Record a Judgment Lien and Keep a Corporation Active

In the recent California case of Longview International v. Stirling, Anne Catambay appealed the denial of her motion to expunge a judgment lien on real property. She contended that because the judgment creditor was a corporation that was suspended at the time the lien was created, the lien was void. 

The Appellate Court concluded that recording an abstract of judgment is a procedural act that is retroactively validated once a suspended corporation’s powers are reinstated. As a result, it found the trial court had correctly denied the motion. 

Anne Catambay’s husband was sued in Santa Clara County for embezzlement. That lawsuit resulted in a judgment against him for over one million dollars. A corporation––Longview International, Inc.––was the judgment creditor. 

Longview International recorded an abstract of judgment in San Mateo County, creating a judgment lien on real property owned by Catambay’s husband in that county (a house in Redwood City). Two days later, Catambay’s husband conveyed the Redwood City house to her as part of a marital settlement agreement in their then-pending dissolution proceeding. 

Catambay discovered that at the time Longview International recorded the abstract of judgment its corporate powers had been suspended because it had failed to file an annual statement of information and pay a $25 fee to the state of Delaware. She filed a motion in the Santa Clara County embezzlement case, asking to intervene in the action and seeking to expunge the judgment lien from the Redwood City property. 

Longview International opposed the motion arguing that its corporate powers had been reinstated, which retroactively validated any actions it took while suspended, including recording the abstract of judgment. 

The Appellate Court noted that Catambay’s motion to expunge the judgment lien was not authorized by any statute, and may not even be the appropriate vehicle to secure the relief she sought.  But even if it assumed the trial court had authority to grant the motion, denial was proper because there is no basis for removing the lien. 

A judgment lien on real property is created by recording an abstract of a money judgment with the county recorder in which the real property is located. (Code of Civil Procedure § 697.310,(a).) Upon recording, the lien automatically attaches to all real property the judgment debtor owns within that county. 

The effect of the lien is to secure the debt; it allows the judgment to be satisfied from the proceeds of a sale of the property. The lien remains until the judgment creditor files an acknowledgement of satisfaction of judgment (a certified copy should then be recorded) or agrees to release the lien. For a judgment lien to be valid, an abstract of judgment must be properly recorded and contain all the information required by statute. 

Catambay did not dispute that the abstract of judgment was filed with the county recorder and complied with the necessary statutory formalities. She contended the lien was invalid because Longview International’s corporate powers were suspended when the abstract was filed, and suspended corporations are not allowed to take any action to enforce a judgment. 

A suspended corporation loses all "corporate powers, rights, and privileges.” (Rev. & Tax. Code § 23301.) The right to enforce a civil judgment is one of the rights lost. 

Catambay was correct that at the time Longview International recorded the abstract it did not have the legal authority to do so. That does not end the inquiry, though, because a corporation can retroactively validate unauthorized actions taken during a suspension by correcting the condition causing the suspension and applying for a certificate of revivor. (Rev. & Tax. Code § 23305) Longview International obtained such a revival of its powers, before Catambay moved to expunge the lien. 

The revival of corporate powers retroactively validates any procedural steps taken on behalf of the corporation in the prosecution or defense of a lawsuit while the corporation was under suspension.

Accordingly, so long as recording an abstract of judgment is a “procedural step” in prosecuting a lawsuit, the abstract recorded in the case (which by operation of law created a judgment lien) was retroactively validated upon the revival of Longview International’s corporate powers. 

Most litigation activity has been characterized as procedural for purposes of corporate revival. Obtaining a writ of attachment––a collection method that is a close analogue to the judgment lien here––has been found to be a procedural step subject to retroactive validation. 

Even obtaining the underlying judgment is procedural and subject to later validation if a corporation is suspended when the judgment is issued.  If obtaining a judgment is considered a procedural step, the Appellate Court saw no reason why enforcing one would not be. 

Catambay argued that Longview International’s enforcement action should be considered substantive because she was not a party to the litigation underlying the judgment and the lien affected rights she acquired in the property during the period of suspension. 

But any interest Catambay has in the property is subject to the judgment lien that was recorded before she acquired it. Giving effect to that lien does not take anything away from Catambay, and the Appellate Court saw no reason for her to be rewarded with more than she had to begin with. 

Therefore, Longview International’s recording of an abstract of judgment while the corporation was suspended is a procedural matter which was retroactively validated when its corporate powers were restored. 

Catambay made an alternative argument: that even if the abstract of judgment is retroactively validated, it would not affect her interest in the property because the validation did not occur until the corporation’s powers were revived, which was after the date the property was transferred to her. 

She invoked California’s “race-notice” statute, which provides that one who purchases property without notice of an unrecorded, previously created interest takes the property free of that unrecorded interest. (Civil Code § 1214.) 

The argument assumes the abstract of judgment when recorded was void–– something that “is without legal efficacy, is incapable of being enforced by law.”  A void instrument, even if recorded, does not create an interest in real property, and it is not effective to provide notice of an adverse interest in the property to a later purchaser. 

But the abstract of judgment was not void. At the time it was recorded, it was capable of being enforced by law––upon Longview International obtaining a revival of its corporate powers, which would retroactively validate the lien and make it fully enforceable. 

In the case, the abstract complied with all the statutory requirements, but Longview International could not enforce the judgment until it obtained a revivor. When Catambay took title to the property it was always possible that Longview International would cure its incapacity and be able to enforce its rights. The abstract of judgment was not void given the existence of that possibility. 

The purpose of the recording statutes is to protect purchasers of real property by giving them notice of all existing and outstanding estates, titles, or interests in the property, whether valid or invalid, which may affect their rights as purchasers. The recorded abstract gave Catambay notice that Longview International asserted an interest in the Redwood City property, one that could be enforced upon the revival of its corporate powers. She therefore received the property subject to that interest. 

A conveyance of real property subject to a judgment lien does not affect the lien, which can be enforced against the transferee. There was no basis for removing the judgment lien. 

LESSONS:

1.         Upon obtaining a money judgment, obtain an abstract of judgment from the Court and record it in all counties that the judgment debtor owns real property.

2.         Corporations should always maintain its corporate status, and should file with the California Secretary of State the annual Statement of Information before the Corporation is suspended.

3.         If the corporation is suspended, it should comply with the necessary requirement to obtain certificate of revivor.

4.         If a corporation's powers are reinstated, it retroactively validates any actions it took while suspended, including recording an abstract of judgment.

California's Homeowner Bill of Rights Will Be Enforced

In the recent case of Potocki v. Wells Fargo, the California Court of Appeal ruled that Wells Fargo did not breach the terms of a loan forbearance agreement by declining to modify a homeowner’s loan after the homeowner made three trial payments since the agreement clearly disclaimed a promise to modify. While a lender can owe a duty of care in processing load modifications, a lender cannot be found liable for breaching that duty in the absence of any allegations that suggest a failure to comply with the lender’s duty. 

However, the California Homeowner Bill of Rights ("HBR") imposes a duty on a lender to provide specific reasons for denying a loan modification; a lender’s assertion that it did not have contractual authority to modify a loan because of limitations in its servicing agreement does not suffice as an explanation.

Plaintiff borrowers sued Wells Fargo Bank arising out of plaintiffs’ attempts to get a loan modification. The trial court ruled against Plaintiffs on Wells Fargo’s objections (i.e, demurrer)  to the third amended complaint which alleged five causes of action: (1) breach of contract, (2) violation of Business & Professions Code §17200, (3) negligence, (4) violation of HBR ("Civil Code § 2923.6), and (5) intentional infliction of emotional distress.

On appeal, plaintiffs contended their third amended complaint sufficiently alleged causes of action and argued: (1) the forbearance agreement obligated Wells Fargo to modify their loan; (2) the trial court erred in finding Wells Fargo owed no duty of care; (3) Wells Fargo’s denial of a loan modification was not sufficiently detailed to satisfy the HBR; and(4) a claim of intentional infliction of emotional distress was sufficiently pled. 

The Appellate Court found that only Plaintiffs’ third contention had merit for a potential violation of the HBR, and remanded the case back to the trial court for further proceedings. 

Plaintiffs purchased their home in 2004. In 2009, they fell several months behind on mortgage payments. They contacted their mortgage servicer, Wells Fargo, and were offered a loan modification in exchange for agreeing to make three trial payments of $1,633.53.

Plaintiffs made the three payments but were never provided mortgage modification paperwork. Three months later, a notice of default was recorded. Shortly after, plaintiffs filed a lawsuit against Wells Fargo alleging wrongful foreclosure related claims, but it was dismissed by plaintiffs, and the complaint in the Potockicase was filed in early 2014. 

In late 2014, plaintiffs submitted a completed loan modification application with supporting documents requested by Wells Fargo. Wells Fargo reviewed plaintiffs for two separate modifications: a Home Affordable Modification Program or “HAMP” modification, and a non-HAMP “Trial Payment Plan” modification. 

The “forbearance agreement” attached to the third amended complaint showed there was no promise of a loan modification, allowing Wells Fargo discretion in whether to grant a loan modification after the borrower complied and made the three payments.

Two months later, plaintiffs received a denial for the HAMP modification. The denial explained Wells Fargo could not modify the mortgage because: “[We] do not have the contractual authority to modify your loan because of limitations in our servicing agreement.” 

Plaintiffs also received a letter regarding the non-HAMP “Trial Payment Plan”review.  It stated: “We have good news about the above referenced loan. . . . We want to ensure that you have every opportunity to retain your home.” The letter went on to say that the plaintiffs were required to make three trial payments, the first being $171,745.78, which was “essentially an initial payment of the past due total arrearages . . . .” The plaintiffs alleged the letter was a constructive denial as it was unreasonable to expect they would have the large initial payment. 

Plaintiffs appealed the decisions with Wells Fargo, and “both denials” were affirmed. Plaintiffs also alleged that had Wells Fargo “fairly and carefully reviewed them for the modification, they would have been approved and would not have suffered the damages alleged herein.” 

The Appellate Court affirmed the trial court's decision that the forbearance agreement did not obligate Wells Fargo to modify the loan because the letter from Wells Fargo stated:  “Upon successful completion of the three regular payments as outlined in this plan, your loan will be reviewed for a Loan Modification, based on investor approval, which will satisfy the remaining past due amount on your loan. [¶] The lender is under no obligation to enter into any further agreement, and this forbearance shall not constitute a waiver of the lender’s right to insist upon strict performance in the future.” (Emphasis added.)

Plaintiffs argued the temporary payment plan coupled with Plaintiffs being led to believe a permanent modification was “at the end of the tunnel” was tantamount to a binding contract. In support, they cited West v. JPMorgan Chase Bank, a 2013 decisionwhich held a “Trial Plan Agreement” required the lender to offer a permanent loan modification. But in West, the trial plans were offered under HAMP, and its holding was limited to HAMP plans.

Thus, West established the precedent that for the Trial Plan Agreement to be lawful and comply with HAMP, the bank’s reevaluation following the trial period would be limited to determine if West had complied with the terms of the trial plan and whether her original representations were correct. West’s compliance obligated the bank to offer her a permanent loan modification.

However, in Potocki, the “Special Forbearance Plan” was not offered under HAMP. Where a trial plan was not alleged to be under HAMP, no contract existed requiring the lender to modify the loan. The decision in West was grounded in a U.S. Treasury directive, HAMP guidelines, and the agreement between the borrower and lender in that case was a TPP under HAMP.

The third amended complaint also alleged negligence based on the argument that Wells Fargo owed Plaintiffs a general duty of care when Plaintiffs and Wells Fargo entered into a contract that was not honored.  Plaintiffs cited Alvarez v. BAC Home Loans Servicing, L.P., which ruled that when a bank agrees to consider a loan modification, it owes a duty to timely and carefully process the modification application. Based thereon, Plaintiffs in Potocki argued Wells Fargo owed a duty of care to diligently handle their modification application and provide a detailed denial. They also argued that a per se duty of care was owed based on Wells Fargo’s violation of the HBR. 

Even though the Court of Appeal assumed that Wells Fargo owed a duty of care in processing the loan application, plaintiffs failed to allege any breach of that duty. The parties never entered into a contract to modify the loan. Plaintiffs failed to allege facts that might suggest a failure to comply with any duty articulated in Alvarez (alleging defendant failed to timely review applications, foreclosed while considering a HAMP modification, and mishandled applications by relying on incorrect information).  

Also, Rossetta v. CitiMortgage, Inc., the Appellate Court allowed a negligence cause of action thatalleged the borrower was dragged through a “seemingly endless application process, requiring her to submit the same documents over and over again,” documents were lost or mishandled, the status of various applications were mishandled, and borrower was ultimately denied for “bogus reasons”.)   However, simply alleging that the modification was “denied in bad faith” is insufficient, and more facts similar to those in Alvarezand Rossettawere required.

Nor did the argument of a per se duty rehabilitate the contention because the doctrine of negligence per se is not a separate cause of action, but creates an evidentiary presumption that affects the standard of care in a cause of action for negligence. With negligence per se, statutes may be borrowed in the negligence context for one of two purposes: (1) to establish a duty of care, or (2) to establish a standard of care. Even assuming a duty of care is owed in the processing of the modification in Potocki,plaintiffs failed to allege any breach.

However, the Appellate Court found that as to Plaintiffs' claim under section 2923.6 of the HBR, the denials as alleged were not sufficiently detailed to comply with subdivision (f).

Section 2923.6 subdivision (f) of the HBR requires a servicer, following the denial of a loan modification, to send written notice “identifying the reasons for the denial.” Subdivision (f)(2) further requires that “[i]f the denial was based on investor disallowance, the specific reasons for the investor disallowance” must be given. (Italics added.) 

Wells Fargo's explanation that “[we] do not have the contractual authority to modify your loan because of limitations in our servicing agreement,” does not suffice as an explanation — at least for purposes of a demurrer. The statement is ambiguous and appears to imply the investor has not allowed the modification. If that is the case, subdivision (f)(2) requires the “specific reasons for the investor disallowance.” As is, the explanation appears to communicate little more than the modification was denied because the investor did not want to approve it.

Wells Fargo argued that where a trustee’s deed upon sale has not been recorded (the case in Potocki), a borrower may only bring a claim for injunctive relief to enjoin a material violation of section 2923.6, under section 2924.12, subd. (a)(1).) Wells Fargo maintained  that any violation of section 2923.6 was not material in that plaintiffs would not have been better able to protect their rights or achieve a more favorable outcome absent the violation. 

The Appellate Court disagreed, reasoning that without knowing the investor’s actual reason for denying the HAMP modification, the Appellate Court could not say for certain that the failure to provide “specific reasons for the investor disallowance” was not material. 

Finally, Plaintiffs claimed intentional infliction of emotional distress based on allegations that Wells Fargo’s irrational refusal to offer plaintiffs help “is extreme and outrageous” conduct, together with sending Plaintiffs a letter congratulating them on being approved for a loan modification, only to tell them they have to pay over $100,000 in order to accept. 

Wells Fargo responded that plaintiffs had not made a mortgage payment in six years, and it was standard practice for a bank to agree to “piggy bank” 12 months of late payments, but no more. The amount plaintiffs were asked to pay would bring the arrearages to within 12 months of being current. The trial court explained that creditors enjoy a qualified privilege to protect their economic interest by asserting their legal rights even though doing so may cause emotional distress. Requiring plaintiffs to first pay $171,745.78 to cover past due arrearages was not extreme and outrageous. 

The Appellate Court ruled that no such extreme and outrageous conduct occurred where Plaintiffs were given an offer of a loan modification, albeit one they could not afford. The fact that the offer was prefaced with “We have good news" is not conduct exceeding all bounds usually tolerated by decent society, of a nature which is especially calculated to cause, and does cause, mental distress of a very serious kind.

Therefore, plaintiffs were allowed to proceed with the fourth cause of action for violation of section 2923.6 of the Homeowners Bill of Rights, and the other causes of action were dismissed.

LESSONS:

.

1.         A HAMP modification agreement is superior to a non-HAMP “Trial Payment Plan” modification, and borrowers need to understand the differences because they control review by California courts.

2.         Borrowers should obtain a legal explanation of the loan modification agreements they contemplate entering into from an experienced attorney, as they may make the required payments and still be denied a permanent loan modification (i.e., "throwing good money after bad").

3.         Beware of a lender's offer of a non-HAMP “Trial Payment Plan” modification, and determine whether the agreement contains language that no permanent modification is promised or required.

4.         A negligence cause of action against a lender considering a loan modification (i.e., unreasonable conduct) may be possible if enough facts similar to those in Alvarez and Rossetta are alleged.

Easements May Be Limited to Initial Use

The existence of an easement on a parcel of real property is a title issue that should be carefully evaluated in the purchase of the property, and some general rules should be considered before the purchase. 

Initially, the preliminary title report should be carefully reviewed to determine the nature and scope of easements.

The dominent tenement is the parcel of land that benefits from the easement, and the servient tenement is the parcel that is burdened by the easement and is typically where the easement is located.

The method of creation determines the extent of an easement's use. (Civil Code § 806.)  

Civil Code § 806 provides:  The extent of a servitude is determined by the terms of the grant, or the nature of the enjoyment by which it is acquired.

The extent to which an expressly created easement can be used by its owner is determined by the terms of the instrument of its creation. The recipient of an easement has the burden of proving what rights of use are attendant to the easement. 

Generally, a grantee of an easement receives only those rights of use expressly conveyed, and any additional rights that are necessary and reasonable for enjoyment of the easement incidental to the grant, and consistent with its purpose. 

When the instrument of conveyance grants an easement in general terms, without specifying or limiting the extent of its use, the permissible use is determined in the first instance by the intention of the parties and the purpose of the grant. 

Once the easement has been used for a reasonable time, the extent of its use is established by the past use. Thereafter, an owner cannot make changes in its use that would substantially modify or increase the burden of the servient tenement. 

Once an easement has been created both parties have the right to insist that so long as the easement is enjoyed it shall remain substantially the same as it was at the time the right accrued, regardless of the question as to the relative benefit and damage that would ensue to the parties by reason of a change in the mode and manner of its enjoyment. 

The owner of the easement can make minor changes in the use of the easement so long as there is no material or substantial increase in the burden on the servient tenement. 

Once the extent of an easement's use has been established, the easement owner cannot subsequently enlarge its character so as to materially increase the burden on the servient tenement. An easement acquired for a specific purpose generally cannot be used for a different purpose. 

An unreasonable increase of the burden may ripen into a prescriptive right, and until then it is a nuisance that can be enjoined by the owner of the servient tenement. 

When a party already has an easement, the use of the easement may be enlarged by prescription if the excessive use is of a nature and duration sufficient to put the owner of the servient tenement on notice of the greater rights claimed by the user. 

The owner of an easement cannot change or increase the use of the easement in any manner that imposes a new or greater burden on the servient tenement without the consent of the servient owner.  An unreasonable increase in the burden on the servient tenement resulting from an increase or change in the sue of an easement is called a "surcharge".

The extent to which the use of an easement can be altered, and the question whether the use is excessive and amounts to a surcharge on the servient tenement, are issues of fact in each case. 

A person other than the owner of the servient tenement, and possibly a person holding a lien on the servient tenement, cannot challenge the existence or use of an easement over the land of another. 

An easement may be unenforceable when its use is illegal, such as a commercial use in a residential zone in violation of the zoning laws. The owner of the easement may not enforce the illegal use, and it may be enjoined as a nuisance.

When considering the rights of the parties relating to an easement, the rights and duties of each party are relative to the rights and duties of the other party.  The rights of the owner of the easement are restrictive, and the rights of the owner of the servient tenement are residual, but both must act reasonably toward the other.  

As a general rule, the owner of the dominent tenement must use the easement in a manner that imposes the least burden on the servient tenement. Every incident of ownership that is not inconsistent with the use and enjoyment of the easement is reserved to the owner of the servient estate. 

The issue of whether a change in the use of an easement is excessive and a surcharge on the servient tenement is a question of fact in each case that requires a determination as to whether the alteration will cause an unreasonable increase in the burden of the servient tenement. 

LESSONS:

1.         An easement can have significant impact on both the dominent tenement (may increase its value or access) and the servient tenement (may decrease its value or restrict the use of the property).

2.         Both the owners of the dominent tenement and servient tenement should evaluate the use and extent of the easement, and carefully monitor its use over time to determine if the use is being increased so as to create a surcharge on the servient tenement.

3.         If the servient tenement determines that there has been a surcharge in the use of the easement, the owner of the servient tenement may file a legal action for nuisance and seek to enjoin the increased use in the easement.

4.         The use of the easement may be enlarged by prescription if the excessive use is of a nature and duration sufficient to put the owner of the servient tenement on notice of the greater rights claimed by the user.

Be Careful to Sign and Save Contracts

In the recent California decision in Juen v. Alain Pinel Realtors, broker/defendant appealed from an order denying its motion to compel arbitration, arguing that the trial court erred in finding no enforceable arbitration agreement. 

The Court of Appeal affirmed the order because broker failed to show through custom and habit evidence that the broker had initialed the arbitration clause on the original residential listing agreement, or that the broker had assented to arbitration through other conduct. 

Seller/Plaintiff engaged broker Pinel to sell his Danville home in 2008. In 2015 he filed a putative class action lawsuit on behalf of California residents who between August 2004 and July 2011 had used Pinel in a transaction to buy or sell a home in California and had utilized TransactionPoint, a real estate software program developed by Fidelity National Financial, Inc. 

Plaintiff sued Pinel, certain managing owners and brokers,and Fidelity subsidiaries alleging breaches of fiduciary duties, aiding and abetting, violations of Civil Code section 1710 and Business and Professions Code section 17200, constructive fraud, and unjust enrichment. 

Plaintiff alleged Pinel had entered into unlawful sublicensing agreements with Fidelity subsidiaries Ticor Title Company of California, Fidelity National Home Warranty Company, and Chicago Title Company (the Fidelity defendants), allowing those entities to contract their settlement services to Pinel clients using TransactionPoint; during the class period Pinel had used the software to contract for real estate settlement and related services; and the Fidelity defendants paid unlawful sublicensing fees to Pinel in return for the TransactionPoint - generated business. 

Pinel and all individual defendants except the Pinel defendants moved to compel arbitration in the trial court, relying on the arbitration clause (paragraph 19B) in plaintiff’s residential listing agreement. Following that clause, the agreement contained a notice provision required by Code of Civil Procedure, section 1298, subdivision (c) with spaces for the client’s and broker’s initials. 

In support of their motion, the Pinel defendants produced a copy of the listing agreement signed by plaintiff and Pinel’s listing agent, Sue Smith. The section 1298(c) notice on the copy showed plaintiff’s initials, but the space for Pinel’s initials was blank. 

To establish that the original listing agreement had actually been initialed by Pinel, the Pinel defendants submitted the declaration of Lisa Crosby-Torres, the managing broker of Pinel’s Danville office at the time the listing agreement was executed. Crosby-Torres explained that:

- the files maintained by her office relating to the sale of plaintiff’s home (including the original listing agreement) were destroyed in accordance with Pinel’s normal document retention policy; 

- that she had obtained a copy of plaintiff’s listing agreement from Smith to support the Pinel defendants’ arbitration demand; 

- that at the time Pinel and plaintiff entered into the listing agreement it was Pinel’s policy, custom, and practice to allow a client to elect whether to assent to the arbitration provision by initialing paragraph 19B; 

- that “the policy in my office required an agent, like Smith, who had obtained a Residential Listing Agreement to promptly present the executed [agreement] to [Crosby-Torres] for [her] review”; and that in the event the client had initialed the arbitration provision, Crosby-Torres (rather than the listing agent) “would as a matter of policy and custom and practice adopt the election of the client and initial Paragraph 19B on behalf of [Pinel].” 

Crosby-Torres further explained: “In the case of Plaintiff’s Residential Listing Agreement, I would have, as a matter of policy and custom and practice, adopted his election of arbitration and initialed Paragraph 19B on behalf of [Pinel], and placed the original Residential Listing Agreement bearing Plaintiff’s initials and my initials on Paragraph 19B in the file maintained by [Pinel] on the subject transaction.” 

The declaration continued: “At the time of execution of the Residential Listing Agreement, and continuing to the present, it has been the policy to retain files relating to closed listing and sale transactions for a period of five (5) years. Escrow closed on Plaintiff’s sale of the Subject Property on July 11, 2008. The file maintained by [Pinel] relating to the subject transaction, including the original Residential Listing Agreement bearing Plaintiff’s initials and my initials on Paragraph 19B, was therefore destroyed in 2013 pursuant to the normal document retention policy of [Pinel].” 

The Pinel defendants argued in the trial court that destruction of the original listing agreement bearing Crosby-Torres’s initials did not preclude their arbitration demand because Crosby-Torres’s declaration established through practice and custom that the original listing agreement had been initialed by Crosby-Torres on behalf of Pinel. 

Alternatively, they argued (1) under the Federal Arbitration Act, parties to an executed listing agreement are not required to initial the arbitration provision, and (2) even if Pinel had not assented to the arbitration provision, the provision is enforceable against plaintiff under Grubb & Ellis Co. v  Bello, which concluded that a mutual agreement to arbitrate was not required in order to enforce an arbitration clause in a real estate listing agreement against an assenting party. 

After a hearing, the trial court issued a written order denying the Pinel defendants’ motion. The court concluded that the Crosby-Torres declaration failed to establish that Pinel had initialed the arbitration provision. 

It rejected the reasoning in Bello, and instead adopted the reasoning in Marcus & Millichap Real Estate Investment Brokerage Co. v. Hock Investment Co. to find no enforceable arbitration agreement. The court concluded that the language of the arbitration provision contemplated that the seller and broker mutually agree to the provision and that each indicate its assent by initialing the provision. 

Having failed to show that the broker had initialed the provision, the Pinel defendants failed to establish the existence of an enforceable arbitration agreement. 

The validity of an arbitration agreement in California is determined by a petition or motion to compel arbitration. Motions for arbitration are adjudicated summarily. Factual issues may be submitted on declarations and affidavits, or by oral testimony in the court’s discretion.  

A proceeding to compel arbitration is in essence a suit in equity to compel specific performance of a contract. The party seeking arbitration bears the burden of proving the existence of an arbitration agreement by a preponderance of the evidence, and the party opposing arbitration bears the burden of proving by a preponderance of the evidence any defense.

An arbitration agreement must be in writing to be valid and enforceable.  The existence of an enforceable arbitration agreement is established under state law principles involving formation, revocation and enforcement of contracts generally.

Code or Civil Procedure, section 1298 is a notice provision applicable to real estate contract arbitration. Section 1298(a) applies to contracts to convey real property (such as residential purchase agreements between buyers and sellers), and subdivision (b) applies to contracts between principals and agents in real property sales transactions, including residential listing agreements. Section 1298(c) provides for initialing immediately before the line or space provided for the parties to indicate their assent or nonassent to the arbitration provision.

Evidence Code section 1105 provides “Any otherwise admissible evidence of habit or custom is admissible to prove conduct on a specified occasion in conformity with the habit or custom.”Defendants argue that the arbitration clause was executed by Crosby-Torres and therefore enforceable because Pinel had established through custom and habit evidence that Crosby-Torres had initialed the notice provision. 

While Crosby-Torres’s declaration may have established through custom and habit that she initialed the arbitration notice provision in all residential listing agreements presented to her in which the provision had been initialed by the client, the declaration does not establish Crosby-Torres ever having received or reviewed plaintiff’s listing agreement in particular. 

The declaration states that Pinel’s Danville office had a policy requiring its agents to present executed listing agreements to Crosby-Torres for review, but the existence of a policy is not evidence of adherence to the policy, and the Pinel defendants offered no evidence (directly or circumstantially through custom or habit) showing that Smith had actually presented plaintiff’s listing agreement to Crosby-Torres. 

“Habit” means a person’s regular or consistent response to a repeated situation. “Custom” means the routine practice or behavior on the part of a group or organization that is equivalent to the habit of an individual.

Here, the evidence presented in the declaration is not of such character and weight as to compel a finding that Crosby-Torres initialed the listing agreement as a matter of law.  What is missing is either a statement from Crosby-Torres establishing that it was her habit to account for and review every listing contract executed by Smith, or a declaration from Smith stating that she either presented Crosby-Torres with plaintiff’s listing agreement, or that as a matter of habit she presented all listing agreements to Crosby-Torres during the relevant time period. 

Without that evidence, the Pinel defendants failed to establish that plaintiff’s listing agreement was among those habitually reviewed and initialed by Crosby-Torres. Accordingly, the trial court did not err by concluding that the Pinel defendants failed to prove that in this particular instance Crosby-Torres initialed the arbitration provision.

LESSONS:

1.         Be careful to read all contracts, and initial the provisions you want enforced in the event of a dispute.

2.         Scan the key documents or otherwise maintain digital copies, and make paper copies of all important contracts, especially those that control the rights and obligations of the parties, such as arbitration provisions.

3.         Agents should keep their own files of key documents for every transaction and not destroy those files so they are available if the broker's file is lost or destroyed.

4.         Declarations in support of motions have to be carefully crafted to satisfy the proof issues in dispute, or they may be found lacking by a reviewing court.