The DirtLaw Blog

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Realtors(R), Homebuyers & Homeowners & Investors - new EPA rules on lead paint may affect your sale.

Effect April 22, 2010, the EPA issued a rule requiring the use of lead-safe practices and other actions aimed at preventing lead poisoning. Under the rule, beginning April 22, 2010, contractors performing renovation, repair and painting projects that disturb lead-based paint in homes, child care facilities, and schools built before 1978 must be certified and must follow specific work practices to prevent lead contamination.

EPA requires that firms performing renovation, repair, and painting projects that disturb lead-based paint in pre-1978 homes, child care facilities and schools be certified by EPA and that they use certified renovators who are trained by EPA-approved training providers to follow lead-safe work practices. Individuals can become certified renovators by taking an eight-hour training course from an EPA-approved training provider.

BOTTOM LINE: If you have painter, handyman repairs, remodel work on your house (residential real estate, commercial building with a child care service, daycare, school or afterschool program) that could disturb the old paint, your vendor, repair person or general contractor may need to do comply with the EPA rule requiring them to be CERTIFIED to use lead-safe work practices and follow these three simple procedures:

• Contain the work area.
• Minimize dust.
• Clean up thoroughly.

WHAT DOES IT MEAN IN A PURCHASE OR SALE OF A BUILDING:  Anyone who had some work done in the last six weeks since April 22, 2010 should disclose that there was work performed and whether or not the vendor, painter or general contractor was EPA certified.

Mailbag with Julia - Collecting on Family Law Support Judgments

Recently a family law attorney in Southern California wrote to me to ask if child support judgment holders needed to also record a special request for notice (Civil Code Section 2924) after I wrote about the recent case of BANC OF AMERICA LEASING & CAPITAL, LLC, v. 3 ARCH TRUSTEE SERVICES, INC., [ (2009) 180 Cal. App. 4th 1090].

The answer is yes.  

    If you are a judgment holder, and you are behind a bank loan or mortgage (deed of trust), ie, your judgment is after or "junior" to the bank, when they begin their foreclosure process on the borrower (your judgment creditor), they do NOT have to provide you a notice of the trustee's sale.

    While you may have no intention of actually reinstating the loan and conducting your own sheriff's sale on the property to levy or collect on your judgment, you still want to be on the special request for notice list because if there are surplus proceeds from an overbid, you want the Trustee to send you a claim form.

    The form is not on the Judicial council website, but many title companies should have one.

The Residential Remodel - Working with general contractors who are unlicensed

There has a been a recent flurry of cases in California courts awarding homeowners disgorgement of all fees paid to general contractors (under B&P Section 7031).  In cases like White v. Cridlebaugh, 175 Cal. App. 4th 1535 - 2009 and Oceguera v. Cohen, there were technical defects with the general contractor's license--ie, the general contractor had been licensed at one time, but failed to adhere to the guidelines or insurance to remain licensed.  In the case of Wright v. Isaak, the general contractor had lost his license due to willful underreporting of his employees and failure to maintain worker's compensation insurance for the employees (while billing the unsuspecting homeowner for labor!).

In the recent case of Alatriste v. Cesar's Exterior Designs, Inc., the case actually addressed the issue of the homeowner actually knowing that the general is unlicensed.  The court concluded that the statute is very clear--it didn't matter that the homeowner knew that the general was unlicensed, the general contractor still had to disgorge all payments (including costs) of the job.

It strikes me that in previous case law, there was discussion of the legislative intent to protect consumers from unlicensed contractors, and that before even evaluating whether the contractor could make a showing of unjust enrichment the courts would evaluate whether the general was licensed at the time of negotiating the contract with the homeowners.  The obvious reasoning being the homeowner should not be misled by the general's licensed status at the time of contracting.  However, if the homeowner knows the contractor is not licensed in California, negotiates a lower price as a result, getting "handyman" rates, then should the homeowner retain the right to then seek disgorgement when the relationship goes south? Seems inequitable, and perhaps an unintended gap in the legislation.

Forcing a Debtor into Bankruptcy - It can go terribly wrong sometimes...

In a recent Ninth Circuit case, (In re : Southern California Sunbelt Developers, Inc. "SCSD" June 9, 2010), the Court whacked creditors by upholding the bankruptcy court's award to debtor of over $700k in attorneys fees and $130k in punitive damages.

Apparently, 13 creditors had forced IBT, Inc. and  SCSD into bankruptcy (petitions for involuntary bk), which the bankruptcy court later found to be unwarranted because a genuine dispute existed between the creditors and the "debtors".  Accordingly, after unwinding the bk, the debtors were able to seek attorney fees for their trouble, and the court hit the credits with sanctions awarded under  Bankruptcy Rule 9011 and the court's inherent power. Section 303(i). 

Unfortunately, the opinion did not cite the facts that the lower court considered that demonstrated bad faith on the part of the creditors.

Lesson to creditors - make sure the debtor is really insolvent before circling the wagons or it can be an extremely costly decision if the involuntary petition is sought prematurely.

California's Homestead Exemption - No Need for Continuous Ownership For Debtor to Claim Exemption

In the recent case of Tarlesson v. Broadway Foreclosure Investments, LLC (May 17, 2010), the California Court of Appeal upheld a debtor's homestead exemption despite the fact that she had deeded away the property at one point because it was deeded back to her.

It appears that the creditor attempted to have a judicial foreclosure or otherwise levy debtor's residence.  Debtor claimed a $150k exemption in the home (pursuant to California Code of Civil Procedure 704.740 and Article XX, section 1.5 of the California Constitution) and creditor objected on the grounds that Debtor had not owned the property continuously.

The Court upheld earlier precedent that since the debtor had continuously resided at the property, that was a sufficient equitable interest to claim a homestead exemption.

Additionally, the creditor argued that debtor should have only been entitled to $50k for her exemption, but the debtor gave evidence (a declaration) that she was single, over age 55, and earned less than $15k/yr to qualify her to a larger homestead exemption.

What is interesting about this case is that although the court looked at the "equitable" interest that debtor had in the property, there was no discussion of whether she had unclean hands or engaged in otherwise inequitable conduct in deeding her property back and forth.

Mailbag with Julia - How Does the Abstract of Judgment Work?

S. Family writes:

 

"Do you know how we can get a judgment lien against a property when our judgment is in the name of the individual but the property is in the name of the individual's revocable trust?"

Dear S. Family -

 

If you already have a judgment, you should absolutely record an abstract of that judgment against the debtor (individuals) in the county where they own property.  This form is freely available from the Judicial Council Forms website.

 

There is caselaw that there isn't much difference between an individual and their trust.  The issue is, will your abstract attach to the debtor's property if the name on the abstract and the name on the title are not identical.  The answer is--it depends. 

 

Counties are set up on a Grantor/Grantee index.  If you spell the individual's name wrong on the abstract - you have a problem.  If you spell it correctly, but it does not match the Grantee index exactly, you will not know if a title company will pick up until you try it yourself.

 

The normal scenario on a payoff is that if the debtor tried to sell the house, your abstract would show up on the preliminary title report.  So, the practical response is for a judgment creditor to record the abstract in the county (for example if the debtor owns real estate in San Jose, that would be Santa Clara county), and then a few weeks later, contact the customer service department of a title company to see if they can pull it up in their search.

 

You Made a Private Money Loan, Your Borrower has filed Bankruptcy - Now What?

Many private money (or "hard" money) lenders enjoyed the consistency of borrower payments during the economic boom.  The recession has put a real squeeze on borrowers and many are now defaulting on their loans.  While some may be angling for a "strategic default," many borrowers who wish to keep their home or their business will file a bankruptcy petition and seek the protection of the automatic stay to halt their creditors from foreclosing.

What does the Automatic Stay mean?  Exactly what it sounds like, it stays all creditor acts until or unless the bankruptcy court grants the creditor relief from the automatic stay.

How does a creditor seek "relief from the automatic stay"? In the traditional loan secured by real estate, the creditor can allege that they are not adequately protected by a sufficient equity cushion or that the debtor does not need the property as part of their reorganization (Section 362).  Often this requires an appraisal of the collateral to determine just what the equity cushion is.

Does the Debtor/Borrower have to make payments to the lender even during their bankruptcy? Depends. Again, this goes back to whether or not the Debtor is trying to reorganize their debt and their bankruptcy plan.  In a Chapter 13 ("Wageearner") filing, the debtor is obligated to make post-petition payments.  Alternatively, creditors can seek "adequate protection" payments in the alternative to terminating the automatic stay.

What if my loan is underwater? Beware the CRAMDOWN or LIENSTRIPPING.  Here in Santa Clara county, there has a been a flurry of lienstripping where underwater junior liens are "stripped" -- but that is a topic for another day.

For those of you following the progress of California Senate Bill 401, the Governor signed it yesterday, which means that mortgage debt forgiveness for the California taxpayer is now more in line with the Federal relief act. "SB 401 extends the law providing mortgage debt forgiveness to homeowners who have already lost their homes due to declining home prices and cannot afford to pay thousands of dollars in taxes because the mortgage company forgave the remainder of the loan. This means that Californians who have sold their homes as short sales are allowed to exclude from taxable income the amount that was still owed to the mortgage company. The legislation, which increases the amount of mortgage debt forgiveness available, also applies to homeowners who have made loan modifications in 2009."

http://gov.ca.gov/press-release/14871/

Judgment Creditors - More Work For Collection, Request That Notice!

When a judgment creditor has gone all the way to verdict, has obtained the Judgment, the first thing the Judgment creditor does is record an Abstract of Judgment in the counties where the creditor thinks or knows that the debtor owns real estate.

For example if the judgment creditor is the prevailing party in a litigation Santa Clara County, and the debtor owns real property in Santa Clara County, then that is the logical place to record the Abstract.

A judgment is an unsecured obligation.  Once an abstract of judgment is recorded in the county where the debtor owns property, then it attaches to the debtor's asset and actually becomes a secured lien.

This means the judgment creditor would be treated differently in bankruptcy, as a secured creditor as opposed to an unsecured creditor and is generally paid more in a reorganization.  Secured obligations are also not discharged by the bankruptcy.

However, now the judgment creditor must do more than just record the Abstract of Judgment, under a recent California Appellate court ruling, the creditor must also record a Request for Notice.  [BANC OF AMERICA LEASING & CAPITAL, LLC, Plaintiff and Respondent, v. 3 ARCH TRUSTEE SERVICES, INC., Defendant and Appellant. (2009) 180 Cal. App. 4th 1090; 103 Cal. Rptr. 3d 397]

Let me explain:

Say you have a judgment against Joe Smith.  He owns a house in Palo Alto or Mountain View.  You record your abstract of judgment for $50k in Santa Clara County.  You request a title search or property profile from your buddy in customer service at the title company to verify that your abstract is showing up in the title search.  Turns out Mr. Smith has a big loan from Wells Fargo for $600k and another home equity line of credit in the amount of $100k from Chase bank.  Your judgment goes behind those two mortgage trust deeds.

Smith defaults on his loan.  Wells Fargo starts the foreclosure and records a Notice of Default, they order their Trustee's Sale Guarantee and your abstract does NOT show up as someone Wells Fargo must notify.  They do not notify you and they conduct the sale.  There are many bidders, the final bid is $785k, which would have been enough to pay all mortgages off and satisfy your judgment lien.  Except--you were not notified of the sale, you did not get notified of a surplus and you did not submit a claim for the overbid amounts.  Debtor Smith has his homestead exemption and receives the $85k.

What went wrong?  Why weren't you notified of the foreclosure sale and overbid? Answer - because the Trustee is only required to notify other mortgage holders and those who record a Request for Special Notice.  That means judgment creditors, tax lien claimants, mechanic's lien claimants, easement holders and lessees are not protected.

 The Court concluded that the Trustee did not have any obligation to further search public records or do anything more than was required under the California Civil Code Section 2924 et seq.  The fact pattern of the case had a lot to do with timing, since in the BofA case, the creditor actually recorded his Abstract of judgment just one month before the sale had been conducted, so they were not included in the Trustee's Sale Guaranty and the Trustee did not get an update before sending out the notice of surplus claims.

When should it be recorded? Technically, the Code allows the creditor to record it anytime after the lien and anytime before the Notice of Default. That means, do it the same time that you record your Abstract and just ask the recorder to make the Notice second.