27th Annual Real Property Law Retreat

May 3, 2008

La Jolla, California

THE LAW PROFESSORS’ ROUNDTABLE:

IMPORTANT RECENT DEVELOPMENTS

IN REAL PROPERTY LAW

Roger Bernhardt, Golden Gate University

Jo Carrillo, University of California Hastings College of the Law

Dan Schechter, Loyola Law School, Los Angeles

Charles Sheppard, Western S§tate University College of Law


The Speakers

Roger Bernhardt is Professor of Law at Golden Gate University in San Francisco. He is the author of the California Continuing Education of the Bar book: California Mortgage and Deed of Trust Practice, and also Bernhardt’s California Real Estate Codes. He is also the Editor (and commentator) of CEB’s California Real Property Law Reporter.  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 Academic Press. He has been 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 Trust and Estate 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.

Jo Carrillo is Professor of Law at the University of California Hastings College of the Law where she has taught Property and other property related courses since 1991.  In 2007-2008, Carrillo was awarded the Roger Trayner Publication Award for outstanding scholarship.  In 2006-2007 she was named the Harry and Lillian Hastings Research Chair at UC Hastings, as well as a Visiting Scholar at the Center for the Study of Law and Society at UC Berkeley School of Law.  In 1997-1998 she was Visiting Professor of Law at Stanford Law School.  Carrillo has taught Property, Community Property, Wills and Trusts, Federal Indian Law, and Property Related Mediation, and a seminar on lending regulations.  This past year Carrillo published the following mortgage related articles:  In Translation for the Latino Market Today:  Acknowledging the Rights of Consumers in a Multilingual Housing Market, 11 HARVARD LATINO LAW JOURNAL 1 (2008); Dangerous Loans:  Consumer Challenges to Adjustable Rate Mortgages, 5 BERKELEY BUSINESS LAW JOURNAL 1 (2008); and Irregularities in Mortgage Disclosures:  Classwide Rescission Under the Truth in Lending Act, 25 CALIFORNIA REAL PROPERTY JOURNAL 3 (2007).

Dan Schechter is a Professor of Law at Loyola Law School, Los Angeles, California.  Since 1980, he has taught courses in Property, Secured Transactions in Real Property, Secured Transactions in Personal Property, and Bankruptcy.  He received his undergraduate degree from Loyola Marymount University and his JD from UCLA.  He currently serves as a special legislative advisor to the Insolvency Law Committee of the California State Bar.  He is the author of the Commercial Finance Newsletter (database "COMFINNL"), published weekly on Westlaw.  He writes a quarterly column for the Los Angeles County Bar Association Commercial and Bankruptcy Section.  He has served on various committees and task forces dealing with real estate, insolvency, and financial issues, and he has published several articles concerning those issues.  He also participates frequently in continuing legal education programs.  He is also  a coauthor of the upcoming Fifth Edition of California Real Estate Finance, a casebook published by Carolina Academic Press.

Charles Sheppard is a Professor of Law at Western State University College of Law where he regularly teaches Property, Estates (Wills & Trusts), Secured Transactions in Real Property, and Real Estate Transactions, as well as Mortgages, Future Interests, and Title Insurance.  Professor Sheppard received his J.D. from the University of Loyola Law School Los Angeles. He practiced law for 20 years before becoming a member of the full-time faculty of Western State. His experiences as a practicing attorney included serving as a Vice President and underwriting and claims counsel for two major title insurance companies, appearing as counsel of record in litigation matters in every Superior Court in Southern California with the exception of Imperial County, and handling various real estate transactions. Professor Sheppard has authored an article regarding the anti-deficiency provisions of CA Code of Civ Pro §580b, 6 Southern California Interdisciplinary Law Journal, No. 2 245 (Winter 1997), and Eminent Domain – Condemnation of Private Property for a Private Use: Legitimate or a Land Grab? 44 Orange County Lawyer 30 (September 2002); The Grading Process 30 Western State University Law Review 177 (2002-2003); and forms of title assurances in the United States 79 North Dakota Law Review 311 (2003, No. 2); reprinted in two parts in 17 Minnesota Real Estate Journal Number 6 (November/December 2004) and 18 Minnesota Real Estate Journal Number 1 (January/February 2005). He has served as a consultant or expert witness in various real estate disputes and is a past chair of the Legislative Committee of the Business Law Section of the California State Bar.


The Cases

1. Sale of property for less than 1% of its value at judicial foreclosure may not be set aside by virtue of late arrival of creditor for the bidding.  Amalgamated Bank v.  Superior Court, 149 Cal App 4th 1003, 57 CR3d 686, 2007

The mortgage on 57 acres of land for $17 million had gone into default  and Pension Trust Fund had obtained a degree of judicial foreclosure.  The auction was scheduled for 10 a.m. on February 24 and PTF intended to bid $6 million to $6.5 million -  the estimated value of the security – at the sale. However, PTF’s representatives, driving up from the Bay Area that morning, were delayed in traffic and arrived a few minutes late.

The sale was also attended by Palmbaum, who had brought with him $10 million to bid.  But because he was the only bidder in the room when the sale started, his bid of $2000 was accepted by the sheriff. The Sheriff thereafter refused to rescind the sale when PTF’s representatives entered the room and demanded it start over.

PTF sued to set aside the sale but the trial court granted summary judgment against it because CCP section 701.680 provides that a judicial foreclosure sale “may not be set aside for any reason” and permits only a judgment debtor to have a sale set aside for irregularities. The trial court also expunged the lis pendens that PTF had filed.

The Court of Appeal refused to issue a writ of mandate to vacate the expungement order.  The standard to be applied is probable validity of the underlying real property claim, which standard had not been satisfied in these circumstances because of the finality given by the statute to judicial foreclosure sales.  The court rejected PTF’s argument that there was no meaningful need for finality in a judicial foreclosure sale where a deficiency judgment has been sought since the sale remains subject to the right of redemption by the judgment debtor in any event.

 


2. Claim for Attorneys Fees in Succesful Specific Performance Action Does Not Take Priority over Liens on the Property Subsequently Imposed by Vendors, notwithstanding Lis Pendens recorded at outset of Litigation.  Behniwal v Mix, 147 Cal App 4th 621, 54 CR3d 427 (2006).

The purchasers prevailed in their action for specific performance of a contract to purchase the vendors’ residence. Since there had been three trials and appeals of this matter, and since there was an attorneys’ fees clause in the contract, the trial court awarded the purchasers $250,000 attorneys’ fees and offset it against the $540,000 purchase price that they owed. The court of appeal held that this offset was error,

First, the court held that the right of offset is subject to the law of priorities, meaning that a party to a lawsuit cannot automatically assert a right of offset – even if he otherwise entitled to one – if that would be inconsistent with the rules of lien priorities.  Normally, if A owes B $100 and B owes A another $100, the two debts offset each other so that A does not have to pay B the $100 that she owes him. But if B has other claimants to that money whose interests in it are determined to be superior to A’s claim, then A may have to pay B – despite the fact that she is at the same time owed  money by B, in order to be fair to C, B’s superior claimant. In this case, the sellers only asset was their house, on which three liens (two of them mortgages) had recently materialized, which made A’s having to pay B so that C could collect would lead to A being unable to enforce her offsetting debt from B .

Second, the court held that the plaintiffs’ attorneys’ fee claim came in fourth -  behind a $238,000 deed of trust given by the sellers to World Savings Bank, two other deeds of trust totaling $70,000 given to their attorneys, and a homestead exemption (equal to $150,000) recorded by the sellers on their residence. All three of those interests arose after  the plaintiffs had filed their specific performance action. The court held that the reason the attorneys’ fees claim came in behind them was because it constituted only an ordinary money judgment that did not take effect until it was awarded, entered, and then recorded. Since none of that could happen until the end of the trial, the three rival claims against the sellers had priority of it because they had all been recorded prior to that date.   Since the fees did not themselves relate back, then neither 1) the fact that the first deed of trust was taken with constructive notice of the lawsuit (because of a recorded lis pendens, discussed next), nor 2) the fact that the deeds of trust given to the sellers’ attorneys were undoubtedly taken with actual knowledge of the litigation (the attorneys were defending it), and was probably for services to be rendered in the case, nor 3) the fact that the homestead declaration was recorded by the sellers after the filing of the lawsuit against them which was based upon a sales contract which included an agreed on attorneys’ fees clause in it,  mattered, since the ordinary money judgment for attorneys fees was not (and could not be) recorded until after all of that happened. Notice or knowledge of what is inferior does not make it superior.

Third, the court held that the lis pendens – recorded at the very outset of the litigation – did not give the purchasers any superpriority over the three competing liens. It gave notice only of their attempt to pursue specific performance and thereby have to pay the price to the vendors; it did not give notice of a further claim for attorneys fees, because that had no relationship to the issues of title or possession of the property in issue. Title ordered by the decree of specific performance would relate back to the date of filing the lis pendens, but not the money awarded to pay the victorious plaintiff’s attorneys fees.


3. Unrecorded Trust Deed Is Void Because Bankruptcy Trustee’s “Bona Fide Purchaser” Status Is Not Defeated by Facts Contained in Papers Accompanying a Voluntary Chapter 7 Bankruptcy Petition. In re Deuel (9th Cir. BAP (Cal.) 2006) 361 B.R. 509

A Bankruptcy Appellate Panel has held that a bankruptcy trustee did not have constructive or inquiry notice of an unrecorded deed of trust and that the creditor was not equitably subrogated to its released, refinanced lien. In so holding, the BAP reversed the ruling of the Bankruptcy Court for the Southern District of California that the trustee could not set aside the unrecorded deed of trust which was found to be the result of the Bankruptcy Court’s misapplication of the Circuit Court’s decision in the case of In re Professional Investment Properties of America 955 F.2d 623 (9th Cir. 1992).

A husband and wife by the name of Deuel obtained a refinance loan from Chase Manhattan Bank (“Chase”). Chase caused its prior deed of trust against the Deuel’s home to be reconveyed, but the new deed of trust was not recorded as a result of mistake. Mrs. Deuel subsequently filed a voluntary Chapter 7 bankruptcy petition, schedules, and statement of financial affairs (“SFA”). Chase was listed as a secured creditor in various portions of the schedules and SFA. Chase filed a complaint to quiet title to a deed of trust against the realty of the Deuels before the Bankruptcy Court. The bankruptcy trustee was named as a defendant in that action. Cross-motions for summary judgment were filed by Chase and the defendants. The Bankruptcy Court granted Chase’s MSJ and denied the defendants’ MSJ and the Trustee appealed.

The 9th Circuit BAP held that “whatever the Trustee learned from the schedules and SFA came too late and is irrelevant.” [361 B.R. at 514] The BAP emphasized that whether a bankruptcy trustee does or does not have the status of a bona fide purchaser is determined “as of the commencement of the case” pursuant to 11 U.S.C. § 544(a)(3). The BAP noted that inasmuch as a bankruptcy case is commenced as of the time of the filing of the petition, the bankruptcy schedules and SFA were filed in the case after the commencement of the case notwithstanding that the schedules and SFA were presented for filing with the petition citing In re Castro, 158 B.R. at 183.

The BAP distinguished In re Professional Investment Properties of America by explaining that constructive or inquiry notice was imparted to the Trustee in that case because of information that was contained in the bankruptcy petition.

In reversing the Bankruptcy Court’s judgment on the issue of equitable subrogation, the BAP followed California cases and cases of other states which hold that “the equities favor a bona fide purchaser over one asserting equitable subrogation.” [361 B.R. at 517] The Panel noted that “there might be circumstances in which the equities might favor application of the doctrine of equitable subrogation,” but Chase did not allege any such circumstances. [361 B.R. at 518]

The decision in this case appears to be consistent with the intent of Congress regarding the scope of a bankruptcy trustee’s power to deal with the bankruptcy estate for the primary benefit of unsecured creditors.


4. Pre-Foreclosure Transfer of Realty to Affiliated Corporation Just before Bankruptcy Does Not Raise Inference of Fraud for Purposes of "Anti-Foreclosure Fraud" Statute.  In re Duncan & Forbes Development, Inc. (Bankr. C.D. Cal.) 2007 Westlaw 1241836.

A bankruptcy court in California has held that a creditor may not obtain relief under the newly-enacted "anti-foreclosure fraud" provision in the Bankruptcy Code, even though a borrower facing foreclosure had transferred his real property to his wholly owned corporation, which filed a bankruptcy petition four days later.

Facts:  A commercial building was encumbered by a first trust deed.  The owner of the building then borrowed additional money from another lender, secured by a second trust deed.  Several months after that loan was funded, the borrower defaulted, and the junior lienholder filed a notice of default. Facing foreclosure, the borrower transferred the property to a corporation that he controlled; four days later (!) the corporation filed a Chapter 11 case.  The junior lienholder immediately filed a motion for relief from stay, claiming (among other things) that the original borrower and his corporation had engaged in a fraudulent scheme under §362(d)(4) of the Bankruptcy Code.

Reasoning: Although the court granted relief from the stay under §362(d)(1), the court denied relief under newly-enacted (d)(4).  That subsection, which went into effect in late 2005, provides that the bankruptcy court may grant relief from the automatic stay to creditors holding security interests in real property "if the court finds that the filing of the petition was part of a scheme to delay, hinder, and defraud creditors that involved either-- (A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or (B) multiple bankruptcy filings affecting such real property."  (As a threshold matter, the court noted that the "multiple filings" prong of the statute was not involved.)

The creditor argued that the actions of the borrower and his corporation (a transfer followed immediately by a bankruptcy filing) demonstrated the existence of a scheme.  The court reasoned that the terms "delay, hinder, and defraud" were in the conjunctive; thus, each element had to be satisfied.  The court then noted that a scheme to "delay or hinder" must involve actual malice:

Absent this requirement, every voluntary bankruptcy filing would satisfy an important element of [the statute] and would support in order for relief from the automatic stay . . . . This interpretation would prove too much, and would threaten the availability of bankruptcy relief altogether.

In consequence, any lawful delay, such as the filing of a bankruptcy case or the transfer of property from an individual to a corporation controlled by that individual, does not qualify as a delay under this statutory language.

The court went on to hold that there was insufficient evidence to support an inference that the borrower and his corporation intended to defraud anyone.  In reaching its result, the court quoted (but did not discuss) the "badges of fraud" set out in California Civil Code §3439.04(b), the Uniform Fraudulent Transfer Act.


5. Bankruptcy Court May Enjoin Proceedings against Nondebtor If Debtor Shows Likelihood of Successful Reorganization and If Harm to Reorganization Outweighs Harm to Plaintiff.  In re Excel Innovations, Inc. (9th Cir.) 2007 Westlaw 2555941.

The Ninth Circuit has held that a bankruptcy court may issue a preliminary injunction staying proceedings against a nondebtor if the debtor shows a likelihood of success in reorganization and if the potential harm to the estate outweighs the harm to the plaintiff.

Facts:  In a complex fight over corporate governance and patent rights, a corporation filed suit against its former CEO and his new corporation, claiming that they had breached various agreements and had committed tortious acts.  After a complicated procedural history, the plaintiff corporation and the CEO were involved in arbitration, while the new corporation filed a Chapter 11 case.

The CEO then argued that the arbitration proceedings against him should be stayed, but the arbitrator refused to halt the arbitration.  The corporate debtor in possession then filed an adversary proceeding in the bankruptcy court, seeking to enjoin the arbitration on the ground that it would have an adverse impact on the reorganization process.  The bankruptcy court granted injunctive relief and the BAP affirmed, but the Ninth Circuit reversed.

Reasoning: Noting a split of authority among the circuits, the court held that the bankruptcy court had employed an overly-lenient standard in granting injunctive relief under 11 USC §105 of the Bankruptcy Code.  The court held that the standard for staying proceedings against non-debtors is essentially the same as the usual standard that applies to all preliminary injunctions:

[W]hen a debtor applies for a 11 U.S.C. §105(a) preliminary injunction to stay a proceeding in which the debtor is not a party, the bankruptcy court must balance the debtor's likelihood of success in reorganization against the relative hardship of the parties, as well as consider the public interest if warranted.

The debtor and the CEO argued, however, that the CEO's participation in the arbitration would be very harmful to the reorganization process, since (among other things) the CEO planned to argue that he had been acting as the debtor's agent, thus giving rise to a potential indemnification claim against the debtor.  Also, the CEO threatened to reveal the substance of critical attorney-client communications involving the debtor.

The Ninth Circuit was not persuaded, reasoning that since the debtor was not a party to the arbitration, the CEO's claims of an agency relationship with the debtor could not be binding on the debtor.  The threatened disclosure of attorney-client communications could not serve as the basis of injunctive relief, since the debtor had made no showing as to how those disclosures might impair the debtor's ability to reorganize.


6. Lender's Failure to Verify Borrower's False Income Statement Violates "Predatory Lending" Statute; Borrower May Avoid Mortgage Debt and Recover Damages. LaSalle Bank vs. Shearon, 850 N.Y.S.2d 871 (N.Y. Supp.).

A New York trial court has held that a lender who failed to verify a borrower's admittedly false income statement had thereby violated the state’s "predatory lending" statute, which requires due diligence.  Further, the borrower was permitted to seek avoidance of the underlying mortgage obligation and to recover damages, apparently from the originating lender's assignee.

Facts: A married couple sought financing for the purchase of a home.  The borrowers enjoyed a very good credit rating and could afford to make a down payment.  Nevertheless, the mortgage broker allegedly steered them into a "subprime" arrangement, under which the entire transaction (plus closing costs) was financed at above-market interest rates.  Supposedly, the lender originating the transaction did not conduct any due diligence.

The mortgage was later apparently assigned to a third-party lending institution.  Following the borrowers' default, the new lender sought foreclosure and brought a motion for summary judgment.  The trial court denied the lender's motion and (apparently on its own motion) granted summary judgment in favor of the borrowers.

Reasoning:  The lender first argued that the borrowers were not covered by the provisions of the New York Banking Law governing predatory lending, since the borrowers stated on their application that their monthly income was $7,200.  But the court held that the originating lender had a duty to verify that data and could not rely on it:

If [the borrowers] stated on the original loan application that their monthly income was $7,200, the lender's statutory requirement is to make an inquiry as to the truth of the statement and the borrower's ability to repay the loan. While this court will not condone fraud by the borrower, New York Banking Law § 6-L(2)(k) states that:

"A lender or mortgage broker shall not make or arrange a high-cost home loan without due regard to repayment ability, . . . , as verified by detailed documentation of all sources of income and corroborated by independent verification." [Emphasis added; bracketed material added.]

The court later concluded:

[T]he voluminous documentary evidence demonstrates violations of New York Banking Law § 6-L(2)(k), which deals with the [lender's] due diligence into the ability of the [borrowers] to repay the loan. The [lender] has not offered one scintilla of evidence of any inquiry into the [borrowers'] ability to repay the loan. New York Banking Law § 6-L(2)(k) requires this inquiry to be "verified by detailed documentation of all sources of income and corroborated by independent verification."  This failure to inquire is a violation of New York's Banking Law. Therefore, summary judgment on this affirmative defense is granted in favor of the [borrowers].  [Bracketed material added.]

The court then scheduled a hearing to determine whether the lender's statutory violations were intentional:

The finding of intentional violation renders the home loan agreement (mortgage) void, and strips the lender from having a right to collect, receive or retain any principal, interest, or other charges whatsoever with respect to the loan, as well as giving the borrower the ability to recover any payments made under the agreement.


7. Mortgage Holder Seeking Relief from Automatic Stay in Order to Foreclose May Be Denied Relief for Failure to Establish Chain of Title from Loan Originator to Ultimate Assignee. In re Maisel, 2007 Westlaw 4029094 (Bankr. D. Mass.).

A bankruptcy court in Massachusetts has held that a mortgage holder seeking relief from the automatic stay in order to foreclose may be denied relief if the creditor fails to establish a chain of title leading from the loan originator to the ultimate assignee.

Facts:  After a mortgagor filed a bankruptcy petition, the purported assignee of the original mortgagee sought relief from the automatic stay.  The court asked the assignee to provide documents showing that it was the real party in interest, and the assignee submitted documents showing the execution of an assignment of the mortgage dated four days after the motion for relief had been filed.

Reasoning:   Although the court ultimately granted relief (because the debtors indicated their intent to surrender the property), the court indicated that it would otherwise have denied relief from the automatic stay on the ground that the purported assignee had no standing as a "party in interest," since it had not yet obtained the assignment from the original mortgagee at the time that the motion was first filed.  The court sharply criticized lenders who fail to comply with the basic procedural requisites of the Bankruptcy Code:

[A] movant cannot state that it is the "current holder" of an instrument if it is not. Similarly, this Court has seen motions for relief that state that a debtor is in post-petition default where the last payment was due prepetition, or allege that the Debtor will be in default by the time of any hearing; these types of allegations are unacceptable to this Court. Lenders must take care in their haste to obtain relief from stay to ensure that the factual statements they make in their motions are true, have evidentiary support and support their claims.


8. Secondary party who was forced to pay on letter of credit may not recover equitable contribution from coguarantors of same debt because liabilities are at different levels. Morgan Creek Residential v Kemp, 153 Cal. App. 4th 675, 63 CR3d 232 (2007)

In order to obtain a loan of  $6.5 million for their golf club,  the project’s several promoters (defendants) posted guarantees with Citicapital, the intended lender. Since those guarantees were partial and totaled only $4.8 million, the defendants induced the master developer of the project (plaintiff)  to post a letter of credit with Citicapital for $1.4 million additional security.

The subsequent the filing of mechanics’ liens threw matters into disarray and Citicapital responded by drawing down its letter of credit and thereby reducing the loan balance from $6.1 million to $4.8 million (rather than curing loan defaults). Since $4.8 million was roughly what the project was then worth, the defendants were able to refinance a $4.7 million new loan from Citicapital and terminate the old financing.  But this left the plaintiff minus the $1.4 million it had been forced to reimburse the issuer of the letter of credit after the letter was called, and it sued the promoters/guarantors for the share of that $1.4 million obligation, which it claimed all of them owed but it alone had paid.  Plaintiff’s theories were equitable contribution and subrogation.

Equitable contribution provides that one party who pays a debt that is owed by others as well as him should be entitled to make those others reimburse him their proportionate share. It is codified as Civil Code §1432, and also in Civil Code § 2848 - a statute that provides that a surety can make cosureties contribute when it has to pay the principle’s debt, but it is a settled part of the common law even when there is no statute to that effect. Plaintiff claimed that pursuant to that doctrine, the defendants ought to pay it 78% of the burden of the $1.4 million that it had paid, since its letter of credit covered only 22% of the total obligations guaranteed by all parties.

The contention was rejected by the court because plaintiff had not signed a guarantee, as all of the defendants had done, and the letter of credit that it had provided instead was legally different from their guaranties. The plaintiff was at a “different level of liability” than the defendants, and therefore equitable contribution did not apply.  The “independence” principle of UCC §5114distinguishes a letter of credit from a standard guaranty, where the guarantor may be protected behind the defenses that the principal debtor has against the creditor.  Equitable contribution is available only among parties who are equally liable for the obligation. Since the liabilities of the issuer (and applicant) of a letter of credit issuer are different from that of one who guarantees a debt, the precondition for equitable contribution was missing.

the plaintiff had to swallow its own loss.

Plaintiff’s other theory was subrogation.  UCC §5117 says that an issuer of a letter of credit who pays is thereupon subrogated to all of the beneficiary’s rights as if it were a secondary obligor, and that an applicant who reimburses the issuer is subrogated to all of the issuer’s rights against the beneficiary. Plaintiff argued that when it (the applicant) had to reimburse the issuer for what it paid to Citicapital (the beneficiary), it could claim subrogation to Citicapital’s rights under its loan documents, which included both the right to foreclose on the mortgage posted by the debtor, but also the right to proceed against the parties who guarantied the debtor’s loan, i.e. the defendants.  But the court held that subrogation might permit plaintiff to go after the primary debtor, but not after the several guarantors, who were only secondarily liable and never in default to the lender.  As against them, plaintiff had no superior rights to justify equitable subrogation.


9. Development agreement negotiated between county and landowneris invalid if it permits activity prohibited by the zoning ordinance. Neighbors in Support of Appropriate Land Use v. County of Tuolumne, 157 Cal.App.4th 997, 68 Cal.Rptr.3d 882, 2007

The owners of a 37 acre parcel of land sought to conduct commercial lawn parties on their property, an activity which was not then permitted under the current 37 acre minimum lot size agricultural zoning classification that covered the property.  Ultimately there request was granted through negotiation of a development agreement with the county and the issuance of a conditional use permit to that effect.

The trial court held the development agreement and the conditional use permit invalid. The court of appeal affirmed. A zoning ordinance must treat all uses within a zone uniformly and may not permit the owner of one parcel in a zone to engage in activities that are denied to the owners of other parcels there.  While exceptions do exist for variances and for conditional uses, no grounds for a variances was shown in this case and nothing in the existing ordnance permitted lawn parties as conditional uses.

Furthermore, nothing in California’s Development Agreement Act, Government Code section 65864, entitles a local government to ignore its own zoning rules.  A development agreement is not an alternative to proper zoning and does not excuse the country from following the necessary steps to properly make commercial lawn parties a permitted or conditional use in agricultural zone under its zoning ordinance.


10. Action for Rescission of a Real Estate Sales Contract in Which Plaintiff Sought Recovery of Something Other Than Return of Consideration Originally Given by Plaintiff Was in Equity and Not at Law NMSBPCSLDHB v. County of Fresno, Cal.App. 5th Dist. 2007) 152 Cal.App.4th 954, 61 Cal.Rptr.3d 425

NMSBPCSLDHB (NMS) sold a parcel of unimproved land to the County which was adjacent to developed land retained by NMS. The County acquired the land from NMS for the purpose of constructing a library upon that property. As memorialized by the contract of sale, the County promised that the library would be architecturally compatible with the development on the land retained by NMS. Subsequently, the County approved a design for the library that NMS contended was “wholly incompatible with the architecture of NMS’s adjacent development.” [152 Cal.App.4th at 957]

NMS sued the County alleging breach of contract and rescission based on the fraud and failure of consideration provisions of CA Civ. C. §1689(b)(1)(2). The trial court dismissed the breach of contract cause of action and struck the demand of NMS for a jury trial. NMS dismissed its request for injunctive relief a few months before the commencement of the court trial. The relief sought by NMS at trial did not include a return of the property upon which the County built its library. Instead, NMS sought a recovery damages for equal to the profit NMS contended it would have made had it kept ownership of the property it sold to the County; built an office building on that property and leased office spaces in that building over a period of 30 years, and then sold the property. After the completion of the bench trial, the trial court ruled that the County did not commit fraud and that there was no failure of consideration and it rendered judgment for the County. NMS appealed.

The sole issue on appeal was whether the trial court erred in striking the demand of NMS for a jury trial. The Court of Appeal noted that it would be bound to reverse the judgment if the contention of NMS had merit “regardless of whether the trial court’s ruling on the merits of the rescission claim was or was not correct.” [152 Cal.App.4th at 956] However, the Court of Appeal held that the trial court was correct in characterizing the claim of NMS as an action in equity and, therefore, affirmed the trial court’s denial of NMS’ demand for a jury trial and also affirmed the judgment for the County.

The Court of Appeal quoted portions of the opinion of the California Supreme Court’s decision in Runyon v. Pacific Air Industries, Inc. (1970) 2 Cal.3d 304, as a  review of the law of California regarding rescission as it existed prior to 1961 and as it is deemed to currently exit as a result of the legislative changes that were enacted and became effective in 1961. The Runyon opinion notes that prior to 1961, the Civil Code provided for two methods by which a party entitled to rescind could obtain rescissionary relief. The first method was commonly referred to as unilateral rescission; an action at law. The second method was an action for judicial rescission which was commonly regarded as an action in equity. The addition of Civ. C. §1692 , and the repeal of Civ. C. §§ 3406-3408, “in effect, abolished the action to obtain court rescission and left only an action to obtain relief based upon a party effected rescission.”

NMS contended that the legislative changes that became effective in 1961 established a plaintiff’s right to a trial by jury when the plaintiff seeks only a monetary recovery. The Court of Appeal disagreed concluding that “if a rescission action seeking to recover something other than the consideration paid was an equitable action prior to the 1961 amendments, then it is an equitable action today.” The Court also noted that “Here, we have a plaintiff who pays consideration in one form (land) and who seeks in rescission the purported value of that consideration in an entirely different form (money).” In short, the Court apparently treated the nature of the money claim made by NMS as a substitute for, but having the same effect as, a claim by NMS for a return of the consideration it provided to the County under the subject contract. If that is so, the Court’s characterization of the claim of NMS as an “action seeking to recover something other than the consideration paid” without having specifically limited the scope of that phrase to include only those claims which can be regarded as a substitute for a return of the consideration paid invites further disagreement in the marketplace and judicial review on that point.

NMS also contended that the trial court erred in the manner in which it relied upon the decision in Snelson v. Ondulando Highlands Corp. (1970) 5 Cal.App.3rd 243, 84 Cal.Rptr. 800. While the Court agreed with NMS that the trial court’s reliance on Snelson was misplaced, that erroneous reliance did not justify a reversal of the judgment of the trial court.


11. Memorandum Without Subscription or Extrinsic Evidence of an Intent to be Bound Does Not Satisfy Statute Of Frauds Writing Requirement. Sterling v Taylor, 40 Cal 4th 757 (2007):

Sterling involves the Statute of Frauds – Cal. Civil Code Section 1624(3) which makes unenforceable “[a]n agreement . . . for the sale of real property, or of an interest therein . . . unless the same, or some note or memorandum thereof, is in writing and subscribed by the party to be charged or by his agent.”  In Sterling, two real estate investors met to discuss the sale of defendant’s properties.  At the first meeting the prospective buyer (plaintiff) drafted a handwritten memorandum that he signed.  Defendant declined to sign saying that he needed approval from his partners.  The memorandum included at least two facial ambiguities, one involving price.  After a brief correspondence in which defendant signed for receipt of plaintiff’s deposit checks, the defendant returned those same checks uncashed.  The plaintiff sued the defendant alleging that the handwritten memorandum was evidence of the parties’ intent to be bound by its terms.  The defendant moved for summary judgment citing section 1624(3).

The trial court granted defendant’s motion.  The Court of Appeal reversed, holding that the handwritten memorandum was sufficient to meet the statute of frauds and thus raised a triable issue of material fact as to the price ambiguity.  The Supreme Court reversed holding that while extrinsic evidence is allowable to clear up ambiguities and to establish an intent to be bound, in this case the memorandum did not comply with the statute of frauds since the defendant had neither signed the memorandum nor otherwise made an admission as to his intent.

A memorandum, even if brief and informal, can meet the statute of frauds so long as it identifies the subject matter of the agreement, sets forth terms in a “reasonably certain” manner, and demonstrates the parties’ intent to be bound.  Under section 1624, extrinsic evidence is allowable both to clarify the meaning of imperfectly stated material terms and to establish the parties’ intent.  Applying this standard, the California Supreme Court concluded that the memorandum at issue was unenforceable not because it included two opposing methods of setting the price (formula versus set number), as this ambiguity could have been cleared up by extrinsic evidence, but rather because the court of appeal had erred when it considered only the testimony of the plaintiff – the prospective buyer.  Had the court of appeal also considered defendant’s testimony on the issue of price and had defendant’s testimony established that “the parties meant to leave the price open to determination based on the formula” – evidence that would have constituted an admission on defendant’s part – then the memorandum would have complied with the statute of frauds.

The California Supreme Court stressed that the sole purpose of the statute of frauds is to prevent perjury in support of a purported contract of the type enumerated in section 1624.  Additionally, section 1624 requires that the party to be charged subscribe to the agreement, note or memorandum, hence the absence of such a subscription necessarily requires extrinsic evidence to establish intent.  In this case, plaintiff’s memorandum included material terms that were imperfectly stated yet subject to clarification by extrinsic evidence.  However, because the Supreme Court did not find evidence in the record of the defendant’s intent to be bound, the memorandum at issue was deemed not to comply with section 1624, California’s general statute of frauds.

Justice Kennard dissented.


12. Following Entry of Unlawful Detainer Judgment, Commercial Landlord Has Duty to Inspect Defaulting Tenant’s Premises for Hazardous Conditions. [Stone v. Center Trust Retail Properties, (Cal. App. 2nd Dist. 2007) 146 Cal.App.4th 1435, 53 Cal.Rptr.3d 668]

The California Court of Appeal Second District held that a commercial landlord had a duty to inspect the tenant’s restaurant which arose upon entry of a judgment of possession in the landlord in an unlawful detainer action. However, the trial court judgment against the landlord was reversed and the cause remanded because the record before the court was insufficient to enable the Court of Appeal to determine whether the jury’s verdict was based on a correct or incorrect application of the law as to when the landlord’s duty of inspection attached in the instant case.

Center Trust leased commercial property which the tenant used to operate a restaurant and an after-hours dance club. Tenant defaulted on payment of rent in August 2001. Center Trust served tenant with a five-day notice to pay rent or quit in October 2001. Tenant did not pay or quit and Center Trust filed an unlawful detainer proceeding against Tenant in November 2001. On December 3, 2001, Center Trust obtained a partial judgment of possession. Later that same month, Center Trust was issued a writ of possession. A week and half after Center Trust obtained the writ of possession, plaintiff and respondent Stone hosted a party at the restaurant. While dancing on a temporary wooden floor that was placed over carpet, Stone slipped on water that was on the floor. Stone fractured an ankle as a result of her fall. The carpet next to the floor was “soaked” due to a leak in a water pipe.

The court rejected the contention of Center Trust that it was not exposed to liability in this case based upon case authority for the proposition that “a landlord ordinarily is not liable to a tenant’s guests and invitees for dangerous conditions which arise on the property after the tenant occupies it.” [53 Cal.Rptr.3d at 671] The court explained that the writ of possession conferred upon Center Trust the status of an “occupying landowner.” [53 Cal.Rptr.3d at 672]

The Court of Appeal agreed with the Trial Court that Center Trust had a duty to inspect in the case at hand. However, it reversed the trial court judgment against Center Trust and remanded the case on the issue of liability only because “the jury might have concluded Center Trust should have inspected the property shortly after the restaurant’s August default, instead of, as we hold, the entry of the judgment of possession in December.” [53 Cal.Rptr.3d at 672] The Court of Appeal formulated its concern about the basis for the jury verdict of liability against Center Court because the lower court “instructed the jury that a landlord must act reasonably to correct defects it knew, or should have known, about,” but did not instruct the jury that in this case, “such a duty [on Center Trust’s part arose] during the eviction proceedings.” [53 Cal.Rptr.3d at 670].

Center Trust’s claim on appeal that the evidence did not support the economic damages award to Stone was found by the Court of Appeal to be without merit.


13. Creditor's Failure to Provide Timely and Accurate Beneficiary Statement May Be Liable for Negligent Interference with Prospective Economic Advantage, Even If Failure Is Not Willful.  [Venhaus vs. Shultz (Cal.App.) 2007 Westlaw 2812636.

A California appellate court has held that when a creditor holding a deed of trust fails to provide a timely and accurate beneficiary statement, a creditor may be held liable for negligent interference with the property owner's prospective economic advantage, even if the failure to comply with the statute is not willful.

Facts:  An undeveloped parcel of real property was encumbered with a trust deed.  The original borrower sold the property to a new owner, who took the property subject to the lien but did not assume the underlying promissory note.  Nevertheless, the new owner made payments on the promissory note.

The original holders of the note and trust deed died, and their daughter became the holder of the paper.  About 20 years after the new owner purchased the property, he sought to sell it.  He took the position that he had paid off the underlying note.  (He later testified that a deed of reconveyance had been given to him but that he had failed to record it and that it had subsequent to been destroyed in a fire.)  The creditor holding the paper denied that the promissory note had been paid off.  She delayed substantially in providing the statutorily-required "beneficiary statement" (i.e., an accounting of the amounts paid and owing), and the amount that she originally claimed under that statement was approximately double the amount due that she later claimed at trial.

Supposedly, the wrangling between the parties killed one prospective sale of the property and substantially delayed another.  The disgruntled former property owner then brought an action against the creditor for negligent interference with prospective economic advantage.  During the course of a jury trial, the court instructed the jury that it could find the creditor liable for negligent interference only if her conduct was wrongful and if she either intentionally misrepresented the amount due on the loan or intentionally failed to submit the statutorily-required "written payoff statement" within 21 days.  The jury found that her conduct was not intentional.  The plaintiff, the former property owner, appealed, claiming that the instruction had been erroneous.

Reasoning: The court ruled in favor of the plaintiff because the instruction should have told the jury that her wrongful conduct need not be intentional:

As the holder of a deed of trust against [the property owner's] real property, [the creditor] was required by Civil Code section 2943, subdivision (b) to provide [the property owner] with a beneficiary statement . . . within 21 days of the receipt of the written demand for the statement . . . .  If [the creditor] failed to submit such a statement in accordance with the statute, or if the statement provided was inaccurate -- at least if the inaccuracy was a result of Shultz's negligence, her conduct was sufficiently wrongful to support the negligent interference claim . . . .  There is no question here whether [the creditor] owed a duty to [the property owner] . . . , since since the obligation to timely provide a correct beneficiary statement was imposed upon her by the statute.  [Citations and footnotes omitted; bracketed material added.]


14. Lender Cannot Invoke "Shared Appreciation" Exception to Usury Laws Because Additional Interest Is Not Really Contingent; Guarantor's Waiver of Usury Defense Is Ineffective.  WRI Opportunity Loans II, LLC v. Cooper (Cal.App.) 2007 Westlaw 2391813

A California appellate court has held that a lender cannot invoke the "shared appreciation" exception to the usury statutes when the additional interest to be earned was not really contingent.  Further, a guarantor's purported waiver of the usury defense was ineffective, despite a California statute authorizing broad waivers by guarantors.

Facts:  A lender provided subordinated credit to a real estate developer, in exchange for a "shared appreciation" loan.  The lender also took personal guarantees from the principles of the borrower.  After default, the lender brought suit against the guarantors.  The guarantors argued that the loan was usurious.  The trial court granted summary judgment in favor of the lender; the guarantors appealed, and the appellate court reversed.

Reasoning:  The lender argued that although the terms of the loan seemed to be usurious, the lender was entitled to invoke the "shared appreciation" or "interest contingency" exceptions to the usury statutes, since there was some risk that the lender would get no additional interest, depending on the circumstances.  But the court held, as a factual matter, that almost any plausible scenario would have entitled the lender to collect additional interest; thus, the loan was not a bona fide "shared appreciation" or "interest contingency" transaction.

As a fallback, the lender argued that the guarantors had waived the ability to assert a derivative usury defense, based on Civil Code §2856.  The guarantee contained the following waiver:

"Guarantor . . . waives any rights, claims, defense, abatements, or rights of setoff or recoupment based on or arising based on or arising out of: (1) any legal disability, discharge, or limitation of the liability of Borrower to Lender, whether consensual or arising by operation of law or any proceeding . . . . Guarantor affirms its intention to waive all benefits that might otherwise be available to Guarantor or Borrower under . . . Civil Code Sections 2809, 2810, . . . , among others."

The court then examined the case law preceding the 1995 enactment of §2856; those earlier cases had held that when the principal obligor is entitled to a usury defense, the guarantor is exonerated.  The court noted that when the Legislature enacted § 2856, it stated that the statute was "merely declarative of existing law."  Thus, the Legislature did not intend to abrogate the rule articulated in those earlier cases.  As a result, the usurious nature of the underlying loan meant that the guarantors may have been exonerated.

[Note: Some items in these materials have been excerpted from articles originally prepared by Prof. Dan Schechter for his Commercial Finance Newsletter, published on Westlaw (database “COMFINNL”).  Westlaw holds the copyright on those items, and no part of the copyrighted material work may be copied or reproduced in any form without the written permission of West Group. West has given its permission for the use of those items in these materials.  The editorial opinions expressed in those excerpted materials are solely attributable to Prof. Schechter.]


15. Consumer Rights to Translated Mortgage Documents:  California Civil Code Section 1632 and Related Cases

Cal. Civil Code 1632 (2006): requiring translation into one of five languages commonly spoken in California (Chinese, Tagalog, Korean, Vietnamese, and Spanish) for:

(3) A lease, sublease, rental contract or agreement, or other term of tenancy contract or agreement, for a period of longer than one month, covering a dwelling, an apartment, or mobilehome, or other dwelling unit normally occupied as a residence.

(4) A loan or extension of credit secured by real property for use primarily for personal, family, or household purposes that is subject to the provisions of Article 7 (commencing with Section 10240) of Chapter 3 of Part 1 of Division 4 of the Business and Professions Code.

California Civil Code Section 1632 requires landlords and lenders subject to section 10240 duties to give consumers who are proficient in one of the five enumerated languages translations of leases, loan contracts, and agreements.  First, passed in 1974 to protect the rights of Spanish language consumers in non-real estate transactions, [1] section 1632 was amended in 2003 to include within its purview four additional languages– Chinese, Tagalog, Vietnamese, and Korean – and to include personal, family, or household loans or extensions of credit made by real estate brokers (as defined by Cal. Bus. & Professions Code Section 10131) who are subject to the requirements of the Cal. Bus. & Professions Code section 10240. In 2006, section 1632 was again amended to include reverse mortgages.  In 2007, A.B. 512 was proposed to expand section 1632’s purview to extensions of credit, including mortgages, made by a supervised financial organization.  The remedy for failure to comply with section 1632 is rescission.  Additionally, under the current version of section 1632, Nymark v. Heart Federal Savings & Loan Ass’n, 231 Cal. App. 3d 1089 (1991) remains in force.  Nymark holds that a lender does not owe a duty of care to a borrower unless that lender “actively participates” in the transaction.

Three factual bases dictate when translation documents are required under section 1632.  If a consumer affirmatively requests translation documents in his or her language of proficiency then such documents must be provided upon pain of rescission.  Alternatively, if a service provider posts at its premises information about its ability to transact in one of the five enumerated languages then translation documents must be provided to the consumer upon pain of rescission.  Finally, if a lender is subject to duties under section 10240, then that lender has a duty to provide translation documents to consumers whose language proficiency is in one of the five covered languages.

Translation documents are unexecuted; English documents are binding.  Translation documents serve to educate the consumer about the cost, terms and obligations of the loan.  Agreement documents are broadly defined under section 1632 to include all documents that determine the rights and obligations of the parties, including, as was held in Reyes v. Superior Court, 173 Cal. Rptr. 267 (Cal. Ct. App. 1981), default and repossession notices.


A.B. 512 (2007): This bill would expand section 1632 to include residential real estate mortgages made by conventional lenders, meaning those lenders who do not participate in a real estate transaction other than to provide funds to the consumer in exchange for a security interest.  A.B. 512 permits the use of a summary document translated in one of the five covered languages (Chinese, Tagalog, Korean, Vietnamese and Spanish), and it requires the Secretary of the Business, Transportation Housing Agency to develop the translated summary forms.

The specific language of the amendment is 1632(4): or, is made by a supervised financial organization.  The requirements applying to supervised financial organizations shall be operative commencing on January 1, 2009, or 90 days following issuance of forms by the Secretary of the Business, Transportation and Housing Agency pursuant to subdivision (m), whichever is later.”

Authored by Senator Correa and introduced by Assembly Members Lieber and Coto, A.B. 512 was passed by the Senate Banking, Finance, and Ins. Committee (7 – 3; 1 abstention), the Senate Judiciary Committee (3 – 2), the Senate Appropriations Committee (9 – 7; 1 abstention), and the Assembly Floor (47 – 29).  It is presently being held in the Department of Financial Institutions Committee out of concern that the bill contains no specific guidance on how to draft the summary forms it would require.

If A.B. 512 is signed into law, in addition to the changes discussed above, it will effectively cancel the application of Nymark v. Heart Federal Savings & Loan Ass’n, 231 Cal. App. 3d 1089 (1991) by imposing on all lenders – active or passive – an affirmative duty to provide summary translation documents to those consumers whom the lender knows or has reason to believe are proficient in one of the five enumerated languages of section 1632.  Such an interpretation would be consistent with Reyes v. Superior Court, 173 Cal. Rptr. 267 (Cal. Ct. App. 1981), which recognized an implicit duty on a lender even where the consumer did not request translation documents and the lender had not posted its ability to transact in the covered language, but the lender knew or had reason to know that the consumer spoke only Spanish.

For a more extensive analysis of banking practices in relation to the Latino population nationally, section 1632, A.B. 512, and related cases up to the first quarter of 2008, see Jo Carrillo, In Translation for The Latino Market Today:  Acknowledging the Rights of Consumers in a Multilingual Housing Market, 11 Harvard Latino Law Review 1 (2008).


Ruiz v. Decision One Mortgage Company LLC et. al., 2006 U.S. Dist. LEXIS 54571:

This civil action, filed in 2006 in the Northern District of California, raises the issue of whether mortgage lenders are subject to the translation provisions of Cal. Civil Code Section 1632 in a case where the plaintiff alleged an agency relationship between a conventional lender and a local real estate broker who was subject to professional duties under section 10240 of the Cal. Bus & Prof. Code.  (Section 1632 is discussed above.)

In Ruiz, plaintiffs’ claim arose out of alleged predatory mortgage lending practices on the part of local mortgage broker who acted as intermediary between the plaintiffs and Decision One Mortgage, a subprime arm of HSBC.  (HSBC announced the closure of Decision One Mortgage on Sept. 21, 2007, but HSBC continues to operate the subprime HFC and Beneficial brands).  Plaintiffs, a married couple who are proficient in Spanish but not English, allege that Decision One had a duty as a mortgage lender to provide them with translated mortgage documents under 1632 upon pain of rescission.

Decision One moved to dismiss several of plaintiff’s allegations, including their section 1632 claim.  Decision One argued that it had no duty under 1632(b)(2), which explicitly excludes from its coverage loans secured by real property, and that it had no duty under section 1632(b)(4), which covers “personal, family, or household . . . loans or extensions of credit” but only if the broker is also subject to section 10240 duties. Decision One argued that in its role as a conventional lender it was a passive provider of funds, and thus plaintiffs’ remedy, if any, was against the local brokers who took an active part in the transaction.

Judge Howard R. Lloyd of the N.D. Cal granted Decision One’s motion as to some of plaintiffs’ claims, but not others.  Judge Lloyd dismissed all allegations that were based on the theory that Decision One had a direct duty under section 1632 to provide translated mortgage documents to plaintiffs – thus agreeing that 1632(b)(2) excludes mortgage loans generally.  But the judge allowed plaintiffs’ complaint to go forward on all section 1632 allegations based on the theory of secondary liability – thus agreeing that section 1632 extends its protections to those mortgage loans originated by any broker who is directly or through an agent subject to section 10240 duties.  Judge Lloyd’s rationale rested on Nymark v. Heart Federal Savings & Loan Ass’n, 231 Cal. App. 3d 1089 (1991), which he cited for the general rule that a lender does not owe a duty of care to a borrower unless that lender “actively participates” in the financing transaction “beyond the domain of the usual money lender.”

Judge Lloyd also found that for purposes of a Fed. R. Civ. P 12(b)(6) motion, plaintiffs sufficiently alleged an agency relationship between Decision One and the local defendant mortgage broker.  In a Rule 12(b)(6) context, the judge explained, specific allegations of agency, vicarious liability, or respondeat/superior are not necessary to successfully allege an agency relationship.  Thus, the plaintiff’s “boiler plate allegation of agency between all defendants” was sufficient to incorporate a section 10240 claim of professional negligence as applied to all defendants.  In this way, Ruiz clarifies the view that section 1632(b)(4) applies both to agents who are directly subject to section 10240 through active participation in a transaction and to agents who are indirectly subject to section 10240 through the acts of their intermediary agents.


Hernandez v. Hilltop Financial Mortgage, Inc., Fieldstone Mortgage Co., Countrywide Home Loans, Inc. and Ameriquest Mortgage Co., , 2007 U.S. Dist. LEXIS 80867: This 2007 N.D. California civil action offers a summary reiteration of Ruiz.  In Hernandez, the plaintiffs’ claim arose from two mortgage loans:  an original loan that was refinanced. The original and the refinanced loans were originated and closed by different lenders, with the refinanced loan eventually assigned to defendant Countrywide who then assigned partial interest to an investor and kept partial interest.

At the origination of both loans, all discussions and negotiations between the plaintiffs and the lenders were in Spanish, as the plaintiffs are not proficient in English.  Loan documents were executed in English.  In the case of the first loan, at execution, a notary public paid for by the lender acted as an interpreter, making representations about the loan’s costs and terms.  In the case of the second loan, the local mortgage broker made representations in Spanish to plaintiffs about the loan’s terms and costs.  These representations were shown to seriously underestimate and/or misrepresent essential financial facts as to the loan, leaving plaintiffs to allege that the English documents did not capture the terms agreed to during the oral Spanish language negotiations.  Relevant to this discussion, plaintiff alleged a violation of the federal Truth in Lending Act (TILA) and what the court termed the California Translation Act (CTA), presumably section 1632.

Defendant Countrywide moved to dismiss plaintiff’s allegations as to its liability on the ground that it was a mere lender – a conventional assignee – and thus could not be held liable under the CTA (section 1632).  The court denied Countrywide’s motion to dismiss, stating that for purposes of surviving a Fed. R. Civ. Pro 12(b)(6) motion, plaintiff had sufficiently alleged a connection between Countrywide and the other defendants –Hilltop and Fieldstone – to justify “viewing Countrywide, the assignee, as the original creditor.”  The court also said that plaintiff was not required to formerly allege agency, vicarious liability, and/or respondeat superior in order to survive Countrywide’s 12(b)(6) motion.  Additionally, the court noted that Countrywide, which cited Ruiz to support its motion, “misstated the law in Ruiz, [by] falsely inserting a requirement for an allegation of an agency relationship in an indirect liability claim.”

With this clarification, Hernandez, without explicitly citing to section 1632, ratifies the Ruiz analysis that conventional lenders may be liable to consumers under section 1632(b)(4) notwithstanding 1632(b)(2)’s explicit exclusion of mortgage loans.  Additionally, both Ruiz and Hernandez allowed plaintiff’s allegations of indirect liability to stand despite the lack of a formal allegation of agency between the lenders.  Thus, in Hernandez, as based on Ruiz, plaintiff’s boilerplate allegations of agency were sufficient to preserve plaintiff’s indirect liability claim against a conventional lender otherwise not subject to section 10240 duties.

 

Marks v. Ocwen Loan Servicing, 2008 U.S. Dist. LEXIS 12175:

In this February 6, 2008 N.D. Cal. decision, Judge Susan Illston (who wrote the opinion in Hernandez) again addressed the issue of indirect liability in a TILA claim and in a state law claim for intentional and negligent misrepresentation.  Plaintiff alleged false statements made by New Century (the now defunct second largest subprime lender as of early 2007) one year before the loan at issue was assigned to defendants, but plaintiff did not allege any misrepresentation or false statement made by defendants.  Expressing skepticism about plaintiff’s indirect liability theory, the court nevertheless allowed plaintiff’s allegations to stand for purposes of defendant’s Rule 12(b)(6) motion.  Judge Illston noted, as she had in Hernandez, that the plaintiff must be allowed to develop her case to show that defendants were “so closely connected” to New Century or its Home 123 arm that they “should be liable for the false statements of the loan originators.”



[1] A.B. 212, 1973-74 Regular Session (proposed Cal. Civ. Code §1632(1974)).