A Trustee of an Inter Vivos Trust Can be a Partner of a Partnership

The manner of holding title to real property is arguably the most important issue of ownership in California, as is an estate plan in the inevitable death of the owner.

Because an inter vivos trust (i.e., living trust) is essential for persons desiring to avoid probate of an estate and the related time and expense, the question arises: What ownership interests in real property can be owned by trustees of trusts?

It is commonly known that individuals and spouses can hold title to real property as trustees of a trust. Upon death, the terms of the trust become irrevocable and dictate the ownership and management of the real property as an asset of the trust. The real property should always be deeded to the trust owner as the trustee of the trust, in order to confirm the real property is an asset of the trust.

The trustee of a trust can be a shareholder of a corporation, thereby allowing the successor trustee of the trust to own the shares under the terms of the trust.  Most close corporations should elect "S" Corp status so all profits "flow through" to the individual trustee, and are only taxed once on the individual's tax returns. The corporation would be on title as the owner of the real property.

A member of a limited liability company can be a "person" who is an individual, partnership, or trust. (Cal. Corp. Code § 17701.02(v).)  The LLC can be the owner of the real property, and upon death of the member, the successor trustee of the trust would control ownership of the LLC and the real property.  Having an LLC or corporation as the owner of the real property also provides some privacy from creditors searching for assets in the name of the individual who is the trustee.

Even the ownership rights of a professional corporation can be transferred to a trust if the trustee and beneficiaries are all licensed, and to a non-licensed spouse if certain conditions are met, including that the shares must be sold and proceeds distributed within six months of the death of the licensed trustee. (Cal. Corp. Code § 13407)

In all of these situations, multiple owners (other than spouses) should have a written co-ownership agreement among the individuals, trustees, shareholders, members, or partners regarding how the ownership of the real property will be managed, and issues resolved upon any deaths or disagreements.

In the recent case of Han v. Hallberg, the California Court of Appeal resolved the question of whether a trustee of a trust can be partner of a general partnership.  In other words, who was a partner of the general partnership when he died, Dr. Richard Hallberg individually, or his trust or the trustee of his trust?

The trial court concluded the trust was not a separate legal entity, and that Dr. Hallberg individually was a partner at the time of his death. The court stated it was required to follow the decision in Presta v. Tepper that held when a trustee of an ordinary express trust enters into a partnership relationship in his capacity as trustee, it is the individual, and not ‘the trust’ that is the party to that agreement. 

The Court of Appeal disagreed and reversed the trial court, concluding Dr. Hallberg individually was not a partner when he died. Instead, his trust, or Dr. Hallberg's son as trustee of his trust, was the partner. 

In 1975, four dentists, including Dr. Hallburg, formed a partnership to acquire and maintain a dental office building, and the partnership agreement required the partners to be practicing dentists. In 1994, the partners amended their agreement to allow one of the partners, Dr. Hallberg, to assign his partnership interest to his living trust, and to substitute the trustee (then Dr. Hallberg) as a general partner in place of Dr. Hallberg individually. 

On September 12, 1994, the four partners amended the partnership agreement, whereby the parties agreed to the assignment of Dr. Hallberg’s partnership interest to Dr. Hallberg as trustee of The Richard W. Hallberg Trust (the Hallberg Trust).

In 2003, Dr. Hallberg appointed his son, Richard Hallberg Jr. (Hallberg Jr.) to serve as a co-trustee of the Hallberg Trust. In 2009, Hallberg Jr. became the sole trustee of the Hallberg Trust. 

On March 16, 2010, Dr. Hallberg died, and litigation ensued between the partners and Hallberg Jr. over whether, despite the substitution, Dr. Hallberg as an individual was still a partner at the time of his death, triggering certain buyout provisions that applied in the event of a partner’s death. 

If Dr. Hallberg was still a partner when he died, then the partnership agreement would give his estate 90 days to notify the surviving partners of the election of the estate to retain the deceased partner’s interest and to continue operation of the partnership on behalf of the estate or its distributees. No such notification was ever given. 

If Dr. Hallberg was still a partner when he died, and his estate failed to exercise its option to continue the partnership, then the partnership agreement would give the surviving partners the option, within 60 additional days, to continue the partnership business and purchase Dr. Hallberg’s interest.

On September 6, 2011, Drs. Loberg and Schrillo filed a complaint against Hallberg Jr. as successor trustee of the Hallberg Trust. The complaint recited that, after exhaustive discussions, the parties were unable to agree on terms, including the price, to buy-out the interest of the Hallberg Trust.

After a bench trial, the trial court held that the Hallberg Trust was not a separate legal entity that continued to own a partnership interest, and the partner was Dr. Hallberg. The trial court observed that defendant’s effort to distinguish the Presta case was "valiant but unavailing," and that the court was required to follow Presta.

Litigation then continued over the appointment of a referee and the appraisal of the Hallberg 26% Interest in the partnership. In a second phase of the trial, the court found the buyout amount owed to the Trust was $723,366.The buyout amount consisted of 26 percent of the referee’s property valuation of $3.7 million, reduced by 7 percent as required by the partnership agreement, and further reduced by $171,294 in debts (for the mortgage, loans from partners, and certain disputed expenses for improvements to the building). 

The Appellate Court found it incontrovertible that Dr. Hallberg individually was not a partner when he died because of the express terms of the 1994 amendment to the partnership agreement. The four partners expressly consented to the substitution of Dr. Hallberg as Trustee of the Hallberg Trust as general partner in place of Dr. Hallberg individually.

And Dr. Hallberg, as trustee of the Hallberg Trust, agreed to be bound by the terms of the partnership agreement, and as trustee, he assumed the rights, benefits, responsibilities, and liabilities of Dr. Hallberg individually as a general partner. 

The express substitution of Dr. Hallberg as trustee in place of Dr. Hallberg individually could not be ignored. The holder of the partnership interest, for the 15 years before and at the time of Dr. Hallberg’s death, was the trustee of the Hallberg Trust – not Dr. Hallberg individually. That did not change when Dr. Hallberg died. 

The whole point of the assignment of Dr. Hallberg’s partnership interest to the trust was to avoid having the partnership interest pass to Dr. Hallberg’s estate when he died.

A trust is not a person but rather "a fiduciary relationship with respect to property,” and an ordinary express trust is not an entity separate from its trustees. 

While a trust cannot act in its own name and must always act through its trustee, a trust is a “person” that may associate in a partnership under the Uniform Partnership Act of 1994 (UPA; Corp. Code,§ 16100 et seq.), based on the plain language of the UPA’s definition of “person.” 

Thus, for example, a trust cannot sue or be sued or otherwise act in its own name; instead the trustee acts on behalf of the trust.  Similarly, an estate is not considered a traditional legal entity. An "estate" is not a legal entity and is neither a natural nor artificial person.

But the fact that a trust is a “relationship” and not an entity separate from its trustees does not mean that a trust cannot act – as always, through its trustee – as a partner under general partnership law. California’s UPA expressly provides that a trust may associate in a partnership. Under the UPA, a partnership is “an association of two or more persons,” and the term “person” is defined to include a “trust.” (Corp. Code, § 16101, subds. (9) & (13).) 

The trustee has all the powers needed for effective transaction of business on behalf of the trust. In other words, it does not matter whether the Court identifies the partner as the trust or as the trustee that transacts business for the trust. The result is the same. 

To the Appellate Court, it was quite clear from the language of the 1994 amendment that Dr. Hallberg individually was not a partner when he died. 

It was also quite clear from the language of the UPA that a trust, as well as a business trust and an estate, is a person that may associate with other persons in a partnership. And it was quite clear from the UPA that the appointment of a successor trustee does not dissociate a partner that is a trust (or is acting as a partner by virtue of being a trustee of a trust) from the partnership. 

As a consequence of these points, the Appellate Court held that Dr. Hallberg individually was not a partner when he died, his death did not require his estate to make an election to retain his interest, as that interest had long ago been assigned to the trustee of the Hallberg Trust, and it did not pass to Dr. Hallberg’s estate. 

The Hallberg Trust, or its trustee acting as a partner by virtue of being the trustee, continued to be a partner in the SM-Ensley Dental Group.

LESSONS:

1.         How title is held to real property can have significant consequences in any litigation regarding ownership of the real property.  This is especially possible upon the death of one of the owners.

2.         For estate planning purposes, the trustee of a trust may be a partner in a general or limited partnership in California, as well as a shareholder of a corporation, or member of a limited liability company.

3.         Written agreements among business partners, individuals, shareholders, and members, are always beneficial to determine the relationship between the parties, and their rights and duties upon death or disagreement.

CC&Rs Are An Enforceable Contract

In the recent case of Sands v. Walnut Gardens Condominium Association, the California Appellate Court considered whether condominium owners can make their homeowners association pay for a water leak. Sands sued and went to trial against the Walnut Gardens Condominium Association, Inc. and its property manager for breach of contract and negligence. The trial court granted a nonsuit (motion under Code of Civil Procedure section 581c where, disregarding conflicting evidence and indulging in every legitimate inference from the plaintiff’s evidence, there is no substantial evidence to support a verdict for the plaintiff).

The Sandses appealed, arguing the trial court erred by granting the nonsuit, by excluding certain evidence, and by denying their motion for a new trial. The Appellate Court reversed and remand the contract nonsuit, and affirmed the tort nonsuit. 

The Sandses owned a unit in the Walnut Gardens development. A pipe on the roof broke and water entered the Sandses’ bedroom. The association’s agent hired people to repair the pipe and roof. 

The association had responsibility to maintain its common areas, including the piping and roof. The Sandses sued the association for breach of contract and negligence. The trial court selected a jury, heard the Sandses’ two witnesses in their case in chief, and granted a nonsuit. 

The Sandses claimed a breach of contract of the association’s covenants, conditions, and restrictions ("CC&Rs"), one part of which required the association to keep the project in “a first class condition.” 

The Sandses’ first witness, however, testified the association was performing no preventive maintenance at all, even though preventive maintenance was desirable. The roof and pipes over the Sandses’ unit had not been inspected or maintained in years. 

The association’s oral motion for nonsuit was concise to a fault. It first argued there was “a complete absence of evidence” to show a breach of contract. This first argument was incorrect. Reasonable jurors could have concluded a total failure to maintain common areas breached a promise to keep these areas in first class condition. 

The association next argued no evidence showed the association was “on notice that it needed to make repairs or do something to the roof or the pipes.” This argument was also incorrect. The property manager testified “[m]aintenance wasn’t happening. It was a very sad situation for the homeowners.” A jury could find buildings need maintenance to remain in first class condition. The association knew “[m]aintenance wasn’t happening.” As a prima faciematter (Latin for "at first look" or "on its face", meaning evidence is sufficient to prove case unless there is substantial contradictory evidence), no more was needed. 

In the course of granting the motion, the trial court added oral reasoning beyond the contents of the nonsuit motion. The court said the Sandses’ lack of expert testimony would force the jury to “speculate” about how a pipe broke and the roof leaked. By suggesting expert testimony was essential, this contract analysis erred. A complete lack of preventive maintenance is evidence the association did not keep the roof or pipes in first class condition. The jury would not need experts to grasp this. 

Neither the motion nor the court’s rationale challenged the idea that CC&Rs comprise a contract between the association and individual owners. 

Nor did the motion or rationale hint at the rule of deference governing owner suits against homeowner associations.  The nonsuit argument did not consider these points. Therefore, neither did the Appellate Court, and it reversed and remanded the nonsuit judgment about the contract. 

However, it affirmed the nonsuit tort judgment. 

The association argued there was no evidence “as far as negligence [was] concerned” showing the association “was on notice of any condition that required repair.” The trial court rightly decried this effort to “tortify” a creature of private ordering. If every negligent breach of a contract gives rise to tort damages, the limitation that "breach of contract is tortious only when some independent duty arising from tort law is violated" would be meaningless, as would the statutory distinction between tort and contract remedies.

Outside the CC&Rs, the association had no independent duty as to the pipes and roof arising from tort law. The Sandses’ trial counsel conceded the evidence for their negligence claim was “pretty much the same, under the same thing as a contract . . . .” The Sandses presented no authority for a cause of action in tort. They state: “As with the cause of action for contract, the duties and obligations for which the HOA, Walnut Gardens, was responsible, are found in the [CC&R's] ” 

Even had the association omitted this issue in its nonsuit motion, nothing the Sandses could have done at trial would have summoned into existence a tort claim barred by law. 

LESSONS:

1.         CC&Rs are an enforceable contract, and analysis of the incident and contract language is essential to determine if a breach of contract claim has merit.

2.         Do not assume that if there is a breach of contract claim, there is also a negligence claim.

3.         A tort claim, in addition to a breach of contract claim, requires an independent duty arising from tort law that is violated.

California Supreme Court Allows Deficiency Judgment on Junior Lien

In the recent decision in Black Sky Capital v. Cobb, the California Supreme Court held that Code of Civil Procedure, section 580d does not preclude a creditor holding two deeds of trust on the same property from recovering a deficiency judgment on the junior lien that was extinguished by a nonjudicial foreclosure sale on the senior lien. 

Under California law, a creditor can recover a debt secured by a deed of trust on real property through a nonjudicial foreclosure action to sell the property at a public auction. 

Code of Civil Procedure section 580d provides that a creditor cannot collect a deficiency judgment — that is, the difference between the amount of indebtedness and the fair market value of the property — if the property is sold for less than the amount of the outstanding debt. 

The question the Supreme Court considered was: Where a creditor holds two deeds of trust on the same property, can the creditor recover a deficiency judgment on a junior lien extinguished by a nonjudicial foreclosure on the senior lien? 

The trial court applied section 580d to bar such a recovery, and the Court of Appeal disagreed and held such deficiency judgment could be recovered. 

The Supreme Court affirmed the ruling of the Court of Appeal, and held that under the circumstances in Black Sky Capital, section 580d does not preclude a creditor holding two deeds of trust on the same property from recovering a deficiency judgment on the junior lien extinguished by a nonjudicial foreclosure sale on the senior lien. 

In 2005, defendants Michael and Kathleen Cobb borrowed approximately $10 million from Citizens Business Bank by executing a promissory note secured by a deed of trust, on a parcel of commercial property in Rancho Cucamonga. In 2007, the Cobbs borrowed an additional $1.5 million from Citizens Business Bank by executing a second promissory note secured by a separate deed of trust on the same property. 

The second deed of trust said the lien “may be secondary and inferior to the lien securing payment of an existing obligation . . . to Citizens Business Bank described as: First Deed of Trust dated August 18, 2005.” 

In 2014, Citizens Business Bank sold both loans to plaintiff Black Sky Capital, LLC (Black Sky), and after Cobbs defaulted on the first trust deed, Black Sky sent the Cobbs a notice of default and election to sell the property under the first deed of trust. 

Black Sky acquired the property at a public auction for $7.5 million, and then filed a lawsuit to recover the amount still owed on the second deed of trust extinguished by the foreclosure sale. 

Applying the decision in Simon v. Superior Court, which held that section 580d precludes a deficiency judgment for a junior lienholder who was also the foreclosing senior lienholder, the trial court concluded that section 580d bars the monetary judgment sought by Black Sky and granted the Cobbs’ motion for summary judgment. 

On appeal, the Court of Appeal declined to follow Simon in light of the Supreme Court's decision in Roseleaf Corp. v. Chierighino, which held that section 580d does not preclude a deficiency judgment for a non-selling junior lienholder.  

The Court of Appeal observed that although the senior and junior lienholder are the same, any debt owed on the junior note in this case had no relationship to the debt owed on the senior note, and by no contortion of the definition of a deficiency judgment can the unpaid balance on that note be deemed a deficiency with respect to the senior note, within the meaning of section 580d.   Rather, the unambiguous language in section 580d indicates that section 580d applies to a single deed of trust, and it does not apply to preclude Black Sky from suing for the balance due on the junior note.

California has an elaborate and interrelated set of foreclosure and anti-deficiency statutes relating to the enforcement of obligations secured by interests in real property.  Most of these statutes were enacted as the result of the Great Depression and the corresponding legislative abhorrence of the all too common foreclosures and forfeitures which occurred during that era for reasons beyond the control of the debtors.

Under Code of Civil Procedure section 726, there is only ‘one form of action’ for the recovery of any debt or the enforcement of any right secured by a mortgage or deed of trust; that action is foreclosure, which may be either judicial or nonjudicial.

In a judicial foreclosure, a creditor may seek a deficiency judgment to recover the difference between the amount of the indebtedness and the fair market value of the property if the property is sold for less than the amount of the outstanding debt. But the debtor has a statutory right of redemption, which provides an opportunity to regain ownership of the property by paying the foreclosure sale price, for a period of time after the foreclosure.  

In a nonjudicial foreclosure, also known as a trustee’s sale, the creditor exercises the power of sale given by the deed of trust, and the debtor has no statutory right to redemption.  But under section 580d, the creditor may not seek a deficiency judgment after a nonjudicial foreclosure.  

Section 580d, subdivision (a) provides that no deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property or an estate for years therein executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.

Black Sky contended that section 580d does not apply because it is seeking a deficiency on the note secured by the second deed of trust and no sale occurred under power of sale contained in that deed of trust. 

The plain language of section 580d, subdivision (a) bars a deficiency judgment on a note secured by a deed of trust on real property when the trustee has sold the property under power of sale contained in "the . . . deed of trust.”  The definite article in the phrase “the . . . deed of trust” makes clear that the statute applies where sale of the property has occurred under the deed of trust securing the note sued upon, and not under some other deed of trust. The phrase refers to the instrument securing the note sued upon. Nothing in the text of section 580d indicates that the statute applies where no sale has occurred under the trust deed securing a junior lien, even if the lien is held by a creditor who has foreclosed on a senior lien on the same property. 

Where there is evidence of gamesmanship by the holder of senior and junior liens on the same property, a substantial question would arise whether the two liens held by the same creditor should — in substance, if not in form — be treated as a single lien within the meaning of section 580d.  It is unclear that the Legislature, in enacting section 580d, intended to permit such gamesmanship to affect the amount of recovery under a junior lien. 

But the Cobbs did not allege, and there was no evidence to suggest, that the two notes in that case arose from intentional loan splitting; they were executed in separate transactions more than two years apart. The bare assertion by the Cobbs that Black Sky’s purchase of the property for $7.5 million at a public auction in October 2014 was substantially less than the appraised value of the Subject Property as of August 1, 2013 — with no evidence of irregularity at the public auction or price stability between the appraisal and auction — is not enough to suggest that $7.5 million was a lowball bid designed to effect an excessive recovery by obtaining a deficiency judgment on the junior lien. 

Where, as in Black Sky, there is no allegation of evasive loan splitting or recovery in excess of what any junior lienholder would be able to recover, the Supreme Court saw no reason to depart from a straightforward reading of section 580d. Because no sale occurred under the deed of trust securing the junior note in the case, section 580d did not bar a deficiency judgment on the junior note.

LESSONS:

1.         Remain aware of Code of Civil Procedure section 580d as its prohibition on deficiency judgments on certain loans is a powerful defense.

2.         Having two liens on the same property may allow a deficiency judgment on the junior lien after a foreclosure on the senior lien, unless there is gamesmanship by the lender of evasive loan splitting or recovery in excess of what any junior lienholder would be able to recover.

3.         If a deficiency judgment is desired, a judicial foreclosure resulting from a filed legal action is necessary, instead of a nonjudicial foreclosure.

Avoid Foreclosure in California - Right to Reinstate Loan

In the recent decision in Taniguchi v. Restoration Homes, LLC, a case of first impression, the California Court of Appeal held that if all or part of the principal secured by a mortgage or deed of trust becomes due as the result of the borrower’s default in paying interest or installments of principal, Civil Code § 2924callows the borrower to pay the amount in default, plus specified fees and expenses, and thereby cure the default, reinstate the mortgage loan, and avoid foreclosure. 

The borrowers in Taniguchimissed four monthly payments on a mortgage loan that had been modified after an earlier default. The modification deferred certain amounts due on the original loan, including principal, and provided that any default would allow the lender to void the modification and enforce the original loan terms. 

The question before the Appellate Court: Must the borrowers pay the amount of the earlier default on the original loan, which had been deferred under the modification to the end of the loan term, as well as paying the missed modified monthly payments that caused the default on the modified loan, in order to cure the default and reinstate the loan under section 2924c? 

The Court of Appeal answered the question "No", and reversed the decision by the trial judge.

In 2006, the Taniguchis obtained a home loan of $510,500, secured by a deed of trust. In 2009, they agreed to a loan modification that adjusted the principal amount, reduced the interest rate and monthly payments, and deferred until the maturity of the loan approximately $116,000 of indebtedness, including accrued and unpaid interest and principal, fees, and foreclosure expenses. 

The modification provided that failure to make modified payments as scheduled would be an event of default, and that in the event of a default the modification would be null and void at the lender’s option, and the lender would have the right to enforce the loan and associated agreements according to the original terms. 

The modification left unchanged certain provisions of the original loan documents, including acceleration clauses authorizing the lender to require a defaulting borrower to immediately pay the full amount of principal not yet paid and all interest owed on that amount, and to invoke the power of sale. 

The Taniguchis defaulted on the modified loan, which was eventually assigned to Restoration Homes, LLC. Restoration Homes caused a notice of default to be recorded in 2013. 

The Taniguchis were informed that to reinstate their loan and avoid foreclosure, they would be required to pay their four missed monthly payments and the associated late charges specified in the modified loan (totaling about $11,000) and $4,500 in foreclosure fees and costs, plus all the sums that had previously been deferred under the loan modification. By then, the deferred amount was over $120,000 in principal, interest and charges (deferred amounts). 

The Taniguchis took exception to the amount Restoration Homes required for reinstatement of the loan and filed suit in superior court. Shortly after that, Restoration Homes caused a notice of trustee’s sale to be recorded, which led the Taniguchis to file a second suit and seek a temporary restraining order to prevent the foreclosure sale. 

The temporary restraining order was granted; the two lawsuits were consolidated; and the consolidated matter was stayed for approximately a year as a result of Charles Taniguchi filing for bankruptcy. Eventually, the Taniguchis filed a third lawsuit, and all three superior court cases were consolidated. 

The Taniguchis alleged four causes of action against Restoration Homes: 

1.  violation of section 2924c by demanding excessive amounts to reinstate the loan, 

2.   unfair competition, 

3.  breach of contract, and 

4.  breach of the covenant of good faith and fair dealing. 

The unfair competition cause of action alleged that Restoration Homes’ violation of section 2924c constitutes a violation Business and Professions Code section 17200 et seq. (the UCL). 

Like the Taniguchis’ loan documents, the typical form promissory note and deed of trust provide that upon any default in the trustor’s obligations, the beneficiary may elect to accelerate the payment of all sums of principal and interest and commence foreclosure proceedings. The statutory right of reinstatement, set forth in section 2924c, effectively modifies the contract provision which permits acceleration upon default. 

Section 2924c, subdivision (a)(1) provides that when a mortgage loan is accelerated as a result of a borrower’s default, the borrower can reinstate the loan by paying all amounts due, “other than the portion of principal as would not then be due had no default occurred.”   That is, the borrower can cure the default and reinstate his or her loan by paying the amount of the default, including fees and costs resulting from the default, rather than the entire accelerated balance. The mortgage lender must inform the borrower of the correct amount due to reinstate the loan. 

Once a notice of default is recorded, the borrower can reinstate the loan until five business days before the date of sale set forth in the notice of sale. (§ 2924c, subd. (e).)  

The right to reinstate a loan under section 2924c cannot be waived.  Any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property, whereby the borrower agrees to waive the rights, or privilege conferred upon him by Sections 2924, 2924b, 2924c of the Civil Code shall be void and of no effect. (Section 2953)

The Taniguchis contended that under section 2924c, Restoration Homes could not lawfully condition reinstatement of their loan on the payment of amounts that were deferred in the loan modification. They argued that requiring them to pay the deferred amounts, instead of just the missed modified payments plus costs, essentially required them to waive their right of reinstatement with respect to the modified loan, in contravention of section 2953. 

Restoration Homes argued that the loan modification gave it the option to enforce the original loan terms if the Taniguchis defaulted on the modified loan, and since under the original loan—pre-modification—the deferred amounts were due and owing, they could properly be required as a condition of reinstatement under section 2924c. 

The Appellate Court concluded that the Taniguchis had the better argument. When principal comes due as the result of a default, section 2924c allows a borrower to cure that precipitating default and reinstate his or her loan by paying the amount of the default, plus fees and expenses. 

In the Taniguchi case, the default was the failure to make payments on the modified loan. Accordingly, section 2924c gave the Taniguchis the opportunity to cure their precipitating default (that is, the missed modified payments) by making up those missed payments and paying the associated late charges and fees, and in that way to avoid the consequences of the default on the defaulted loan. 

Those consequences, of course, would include the demand for immediate payment of the deferred amounts. Restoration Homes’ position had the effect of depriving the Taniguchis of any opportunity to cure the precipitating default and reinstate the modified loan. Restoration Homes points to nothing in the loan modification documents to suggest that the Taniguchis had forfeited such an opportunity, nor to anything in section 2924c to suggest that such a forfeiture would be enforceable even if it were reflected in the loan documents. 

In sum, on the undisputed facts, Restoration Homes failed to demonstrate that the Taniguchis could not prevail on their claim that Restoration Homes violated section 2924c, and the trial court erred in granting summary adjudication to Restoration Homes. 

LESSONS:

1.   Loan agreements, including modification agreements, should be carefully reviewed because the lender may assert a legal position that is not supported by the applicable statute.

2.  Timely assistance of legal counsel can often provide the legal expertise necessary to avoid significant adverse events and results that may have been avoided.

Easements and Enforcement in California

In California, land may be originally owned by one owner who decides to sell a portion of the land to another person, and records an easement for ingress and egress to the retained parcel that crosses the property that is sold. Later, the owner of the land on which the easement is located may decide to bar the other owner from using the easement, or place obstructions on the easement.  Depending on the circumstances, the owner of the easement may file a legal action including causes of action for nuisance and injunctive relief, and obtain a judgment for a permanent injunction against interference with the easement, compensatory damages, and even punitive damages if malice is proved by clear and convincing evidence.

An easement is an incorporeal interest in the land of another that gives its owner the right to use another's property. The land to which the easement attaches is called the dominant tenement;  the land to which the burden or servitude is imposed is called the servient tenement. (Civil Code § 803) 

Easements are classified as appurtenant or in gross (also known as "incidents").  (Civil Code § 801)  The basic effect of the distinction arises when the owner of an easement conveys his property.  The conveyance of the dominant tenement transfers all appurtenant easements to the grantee, even though the easements are not specifically mentioned in the deed. (Civil Code §§ 1084, 1104 (transfer "passes all easements attached thereto"))   

An easement in gross, unlike an appurtenant easement, is merely a personal right to use the land of another.  It does not pass with the dominant tenement when it is sold.

Generally, the determination of whether an easement is appurtenant or in gross is made by reference to the instrument creating it.  However, often the instrument itself may be deficient because it fails to specify whether the easement is in gross or appurtenant, and it may fail to identify a dominant tenement.  

Moreover, the character of the easement as appurtenant or in gross are not necessarily determined by the nature of the rights granted because easements for right of way (“ingress and egress”) may be either appurtenant or in gross.  

When a court is called upon to determine whether an easement is appurtenant or in gross, it applies the general rules relating to the interpretation of deeds.  In most cases, “Grants are to be interpreted in like manner with contracts in general․”  (Civil Code § 1066.)

In interpreting incomplete or ambiguous deeds, courts may consider extrinsic evidence of the circumstances under which the deed was made.  When the deed does not expressly declare an easement to be appurtenant, or when the language of the deed is ambiguous, and it does not clearly appear whether an easement was intended to be in gross or appurtenant to land, evidence is admissible to determine the nature of the easement and to establish a dominant tenement.   

In considering extrinsic evidence of the nature of an easement, courts may consider the type of rights conveyed and the relationship between the easement and other real property owned by the recipient of the easement.  Where a roadway easement provides access to a particular parcel of real property, a court may infer the easement is appurtenant to that parcel. 

Courts also employ two rules in reviewing easement claims. The first rule, of statutory origin, is that “a reservation in any grant, . . . is to be interpreted in favor of the grantor.” (Civil Code § 1069.)  The second rule, of judicial origin, is that an easement will not be interpreted as being in gross if it may fairly be interpreted as being appurtenant.   

When the language of a deed is ambiguous, and it does not clearly appear whether the easement was intended to be in gross or appurtenant to land, it is never construed as personal when it may fairly be construed as appurtenant.  If it does not clearly appear from the deed that the parties intended the easement to be of a particular character, the trial court could properly find the easement to be appurtenant. Such a finding is supported by section 1069's directive that reservations in grants are to be construed in favor of the grantor.   

If the easement is appurtenant to the dominant parcel, successors in interest are entitled to enforce the easement.  Conveyance of the dominant tenement transfers all appurtenant easements to the grantee, even though the easements are not specifically mentioned in the deeds.  Thus, omission of any mention of the easement in the deed to a successor in interest to the dominant parcel is inconsequential.

There is no authority holding that a recorded easement for ingress and egress must actually touch the parcel to which it is appurtenant.  An easement for ingress and egress reserved in a deed may be appurtenant to a parcel it does not touch.

Each successive owner of the dominant tenement is entitled to enforce the easement.   

When a person interferes with the use of an easement he deprives the easement's owner of a valuable property right and the owner is entitled to compensatory damages.  The interference is a private nuisance and the party whose rights have been impeded can recover damages as measured in the case of a private nuisance.  The interference can also be enjoined by the owner of the easement as a harassment.

The damages are measured in the same manner as those for a nuisance, and can include diminution of the property's value, and for annoyance and discomfort flowing from loss of use. The damages may be unliquidated and not readily subject to precise calculation, and the amount thereof is necessarily left to the subjective discretion of the trier of fact․  If the plaintiff is wrongfully deprived of use of the easement for a period of time, the award may include damages calculated by a specified dollar amount per day.  If malice is shown by clear and convincing evidence, exemplary (punitive) damages can be recovered. 

Code of Civil Procedure §731 provides that an action may be brought by any person whose property is injuriously affected, or whose personal enjoyment is lessened by a nuisance, as defined in Civil Code § 3479, and the nuisance may be enjoined or abated as well as damages recovered therefor. Section 3479 defines nuisance as anything that is injurious to health, including, but not limited to, an "obstruction to the free use of property, so as to interfere with the comfortable enjoyment of life or property".  An encroachment is the nuisance if it is an obstruction to the free use of the easement by the owner of the dominant tenement.

The action may also include a cause of action for harassment.  Harassment is defined as a knowing and willful course of conduct directed at a specific person that seriously alarms, annoys, or harasses the person and that serves no legitimate purpose.  The course of conduct must be that which would cause a reasonable person to suffer substantial emotional distress, and the defendant must actually cause substantial emotional distress to the plaintiff.  (Code of Civil Procedure § 527.6(b)(3).)  The prevailing party may be awarded attorney's fees, so this cause of action should be carefully considered because it may result in an award of attorney's fees against an unsuccessful claimant.

Code of Civil Procedure §526 provides that an injunction may be granted to remove the encroachment when it appears by the complaint that the plaintiff is entitled to the relief demanded, and the relief, or any part thereof, consists in restraining the commission or continuance of the act complained of, either for a limited period or perpetually, when pecuniary compensation would not afford adequate relief, or where it would be extremely difficult to ascertain the amount of compensation that would afford adequate relief.  Injunction is a remedy for the tort of nuisance.  An action to abate a nuisance is an action in equity that is tried by the judge, not a jury.

A preliminary injunction may be granted at any time before a judgment with a verified complaint that shows satisfactorily that sufficient grounds exist therefor. (Code of Civil Procedure§526)

It is proper to record a notice of pendency of action, commonly called a lis pendens, on a servient tenement in an action concerning an easement.  A lis pendens is a recorded document giving constructive notice that an action has been filed affecting title or right to possession of the real property described in the notice. Claimant means a party to an action who asserts a real property claim and records the notice of the pendency of the action. A real property claim means the cause or causes of action in a pleading which would, if meritorious, affect (a) title to, or the right to possession of, specific real property or (b) the use of an easement identified in the pleading, other than an easement obtained pursuant to statute by any regulated public utility.  A lis pendens may be recorded in an action to establish an easement, to enforce the claimant's rights under an easement, or that affects the use of an easement. 

LESSONS:

1.         Determine if the easement is appurtenant or in gross, and if appurtenant, it passes with the transfer of ownership of the dominant and servient tenements, even if it is not mentioned in the deeds.

2.         Easements appurtenant to the servient tenement should appear in the preliminary title report for the sale of the servient tenement, and the report should always be carefully read to obtain a complete understanding of the issues with the title, including easements.

3.         Interference with an easement is a nuisance, and it can be permanently enjoined, and result in a judgment for compensatory damages and punitive damages.

Revocable vs. Irrevocable Trusts

Whether a creditor can reach assets in a revocable trust is a common question, and the general answer is revocable trusts offer no protection from creditors. However, if the trust is irrevocable, such protection is provided.  The reason for this different treatment is illustrated in the recent case of Dudek v. Dudek.

InDudek, the Court of Appeal reversed the decision of the trial judge, and held that the signing of the irrevocable Trust that specified a life insurance policy was an asset of the Trust, caused the Policy to become an asset of the Trust and under the control of the specified trustee immediately upon the signing. In other words, the Policy was no longer under the control of the grantor/settlor as it had been gifted to a Trust no longer owned by the grantor/settlor.

Petitioner David Dudek appealed to recover money distributed to the respondents in accordance with the beneficiary designation of the Genworth Life Insurance Policy that covered the life of J.D. Dudek, David's brother. 

According to David, in late 2009, J.D. created and executed the J.D. Dudek Life Insurance Trust, an irrevocable life insurance trust that named David as the trustee, and beneficiary of the death benefit of $1,000,000. David claimed the Policy is listed as an asset of the Trust, to be held and administered in accordance with the Trust's terms. 

The Trust designates David and his sister as the residual beneficiaries of the Trust who would be entitled to the proceeds of the Policy. 

J.D. prepared and submitted to the life insurance company the forms required by that company to change the ownership and beneficiary designations on the Policy in order to establish David, as trustee, as the sole owner and named beneficiary of the Policy.

David was unaware that not long after J.D. submitted the forms, the insurance company rejected the ownership and beneficiary designation forms because J.D. had altered some of his entries without initialing the changes. David was also unaware that J.D. had failed to file corrected forms with the life insurance company after he was notified of the insurance company's rejection of his submitted forms. 

Further, David did not know that in 2016, J.D. submitted a new form to the life insurance company in which he purported to alter the beneficiary designation on the Policy to name the respondents as the beneficiaries of the Policy, or that the new form was accepted by the life insurance company. 

After J.D. died, David submitted the Trust to the life insurance company and sought to obtain the proceeds of the policy. The life insurance company refused, and instead distributed the proceeds of the policy to the beneficiaries that it had on file, pursuant to the beneficiary designations that J.D. submitted in 2016. 

David filed the Petition seeking an order directing the respondents to transfer the proceeds of the Policy to him as the trustee of the Trust. 

The trial court concluded that the Trust had not been funded, and therefore, had not become a valid trust, as a result of J.D.'s failure to file documents with the life insurance company to change the ownership and beneficiary designations to correspond with the terms of the Trust document.  In other words, the trial court concluded that no trust was ever created because J.D. never effectively placed the Policy into the Trust. 

The Appellate Court held the trial court erred because the Petition alleged facts that could support a finding that the execution of the Trust document created an irrevocable trust, and constituted an effective inter vivos donative transfer of the Policy to David as trustee of the Trust.  Given the irrevocable nature of the Trust and the language in the Trust document demonstrating J.D.'s intention to immediately transfer ownership of the Policy to David, upon execution of the Trust document, the Policy irrevocably became Trust property. As a result, J.D. had no ability to effectuate any further transfer of the Trust property to other parties. 

The Trust stated that JD, as the Grantor, retained no right, title, or interest in any trust property. The Trust and all interests in it were irrevocable, and the Grantor had no power to alter, amend, revoke, or terminate any trust provision or interest. Schedule A of the Trust listed two assets to be held in the Trust: (1) one hundred dollars, and (2) the $1,000,000 Policy. 

After the insurance company distributed the proceeds to the respondents, David sent letters to the respondents notifying them that they had received the proceeds from the Policy to which they were not legally entitled because those proceeds were the property of the Trust. David asked the respondents to deliver to him, as trustee of the Trust, the Policy's death benefits. David did not receive payment from any of the respondents. 

David filed his Petition seeking: 

(1) an order directing the transfer of Trust property from respondents to David, as trustee, pursuant to Probate Code section 850; 

(2) an order determining the proper beneficiaries of the Trust's assets pursuant to Probate Code section 17200; 

(3) a determination that the respondents had acted in bad faith in wrongfully taking, concealing, or disposing of property belonging to the Trust; and 

(4) a determination that J.D. had acted in bad faith in wrongfully taking, concealing, or disposing of the property of the Trust. 

Respondents argued that David's claim should have been brought against J.D., alone, and they had no liability to the Trust because they are not signatories to the Trust, were not bound by the Trust and owed no duty or obligations to the Trust. 

David contended that the trial court erred in concluding that J.D. failed to complete the steps necessary to create the Trust as required by Probate Code § 15200(b).  According to David, when J.D. executed the Trust, he forfeited his interest in and control of the Trust    and its assets, so that J.D. did not have the right to change the beneficiary designation in November 2016.  Because J.D. lost the right to change the beneficiary designation, David, as trustee of the Trust, may properly pursue a claim against respondents for recovery of the Trust's assets that respondents received, but to which they were not entitled. 

Under the Probate Code § 15200, a trust may be created in one of five ways: 

(a) A declaration by the owner of property that the owner holds the property as trustee.
(b) A transfer of property by the owner during the owner's lifetime to another person as trustee. 

(c) A transfer of property by the owner, by will or by other instrument taking effect upon the death of the owner, to another person as trustee. 

(d) An exercise of a power of appointment to another person as trustee. 

(e) An enforceable promise to create a trust." 

The Petition alleged that J.D. sought to create the Trust pursuant to subdivision (b) of section 15200— through the transfer of property by the owner during the owner's lifetime to another person as trustee.

The essential necessary elements of a valid trust are:

(1) a trust intent (Probate Code § 15201); 

(2) trust property (Probate Code § 15202); 

(3) trust purpose (Probate Code § 15203); and 

(4) a beneficiary (Probate Code § 15205

Except for trusts that are created by declaration or by contract, a transfer of the intended trust property is required for the creation of an express trust, whether during life or at death.  The effectiveness of a transfer for the purposes of establishing an inter vivos trust, however, is determined by the rules that govern the making of gifts. A gift is a transfer of personal property, made voluntarily, and without consideration.  A donative transfer is a gratuitous transaction. It can be inter vivos or testamentary

Three things are necessary for a valid gift:
(a) There must be an intent, on the part of a donor having capacity to contract, to make an unconditional gift. 

(b) There must be an actual or symbolical delivery, such as to relinquish all control by the donor. 

(c) The donee must signify acceptance, except where it may be presumed. 

With respect to personal property, a donative transfer that is intended to be completed during the donor's lifetime may be completed in one of two ways: either by the actual delivery of the personal property at issue to the intended donee or through the use of a document of donative transfer. 

The Petition alleged that J.D. intended to make a donative transfer of the Policy into the Trust, such that the Policy would be owned by David as Trustee, through the use of a document of donative transfer. 

An inter vivos donative document may transfer any type of personal property, whether tangible or intangible, including contract rights such as those embodied in a life-insurance policy.  An inter vivos donative document is a writing signed by the donor that (a) identifies the donor and donee, (b) describes the subject matter of the gift, and (c) specifies the nature of the interest given. 

The Trust document attached to the Petition appeared to meet all of the necessary 

elements of a donative transfer document. Specifically, the Trust document evidenced that J.D. had the intent to effectuate an immediate, complete and irrevocable transfer of ownership of the Policy to David, as trustee. 

Thus, although J.D.'s failure to complete the forms according to Genworth's requirements protected Genworthfrom claims made against it by individuals other than those who were identified on the forms that it had on file, the failure to properly complete the forms could not invalidate or revoke the irrevocable gift that J.D. had previously effectuated to David, as trustee of the Trust. Once J.D. made a donative transfer of the policy to David, J.D. no longer owned the Policy, even if Genworth was unaware of this. 

Thus, although J.D.'s later decision to name the respondents as beneficiaries through the change of beneficiary forms provided by Genworth may have protected Genworth from claims for damages made by individuals or entities not identified on the forms on the ground that it had wrongfully distributed the proceeds, David's naming the respondents as beneficiaries on the Genworth documents did nothing to alter David's legal right to possess the Policy, and, ultimately, its proceeds, as trustee of the Trust. 

Once an irrevocable trust is created and a valid transfer of property is made to the trust, the settlor no longer has any right to possess or otherwise dispose of the property placed in an irrevocable trust, such that that individual has no ability to reverse course or change his/her mind later. 

David may name the respondents in his Petition, and the respondents are proper parties to the action brought pursuant to the Probate Code. If David can establish the facts alleged in the Petition, then it would be clear that J.D. created an irrevocable trust, and properly funded it, when he delivered to David the transferring document (i.e., the Trust document itself, which included the transferring language). 

If the Trust was created, then David's entitlement to the proceeds of the Policy that was an asset of the Trust would be established, and he would be able to seek the court's assistance in having those proceeds conveyed to him in his capacity as trustee. 

LESSONS:

1.         The effect of an irrevocable trust is different from that of a revocable trust, and the grantor/settlor should carefully consider the nature of the trust being created.

2.         After signing the living trust, it should be funded with assets by transferring the assets into the trust (e.g., deeding real property to the trustee of the Trust).

3.         If the trust is irrevocable, and the language in the trust document demonstrates the intention to immediately transfer ownership of the assets to the trustee, upon execution of the trust document, the asset may irrevocably became trust property.

4.         An irrevocable trust prevents the grantor from making any changes to the trust after it is signed, and consideration should be given to making Trust revocable so it can be amended and revoked.