Short Sales and Foreclosures Require Care

I recently had occasion to talk with one of the many servicing companies that do business in California.  These companies typically aren’t lenders.  Instead, they collect the monthly payments made by the borrowers, and then they transfer the monies collected to the owners of the loan.  These companies are often referred to as “loan servicers.”  To many borrowers, it feels like the loan servicer is the lender, but actually that’s not true.  The lender may never directly communicate with the borrower.  It’s the servicer that handles all of the payments, and often the servicer takes action when there’s a default in the loan payments.

The servicer I spoke with was handling a “short sale” for the lender.  A “short sale” occurs when the sales proceeds are not enough to pay off the balance due on the loan.  Lenders often agree to “short sales” when the property is worth less than the loan.  Lenders sometimes agree to these “short sales” because they’d rather have cash than another property.  Lenders can lend cash for a profit – they can’t (or they won’t) lend a property.

Lenders and servicers are in the business of generating profits.  They’re generally not in the business of helping borrowers.  If a lender agrees to help a borrower through modifying a loan, or reducing an interest rate, or agreeing to a short sale, then there’s often a business reason that benefits the lender.

There can be real benefits to sellers in conducting a short sale.   But even though there can be benefits, Sellers need to be cautious when they’re considering a short sale.  There can sometimes be unintended consequences from a short sale.

For example, Sellers can get ready to close a short sale only to find out that their lender won’t release them from personal liability on their loan.  New laws can make this illegal in some situations but it still happens.

So what’s a borrower to do when confronted with such decisions?  They should get competent, qualified, professional help.  It still surprises me sometimes when I hear of borrowers who would rather not pay a consulting fee than fully understand the considerations in these matters.  These decisions can make a difference of literally hundreds of thousands of dollars.  It just seems short-sighted to try to save several hundred dollars in a consultancy fee and possibly become unnecessarily exposed to a hundred thousand dollars or more in liability.  And the reality is that in some situations, lenders are in fact pursuing borrowers for deficiencies in their loans.  As a result, some borrowers who think their situation is over when the foreclosure or short sale is done can be in for a surprise.

 

Robert B. Jacobs practices Real Estate and Business Law throughout the San Francisco Bay Area and California.   The foregoing article is not a complete discussion of the subject addressed, and should not be relied on.  Readers with specific questions or issues should consult an attorney.

Soil Movement Can Be Dramatic

I well remember several lawsuits where homes were moving due to soils movement.  This may not sound like a problem.  If all parts of a house all move the same distance together at the same time and in the same direction, then there might not be a problem.  However, experience shows that house movement due to expansive soils is often not uniform.  Some parts of a house might move while other parts remain still.  This can create dramatic results.  When this happens, one part of a house may literally pull away from the rest of the house.  There can be visible evidence of such a separation.  Interior components can start separating, such as hardwood floors, or sheetrock may start to crack. Kitchen counters can pull away from the walls. Siding can start pulling away from the home.  Concrete may develop serious cracks.  Foundations can start to slowly move and buckle.  I’ve seen sheetrock crack so much that you could insert your arm in the wall all the way to your elbow.  It’s really dramatic.  And it’s really unpleasant for the homeowners.  They never envision such a thing when they buy their home.  When they purchased it, their home looked beautiful, undamaged, and attractive.  But their experiences with such homes can often be very different from their expectations.

Sometimes homeowners lie awake at night and listen to their house as the framing creaks and pops due to the movement.  Ultimately, some of these homeowners end up selling their homes for whatever they can get.  They aren’t able to withstand the process of seeing their homes literally coming apart at the seams.  Sometimes such homes can be fixed, and sometimes they can’t be.  But it’s often very expensive when foundation or soils repairs must be made.  In some situations the proposed repair is to literally separate the entire house from the foundation, jack the house up into the air, remove the entire foundation and replace it with a new one.  The house is then to be lowered back into place.

Fortunately, many houses never experience this kind of movement, and as a result many homeowners are completely oblivious to this kind of a situation.  But when situations of this nature arise, the effects can be really dramatic.

Soils Issues Can Be Significant for Homeowners

Most people don’t give much thought to dirt.  So long as soil stays outside, many homeowners don’t ever give it another thought.  If their soils are behaving properly, the biggest soils concern might be making sure that dirty footprints don’t get tracked across the living room floor.

But California and Bay Area soils are known for behaving poorly when they get wet.  If a hillside property is not properly drained and supported, then it can behave poorly when the soils get soaked with water.  Some soils can lose their strength when they get wet.  When this happens, these soils can lose their holding power, and there can be a “slump” or slide.

Evidence of these kinds of slides are visible on hillsides around the Bay Area.  I’ve seen several of them on hillsides adjoining Bay Area freeways.  When you know what to look for, you can see green hillsides where slumps of soil have pulled away from the hill.  There’s often a sharp dropoff at the top of the slump, and a small hill or pile of soil at the bottom.  You can tell that the soil has partially slipped down the hillside.

When these “slumps” happen on vacant land hillsides, there might not be much of a problem.  But there can be disastrous results when slumps or soils movement occurs in a subdivision with homes.  Modern engineering and construction methods can be used to address some issues with soils movement.  Retaining walls can be built to hold back a hillslope that would otherwise be unconfined.  And deep concrete piers can be drilled to address other concerns with soils movement.  Drains can be installed to carry away water that would otherwise penetrate the soil.  But some soil movements can be so severe that even modern design and construction methods may not be able to withstand them.  When this happens, a house can experience movement that can either be minor or significant.

Sold-Out Junior Loans Can Be A Concern

Last week’s column described how California has two types of homeowner loans with respect to personal liability.  Such loans are either “recourse” or “non-recourse.” The distinctions between these two types of loans can make a significant difference on whether or not a buyer ends up with personal liability following a foreclosure.

Homeowners with two loans on their properties are particularly at risk with respect to personal liability.  If a borrower has a second loan that is a “recourse” loan and if the first lender forecloses, then the       second lender will become a “sold-out junior.”  When this happens, the second lender will in most cases have the right and ability to file suit against the borrower for the full unpaid amount of the second loan.  However, until the first lender forecloses, the second lender can’t file suit.  This is because as long as the second loan is secured by a mortgage or deed of trust, the lender can’t file suit directly on the loan.  Instead, the second lender is required to foreclose as long as the second loan is secured by a mortgage.

Both first and second lenders must first “exhaust” their security by foreclosing before they can ever seek personal liability against the borrower.  And because some foreclosures don’t result in personal liability by the borrower to the foreclosing lender, many borrowers who have only one loan on their property find that they don’t have personal liability to their lender following a foreclosure. (However, there can be exceptions).

The situation is different when there are two loans.  When the first lender forecloses, the deed of trust of the second lender is “wiped out” but the loan from the second lender isn’t “wiped out.” As a result of a foreclosure by the first lender, the borrower is exposed to full personal liability on any recourse loan from the second lender.

Some second lenders actually do file suit against borrowers following foreclosure by the first.  If the borrower cannot pay or settle the claim of the second lender, then sometimes these borrowers end up in bankruptcy.  With proper advance planning, these situations can sometimes be avoided.  Borrowers are therefore wise to obtain competent, experienced legal counsel before committing themselves to a course of action with their lender workout negotiations.

Storing Your Property Without Government Interest

Ever feel like the garage is just too full?  Since most California homes don’t have basements, a garage or an outdoor storage shed often becomes a homeowner’s storage facility.

But when the garage gets too full, it just might be time to look into a self-storage unit.

And apartment dwellers find that a self-storage unit might be just the thing if they’ve downsized their living space.

As with many other aspects of California living, California has a law that governs (in part) the use of self-storage facilities.  This law is known as the California Self-Service Storage Facility Act and is found at the California Business and Professions Code section 21700.  This Act doesn’t govern all aspects of self-storage unit rentals.  Instead, a key focus of the act is to provide for liens to ensure that renters pay their storage fees.  If they don’t, then the owner of the storage facility is entitled to place a “lien” on the personal property being stored at the facility.  The facility owner can even “lock out” a renter, and if the fees aren’t paid, then the stored property can be sold at public sale and the sales proceeds can be used to pay the overdue storage fees.

So what happens if a renter gets behind on their monthly storage fees and the facility owner locks the renter out?  Can the facility owner require that the renter pay the back fees before the renter can retrieve their belongings?  The answer is “yes.”  What’s more, the facility owner can continue charging monthly rental fees and late fees as provided by the lease while the renter is locked out, and if the renter doesn’t pay these additional fees, then the facility owner can continue to lock out the renter.

This principle has been considered by a California Court of Appeal. In this case, the renter got behind on her monthly payments, and the facility owner sent her a notice stating that she owed $124.75 in back rent plus $45 in late fees (at $15 per month).  The notice further stated that if the past due amounts weren’t promptly paid, then the renter’s right to use the space would end, the renter would lose access rights to the space, and the owner would impose a lien on the renter’s property. The notice further stated that the amount due would continue to increase as provided by the lease agreement until paid in full.

The renter eventually paid the facility owner $500, which was more than the amount demanded.  But by the time this $500 was paid, additional charges had accrued.  As a result, the renter still was still behind even after paying the $500.  Ultimately, the owner claimed that the fees due were $1,282.00.  Instead of paying the fees, the renter filed a lawsuit.

At trial, the renter lost and the renter filed an appeal.  On appeal, the Court of Appeal found that nothing in the California Self-Service Storage Facility Act prevented monthly rental fees and late charges from accruing even while the renter was denied access to her space.  As a result, the renter also lost on appeal.  This case is reported as Vitug v. Alameda Point Storage, Inc. (2010) 187 Cal. App. 4th 407.

Store-bought contracts can be slippery

Sometimes people get in a legal dispute who say they used a “standard contract” from a book they bought.  Because they used a form contract from a published book, they expect the contract to be authoritative and adequate.  If the contract turns out to be inadequate, these people are sometimes surprised – and always disappointed – that the form contract they used has not served them well.

I have seen contracts for leases – or sales – of real property from published books that were ambiguous.  When people want to enforce such a contract, they might have a problem, because at trial they will be asking the judge to compel the other side to perform according to the contract.  If the contract isn’t clear, then nobody’s sure what the other side should do, or what they agreed to.  It may then be possible for the other side to break the contract altogether.

It is impossible to evaluate whether all of the contracts from printed sources are adequate.  Each contract must be separately evaluated to tell whether it is adequate.

Some prepared sources claim to follow California law.  But others may not.  The problem is that the California state Legislature regularly passes new laws. If a prepared contract does not follow California law, then it is possible that portions of the contract might be void or unenforceable.  If a prepared contract does follow California law, then it is important to know whether the contract has incorporated legal updates.

The moral to the story?  Enter a contract with care.  And have a good attorney review it.

Valuable Real Estate

The most valuable asset that most people will ever own will be their real estate.  Real estate is an investment.   Nearly everybody lives on some kind of real estate.  Most businesses operate out of some kind of real estate.  Real estate is everywhere, and in this day and age most people in the United States either own,  have owned, or will own some kind of real estate.  Those who don’t will undoubtedly lease some.

Real estate sales, purchases, and ownership can be complex.  When everything goes well, then nobody ever thinks twice about a real estate transaction.  But when things go poorly, people can remember their real estate headaches for a long, long time.

There is only so much land. We’re not making any more of it. And it seems like most buildings have been around for a long, long time.  So why should there be problems with real estate?  It almost seems like all of the kinks should have been worked out by now.  Buildings usually don’t move.  They seem stable.  And land generally stays in one place.  So why all the concern about real estate transactions?

Truth is, there are many, many aspects to real estate.  A smooth transaction, or a smooth construction project, will successfully address all of the potential issues.  But it doesn’t take much for something – anything – to go wrong in a real estate transaction, and when it does, the results can be both expensive and time-consuming.

What are some of the things that can go wrong in a real estate transaction?  Following are just a few.

Nonperformance.  Most real estate transactions have two (or more) parties.  If one of the parties doesn’t perform, then there may be no transaction.  If property is to be sold, the buyer must come up with the money, and the seller has to sign a deed.  If either side refuses to perform, then the transaction fails and someone is going to be disappointed.

Most litigation is filed because someone is surprised, disappointed or angry.  There is a lot of money at stake in a real estate transaction.  Sometimes people get cold feet.  Other times they find a better opportunity elsewhere.  Whatever the reason, non-performance can be a real headache.  And when non-performance occurs, people pick up the phone and call their lawyer.

            Construction Defects.  Modern buildings have many complex systems.  Soil must be properly graded and drained.  Foundations must be properly designed and reinforced.  Framing must be properly built.  Plumbing, heating, and electrical components must be properly installed.  And siding and roofing must be properly constructed.  There is much room for error in constructing any of these systems, and when errors occur the repairs can be expensive.

Real estate must also be maintained.  Roofs need to stay watertight.  Fixtures need to be replaced when they leak.  Termites and other pests need to be controlled.  If Real Estate isn’t properly maintained, the resulting damage can require expensive repairs.

Movie Stunts on Public Streets

            Several past articles have discussed the use and importance of streets and highways in accessing real estate.  It’s clear that most of the time streets and roads are used for the purpose of actually going somewhere to a destination point, or for the purpose of getting to a point on the map.

However, occasionally streets and roads are used for other purposes.  Sometimes these “other uses” can end up in court.

Several years ago, a California case addressed one of these alternate uses for streets.  This case involved a movie stunt that didn’t turn out as expected.  In that case, the streets weren’t used to actually go somewhere.  Instead, they were used for filming.  The case went to trial, and then to an appeal.  In its opinion, the court of appeal wrote the following.

“Motion pictures remain one of the premier forms of entertainment in today’s world.  Movies frequently entertain through flights of fantastic adventure, heavily laden with excitement and danger.  Motion picture producers and directors are often able to achieve such results by employing tricks of the trade (e.g., animation, trick photography, special effects, and clever splicing and editing). Some producers and directors, on the other hand, resort to photographing adventuresome activities which are nearly as dangerous as they appear on screen and which sometimes imperil those in front of and behind the camera.”

“The motion picture industry has long employed seemingly fearless and hardy stuntpersons to perform activities too hazardous for professional actors to undertake.  Frequently, these stuntpersons achieve spectacular results without injury.  Other times, as here, adventure becomes misadventure.”

It seems that a stuntwoman, who was also a ski instructor and aspiring actress, was hired to do stunt work in the filming of “Cannonball Run.” This stuntwoman was to be a passenger in a 1962 Aston-Martin sports car, which itself was a double for another Aston-Martin sports car used elsewhere in the film. Filming began in Los Angeles, then moved to Florida and Georgia, and then to Las Vegas.  The Aston-Martin that was used in the film was a vintage car, and had no seat belts.  (The other Aston-Martin car, for which the stunt car was a double, is referred to in the Court’s opinion as the “original James Bond car” which was used in filming “James Bond” movies, and was equipped with special features such as machine guns – along with seat belts).

When the stunt car was delivered to the set, it was found to have defective steering, bald tires, and a malfunctioning clutch.  It wouldn’t go more than eight miles an hour.  It was repaired – but no seat belts were installed.

In the stunt, the Aston-Martin was driven by a stunt car driver southbound on a highway where it encountered five northbound vehicles also being driven by stunt drivers.  There were two takes made of the stunt.  In the first take, the Aston-Martin cut across the front of opposing traffic and onto the opposite shoulder, passed the oncoming cars, and then returned to the highway.  The camera operators used their lenses to make it look like the vehicles were passing closer together than they actually were.  This stunt went smoothly, and the stuntwoman thought the car performed perfectly.

After the first take, the director told the stunt drivers to pick up the pace and drive faster.  The director wanted the Aston-Martin to weave in and out of the oncoming cars in serpentine fashion.  Nobody told the passenger stuntwoman that the second “take” was to be different than the first.  Unfortunately, during the second take the Aston-Martin collided with a Ford van, and both the driver and the stuntwoman were hospitalized, with the stuntwoman suffering catastrophic injuries.

The stuntwoman sued for her injuries because there were no seat belts in the car, and at trial her expert testified that if she had worn a lap-shoulder seatbelt, she would at most have suffered fractured ribs.  The evidence showed that seat belts were available on the movie set and could have been installed in 20 minutes.

At trial, the jury awarded the stuntwoman damages of seven million dollars, but found her partially at fault in the amount of 35%.  The trial judge therefore reduced her award by 35%, and due to settlements previously received from other parties which served as an offset, the trial judge entered an award in favor of the stuntwoman of $0.00.  The Court of Appeal affirmed this judgment. The case is reported as Von Beltz v. Stuntman, Inc. (1989) 207 Cal. App. 3d 1467.

Issues of negligence, liability, offsets, and personal injuries involve complex issues of fact and law.  Persons considering such questions or issues should seek the advice of competent legal counsel.

Movie Stunts On Public Streets

          Several past articles have discussed the use and importance of streets and highways in accessing real estate.  It’s clear that most of the time streets and roads are used for the purpose of actually going somewhere to a destination point, or for the purpose of getting to a point on the map.

However, occasionally streets and roads are used for other purposes.  Sometimes these “other uses” can end up in court.

Several years ago, a California case addressed one of these alternate uses for streets.  This case involved a movie stunt that didn’t turn out as expected.  In that case, the streets weren’t used to actually go somewhere.  Instead, they were used for filming.  The case went to trial, and then to an appeal.  In its opinion, the court of appeal wrote the following.

“Motion pictures remain one of the premier forms of entertainment in today’s world.  Movies frequently entertain through flights of fantastic adventure, heavily laden with excitement and danger.  Motion picture producers and directors are often able to achieve such results by employing tricks of the trade (e.g., animation, trick photography, special effects, and clever splicing and editing). Some producers and directors, on the other hand, resort to photographing adventuresome activities which are nearly as dangerous as they appear on screen and which sometimes imperil those in front of and behind the camera.”

“The motion picture industry has long employed seemingly fearless and hardy stuntpersons to perform activities too hazardous for professional actors to undertake.  Frequently, these stuntpersons achieve spectacular results without injury.  Other times, as here, adventure becomes misadventure.”

It seems that a stuntwoman, who was also a ski instructor and aspiring actress, was hired to do stunt work in the filming of “Cannonball Run.” This stuntwoman was to be a passenger in a 1962 Aston-Martin sports car, which itself was a double for another Aston-Martin sports car used elsewhere in the film. Filming began in Los Angeles, then moved to Florida and Georgia, and then to Las Vegas.  The Aston-Martin that was used in the film was a vintage car, and had no seat belts.  (The other Aston-Martin car, for which the stunt car was a double, is referred to in the Court’s opinion as the “original James Bond car” which was used in filming “James Bond” movies, and was equipped with special features such as machine guns – along with seat belts).

When the stunt car was delivered to the set, it was found to have defective steering, bald tires, and a malfunctioning clutch.  It wouldn’t go more than eight miles an hour.  It was repaired – but no seat belts were installed.

In the stunt, the Aston-Martin was driven by a stunt car driver southbound on a highway where it encountered five northbound vehicles also being driven by stunt drivers.  There were two takes made of the stunt.  In the first take, the Aston-Martin cut across the front of opposing traffic and onto the opposite shoulder, passed the oncoming cars, and then returned to the highway.  The camera operators used their lenses to make it look like the vehicles were passing closer together than they actually were.  This stunt went smoothly, and the stuntwoman thought the car performed perfectly.

After the first take, the director told the stunt drivers to pick up the pace and drive faster.  The director wanted the Aston-Martin to weave in and out of the oncoming cars in serpentine fashion.  Nobody told the passenger stuntwoman that the second “take” was to be different than the first.  Unfortunately, during the second take the Aston-Martin collided with a Ford van, and both the driver and the stuntwoman were hospitalized, with the stuntwoman suffering catastrophic injuries.

The stuntwoman sued for her injuries because there were no seat belts in the car, and at trial her expert testified that if she had worn a lap-shoulder seatbelt, she would at most have suffered fractured ribs.  The evidence showed that seat belts were available on the movie set and could have been installed in 20 minutes.

At trial, the jury awarded the stuntwoman damages of seven million dollars, but found her partially at fault in the amount of 35%.  The trial judge therefore reduced her award by 35%, and due to settlements previously received from other parties which served as an offset, the trial judge entered an award in favor of the stuntwoman of $0.00.  The Court of Appeal affirmed this judgment. The case is reported as Von Beltz v. Stuntman, Inc. (1989) 207 Cal. App. 3d 1467.

Issues of negligence, liability, offsets, and personal injuries involve complex issues of fact and law.  Persons considering such questions or issues should seek the advice of competent legal counsel.

Suits, arbitration settle differences

            Nobody wants to buy a lawsuit.  But most people want to buy a house.  So what happens when home buyers discover they bought the house of their dreams—but one of their dreams is a nightmare?

The first step is often to call the seller.  If the home is new, the seller is usually a developer, and most developers provide a warranty with their homes.  In these cases, a buyer can sometimes have construction problems fixed at the expense of the seller.

But what happens when the seller is another homeowner instead of a developer?  Homeowners often don’t have the resources to repair major problems.  In some cases, sellers claim they didn’t know of problems (when they actually might have).  In other situations, even a developer may be unwilling to acknowledge a problem or repair it.

If buyers and sellers can’t agree about repairing problems with a house, they often involve lawyers.  The lawyers may exchange several phone calls and letters.  If agreement can’t be reached, the lawyers file a lawsuit.

Are lawsuits effective?  They can be.  Every lawsuit is eventually resolved either by agreement between the parties, or by a judge or jury at trial.  Are lawsuits expensive?  They can be, and they typically are.  The expense depends on how the lawsuit is handled and the length of time before it is resolved.  Many trials are held approximately one year after the lawsuit is started.  The cost of a lawsuit through trial can be surprisingly high.  Is there any way to reduce the costs of a lawsuit?  Yes, through binding arbitration.

Binding arbitration is dispute resolution without a lawsuit.  In arbitration, a dispute is submitted to an arbitrator who is often an attorney or a retired judge.  Both sides present their case at an arbitration, which is similar to a trial.  “Binding” means the result is final and generally there is no right to appeal.

Arbitration is similar to a trial in that both processes use a hearing before a decision maker.  At arbitration, the decision maker is an arbitrator.  At trial, the decision maker is a judge (or a jury).  In both processes, the decision is legally binding between the parties.

Arbitration is different from trial in several ways.  Arbitration is often less intrusive.  In many arbitrations, neither side has the right to ask the other side any questions before arbitration.  This can make the process less expensive than a lawsuit, because in a lawsuit both sides have the right to ask the other side many questions.  Arbitration is often concluded in a matter of months instead of nearly a year or more.  Arbitration is usually thought of as faster and less expensive than a trial.

One of the primary differences between trial and arbitration is the right to appeal.  Because arbitration is designed to be final, there is usually no right of appeal (although there can be exceptions).  Because arbitration usually has no right of appeal, the process can be much shorter.  But if an arbitrator makes an error, the parties often have no recourse.  This means that arbitration may be faster and less expensive than trial, but it may also be less predictable.

There is no general answer as to whether trial or arbitration is better in any given situation.  Each situation must be evaluated separately.  Persons considering whether to choose trial or arbitration should contact a lawyer.