Severing Joint Tenancy During Dissolution of Marriage Action

In the recent decision in Raney v. Cerkueira, the California Court of Appeal recognized that Civil Code § 683.2(c) provides that a written instrument severing a joint tenancy is not effective to eliminate the other tenant’s right of survivorship unless it is recorded before the death of the severing tenant (with one exception not relevant in that case). 

Family Code § 2040(b)(3) provides that the standard automatic temporary restraining order (ATRO) binding parties in a pending dissolution proceeding does not restrain one party’s elimination of a right of survivorship to property, provided that notice of the change is filed and served on the other party before the change takes effect. 

In Raney, the Appellate Court concluded that a party who is bound by the ATRO must satisfy both the generally-applicable Civil Code requirements and § 2040(b)(3)’s notice requirement before the severance of a joint tenancy with the other party is effective to eliminate the right of survivorship. 

However, these requirements may be satisfied in any order. Therefore, if a party records a joint tenancy severance in compliance with Civil Code § 683.2(c), before providing the notice required by § 2040(b)(3), the elimination of the right of survivorship takes effect when notice of the severance is filed and served on the other party. 

During their marriage, Veronica Cerkueira and appellant Lawrence Cerkueira held certain real property (the Property) as joint tenants. Veronica moved out of the Property in 2003 and Lawrence remained in possession. 

In December 2014, Veronica filed a petition for dissolution of their marriage (the Dissolution Action) and Lawrence was served with the petition and summons. The summons included the standard ATRO. 

The ATRO prohibited the parties from transferring any property, real or personal, whether community, quasi-community, or separate, without the written consent of the other party or an order of the court, with certain narrow exceptions. The ATRO further provided the parties were prohibited from creating a nonprobate transfer or modifying a nonprobate transfer in a manner that affected the disposition of property subject to the transfer, without the written consent of the other party or an order of the court. 

Before revocation of a nonprobate transfer can take effect or a right of survivorship to property can be eliminated, notice of the change must be filed and served on the other party. The summons provided that the ATRO remained in effect until judgment, dismissal, or further order of the court. 

In January 2015, Veronica created the Veronica A. Cerkueira Family Trust (the Trust), and named her son, David Raney, as the trustee. Veronica was the sole beneficiary of the Trust until her death, when Raney would become the sole beneficiary. 

Also in January 2015, Veronica executed a document entitled “Transfer Grant Deed” (the Deed). The Deed stated Veronica severed the existing joint tenancy in the Property pursuant to Civil Code § 683.2, reserving to Veronica a 50% tenant in common interest; the remaining 50% tenant in common interest to remain belonging to Lawrence. The Deed also transferred Veronica’s 50 percent tenant in common interest to Raney, as trustee of the Trust. The Deed was recorded on February 5, 2015. There was no evidence in the record that Lawrence had notice of the Deed before its recordation. 

In April 2015, Raney, acting in his capacity as trustee of the Trust, filed the underlying complaint for partition (the Partition Complaint) requesting the Property be partitioned by sale. The Deed was attached as an exhibit to the Partition Complaint. 

After Lawrence was served with the Partition Complaint, he filed an answer asserting, as an affirmative defense, that Veronica “is subject to and in violation of the Standard Family Law Restraining Order.

In November 2015, Veronica died. In March 2016, the Dissolution Action was dismissed for lack of jurisdiction because the court had not terminated marital status at the time of Veronica’s death. 

Also in March, Veronica’s will was accepted into probate and Raney was appointed personal representative of her estate. Subsequently, in the partition action, Raney filed a motion to amend the Partition Complaint to add himself, in his capacity as personal representative of Veronica’s estate, as a plaintiff. The court granted the motion. 

A trial on partition was held and the court issued a statement of decision finding that Veronica’s severance of the joint tenancy substantially complied with the ATRO's provision that notice be provided before a right to survivorship is eliminated. 

However, the court found that Veronica’s transfer of her interest in the Property to the Trust violated the ATRO's prohibition on transferring property. The court cancelled the transfer and reformed the Deed to one severing the joint tenancy only. The statement of decision concluded that Raney, in his capacity as personal representative of Veronica’s estate, is the owner of an undivided one-half interest in the Property and is entitled to an order of partition by sale. 

On appeal, Lawrence argued the trial court lacked jurisdiction over the partition action following Veronica’s death because the Property was community property and, following Veronica’s death, no court had jurisdiction to divide their community property. However, the Appellate Court ruled that Lawrence’s characterization of the Property as community property was incorrect. 

A husband and wife may co-own property as joint tenants, tenants in common, or community property. Property cannot be held both as community property and in either a joint tenancy or a tenancy in common at the same time.  Accordingly, each spouse’s interest in a joint tenancy or a tenancy in common is his or her own separate property. 

Following dissolution, there is a rebuttable presumption that property acquired during marriage in joint form is community property. However, if one spouse dies during a dissolution proceeding but before there is a judgment of dissolution, this community property presumption does not apply.

Because Veronica died before dissolution, no community property presumption applies to the Property. If, as Lawrence contended, Veronica’s severance of the joint tenancy was ineffective, the Property was held in joint tenancy and passed to Lawrence upon her death by right of survivorship. 

If the severance was effective, as Raney contended, Lawrence and Veronica were tenants in common and Veronica’s 50 percent interest in the Property was her separate property, becoming part of her estate conveyed by her will after her death. 

In either event, the Property was not community property. 

The heart of the parties’ dispute is whether Veronica, in severing the joint tenancy, violated the ATRO's provision that before a right of survivorship to property can be eliminated, notice of the change must be filed and served on the other party. 

Lawrence argued the ATRO and § 2040(b)(3) provide that notice of a joint tenancy severance must be filed and served before the severance is recorded. 

A joint tenancy severance is not effective to eliminate a right of survivorship unless it is recorded before the death of the severing joint tenant (with one exception not relevant).  A distinctive feature of joint tenancy, as opposed to other interests in land, is the right of survivorship. This means that when one joint tenant dies, the entire estate belongs automatically to the surviving joint tenant(s).  The severance of a joint tenancy transforms it into a tenancy in common by extinguishing the right of survivorship.

Civil Code § 683.2 provides a joint tenant may sever a joint tenancy in real property as to the joint tenant’s interest without the joinder or consent of the other joint tenants by, among other means, execution of a written instrument that evidences the intent to sever the joint tenancy, or of a written declaration that, as to the interest of the joint tenant, the joint tenancy is severed.” (Civil Code, § 683.2(a)(2).)

The statute further provides that such a severance is not effective to terminate the right of survivorship of the other joint tenants as to the severing joint tenant’s interest unless one of the following requirements is satisfied: 

(1) Before the death of the severing joint tenant, the deed, written declaration, or other written instrument effecting the severance is recorded in the county where the real property is located; or

(2) The deed, written declaration, or other written instrument effecting the severance is executed and acknowledged before a notary public by the severing joint tenant not earlier than three days before the death of that joint tenant and is recorded in the county where the real property is located not later than seven days after the death of the severing joint tenant.

The purpose of Civil Code § 683.2(c), is to avoid potentially fraudulent behavior by the party who executes a document severing the joint tenancy, because absent the recordation requirement, the joint tenant could execute an undisclosed severance, deposit the severing instrument with a third person, and instruct the third person to produce the instrument if the severing joint tenant dies first so the severed half may pass to his or her heirs or devisees, but could also, if the other joint tenant dies first, suppress the severing instrument and take the other half of the property by survivorship.

Ordinarily, holding community property in joint tenancy form is mutually advantageous, during marriage as well as after dissolution. Once a dissolution proceeding is pending, however, it is illogical that the parties would envision or desire the operation of survivorship. An untimely death results in a windfall to the surviving spouse, a result neither party presumably intends or anticipates. Thus, once a dissolution petition has been filed, a spouse may well wish to sever any joint tenancies with the other spouse. 

Under the ATRO and Family Code § 2040, parties to pending dissolution proceedings are restrained from unilaterally eliminating a right of survivorship unless, in addition to the generally-applicable requirements for effectuating such a change, notice of the elimination is filed and served on the other spouse. 

The requirements to unilaterally eliminate a right of survivorship may be completed in any order. When the last remaining requirement is completed, the elimination of the right of survivorship takes effect.

Accordingly, when the Partition Complaint was filed and served on Lawrence in June 2016, Veronica’s severance of the joint tenancy became effective to eliminate the right of survivorship. When Veronica subsequently died, her 50 percent tenancy in common interest was her separate property and became part of her estate. 

LESSONS:

1.         Married persons need to carefully consider how they take title to real property.

2.         Property cannot be held both as community property and in either a joint tenancy or a tenancy in common at the same time. Accordingly, each spouse’s interest in a joint tenancy or a tenancy in common is his or her own separate property. 

3.         The rebuttable presumption that property acquired during marriage in joint form is community property does not apply if one spouse dies during a dissolution proceeding, but before there is a judgment of dissolution.

4.         Notice of the elimination should be filed and served on the other spouse to allow a spouse to unilaterally eliminate a right of survivorship.

5.         The requirements to unilaterally eliminate a right of survivorship may be completed in any order, and when the last remaining requirement is completed, the elimination of the right of survivorship takes effect.

6.         When in doubt regarding real property in a dissolution action, seek the written consent of the other spouse that is confirmed by court order, or make a request to the court for such an order.

Foreclosure Purchaser Must Perfect Title Before Serving 3-day Notice to Quit

What rights does a tenant have after a foreclosure of the premises?

Some answers were provided in the recent unanimous California Supreme Court decision in Dr. Leevill, LLC v. Westlake Health Care Center, a case that originated in Ventura County.

The Court decided a procedural question related to the timing of the notice that must precede an unlawful detainer action, where the action is not brought by a landlord but rather by a new owner that has acquired title to the property under a power of sale contained in a deed of trust. 

The Court concluded that the new owner must perfect title before serving the three-day written notice to quit, and the perfection of title, which includes recording the trustee's deed, is necessary before the new owner serves a three-day written notice to quit on the possessor of the property (i.e., tenant).  

Westlake Village Property, L.P. (Westlake Village) owned property in Thousand Oaks that it leased in 2002 to defendant Westlake Health Care Center (Westlake Health) so the latter could operate a skilled nursing facility on the property. 

Six years later, Westlake Village obtained a bank loan, executing a promissory note and a deed of trust on the property (the latter to secure the promissory note). After Westlake Village defaulted on the loan, the bank sold the promissory note and the deed of trust to Dr. Leevil, LLC (Dr. Leevil), the plaintiff in the action. Dr. Leevil then instituted a nonjudicial foreclosure and bought the property at a trustee's sale. 

The next day, Dr. Leevil served a three-day written notice to quit upon the property's tenant, Westlake Health, and five days after that, Dr. Leevil recorded title to the property. Westlake Health did not vacate the property, and Dr. Leevil initiated the unlawful detainer (UD) action 40 days after service of the written notice to quit.

Proceedings in the trial court ended in a judgment against Westlake Health, based on stipulated facts, with Westlake Health preserving its right to appeal various legal rulings of the court. On appeal, the Court of Appeal affirmed. 

Among other things, the Court of Appeal concluded that, under Code of Civil Procedure section 1161a, subdivision (b) (section 1161a(b)), an owner that acquires title to property under a power of sale contained in a deed of trust does notneed to perfect title before it serves a three-day written notice to quit on the tenant. Instead, the Court of Appeal concluded that the new owner may serve the notice to quit immediately after acquiring ownership, after which it may perfect title, so long as title is perfected before the new owner files a UD action. 

In reaching that conclusion, the Court of Appeal expressly disagreed with the Appellate Division of the San Diego County Superior Court, which addressed the same issue in U.S. Financial, L.P. v. McLitus.  Because Dr. Leevil perfected title before initiating the UD action, although not before serving the notice to quit, the Court of Appeal concluded that the action complied with section 1161a(b). 

Section 1161a(b) authorizes a summary proceeding to remove the possessor of real property in specified circumstances. It is structured to enumerate five cases  in which its substantive provision applies. Specifically, section 1161a(b) opens with the phrase "[i]n any of the following cases," then it sets forth its substantive provision (authorizing an unlawful detainer action to remove a person who holds over and continues in possession of real property after a three-day written notice to quit the property has been served), and then it enumerates five separate situations in which its substantive provision comes into play. 

Thus, the substantive provision of section 1161a(b) has no operative effect unless one of the five enumerated situations (what the statute calls "cases") is present. Put another way, section 1161a(b) contemplates that a property owner seeking to avail itself of the statute's remedy will begin by looking at the five enumerated "cases," considering whether the conditions of any of them are satisfied. Only when one of the cases is satisfied may the substantive provision of the statute be invoked.

Section 1161a(b)(3) is one of those "cases," and it is the only provision on which Dr. Leevil relied. Therefore, Dr. Leevil was not entitled to the remedy provided by the substantive provision of section 1161a(b) unless it first satisfied the conditions of section 1161a(b)(3). 

Section 1161a(b)(3) describes the following case: Where the property (A) has been sold in accordance with Section 2924 of the Civil Code, (B) under a power of sale contained in a deed of trust executed by the holdover possessor, or a person under whom such person claims, and (C) the title under the sale has been duly perfected.

There are two things to notice about the language of section 1161a(b)(3). First, the provision is in the past tense ("has been sold" and "has been duly perfected"), suggesting completion. 

Second, the sale of the property in question is only one of three distinct conditions set forth in section 1161a(b)(3), and the use of the conjunctive word "and" to connect the three conditions can only mean that all three conditions must be satisfied. In other words, all three conditions of section 1161a(b)(3), including perfection of title, were prerequisites to Dr. Leevil having any right to the remedy section 1161a(b) affords. 

In this context, perfection of title requires that the instrument of conveyance (the trustee's deed) be recorded pursuant to Government Code section 27280. Title is duly perfected when all steps have been taken to make it perfect, i.e., to convey to the purchaser that which he has purchased, valid and good beyond all reasonable doubt, which includes good record title, but is not limited to good record title, as between the parties to the transaction.

The court in a UD action has jurisdiction to determine the validity of such defenses. Because one of the conditions set forth in section 1161a(b)(3) is that title under the sale has been duly perfected, Dr. Leevil was not entitled to a section 1161a(b) remedy until it first perfected title, which required, among other things, that the instrument of sale (the trustee's deed) be recorded. 

The most natural reading of the statute required Dr. Leevil to perfect title before invoking section 1161a(b)  but it is undisputed that Dr. Leevil served the three-day written notice to quit before it perfected title to the property. Dr. Leevil, therefore, took the first step in the removal process authorized by section 1161a(b) before satisfying all of the prerequisite conditions.

The UD statutes are to be strictly construed and that relief not statutorily authorized may not be given due to the summary nature of the proceedings. The remedy of unlawful detainer is a summary proceeding to determine the right to possession of real property. Since it is purely statutory in nature, it is essential that a party seeking the remedy bring himself clearly within the statute. 

Because Dr. Leevil served the three-day notice to quit before it perfected title, it did not bring itself within the scope of section 1161a(b), as that provision is most naturally read, before taking the first step in the removal process that the statute authorizes. Its notice to quit was, therefore, premature and void, and its UD action, improper.

A bidder at a trustee's sale might present a check for the purchase price of the property, but whether the bank account on which the check is drawn contains sufficient funds to cover the amount of the check remains to be seen. Therefore, the trustee is authorized to withhold the deed until the check clears. But withholding the deed prevents the purchaser from recording the sale and perfecting its title. The subdivision, therefore, affords a 15-day period during which the deed may be recorded and the sale deemed perfected as of the original sale date. That way, the original sale date may be memorialized even if the deed is withheld pending confirmation of the purchaser's payment of the purchase price.

Moreover, the apparent policy aims of the statute support an inference that the Legislature intended that a new owner of real property should perfect title before serving a three-day written notice to quit on the possessor of the property. In cases where the possessor of the property is a tenant of the former owner, not the former owner itself, the tenant may not know whether the entity serving the notice to quit is a bona fide owner. Thus, section 1161a(b)'s requirement that the new owner perfect title before serving a notice to quit protects the interests of such a tenant.

LESSONS:

1.  In California, the general purpose of the recording statutes is to permit the recordation of any instrument that affects the title to or possession of real property, and to penalize the person who fails to take advantage of recording.

2.  The foreclosure purchaser (or successor in interest) of a deed of trust must perfect title before serving the three-day written notice to quit required by Code of Civil Procedure section 1161a(b) to support a UD action. 

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.