent domain proceedings and the delay was not the property owner’s fault. Moreover, as applied to the facts of the case, the constitutionally mandated requirement of just compensation also warranted changing the date of valuation. The delay in depositing a probable compensation prevented the property owner from going out and acquiring comparable property.
19c. Cathedral City Redevelopment Agency v. Stickles, (2005) 36 Cal.Rptr.3d 833, review granted, March 1, 2006.
Cathedral City Redevelopment Agency (CCRA) instituted “quick take” eminent domain proceedings to take three residential properties owned by Stickels, et. al. CCRA deposited $287,000 on December 16, 2002, and on January 20, 2004, deposited an additional $30,500, a total deposit of $317,500. The additional $30,500 was deposited pursuant to the parties' stipulation and the trial court's order, following a hearing on appellants' motion to increase the deposit. (§ 1255.030.) Appellants later filed a motion in limine to set the date of valuation on the date of trial. The trial court denied the motion, and set the date of valuation on December 20, 2002, the approximate date of the original deposit. (§ 1255.110.) At trial on the compensation issue, which commenced on April 28, 2004, a jury determined that the fair market value of the properties was $384,360 on December 20, 2002.
On appeal, the appellants contend that the trial court committed reversible error in setting the date of valuation on December 20, 2002. They argued first that the date-of-deposit valuation rule of section 1263.110 did not apply because: (1) CCRA did not, by its own admission, deposit the "full" amount of appellants' probable compensation on or before December 20, 2002; (2) the $287,000 deposit was made in "bad faith" because it was based on a then 13-month-old, November 20, 2001, appraisal; and (3) CCRA failed to timely increase the deposit by the additional $30,500 within 30 days of the trial court's order requiring the additional deposit. In the alternative, appellants argued that the original valuation date was unconstitutional because it deprived them of just compensation because the property had substantially increased in value between the initial date of deposit and the date of trial.
The court of appeals rejected the appellants’ arguments. First it concluded that CCRA had complied with (1) the “quick take” statutory requirements by making an initial deposit that was not substantially different from the ultimate determination of the value of the property on that date, and (2) the overriding principle of just compensation at the time of the taking. In the “quick taking” proceedings, the takings occurs when the initial deposit is made because the public entity also receives the prejudgment right to possession following the deposit of probable compensation. The court acknowledged that where the amount of the initial deposit is substantially less than the fair market value on the date of deposit, the equities of the matter and the constitutionally mandated just compensation principle may warrant changing the date of valuation. Where, however, plaintiff's initial deposit was made in good faith based on a well-supported appraisal, and the determination of fair market value was reasonably disputed, then it may be unfair to the plaintiff to shift the date of valuation forward to the date of trial or even to the date of the increased deposit, particularly in a rising real estate market. The court of appeals concluded that CCRA had sufficiently complied with the “quick take” statutory scheme here that the date of valuation should be the date of the initial deposit of the probable compensation.
19d. City of Santa Clarita v. NTS Technical Systems, (2006) --- Cal.Rptr.3d ----, 2006 WL 255080
The City of Santa Clarita condemned an unimproved portion of ETCR's property to construct and operate a major arterial road. At the time the condemnation proceedings were commenced, ETCR owned 148 acres of relatively remote and rural section of the city which NTS leased to operate its facility. The condemned portion consisted of 0.461 acres (fee simple), 5.176 acres (slope/drainage easement), and 1.61 acres (temporary construction easement).
On August 3, 1999, City filed its eminent domain complaint, and made a probable compensation deposit of $48,175 based on an appraisal. ETCR was served on August 14, 1999, with the immediate possession order. On October 14, 1999, appellants (ETCR and NTS collectively) filed a joint answer to the complaint. The court trial began on December 9, 2002. The statement of decision was issued on May 23, 2003. The trial court found the proper date of valuation was August 3, 1999, the date of the probable compensation deposit. The court further found appellants failed to show any goodwill loss caused by GVR. The amount of $48,917.53 was the just compensation for the "part take." On June 17, 2003, judgment was entered, and this appeal followed.
First, appellants argued that contend the jury, not the court, determines whether the loss of goodwill was "caused by the taking of the property or the injury to the remainder" (Code Civ. Proc., § 1263.510, subd. (a)(1)). The court of appeals ruled that compensation for goodwill loss involves a two-step process. Whether the qualifying conditions for such compensation (§ 1263.510(a)) have been met is a matter for the trial court to resolve. Only if the court finds these conditions exist does the remaining issue of the value of the goodwill loss, if any, go to the jury. The court of appeals agreed with the trial court that the appellants did not establish the qualifying conditions.
Second, appellants argued that the court’s use of August 3, 1999 was inappropriate date for valuation purposes. The court noted that under the "quick take" or "early possession" law (§ 1263.110 et seq.) the date of valuation is a date on which the condemner deposits "probable just compensation" for the property, which entitles condemner to seek immediate possession. Based on an independent appraisal performed at that time, the City deposited $48,175. Three years later, at trial, the City’s trial appraiser testified that the value of the property interest as of August 3, 1999 was $80, 250. Based on that appraisal, the City promptly increased its deposit y adding another $32,025. The court ruled that the City’s supplemental deposit did not affect the date which should be used for valuing the property interest being condemned. The court of appeals emphasized that the “quick take” process allows for the party whose property interest is being taken to institute proceedings to increase the initial deposit if the party does not think the deposit is adequate. Appellants here did not institute those proceedings, but instead waited until trial to argue that the deposited amount was inadequate. Moreover, the “quick take” statutory scheme expresses authorizes the condemning party to voluntarily increase its deposit without reference to any change in the valuation date. The court of appeals concluded that these provisions, read together, warranted ruling that the City’s supplemental deposit did not affect the valuation date, despite the size of the supplemental deposit. Lastly, the court of appeals ruled that the mere fact that the property had increased significantly in value between the date of the “quick take” and the date of the trial was not, in and of itself, grounds to change the valuation date.
In addition, the court upheld the trial court’s exclusion of the appellants’ expert who was to testify as to the valuation of the property. Appellants’ expert repeatedly offered information and data which supported valuations of the property based on a valuation date tied to the start of the proceedings. Appellants’ expert did not offer any information and data to support an August 3, 1999 valuation date until after the trial had begun and well after the agreed upon date for the exchange of such data. The court of appeals ruled that there were ample grounds to support the trial court’s ruling.
20. CEQA Protection of Historic Landmarks: CEQA does not apply to proposed architectural changes to the inside of a privately owned historic landmark, even if the changes are to historic features of the landmark, at least where the current features and the proposed changes would not be visible by the public at large from any public spot.
Martin v. City and County of San Francisco, (2005) 135 Cal.App.4th 392, 37 Cal.Rptr.3d 470.
Francis Martin owns the Atkinson House, one of the oldest houses in San Francisco. Because of its unique historical and architectural features, in 1977 it was designated a City Landmark. A large number of features contributed to the House and the neighborhood it is located in being registered as a City Landmark and it being listed on the National Register of Historic Places, including that the famous 19th century architect Willis Polk often used natural redwood interiors as a design feature.
In 2001, Martin submitted plans to the City and County of San Francisco (City) for alterations to the interior and exterior of his house. The proposed changes contemplated the destruction of portions of the Polk-designed redwood interior. In response to the submission of the plans, the City's Planning Department advised Martin that it believed the interior space proposed for renovation was a historic feature that contributed to the historic nature of the House and the neighborhood. As such, that interior space was a historic resource subject to further review under CEQA. Accordingly, the City asked Martin to submit an "Environmental Evaluation application" so that the Planning Department could "proceed to analyze the potential environmental impacts of the project and complete the appropriate environmental review document." Although the City expressed no objection to Martin's proposed changes to the exterior of his home, it refused to process his permit application absent CEQA review.
The parties stipulated that the interior space of the House that Martin was proposed to alter are not visible from the street, the sidewalk, or any other public location. Martin sued for declaratory relief that his proposed interior revisions were beyond the scope of CEQA. The City acknowledged that this was the first time the Planning Department had taken the position that CEQA applied to alterations to the interior of a single-family private residence. The trial court ruled that Martin was not entitled to the requested relief, and Martin appealed.
On appeal, the city argued that a city ordinance give the Planning Department almost plenary power with respect to building permits. In addition, CEQA specifies that local decisions should be made by local authorities. Moreover, the Board of Permit Appeals is the appropriate reviewing body. At a minimum, the City argued that Martin’s recourse to the courts was premature. That position, was mooted when the City acknowledged at oral arguments that the Planning Department had conclusively determined that CEQA applied to Martin’s proposed interior modifications. Therefore, the court concluded that the issue of whether CEQA applied was ripe.
The court emphasized that CEQA is intended to regulate the environmental quality of the state. The major procedure for achieving this goal is to require preparation of an environmental impact report whenever a state or local agency proposes to approve or implement a "project" that "may have a significant effect on the environment." After a careful review of the different provisions of CEQA, the court concluded that CEQA is concerned with tangible physical manifestations that are perceptible by the senses. To come within the scope of CEQA, the proposed project must affect the environment of persons in general, not just particular persons.
As applied to Martin’s proposed alternations to the interior of the Atkinson House, while the proposal may strike some as cultural vandalism, the plans do not come within the scope of CEQA. The plans do not affect the environment of persons in general, they do not affect the environment in general.
21. Community Property – Transmutation: Part performance is not an exception to the statutory requirement that to constitute a transmutation there must be an express written declaration signed by the spouse adversely affected.
In re Marriage of Benson, (2005) 36 Cal.4th 1096, 32 Cal.Rptr.3d 471.
Husband (Diane Benson) and wife (Diane Benson) were married. During the marriage, they acquired a house from the Wife’s father which they initially held in joint title. The Husband claimed the house was community property. In addition, the Husband worked during the marriage as a full-time as a truck driver for a food wholesale company. Through his employer, he participated in a stock ownership plan, and contributed to a 401(k) retirement plan. The retirement plan was clearly community property.
Wife was the beneficiary of an irrevocable trust, of which her father was the trustee. Wife’s father asked the couple to convey the house to the trust. Husband claimed that he and Wife orally agreed that he would deed his interest in the house to the Wife’s trust as her separate property in exchange for Wife agreeing to create a writing transmutating her interest in the Husband’s retirement account to his separate property. The Husband executed a deed conveying his interest in the house to the Wife’s trust. The Wife never executed a writing transmutating her interest in the Husband’s retirement account. The Wife claimed the alleged oral agreement to do so never occurred, and that even if it did, it did not qualify as a valid transmutation.
Family Code section 852 provides that a "transmutation," or an interspousal transaction changing the character of community or separate property "is not valid unless made in writing by an express declaration" approved by the adversely affected spouse. The lower courts ruled that the husband’s partial performance of the alleged oral agreement served as an adequate substitute for the Wife’s express writing. The California Supreme Court disagreed and reversed. It ruled that unlike the statute of frauds, part performance is not applicable to the express writing requirement of section 852.
22. Bankruptcy: A tenant’s security deposit should be applied to the lesser of the landlord’s actual damages or the landlord’s capped damages.
In re AB Liquidating Corp. 416 F.3d 961 (9th Cir. 2005).
Landlord (AMB Property, L.P.) leased commercial property to Adaptive Broadband Corporation (ADC) for a term of five years. The lease required a security deposit of $1,000,000. Just over a year after entering into the lease, ADC filed for Chapter 11 bankruptcy and promptly rejected the lease. In time, AMB re-let the property to another tenant and filed a $2,000,000 claim in the bankruptcy proceedings for damages associated with the lease rejection.
Under the Bankruptcy Code, the “Landlord’s Cap” provision (11 U.S.C. § 502(b)(6))
provides that where a debtor rejects a lease, the landlord’s damages claim as a result of the rejection is the lesser of (1) the landlord’s actual damages or (2) one year’s lease payments. In the case in question, the parties stipulated that the landlord’s actual damages were in the range of $5 million, while one year’s lease payments were only $2 million. Accordingly, under the Landlord’s Cap provision, the landlord’s claim was limited for damages was limited to $2 million.
The issue was whether ADC’s $1 million security deposit should be applied to the landlord’s actual damages or the capped damages in calculating the landlord’s allowable claim in the bankruptcy proceedings. In a question of first impression for the Ninth Circuit, the court declined to follow the reasoning of Judge Klein of the Bankruptcy Appellate Panel and who had applied the security deposit to the actual damages. The Ninth Circuit ruled that the security deposit should be applied to the lesser of the landlord’s actual damages or the capped damages. Here, the court applied the $1 million security deposit to the $2 million capped damages, limiting the landlord’s claim in bankruptcy to $1 million.
23. Community Property – Right to Contribution: For divorce purposes, where one spouse contributes separate property to the other spouse’s separate property, the spouse who contributes property is entitled to reimbursement unless there has been a valid transmutation or there is an express waiver of the right to reimbursement. (Section 2640(c) is new.)
California Family Code, 2005, § 2640. Contribution to the acquisition of property of the community property estate; waivers; amount of reimbursement
(a) "Contributions to the acquisition of property," as used in this section, include downpayments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property but do not include payments of interest on the loan or payments made for maintenance, insurance, or taxation of the property.
(b) In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party's contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.
(c) A party shall be reimbursed for the party's separate property contributions to the acquisition of property of the other spouse's separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.
24. Community Property – Right to Reimbursement: Although property jointly titled during a marriage is presumed to constitute community property, a spouse who made separate property contributions to the jointly titled asset is entitled to reimbursement upon dissolution absent an express transmutation or an express waiver of the right to reimbursement.
In re Marriage of Weaver, (2005) 127 Cal.App.4th 858, 26 Cal.Rptr.3d 121.
Shortly before husband and wife married, they purchased a home on Scandia Drive (the Scandia residence), taking title to the property in joint tenancy, as unmarried individuals. Husband supplied from his separate property $10,600 for the down payment. Husband and wife funded the remainder of the $85,000 home purchase price through a mortgage ($76,189). The deed for the Scandia residence was recorded on September 26, 1985, two days before husband and wife's marriage. Thereafter the couple used community property funds to make substantial improvements to the house, made community property payments towards the mortgage, refinanced the house and again took title as joint tenants, and used community property funds to make payments towards the refinanced mortgage. The court ruled that by commingling community property with the separate property, along with the refinanced title being taken during the marriage as joint tenants, meant that a presumption arose that the proper characterization of the Scandia house was community property. Moreover, upon dissolution, the court ruled that under section 2640, the husband was entitled to reimbursement for his separate property down payment contribution towards the community property asset.
In addition, the couple had an interest in a house on Thule Lane (the Thule residence). The husband’s mother and father initially purchased the Thule residence, taking title in their names and the husband’s name as joint tenants. After the father died, mother and husband executed a deed which put title in the Thule residence in the names of the mother, husband, and wife. Upon dissolution, mother and husband claimed that they did not intend to transfer any interest to the wife when her name was added to the title. The court ruled when the husband first received his joint tenancy interest in the Thule residence, that interest constituted a gift to him by his parents, and as such, was his separate property despite it being received during the marriage. Thereafter, however, the mother and husband executed a joint tenancy deed adding the wife’s name to the title. The court ruled that the statutory presumption that all property held in joint title by spouses during the marriage is presumed to be community property upon dissolution applied, and that the presumption was rebuttable only by written evidence to the contrary. The court acknowledged that there was no written evidence to the contrary here. Hence, the husband and wife’s two-third’s interest in the Thule residence constituted community property.
But the court went on to note that although the community property presumption meant that one spouse’s separate property lost its characterization under this presumption, under the statutory right to reimbursement upon dissolution, the spouse who contributed the separate property would be entitled to reclaim the separate property as reimbursement unless the right to reimbursement is waived in writing. The court expressed disapproval of this approach: “A deed, which changes title to joint tenancy during a marriage, in our view, sufficiently conveys in writing the intent of the donor to waive his separate property interest and transmute the separate property interest to community property. Allowing reimbursement under such circumstances renders the section 2581 community property presumption meaningless since the effect of allowing reimbursement under section 2640 is to negate the transfer of title to joint tenancy and the section 2581 community property presumption. The joint tenancy deed, in effect, becomes illusory in the event of marital dissolution.” Nevertheless, the court acknowledged that unless and until the high court ruled that section 2640’s right to reimbursement does not apply to real property, the court was obligated to apply it to the Thule residence. The court ruled that the husband was entitled to reimbursement of the one-sixth interest he conveyed to the wife by adding her as a joint tenant, but the one-sixth interest conveyed by the mother was property characterized as community property and was not subject to reimbursement. (In addition, any appreciation on the husband’s one-sixth contribution was community property subject to equal division.)
25. Adverse possession: Because an executor owes a fiduciary duty to all who hold an interest in the estate, an executor cannot claim adverse possession of probate property unless he or she repudiates his or her fiduciary duty to the other parties in question – even if the adverse possession began before the party was appointed executor.
In re Estate of Seifert, (2005) 28 Cal.App.4th 64, 26 Cal.Rptr.3d 560.
Robert Seifert owned a 20-acre parcel of real property (the Property). His validly executed will devised the Property to his two sons, Dick and Stanley. Nevertheless, thereafter, on June 9, 1994, he allegedly orally gifted the Property to another son, Bob. Robert Seifert died November 14, 1998 - four and a half years after the alleged oral transfer to Bob. Bob claimed ownership of the Property under the alleged transfer in 1994, or in the alternative, under adverse possession (the trial court found that Bob and his wife had taken possession of the Property shortly after the alleged transfer and had lived there, paying taxes, since the date of the alleged transfer). Dick claimed an interest in the Property under terms of the decedent’s will. The decedent’s will, admitted to probate on January 8, 1999, appointed Bob executor.
The trial court found that Bob had adversely possessed the Property for five years. In calculating Bob’s period of adverse possession, the trial court included the final six months that Bob was executor of the decedent’s estate. The court of appeals reversed. An executor is an officer of the court who owes a fiduciary duty towards all who hold an interest in the estate. The statute of limitations does not run where the parties owe a fiduciary relationship towards each other and the relationship is not repudiated. Once Bob was appointed and accepted the position of executor, due to his fiduciary duty to Dick, his possession was no longer adverse. Accordingly, Bob did not satisfy the requirement that he adversely possess the property for five years.
26. Duty to inquire: Where a party’s possession of the property is consistent with the record title which shows concurrent ownership, a third party has no duty to inquire into the state of the interest of the party in possession unless there are “suspicious circumstances.”
Tejeda v. Taylor, Not Officially Published, (2005) Not Reported in Cal.Rptr.3d, 2005 WL 583334.
Maria Tejeda was born in Mexico in 1930. She married, had 11 children, and then divorced her husband. After her divorce, she moved to Santa Barbara where she purchased a house in 1977. For a variety of reasons (concerns about how it might affect her right to welfare, unfamiliarity with the legal system), she initially took title in the name of her brother and two of her children. A few months later, however, she decided to have her name added, but not to remove the names of the others. She decided to keep them on the title just in case something happened, but everyone understood that Maria alone owned the property and that eventually it would be transferred to her alone.
Over time subsequent deeds were executed and recorded which removed some people from the title and which added others to the title. In 1990, the state of the title showed that the property was owned in joint tenancy by Maria, her brother Frank, her daughter Aide, and her daughter Elane. In 1995, Maria decided that she was ready to take sole ownership and responsibility for the property, so all the parties agreed to transfer their apparent interest to her. Aide, who worked for a title insurance company, agreed to draft the necessary quitclaim deeds. Aide drafted deeds for Frank and Elane to execute which appeared to transfer their interests to Maria, but after they executed the deeds, and without their knowledge, Aide added herself and her husband (the Taylors) as additional grantees as tenants in common. After these deeds were recorded, record title showed that Maria owned a 59% interest, Aide owned a 25% interest, and Aide and her husband owned a 25% interest, but Maria, Frank and Elane all thought Maria alone owned the property.
In 1998, Aide and her husband had a falling out with Maria. They moved to Texas, and thereafter they applied for a loan, listing their interest in the Santa Barbara property as their key asset. Aide and her husband were having trouble obtaining a loan because of their poor credit rating, but they were referred to Back, a real estate broker in the Santa Barbara area who also made private loans. Back never met the Taylors because they had moved to Texas. They never filled out a formal loan application. Back interviewed them over the phone, inquiring only about their jobs and their credit history. They told him it they did not have good credit. But they told him about their interest in the Santa Barbara property. Back checked the record title and drove by the property. He asked Aide if he could do a “walk-through” of the property, but Aide told her that Maria would not permit it.
Nevertheless, Back decided to loan the Taylors $75,000, secured by a deed of trust on their interest in the Santa Barbara property. Thereafter, Maria learned of the Taylor’s claimed interest in the property, the loan and the deed of trust. She instituted an action to quiet title, to cancel the forged quitclaim deeds, and to cancel the deed of trust.
The trial court and court of appeals had little trouble canceling the forged quitclaim deeds and quieting title in Maria alone. The more difficult issue was whether Back qualified as a subsequent bona fide encumbrancer. The court of appeals found that he did not have a duty to inquire into Maria’s interest in the property because her possession was consistent with the apparent joint ownership reflected in the record title. Nevertheless, the trial court impliedly found that that Back had actual notice of additional information that would have caused a prudent person to inquire of Maria as to her ownership interest, and the court of appeals found that this finding was supported by substantial evidence. In particular, the court of appeals emphasized that Aide told Back that Maria would not allow him to conduct a walk-through inspection of the property. If Aide had been an actual cotenant, she would have had the same right as Maria to possess the whole of the property. The court said that when this “key fact” was coupled with other “suspicious facts” – Aide no longer lived on the property; she was now married and had moved away to Texas, while her mother continued to reside there – Back did not qualify as a subsequent bona fide encumbrancer. The court concluded the deed of trust was invalid and canceled it.
(The court went on to also find that Aide and her husband were guilty of slander of title, and as such, could be liable for actual and punitive damages.)