Nuisance-When Neighbors Clash

In California, the legal requirements for a nuisance was clarified in the recent Court of Appeal decision in Wilson v. Southern California Edison Company, that involved a homeowner–plaintiff Simona Wilson–who bought a house next door to an electrical substation operated by defendant Southern California Edison Company.

After remodeling her master bathroom four (4) years after she moved into the house, Wilson felt low levels of electricity in her remodeled shower when she adjusted the showerhead. This flow of electricity was due to neutral-to-earth voltage (NEV), also referred to as stray voltage, on her property. Because NEV is unavoidable in a grounded electrical system, such as the one operated by Edison, Edison was unable to completely eliminate it from Wilson’s property as Wilson insisted, although it recommended ways to reduce the voltage in her shower to below-perceptible levels.

Fearing for her safety and the safety of her three children, Wilson moved out of the house into a rental property. Because she could not afford to pay both the rent on that property and the mortgage on her house, the house went into foreclosure, ruining her credit.

Wilson sued Edison for negligence, intentional infliction of emotional distress (IIED), and nuisance, and sought punitive damages. In the first trial, the jury found in favor of Wilson on all three claims, awarding $550,000 on the negligence and IIED claims, $500,000 on the nuisance claim, and $3 million in punitive damages. Edison appealed.

In a published decision, the Court of Appeal found there was insufficient evidence to support the negligence and IIED claims or the punitive damages award, and found that the jury relied upon irrelevant evidence when determining the nuisance claim. The judgment was reversed, a new judgment was entered in favor of Edison on the negligence and IIED claims, and the case was sent back to the trial court for a retrial on the nuisance claim.

During the retrial, Wilson was allowed to present extensive evidence of incidents related to stray voltage at the house that occurred before she bought it and at other nearby properties, and Edison’s conduct with regard to those incidents. The jury again found in favor of Wilson, and awarded her $1.2 million in damages on her nuisance claim.

On appeal, Edison contended that:

            (1) It is entitled to judgment because, as a matter of law, the harm Wilson suffered cannot outweigh the public benefit of providing electricity;

            (2) It is entitled to a new trial because the trial court improperly allowed Wilson to present inflammatory irrelevant evidence related to stray voltage incidents involving prior owners or tenants of the property or other nearby properties;

            (3) It is entitled to a new trial on damages (if not a retrial on both liability and damages) because the jury improperly included in its award damages to which Wilson was not entitled, such as attorney fees; and

            (4) It is entitled to a new trial on damages (if not a retrial on both liability and damages) because the $1.2 million award was excessive.

Based upon the evidence presented at trial, the Appellate Court could not conclude as a matter of law that the harm Wilson suffered did not outweigh the public benefit of Edison’s conduct, and deferred to the jury on that issue.  But it was error to admit irrelevant evidence related to stray voltage incidents involving prior owners or tenants of the house or other properties, and the admission of that evidence was prejudicial to Edison, so the case was sent back to the Superior Court for a re-trial on the nuisance claim. 

The relevant jury instruction, CACI No. 2022, states: “In determining whether the seriousness of the harm to Simona Wilson outweighs the public benefit of Southern California Edison’s conduct, you should consider a number of factors. To determine the seriousness of the harm Simona Wilson suffered, you should consider the following:

            (a) The extent of the harm, meaning how much the condition Southern California Edison caused interfered with Simona Wilson’s use or enjoyment of her property and how long that interference lasted; and

            (b) The character of the harm, that is, whether the harm involved a loss from the destruction or impairment of physical things that Simona Wilson was using, or her personal discomfort or annoyance.”

The critical questions were:

             (1) Did Edison create a condition that was an obstruction to the free use of property so as to interfere with the comfortable enjoyment of life or property;

            (2) Was this condition of such duration, nature, or amount as to have unreasonably interfered with Wilson’s use or enjoyment of her land;

            (3) Was Edison’s conduct a substantial factor in causing Wilson harm; and

            (4) Did the seriousness of the harm outweigh the public benefit of Edison’s conduct–the jury was split nine to three.

A private nuisance claim is a claim for “a nontrespassory interference with the private use and enjoyment of land.” and it requires proof of three elements:

            (1) The plaintiff must prove an “interference with the plaintiff’s use and enjoyment of that property”.

            (2) The plaintiff must prove “that the invasion of the plaintiff’s interest in the use and enjoyment of the land was substantial, i.e., that it caused the plaintiff to suffer substantial actual damage." This is a question of fact for the jury that turns on the circumstances of each case.

            (3) The interference with the protected interest must not only be substantial, but it must also be "unreasonable", i.e., it must be of such a nature, duration or amount as to constitute unreasonable interference with the use and enjoyment of the land. The primary test for determining whether the invasion is unreasonable is whether the gravity of the harm outweighs the social utility of the defendant’s conduct, taking a number of factors into account.

In its review of the factors that determine the seriousness of the harm the plaintiff suffered, the jury should consider the following:

            (1) The extent of the harm, meaning how much the condition defendant caused interfered with plaintiff’s use or enjoyment of plaintiff's property, and how long that interference lasted.

            (2) The character of the harm, that is, whether the harm involved a loss from the destruction or impairment of physical things that plaintiff was using, or personal discomfort or annoyance.

            (3) The value that society places on the type of use or enjoyment invaded. The greater the social value of the particular type of use or enjoyment of land that is invaded, the greater is the seriousness of the harm from the invasion.

            (4) The suitability of the type of use or enjoyment invaded to the nature of the locality. The nature of a locality is based on the primary kind of activity at that location, such as residential, industrial, or other activity.

            (5) The extent of the burden (such as expense and inconvenience) placed on plaintiff to avoid the harm.

To determine the public benefit of defendant’s conduct, the jury should consider:

            (1) The value that society places on the primary purpose of the conduct that caused the interference. The primary purpose of the conduct means [name of defendant]’s main objective for engaging in the conduct. How much social value a particular purpose has depends on how much its achievement generally advances or protects the public good.        

            (2) The suitability of the conduct that caused the interference to the nature of the locality. The suitability of the conduct depends upon its compatibility to the primary activities carried on in the locality.

            (3) The practicability or impracticality of preventing or avoiding the invasion.

A finding of an actionable nuisance does not require a showing that the defendant acted unreasonably. An intentional interference with the plaintiff’s use of his property can be unreasonable even when the defendant’s conduct is reasonable. This is because a reasonable person could conclude that the plaintiff’s loss resulting from the intentional interference ought to be allocated to the defendant.

This is the type of decision that should be saved for future reference, as it provides the legal outline for a nuisance cause of action, and what needs to be proved to prevail.  It also shows how complicated an action for nuisance can be because of the competing interests in our society, and when neighbors clash, it is prudent to obtain competent legal advice.

Lease Option to Purchase Real Property in California

In a recent California appellate decision, the interaction between a lease and an option to purchase real property was clarified.  The tenant contented that it was entitled to an offset against the purchase price for the rents that it paid to landlord after it exercised its purchase option under the lease and during the pendency of the litigation over the purchase price. According to tenant, upon its valid exercise of the purchase option, the lease was transformed into a contract of sale, thereby extinguishing any landlord-tenant relationship, as well as any right the landlord had to receive further rent because no provision for payment of rent pending the close of the purchase was specified.

Landlord contended that tenant's notice to exercise the purchase option was not an unconditional acceptance of the terms of the purchase option, and therefore, did not constitute a valid exercise of the option. Landlord also argued that by continuing to pay rent, tenant was acting according to the understanding of the parties that rent would remain owing as long as tenant continued to possess the property during the pendency of any lawsuit between the parties.

An option may be viewed as a continuing, irrevocable offer to sell property to an optionee within the time constraints of the option contract, and at the price set forth therein. It is a unilateral contract under which the optionee, for consideration it has given, receives from the optionor the right and the power to create a contract of purchase during the life of the option.  An irrevocable option is a contract, made for consideration, to keep an offer open for a prescribed period.

An option is transformed into a contract of purchase and sale when there is an unconditional, unqualified acceptance by the optionee of the offer in harmony with the terms of the option and within the time span of the option contract. The "exercise" of an option is merely the election by the optionee to purchase the property.  Importantly, the exercise of an option results in a contract of purchase and sale.

Where an option to purchase exists within a lease agreement, the exercise of the option to purchase causes the lease and its incorporated option agreement to cease to exist, and, instead, a binding contract of purchase and sale comes into existence between the parties. Further, a consequence of the termination of the lease agreement is that the former lessee's obligation to pay rent under the lease also terminates, unless there is an express stipulation that requires continued rent payments after the exercise of the purchase option.  Where the relation of landlord and tenant exists under the terms of a written lease, containing an option to purchase which the lessee exercises, he is no longer in possession as a tenant, but his possession is that of a vendee (i.e., buyer).

The landlord ordinarily is not entitled to recover rent from the date when the tenant sought to exercise an option to purchase if landlord prevented effective exercise of the option.
In the recent decision, landlord did not argue that tenant never validly exercised the purchase option. Rather, landlord argued that tenant was required to continue paying rents until such time as tenant could "perform" (i.e., purchase the property), and that performance could not occur until the fair market value of the property was determined by the court due to the parties lack of agreement on the purchase price. However, tenant argued that it had a logical reason for continuing to pay rents, a reason that had nothing to do with believing that such rents continued to be due. Tenant stated that it continued to pay rents as a protective measure in order to ensure that it would not be found to be in default of the lease.

Landlord also contended that tenant's notice conditioned its "exercise" and willingness to enter into an agreement with landlord on the parties reaching an agreement on the "fair market value" of the Property, and the exercise of the option was not complete until the fair market value was determined.

Ultimately, the trial court determined that tenant validly exercised the purchase option, and the exercise of the purchase option caused the lease to cease to exist, and in its place was formed a contract for purchase and sale, which meant that tenant possessed the property as a vendee, rather than a lessee.

Unless there was an express agreement in the lease that required the lessee to continue to make rent payments after the exercise of the purchase option, no further rents were due.
Also, the fact that the purchase option does not specify a price, but instead refers to the "fair market value" of the property, does not render the option unenforceable. Specifying "fair market value" as the price to be paid when exercising the option to purchase does not require future agreement of the buyer and seller, and it is a proper substitute for a specific purchase price and will support an action for specific performance.

It is fundamental that both the seller and the buyer are entitled to receive full performance of the contract where specific performance has been granted, and because execution of the judgment on a specific performance cause of action will occur at a date substantially after the date of performance provided by the contract, or the reasonable date of performance if no set date is provided, financial adjustments must be made to relate their performance back to the contract date.

First, when a buyer is deprived of possession of the property pending resolution of the dispute and the seller receives rents and profits, the buyer is entitled to a credit against the purchase price for the rents and profits from the time the property should have been conveyed. 

Second, a seller also must be treated as if it had performed in a timely fashion and it is entitled to receive the value of the lost use of the purchase money during the period performance was delayed.

Third, any award to the seller representing the value of the lost use of the purchase money cannot exceed the rents and profits awarded to the buyer, for otherwise the breaching seller would profit from its wrong.

This decision confirms that a purchase option in a lease is a viable method for a tenant to purchase real property, but the terms of the lease and purchase option provision are critical to determine the method by which the tenant can "exercise" the option, and such a lease should include terms for the payment of rent until the purchase is completed, and a mechanism to determine the price for the purchase and to resolve any disputes over the price.

California Real Estate Salesperson: Employee or Independent Contractor?

Whether a real estate salesperson ("agent") will be considered an employee or independent contractor  ("IC") is often a question of fact, dependent upon the particular circumstances of each case.

In California,  an agent is normally classified as a non-employee either under the common law "control" rule or as an outside salesperson,  and the minimum wage laws are not applicable.  The less control exerted by the broker, the more likely the agent will be considered an IC, and the relationship should be defined in a written IC Agreement.

Under California's Business & Professions Code and the Unemployment Insurance Code ("UIC"), most agents who enter into an IC Agreement with a broker will be considered an IC.  B&P Code § 10032 provides that the determination of whether an agent is an employee or an IC is determined by UIC  §§ 650, and 13000 to 13054. 

UIC § 650 applies a three part test:

1.         Agent must be a licensed real estate salesperson;

2.         Substantially all of the agent's remuneration must be directly related to sales or other output, including the performance of services, and not to the number of hours worked; and

3.         The agent's services must be performed pursuant to a written agreement between the broker and agent that states that the agent is not an employee for federal tax purposes.

California's Code of Regulations, Title 22 § 4304-2, provides 22 basic guidelines in determining the status of an agent, including:

1.         IC Agreement:  Written agreement between broker and agent specifying IC status should include many of the issues listed below.

2.         Broker Policies:  Broker should have written policies regarding IC activities, with proof of their delivery to existing and new agents, and the credibility of the policies is enhanced if they are up-dated periodically. 

3.         No assignments other than licensed activities: All assignments should be related to licensed activities.

4.         No required educational requirements, training and skills:  A licensed IC should not require mandatory training, and the broker should not require such training or the agent may be considered an employee. Voluntary attendance at in-house training is not evidence of employee status.

5.         Reasonable charge for desk and office space: IC Agreement should specify payments to broker for agent's use of desk and office equipment, including any secretarial or receptionist services, at reasonable charges based upon the actual value of the facilities and services. 

6.         Business cards and advertising require IC's name:  In addition to the broker's name, the IC's name should be on the business cards used by the IC, and if the cards are provided by broker, IC should be reasonably charged.  Agent may advertise with or without broker, and by cost sharing with broker.

7.         No mandatory assignments in office: The agent's presence and activities in the office must be voluntary, or the agent may be considered an employee.

8.         No imposed requirements re open houses:  Imposed requirement to attend open houses based upon specified hours may cause agent to be classified as an employee.  Any such requirements should be disavowed in the IC Agreement.

9.         No required attendance at sales meetings:  Any requirement that an agent attend sales or agent meetings may cause agent to be classified as an employee.

10.       No assigned territory:  Any division of territory or "farm" among agents is broker control of the manner and means by which the agent practices, and will be considered evidence of employment.

11.       No minimum hours or work days:  An IC should have sole control and discretion over the hours and work schedule.

12.       Method of payment:  Payment should be limited to agreed share of commissions.  Payment by salary, minimum compensation, draws or advances against commissions, unless secured and applied against expected commissions from open escrows, will be considered employee compensation.

13.       Participation in benefit plans:  An agent's participation in programs for health, medical, life, or retirement insurance are not evidence of employment, so long as the IC is required to and pays all premiums necessary for participation in the programs.

14.       Workers compensation insurance: The IC Agreement should specify that workers compensation insurance is for broker's benefit, or mutual benefit.

15.       Insurance and fidelity bonds:  Any broker requirement that agent provide a fidelity bond or malpractice insurance should be at agent's expense.

16.       MLS Services:  The IC agreement should require agent to reimburse broker in whole or in part for MLS services.

17.       Business licenses:  Agent should pay for any business license that the agent may be required to have by the governmental authority.

18.       Separate operations:   The agent and broker should keep their respective operations and services separate.

19.       Termination of IC agreement:  Termination should be based on 30 days notice by either party,  unless due to breach of ethics, statutory or regulatory requirements,  or for the protection of the public.

20.       Limited purpose agreements:   The IC  agreement may provide for agent's services for limited transactions, specified developments or building tracts,  or for other limited purposes.

21.       IC should not be manager:  Managers such as sales,  office, and general managers are considered employees of the broker.

22.       IC receives FORM 1099 (federal) and Form 599 (California):  Agent should receive tax forms 1099 (federal) and 599 (California) specifying compensation paid.

The federal Fair Labor Standards Act excludes independent contractors from coverage.  For federal tax purposes, if the broker classifies the agent as an IC, the broker files a 1099-MISC for payments to the agent in excess of $600.  If the agent is classified as an employee, the broker files a FORM W-2 and withholds the appropriate taxes

If the broker is unclear about an individual's classification, the broker can file a

FORM SS-8 to obtain a determination of worker status for purposes of federal employment taxes and income tax withholding.  The IRS will review the facts and circumstances and officially determine the agent's status, but this review may take over six months.

The agent's relationship with the broker should be subject to, and the terms specified in, a written independent contractor agreement that should include most of the issues listed above, and should be tailored for the particular policies and circumstances of the broker's office.

Scope of Unlawful Detainer Judgment

In many landlord-tenant disputes in California, there are legal actions in addition to the unlawful detainer case that has the primary goal of restoring possession of the premises to the landlord, as there are frequent disputes regarding unpaid rent, and even fraudulent inducement to enter into the lease.

In the recent court of appeal decision of Hong Sang Market v. Peng, a commercial tenancy dispute, the defendant tenant challenged a judgment awarding damages for back-due rent to her former landlord arguing that the judgment in the prior unlawful detainer action, in which landlord was awarded one month’s back-due rent along with possession of the premises, has a res judicata effect and bars any further claims for rent owed to landlord. 

The appellate court concluded that the unlawful detainer judgment did not preclude landlord from pursuing a separate civil action for back-due rent that accrued in months other than the one month for which damages were awarded in the unlawful detainer action. 

Although landlord's breach of contract action was filed before the unlawful detainer action, the judgment in the unlawful detainer action was entered before the judgment in the breach of contract action. Before trial of the breach of contract action, tenant filed a motion for judgment seeking to dismiss the breach of contract cause of action on the ground that it was barred by the doctrines of res judicata and collateral estoppel. Tenant argued that the September 2011 unlawful detainer judgment awarding $4,725 as back-due rent for the month of May 2011 had a res judicata effect that precluded a separate lawsuit seeking recovery of rent owed for the period from September 2009 through February 2011. Tenant argued that landlord's claim for back-due rent gave rise to a single cause of action for rent that could not be split between two different lawsuits. 

The trial court ruled in favor of landlord and awarded damages of $85,050, plus prejudgment interest of $18,075.39. The court rejected tenant's res judicata claim, reasoning that claim preclusion does not apply to matters that could not have been tried in the first action. Because landlord was limited by statute in the amount of rent it could recover in an unlawful detainer action, it had no choice but to file the two separate actions to achieve both the eviction of tenant and the payment in full of back-due rent.  

Although tenant acknowledged that Civil Code section 1952(b) expressly permits a landlord to bring a separate action for back-due rent after bringing an unlawful detainer action to recover possession of the premises, tenant argued that a landlord may not split a claim for rent between an unlawful detainer action and a subsequent civil action.  

As generally understood, the doctrine of res judicata gives certain conclusive effect to a former judgment in subsequent litigation involving the same controversy. The res judicata doctrine promotes judicial economy by precluding piecemeal litigation that may occur if a single cause of action is split into more than one lawsuit or if a particular issue has already been decided in an earlier lawsuit. In its primary aspect, commonly known as claim preclusion, it operates as a bar to the maintenance of a second suit between the same parties on the same cause of action. In its secondary aspect, commonly known as collateral estoppel, the prior judgment operates in a second suit, based on a different cause of action, as an estoppel or conclusive adjudication as to such issues in the second action that were actually litigated and determined in the first action.

Although the res judicata doctrine encompasses both claim and issue preclusion, the term res judicata has sometimes been used by California courts to denote claim preclusion, whereas the term collateral estoppel has denoted issue preclusion. 

It was undisputed that two of the three requisites for the application of claim preclusion were present in the Peng case. The unlawful detainer proceeding resulted in a final judgment on the merits, and the parties in the breach of contract action were identical to the parties in the unlawful detainer action. The parties’ dispute turned on whether the claim raised in the breach of contract action for back-due rent is identical to the claim raised in the unlawful detainer action, in which landlord sought and was awarded one month’s rent. Tenant asserted that the claims were identical and landlord was splitting a single cause of action for accrued but unpaid rent into two different lawsuits. 

The appellate court rejected the argument because the back-due rent cause of action was “split” between two very different legal proceedings-a summary unlawful detainer action and an ordinary civil lawsuit. An unlawful detainer action is a summary proceeding designed to adjudicate the right of immediate possession; the only claims that are cognizable in such a proceeding are those bearing directly on the immediate right of possession.  Cross-complaints and affirmative defenses are permissible only to the extent that they would, if meritorious, preclude a court from removing a tenant from the premises.  It is for this reason that a judgment in an unlawful detainer usually has very limited res judicata effect and will not prevent one who is dispossessed from bringing a subsequent action to resolve questions of title, or to adjudicate other legal and equitable claims between the parties. 

An unlawful detainer judgment has a limited res judicata effect because the claim preclusion aspect of the res judicata doctrine applies only to matters that were raised or could have been raised in the earlier action on matters that were litigated or litigable. A necessary corollary is that a prior judgment generally does not bar a subsequent claim if the matter could not have been raised or litigated in the earlier action. Thus, in a situation in which a court in the first action would clearly not have had jurisdiction to entertain the omitted theory or ground, then a second action in a competent court presenting the omitted theory or ground is not precluded.  Because the scope of an unlawful detainer proceeding is limited, the preclusive effect of an unlawful detainer judgment is likewise limited. 

A cause of action for back-due rent falls into the category of claims that a court has limited power to decide in an unlawful detainer proceeding. If landlord proceeds by way of a three-day notice to “pay or quit” when the tenant is in default in rent payments, landlord is limited to recovering rent that accrued within one year of the notice. The amount of back-due rent is generally limited to that demanded in the three-day notice. A landlord proceeding by way of a three-day notice for nonpayment of rent may also recover damages for rental losses occurring after the period covered by the three-day notice expires. 

If landlord proceeds by way of a 30-day notice of termination of a rental agreement, landlord may not recover back-due rent, but may seek damages for the reasonable rental value of the premises from the termination of the tenancy until entry of the unlawful detainer judgment. 

By contrast, the right to recover back-due rent is not so limited in an ordinary civil action premised upon section 1951.2 of the Civil Code. A landlord can generally recover up to four years of back-due rent if the claim is based upon a written lease agreement under Code Civ. Proc., § 337.2, a four-year statute of limitations for breach of written lease. Because a court has no jurisdiction to award more than one year’s back-due rent in an unlawful detainer action, res judicata principles suggest that an unlawful detainer judgment should not preclude a separate, civil action for back-due rent that is not recoverable in an unlawful detainer proceeding. 

The California Legislature has gone further in limiting the res judicata effect of an unlawful detainer judgment in section 1952(b), that provides that a landlord who brings an unlawful detainer action is not precluded from bringing a separate action to recover rent under Civil Code section 1951.2, provided that landlord may not recover damages in the subsequent civil action for any detriment for which a claim for damages was made and determined on the merits in the previous action.

An exception applies when, during the course of an unlawful detainer proceeding, possession no longer becomes an issue and the action is converted to an ordinary civil action in which the landlord may seek relief not otherwise recoverable in an unlawful detainer proceeding. 

Accordingly, the appellate court held that an unlawful detainer judgment awarding back-due rent did not preclude landlord from seeking additional back-due rent in an ordinary civil action. However, landlord was precluded from recovering back-due rent associated with a particular time period in the subsequent civil action if such a claim was actually determined on the merits in the unlawful detainer action. Thus, landlord was precluded from recovering twice for the same items of damages, and may not renew a claim for back-due rent associated with a particular time period if that periodic claim was denied on the merits in the unlawful detainer action. 

Because the damages for back-due rent in the unlawful detainer judgment in Peng were limited to the month of May 2011, landlord was not precluded from seeking additional back-due rent covering the period from September 2009 through February 2011 in its breach of contract action, plus pre-judgment interest and attorney's fees and costs. 

Peng illustrates the technical nature of an unlawful detainer action regarding the issues and remedies, and a prudent landlord or tenant are best served by obtaining legal counsel competent in the area of real estate law.

Reconveyance of Paid-Off Liens is Essential

One of the most important steps in a sale or refinance in California that is frequently overlooked, is the recording of a reconveyance of each of the liens after they have been paid.  Many borrowers do not realize that recording a reconveyance of a satisfied lien is essential to clear the title of that lien, and unless a reconveyance is recorded, the lien will show up as unpaid on a future preliminary title report.

I know of a borrower who obtained a hard money loan in 1999, and then refinanced and paid it off with a conventional 30-year bank loan.  Two subsequent refinances were obtained as the interest rates decreased during the 2000-2008 time period without any issues. It was not until a third refinance was made in 2012 that a preliminary title report showed the 1999 lien had never been reconveyed, and it was clouding the title and preventing the refinance over 10 years later.

Fortunately, the escrow officer that handled the 1999 loan was located, and she obtained and recorded a reconveyance.  However, California statutes provide an alternative method to record a reconveyance of a deed of trust, if a title company is willing.

California Civil Code section 2941, subdivision (b)(3) sets forth the procedure by which a title insurance company may prepare and record a release of a mortgage obligation. 

It states: “If a full reconveyance has not been executed and recorded pursuant to either paragraph (1) or (2) [which require the beneficiary and trustee to take steps to reconvey the deed of trust after a mortgage has been satisfied] within 75 calendar days of satisfaction of the obligation, then a title insurance company may prepare and record a release of the obligation. However, at least 10 days prior to the issuance and recording of a full release pursuant to this paragraph, the title insurance company shall mail by first-class mail with postage prepaid, the intention to release the obligation to the trustee, trustor, and beneficiary of record, or their successor in interest of record, at the last known address.

"The release shall set forth:

(i) The name of the beneficiary.

(ii) The name of the trustor.

(iii) The recording reference to the deed of trust.

(iv) A recital that the obligation secured by the deed of trust has been paid in full.

(v) The date and amount of payment.

"The release issued pursuant to this subdivision shall be entitled to recordation and, when recorded, shall be deemed to be the equivalent of a reconveyance of a deed of trust.”

In a recent case, a plaintiff sought damages for a title company's alleged negligence in executing and recording a release of an assigned lien without complying with the provisions of section 2941(b)(3). Plaintiff argued that as the successor to U.S. Bank, the original beneficiary of the deed of trust, Plaintiff was entitled to damages, including attorney’s fees, under section 2941(b)(6), which states, “In addition to any other remedy provide by law, a title insurance company preparing or recording the release of the obligation shall be liable to any party for damages, including attorney’s fees, which any person may sustain by reason of the issuance and recording of the release . . . .”

The title company demurred to the cause of action, arguing that the plaintiff failed to allege that the tort claims included in the cause of action were assigned to plaintiff with the loan and deed of trust. The trial court agreed, and issued an order sustaining the demurrer without leave to amend and dismissing the title company from the case.

Plaintiff argued that the trial court erred, because plaintiff had alleged that the title company had prepared and recorded the release, which represented that the obligation secured by the deed of trust was paid in full, and that the release was to be deemed the equivalent of a reconveyance under section 2941(b)(3)(B).

Plaintiff further alleged that the title company prepared and recorded the release “carelessly, recklessly, negligently, and without authorization from any person having the authority to authorize such act, and without first complying with the provisions of Civil Code § 2941(b)(3).”  Plaintiff contended that the release was void and of no effect, but asked that if the release “had or has the effect of releasing or reconveying” the deed of trust, plaintiff should be awarded damages as authorized by section 2941(b)(6).

The Court of Appeal began with the language of section 2941, which, as a remedial statute, is to be liberally construed to protect all persons coming within its purview.  In view of the broad language of the statute, the appellate court had no difficulty concluding that plaintiff had alleged facts sufficient to state a claim for damages because plaintiff alleged that as a result of the assignment from U.S. Bank, it was the beneficiary of the deed of trust that was released without compliancy with section 2941(b)(3).

Whether U.S. Bank, plaintiff, or anyone else could prove damages against the title company was an open question, which had no bearing on the fact that section 2941(b)(6) imposes broad liability on any title insurance company that issues and records a release under subdivision (b)(3). 

This decision illustrates the importance of obtaining a reconveyance within 75 days after the lien is paid, and not having to rely upon section 2941.  A prudent borrower will insist on receiving a copy of the reconveyance from the escrow company or title company involved in the sale or refinance because only the recording of the reconveyance will clear the title to the real property.