Cautionary Tales

The Castleman Law Firm
A Professional Corporation

5870 Stoneridge Mall Road, Ste. 207
Pleasanton, CA 94588
(925) 463-2221
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Human behavior and public policy continue to present California courts with opportunities to craft new real estate law. Here are some picks of cases (and one statute) with which both the average citizen and the real estate practitioner should be familiar:

l. McComber v. Wells (1999) 72 Cal. App.4th 512: the case of the careless notary. Mr. McComber took out several loans without his wife's knowledge, forged her signature on the deeds of trust and then asked a notary to notarize her signature. California law prohibits a notary from acknowledging a person's signature unless the person appears before the notary personally. Nevertheless, the notary agreed to notarize Mrs. McComber's signature. The McCombers later divorced, the banks who had made the loans foreclosed, and Mrs. McComber sued the notary. Among other things, she asked the court to award her emotional distress damages. The court agreed that she could recover emotional distress damages against the notary.

Recommendations: A notary should never notarize a signature unless the person signing is personally present. No one should ever ask a notary to do so, for convenience or otherwise. An attorney representing someone with a loss related to a notarized document should consider the notary as a possible defendant, and should raise a claim for emotional distress damages if the notary is named as a defendant.

2. Vournas v. Fidelity National Title Insurance Co. (1999) 73 Cal. App.4th 668: the case of the untrustworthy trustee [and the title company that got away]. The original trustee of a family trust sold three pieces of trust property and pocketed the proceeds of all three sales. When the benficiaries of the trust discovered the loss, they removed the trustee and appointed a successor trustee. The successor trustee sued the title company which had closed the escrow on the three sales. The successor trustee's claim against the title company was based on the fact that the trust agreement required that at least two beneficiaries had to consent to any sale of trust property, and that none of the beneficiaries had consented to the sales which the title company had closed. The title company claimed it didn't know that beneficiary consents were required. It argued that it had no duty to inquire as to whether such consents were needed, and relied on California Probate Code section 18100 to support its arguments. That code section states that a third party has no duty to inquire into the nature or extent of a trustee's powers if it deals in good faith and does not have actual knowledge that the trustee is acting improperly. The court agreed with the title company. I think the title company got off scot-free. As a practical matter, title companies routinely ask for copies of the full trust document when handling transactions involving a trustee. At a minimum, they insist on getting a certificate of trust and a copy of the portion of the trust document which sets forth the powers of the trustee. Had the title company in this case followed the customary practice in the industry, it should have known that beneficiary consents were necessary. Why wasn't the title company held liable? The court felt that title companies should not become insurers against embezzlement.

Recommendations: Anyone who is the beneficiary of a trust should keep close tabs on the trustee of the trust and on the trust assets. If you suspect trust property is being improperly sold, try to locate the title company and then send countermanding escrow instructions to the title company. Such instructions will either freeze the escrow or will provide you with a basis, in later litigation, for arguing that the title company had actual knowledge that the trustee was not authorized to sell the property.

3. DeBerard Properties, Ltd. v. Lim (1999) 20 Cal.4th 659: the case of the unlucky lender. During the Depression, the California legislature passed Code of Civil Procedure section 580b. This section prohibits lenders from recovering a deficiency against a purchase money borrower. The result is that if a purchase money borrower defaults, and the lender discovers that the property is worth less than the loan amount, the lender cannot sue the borrower for the difference, i.e., the deficiency, after the lender forecloses. The lower state courts seemed to be carving away at 580b by allowing a borrower to waive his anti-deficiency protection if he renegotiated his loan with the lender down the road. In DeBerard, the plaintiff sold a piece of commercial property to the Lims and carried back a second. The Lims defaulted on the payments and the plaintiff and the Lims renegotiated the loan, lowering the monthly payments and dropping the interest rate. In exchange for these concessions to the Lims, the plaintiff insisted that the Lims waive the protection of 580b, which they agreed to do. The Lims got behind again and the plaintiff foreclosed. Since the property was worth less than the loan balance, the plaintiff tried to sue the Lims for the deficiency. The case went all the way up to the California Supreme Court, and the Supreme Court unanimously agreed that the waiver of the anti-deficiency protection was not enforceable. The court argued that 580b stabilized real estate values by forcing lenders to accurately value property, and stabilized the economy by shielding borrowers who have lost their property from further liability to their lenders. It is interesting that the court is still as committed to this Depression-era rule as it is, and that the court feels the anti-deficiency rule is still as important to our now-very different economy.

Recommendations: I think lenders may be even more conservative in valuing real property that they have been asked to loan on; this conservatism may be a minor brake on sales prices (unless the property is located in Northern California!) Lenders may also be a little less willing to renegotiate loans, especially in marginal circumstances. Sellers who carry back loans should be careful to assure themselves that there is enough equity in the property to protect them and should be extremely careful about subordinating to any increases in a first loan. For most (but not all) purchase money borrowers, DeBerard is good news: the anti-deficiency rule will be alive and well in the new millennium and they can still walk away from a purchase money loan without worrying about personal liability if the property is upside down. Because the anti-deficiency rule can be complicated, borrowers should always check with counsel before walking away.

4. Cooper v. Cano (1999) 72 Cal. App.4th 1473: the case of the unsecured spouse. Susan Cano divorced her husband Larry; as part of their divorce settlement, Larry gave her a $1.35 million promissory note, which he secured on the family home. She signed a spousal transfer deed and gave Larry title to the home. Some time later, Larry approached Susan and told her that he was refinancing the home and that it would "help" if she signed a quitclaim deed. Susan claims she didn't understand why he needed another deed, but she signed it anyway. Larry then sold the house, and the title company didn't pay Susan off. Susan undoubtedly raised Cain when she found out, and the new owner of the former family home sued Susan to "quiet" their title. What they wanted was a court order stating that they didn't have to pay Susan's note off because she wasn't secured against the home at the time it was sold. They insisted that the quitclaim deed Susan had signed in effect removed her deed of trust. Susan argued that she never signed a deed of reconveyance, the document which is normally used to remove deeds of trust, and that it never occurred to her that a quitclaim deed would reconvey her deed of trust. Nevertheless, the court sided with the new buyers and held that Susan's $1.35 million note was unsecured. I think this was a bad decision, but I suspect the court felt that Susan was not as innocent as she claimed. I also think that, given a choice between protecting the new buyers, who appeared to be completely unaware that Susan might have a lien when they bought, and protecting Susan, the court chose the buyers.

Recommendations: Apparently, Larry got Susan to sign the quitclaim deed because he told her there was some kind of defect in the original spousal transfer deed. Title companies often suggest a quitclaim deed in these circumstances because it is an easy way to paper over transfer problems. Quitclaim deeds are not always a good idea. They don't relate back to the date of the original conveyance. A better way to handle the situation would be to execute a corrective deed which states, on its face, that its purpose is to correct a defect in the original deed. Corrective deeds relate back, and do not have the general effect of a quitclaim deed. Had Susan signed a corrective deed, her deed of trust would not have been affected.

5. Barnes v. Black (1999) 71 Cal. App.4th 1473: the case of the negligent landlord. The Black trust owned an apartment complex situated at the top of a steep driveway. The sidewalk that ran along the top of the driveway led to a small children's play area. Parents complained about the lack of fencing between the sidewalk and the driveway, which dropped to a busy public street. The inevitable happened: little Jimmy Barnes lost control of his big wheel and cascaded down the driveway into the public street, where he suffered fatal injuries. His family sued the landlord. The landlord argued that he was not liable because the accident occurred on public property. The lower court agreed with him. However, the court of appeal did not. The higher court found that a landowner has a duty to keep his property in a condition which protects others from an unreasonable risk of injury, and that it was irrelevant whether that injury occurred on private or public property. I think the court was persuaded to reach this result because the facts of this case were so egregious: the presence of the steep driveway near a childrens' play area and the fact that there had been numerous complaints about the dangerous condition put the landlord on notice well before little Jimmy's accident that there was a very high likelihood that someone would be hurt because of a condition on the premises.

Recommendations: Landlords and other property owners have to monitor their premises for conditions that may lead to injury on and off their property. Tenants and others who are affected by what goes on on someone else's property should document their complaints in writing so that, if an accident occurs, they have evidence that the property owner was warned of the condition.

6. Erlich v. Menezes (1999) 21 Cal.4th 543: the case of the emotionally distressed homeowner. Mr. and Mrs. Erlich entered into a construction contract with Mr. Menezes to build their dream house. After they moved in and it started raining, it became clear that it was going to be a house of horrors: water poured in from the walls and ceilings, the saturated walls began collapsing and there was 3" of standing water in the living room. Mr. Menezes' efforts to repair the defects were ineffective, and the Erlichs had inspections done. The inspections revealed severe construction defects, including improper installation of the main support beam. The Erlichs were naturally upset; in fact, Mr. Erlich was so upset that he developed a permanent, debilitating heart condition related to the stress and had to quit his job as an athletic director. The Erlichs finally sued Mr. Menezes. Among other things, they asked the court to award them damages for their emotional distress. California law does not permit the recovery of emotional distress damages in breach of contract cases, and the Ehrlich case was essentially a breach of contract case. Nevertheless, the facts were so shocking and Mr. Ehrlich's physical condition so affected that both the trial court and the court of appeal allowed him to recover for his emotional distress. Mr. Menezes appealed to the California Supreme Court, however, which reversed the lower courts and said that the Erlichs could not recover emotional distress damages. Emotional distress damages are normally awarded in tort (civil wrong) cases, not contract cases, and the Supreme Court did not want to further blur the line between tort and contract cases by awarding emotional distress damages in a contract case. It also candidly admitted that it was concerned that allowing such damages in contract cases would have a chilling effect on commerce. I think the court was right. Ironically, if the Erlichs' home had collapsed on them and injured them, the Erlichs would probably have been able to recover emotional distress damages related to their injuries.

Recommendations: If you are building a house or doing a remodel, play close attention to the contractors' performance and get an independent inspection if you don't think the contractor is doing things right. The construction in the Ehrlich home was so bad that either they weren't paying attention or they didn't bother to have an architect or other professional monitor the construction. As for attorneys, it is clear that emotional distress claims arising from contract are going to be subject to summary adjudication.

A. Civil Code §2079.10a: sellers and landlords must help buyers and tenants track sex offenders. This new statute went into effect on July 1, 1999, and requires sellers to disclose to purchasers the fact that the State of California maintains a database of registered sex offenders and a Sex Offenders Identification Line which they can call. Landlords must also make these disclosures to tenants.

Recommendations: Sellers and landlords should not think that their disclosure duties end with providing information about the database and the identification line. If a seller or landlord knows personally that a sex offender is residing near the property affected, or if sex offenders have been active near the property, they have a separate obligation to disclose that information. Sellers and landlords do not, however, have to check the database or call the identification line; that is up to their purchasers and tenants.

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