Insurance Coverage is Important

It’s probably safe to say that most home buyers use a loan from a bank or other lender to help pay for their house.  While some home buyers have enough money to pay cash for their home, most home buyers end up paying for their home over a period of years.  The most common way to buy a home over time is to get a loan from a bank or other lender. When this is done the buyer can pay the seller cash for the home, and then the buyer repays the lender over a period of years.

Most institutional lenders will require that a homeowner obtain homeowners insurance.  There’s a good reason for this.  The home serves as the lender’s security.  If the homeowner defaults on their loan payments, then the lender can foreclose.  However, if the home has been severely damaged from fire, storm, or other cause then the lender’s security is damaged as well.  Insurance proceeds can be used to help repair a damaged home.

Most homeowners probably buy an insurance policy and never think twice about what might happen if they ever had to make a claim under their policy for significant damage to their home.  Homeowners might not realize that an insurance company’s obligation to pay will probably be limited by the amount of coverage purchased.  If the homeowner’s coverage limit is a million dollars, then if a storm damaged their home and the damage cost two million dollars to fix, then the homeowner may end up short of cash.  This can be a significant problem.  Also, insurance policies often contain “exclusions.”  These exclusions determine the types of loss the policy will cover.  For example, if an insurance policy excludes coverage due to earthquake, then if a home is damaged or destroyed by an earthquake then the homeowner may very well not be entitled to any payout from the insurance company.

Insurance coverage questions can be quite complex.  For example, if a homeowner’s policy includes coverage for fire but excludes coverage for earthquake, then a question may arise whether or not coverage exists if a water heater falls over in an earthquake starts a fire.  In such a situation, the insurance company may claim that no coverage exists because earthquake damage is excluded from coverage.  However, the homeowner may claim that the damage was caused not by earthquake but by fire, and fire damage is covered in the policy.  Many of these types of questions have already been answered by California cases, but others remain unanswered.

When insurance coverage questions exist, attorneys often get involved in an effort to obtain insurance coverage for their clients.  These attorneys often work long and hard in an effort to obtain such coverage.  Many times such efforts are successful, but sometimes they are not.  An unusual example illustrates this concept.

Several years ago, two motorists were traveling at night on an interstate freeway in Ohio when their car struck a cow that had wandered onto the freeway. The motorists were injured, and they filed suit against the owner of the cow.  However, the owner had no liability insurance.

The motorists’ policy apparently provided that the motorists’ own insurance policy would cover them for injury or damage if another motorist was at fault for a collision even if that other motorist didn’t have any insurance.  Because the owner of the cow had no insurance, the motorists made a claim against their own insurance company for uninsured motorist coverage.

The insurance company denied the claim and the matter was submitted to a court for a decision.  The Court found that the motorists’ policy provided coverage for injuries caused by an accident arising out of the “ownership, maintenance or use” of an uninsured land motor vehicle. The court found that the owner of the cow had no insurance.  However, the Court had a problem with whether or not a “cow” qualified as a “motor vehicle.”   The Court’s own words are as follows:

“There appears to be no dispute that there was a collision; the cow was not insured at the time of the collision, and that the cow caused the collision.  The dispute in this case is whether the cow was a ‘land motor vehicle’ as defined in the policy. While a cow is designed for operation on land, we do not believe a cow is a “motor vehicle.”  The policy at issue does not separately define ‘motor vehicle;’ therefore we must look to the common, ordinary meaning of this term.  The American Heritage Dictionary defines ‘motor vehicle’ as, ‘a self-propelled, wheeled conveyance that does not run on rails.  A cow is self-propelled, does not run on rails, and could be used as a conveyance; however, there is no indication in the record that this particular cow had wheels.  Therefore, it was not a motor vehicle.”

For the full report of the case, see Mayor v. Wedding, (2003) WL 22931354.

The end result?  The cow won (and the motorists lost).

The foregoing article is provided for general information purposes and should not be used in connection with any specific legal matter.  Persons with legal issues or matters should consult competent legal counsel. 
Robert B. Jacobs is an attorney, mediator and arbitrator with over 30 years of litigation experience.  He mediates business, real estate, construction, personal injury, wrongful death, employment, trust and probate cases.  He is a designated Super Lawyer and holds an AV rating with Martindale-Hubbell.  He was the 2020 chair of the ADR section of the Contra Costa County Bar Association and the co-chair of the ADR section of the Alameda County Bar Association. Since 2018 he has been an update author for the CEB treatise Real Property Remedies and Damages. He is an adjunct law professor at Hastings College of the Law in San Francisco.  Reach him at [email protected]

Know Whereof you Read Before Signing a Contract

         Next time you take out a loan or refinance your house, do something unusual: Read all the loan papers.

You’ll drive the loan officer crazy.  The officer will meet you in a large and spacious conference room with a stack of papers at least a foot high.  She’ll set the first group of documents down on the table and slide it toward you.  She’ll show you the signature line and say, “Sign here, here and here.”

If you start reading the papers line by line, the loan officer will first look surprised.  Then impatient.  Then helpless.

My wife has this down to a science.  We’re together, the loan officer hands us a paper, and I start to read it.  My wife quickly says, “He’s a lawyer.  He reads everything.”  This seems to pacify them.

What percentage of borrowers actually read the documents they sign?  Nobody knows for sure.  But if the reactions of the loan officers are any indication, it can’t be very high.

If you don’t read the contract but just sign it, are you bound by its terms?  In most cases, yes.  The problem is, many times borrowers won’t understand the language even if they read it.  If they don’t understand it, are they still bound?  Again, in most cases, yes.

What to do?  Take a lawyer with you to review the documents.  Who actually does that?  Almost nobody.  What does that mean?  That lenders are free to put in that contract a lot of provisions that benefit them and only them.

A small example:  Have you ever signed a contract that provided that any lawsuit about the contract would be filed in New York or another state?  Some states limit or bar punitive damages.  That means if the lender, brokerage house or other institution is really, really guilty of doing something wrong, the most you’ll get is you actual (or out of pocket) damages.  You might get some emotional distress or related damages.  But your ability to get other damages may be severely limited or barred altogether.

How about that?  If a major corporation presents you with a contract to sign that says any lawsuit will be filed in Wyoming, or Delaware or Kansas, will your lawsuit be filed there?  Very possibly, yes.  If a problem develops, you might find yourself talking to lawyers 2,000 miles away.  And a trial?  Try to find a comfortable motel at a good price, because you may find yourself having an extended stay at a place you’ve never been before.

Fortunately, most contracts don’t end up in a lawsuit.  But for conservative people who can afford it?  Know what you’re signing.

Real Estate Transactions are Complex

I remember when we bought our first house in 1989.  We were presented with a document that was titled “Deposit Receipt.”  I accepted this document at face value, and assumed it was a receipt for the deposit we were making on our house purchase.  But as I read through this document, it started looking less and less like a “receipt” and more and more like a contract.  We never did see another contract in connection with our purchase of that house.  The Deposit Receipt was all we ever signed.  Sure enough, that document served as a “receipt” for our deposit, but it also served a more significant purpose.  That document was the contract by which we obligated ourselves to make the single largest purchase we’d made in our lives up to that point.

My wife occasionally points out that escrow officers don’t always know what to do with me.  Whenever we’ve closed a loan, or a real estate transaction, I always sit in the escrow office and read through the entire stack of documents, even if they are a foot high.  The escrow people often don’t seem to know what to do.  It seems like they’ve never had anybody actually wade through all of this stuff before.  Trouble is, I know what it means.  So I’m checking up on them – everybody – by reading all of the fine print.

Everybody tells me I should just sign the documents and take them home with me.  But if I do that, when will I read it all?  Never.  There’s no time like the present.  Plus, if I’m going to read it all, I may as well read it before I obligate myself to it.  Only if I read it can I know if there’s a potential problem involved.

It’s no surprise that non-lawyers who are involved in real estate transactions might get a bit bleary-eyed when confronted with such a stack of paper.  But there’s no defense based on the amount of paper involved in a transaction.  Except in unusual situations, Buyers, Borrowers, Lenders and Sellers who sign loan agreements or other documents are generally bound by such documents regardless of whether or not they read them.

So what’s a buyer to do when presented with a large stack of documents to sign?  Understanding all of the documentation involved in a real estate transaction is no small thing.  There are really only three options. First, Buyers and Sellers can choose to sign all of the documentation without reading anything.  This is certainly the quickest and easiest option, and it seems like some buyers opt for this approach.  But this is a risky approach if there are problems or potential problems.  Second, Buyers and Sellers can read the documentation on their own.  But real estate transactions are complex, and substantial education, experience, and training may be necessary in order to fully understand all of the elements of a real estate transaction. Most Buyers and Sellers lack the necessary training, education, and experience to fully understand and identify potential problem areas in a real estate transaction.  Third, Buyers and Sellers can rely on a professional to guide them through the process.  This professional can be a broker, an agent, an attorney, or another real estate professional.  This seems to be the approach taken by most Buyers and Sellers.  The quality of the advice and guidance received will depend in large part on the skill, experience, training and expertise of such a professional.


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.

The Rule of 78s

            My father-in-law Sandy was a quiet, gentle man.  He’s passed away now, but his memory lives on in those of us who knew him well.  He left a lasting imprint on a large number of us, and he taught us many, many things. One of the minor things he taught me about was the rule of 78s.

Sandy was an engineer.  He sometimes did things that were perhaps unimaginable to those of us who had not been through the School of Engineering.  One of those feats was to perform the interest calculations on his new car loan.

If memory serves, Sandy bought a new Toyota.  He bought it on credit.  After he had received a few statements and made a few payments, Sandy actually got out his mathematical tools (a slide rule perhaps?) and he calculated the amount of interest that was being credited to his account with each payment that he had made.  Sandy wasn’t afraid of numbers.  I sometimes caught him reading books that had strange mathematical symbols.  So in truth, he probably did these calculations as much for fun as he did to check up on the vehicle lender.

Anyway, Sandy’s calculation showed that the lender wasn’t crediting his payments properly.  In other words, Sandy’s principal balance was not going down as quickly as it should have been.  The lender was applying too much of the payment towards interest and not enough of each payment to principal.

I remember Sandy coming down the hall shaking his head.  He told me what the problem was.  He said that he had discovered this problem with the lender’s calculations, and so he contacted them to let them know they were incorrectly crediting his payments, and that his principal balance should actually be lower than what was shown on his statements.  That was when he learned about the “Rule of 78s.”  The lender’s representative told Sandy that the interest was being correctly calculated, but that it was being calculated according to the “Rule of 78s” which meant, in essence, that the interest on the front end of the loan was being paid off at a higher rate than it would be at the end of the loan.  Apparently, when the Rule of 78s is applied, everything works out well in the end if the loan is paid over its full term on the basis stated in the loan papers and if the loan isn’t paid off early.  But if the loan is paid off early, then the lender collects a bit more interest than it would otherwise.

Sandy wasn’t happy about it.  But he had signed a contract that allowed the lender to credit his payments according to the Rule of 78s, and so Sandy figured out he would just pay off the car according to the loan terms (again, if memory serves, he subsequently decided to pay it off early).

I subsequently bought a car on credit, and sure enough, there on the loan application was a box that could be checked so that the “Rule of 78s” could be applied.  However, the box wasn’t checked, and so it wasn’t used in connection with my car loan.

Exactly what is the Rule of 78s? I couldn’t find an article in Encyclopedia Brittanica that discussed it.  But there is an article in Wikipedia.  The URL is   Reading this article?  It helps if you like math.  If you really, really like math, then you might enjoy the Wikipedia article on Rule of 72 Interest Calculations at   I was interested to find that some years ago a federal law was passed that prohibited use of the Rule of 78s on consumer transactions with a term of more than 61 months.  This law is found at 15 U.S.C. 1615 (here’s the link:   Most car loans are 60 months (or less) and so this federal law may not prohibit the use of the Rule of 78s on car loans.

How does this apply to the purchase of housing?  Most home loans are made for a term of more than 5 years (or 60 months).  Since 15 USC 1565 prohibits the application of the Rule of 78s to loans with a term of more than 61 months, most home loans would never be properly subject to the Rule of 78s.

Proper calculation and application of interest can be complex.  Persons with any question about their loan, whether about the interest or otherwise, should contact a trained professional.

Keeping Your Checks

           I recently spoke to an accountant about tax problems.  He pointed out that there are certain statutes of limitations as to tax disputes with the IRS, and that due to these statutes of limitations many accountants advise people to keep their financial records for at least seven years.

Makes sense.  But what’s the preferred time to keep financial records? Is it five years? Seven years?  Something more?  Something less?

Well, it all depends on why the records are being kept. If you want to feel a bit more snug in your home, then of course it’s possible to fill closets and file drawers with old financial records.  At least then you know what you’ve bought, saved, and spent.  I remember my mother showing me her account ledgers from the 1940’s.  It was delightful to see what she paid for a quart of milk in, say, 1942.  And her household expenses were far less when my dad was teaching typing for 25 cents an hour.  It can be a great nostalgia trip to look back and remember those days when bread cost 10 cents a loaf, an ice cream cone was 10 cents, a candy bar was 5 cents and a gallon of gas was 19 cents (I don’t think of myself as being old, but even I can remember those prices).

So nostalgia aside, why is it a good idea to keep old financial records for a period of time, or is it even necessary at all?

If you never have a future dispute or misunderstanding with the IRS, or your lender, or anybody else, then you may never have a need to keep any records.  But the several statutes of limitations are written, in part, because old records tends to get discarded after a period of time.  The thinking is that it’s unfair to allow old, stale claims to be made against people after they’ve tossed all their old records and can’t prove much through their documents.

But the follow on to that line of thinking is that people do tend to keep their written financial and other records for some period of time.  And there is good cause for this.  If there’s a financial dispute or a claim of any kind, then much of the evidence may well be centered on financial records.  For example, an accountant might say that the IRS has a period of several years in which they can come back and challenge a tax return.  Just because the IRS doesn’t say something now doesn’t mean they can’t in the future.  If a taxpayer can’t produce records to verify the deductions claimed, then that taxpayer could find themselves in a very difficult (and potentially expensive) situation.  If a borrower claims to have made payments that can’t be proven later, then it can be both difficult and expensive to resolve a dispute that might have easily been settled if the proper documents were available.

How long does a bank keep copies of checks?  Some banks will tell you that they only keep them for a period of a few years.  So what happens if there’s a dispute?

Over the past few years, there have been a number of reports about banks not being able to find an original loan agreement, or an original promissory note.  What happens if the bank modifies a loan agreement – but if nobody can find that modification agreement?  Loans get paid back over a period of 30 years or more.  There can be a lot of water going under the bridge in 30 years.  If at the end of the day the Bank says that one amount is still due to pay off a loan, but the borrower says it’s something less, then how can such a dispute be resolved?

The best way to resolve such a dispute is through producing a copy of the signed loan agreement, a copy of the signed loan modification agreement, and by producing copies, front and back, of each and every check submitted in payment.  That’s a bit of an administrative feat – but it sure makes things easier if there’s a dispute about how much has been paid.  Borrowers should also review their statement each month to ensure that their loan payments are being properly credited, and should immediately raise a protest if the numbers aren’t correct.  And copies of these statements should also be saved, front and back.

And what if a borrower wants to start making extra payments each month to pay off their loan early?  In such a case it’s certainly a good idea to keep a copy of the canceled checks – just in case the extra payments aren’t properly credited to the account. Early payments can have a profound effect on the interest charged on a loan – but only if the extra payments can be documented, or proven, in the event of a dispute.  Some loans provide for a fee or a penalty to be paid for the privilege of making early payments.

Proper calculation and application of interest can be complex.  Persons with any question about their loan, whether about the interest or otherwise, should contact a trained professional.

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.

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.

SURETY: An Important Ancient Principle

The concept of being a “surety” goes back nearly as far as recorded history.

Perhaps the first recorded instance of “surety” occurs in connection with the experience of Joseph as recorded in the Book of Genesis in the Bible.

As recorded in the Bible, Joseph had been sold as a slave by his brothers for 20 pieces of silver.  His new owners took him into Egypt, where he was sold to Potiphar, Captain of the Guard for the Egyptian Pharaoh.  Joseph was wrongfully accused by Potiphar’s wife, and he was sent to prison.   While still a prisoner, and by divine assistance, Joseph was elevated to a position of responsibility in the prison.

The Egyptian Pharaoh had a series of remarkable and vivid dreams.  He heard that Joseph could interpret dreams, and Pharaoh sent for him. When Joseph arrived, Pharoah described the dreams to Joseph, and Joseph interpreted them.  Joseph also warned Pharaoh about an upcoming famine that would be 7 years long, and Joseph recommended a food storage program be followed. Pharaoh was impressed, and he made Joseph the ruler over all of Egypt, second only to Pharaoh.

After the famine started, Joseph’s family back in the land of Canaan was suffering from the famine.  Joseph’s brothers came to Egypt to buy some of the food that Joseph had recommended be stored.  They met with Joseph, but they did not recognize him.  Joseph sold them food, but then asked them if they had yet another brother.  They said that they did, and Joseph told them that they were not to return to Egypt unless their last brother came with them. Joseph’s brothers then returned to their home in Canaan.

After a period of time, the brothers and their families needed more food.  The brothers told their father, Jacob, that they could not return to Egypt unless they took their last brother with them.  Their father resisted – he didn’t want to put his last son at risk.  As recorded in Genesis chapter 43, Judah made the following statement to his father: “Send the lad with me, and we will arise and go; that we may live, and not die, both we, and thou, and also our little ones.  I will be surety for him; of my hand shalt thou require him: if I bring him not unto thee, and set him before thee, then let me bear the blame for ever.”

Jacob relented, and let Benjamin, the youngest brother, go to Egypt with Judah and his brothers.  After several dramatic events, it looked like Benjamin was going to become a slave in Egypt and would not be allowed to return to his father Jacob.  In a very moving plea, as found in Genesis chapter 44, Judah explains to Joseph that Jacob’s life is “bound up in the lad’s life” and that it would literally kill Jacob if Benjamin did not return.  Judah then says to Joseph “For thy servant became surety for the lad unto my father, saying, If I bring him not unto thee, then I shall bear the blame to my father for ever.  Now therefore, I pray thee, let thy servant abide instead of the lad a bondman to my lord; and let the lad go up with his brethren.”  Because of his surety pledge to his father, Judah offered himself to become a slave or servant, in lieu of his brother Benjamin becoming a slave.

As shown in the story of Joseph, a surety is one who is responsible for another.  For Judah, being a “surety” meant that Judah agreed to be responsible for his youngest brother’s personal well-being, and if necessary he would offer his own self, his own life, or his own freedom instead of his brother’s life or freedom being lost.

In modern legal usage, a surety is usually a person or a company who agrees to answer, or be liable, for the debt of another.

It may seem odd that one person would agree to be responsible for the debts of someone else.  But this arrangement can be seen all the time in financial transactions where one family member agrees to be responsible for another family member.  The person who serves as surety is usually better positioned financially than the person being helped.  The surety often has an interest in the financial well being of the borrower – perhaps the surety wants to see that the borrower receives credit for some type of a purchase.  This type of surety is sometimes known as  a “Voluntary Surety.”

Some commercial bonding companies will even write bonds where these companies agree to serve as a surety for someone else.  These companies agree to serve as surety in exchange for a price or a fee – in other words, it is part of their business. This type of surety is sometimes known as a “Compensated Surety.”  Surety Companies, or Bonding Companies, write bonds and thereby become a surety in certain legal matters, when one person is required to provide a bond for the benefit of another.

For example, if a plaintiff wins a lawsuit and receives a money judgment, and if the defendant wants to appeal the judgment, then in many cases the plaintiff can go ahead and collect on the judgment while the appeal is being decided.  However, it may be impossible for the defendant to get its money back if the case is reverse on appeal.  If the defendant files an appeal bond, then the plaintiff may be stopped, or stayed, from collecting on the case until the appeal is concluded.  There are other legal proceedings where bonds are either required or preferred.

Bonds are common in contractor law, where the law generally requires a contractor to have a bond before the contractor can sign contracts and work as a contractor.  The concept is that if the contractor should become liable on a construction based claim, then the surety will be liable to pay the claim up to the limit of the bond amount if the contractor can’t or doesn’t pay.

Getting a bond from a bonding company can be expensive.  The law allows for private individuals to also serve as sureties in some situations.  However, such private individuals have to meet certain requirements.  For example, a court officers can’t serve as a surety – and a member of the State Bar of California can’t serve as a surety.  Also, a private surety must be a California resident, and must either own real property or be a householder.  Such a private surety must also have a net worth more than the amount of the bond, and this net worth must consist of real property or personal property located in California, minus the debts and obligations of the person.

A Surety is a person or a company who agrees to be responsible for the debt of another person.  A person can act as a “Surety” either on a voluntary basis, or in exchange for a fee.  Most bonding companies act as “Surety” in exchange for a fee.

Some homeowners may have questions about the consequences of a foreclosure.  Some homeowners are concerned that following foreclosure, a lender may be able to subtract deposits out of a depositor’s account without further notice.  Other homeowners are concerned about their credit and their ability to buy a new home in the future.  Others are concerned about whether or not they may be taxed on the forgiven amount of their loan.

These are all valid questions, a deserve careful evaluation in connection with planning a course of action.  For some borrowers, a short sale is the best approach to take.  Others may benefit more from a foreclosure.  Others may want to attempt to obtain a release of liability from their lender in exchange for a deed in lieu of foreclosure.  And still other may be better off in Bankruptcy.

The considerations involved in planning an optimal strategy involve complex issues, and the best strategy for any given individual often hinges on issues of lender liability, foreclosure law, lending law, tax law, bankruptcy law, and the likely credit effect of any given course of action.

In addition to all of these considerations, there is another area of great concern to some borrowers.  These considerations involve the use of a surety, or guarantor.

Borrowers sometimes have parents, friends, family members or others “co-sign” on a loan.  When these borrowers go into default on their loan, they are often very concerned about the effect of such a default on these “co-signers.”  Many times both the borrower and the co-signer want to know what will happen to the co-signer’s assets in the event of a foreclosure, short sale, or a deed in lieu of foreclosure. In addition, some co-signers want to know the likely effect on them if the borrower were to file a petition in bankruptcy.

The concept of Surety is an ancient one. In addition, Shakespeare based one of his plays on the concept of a Surety.  In the Merchant of Venice, Shylock is a moneylender.  Bassanio obtains a loan from Shylock, and Antonio agrees to serve as surety, which means he will be personally liable for the debt if Bassanio should not repay the money which was loaned.  Bassanio fails to repay the debt on time, and Antonio doesn’t have enough money to pay the debt.  As a result, Shylock lays a claim to the collateral – which is a pound of Antonio’s flesh.  In a dramatic turn of events, Shylock is told that he can have his pound of flesh – but not a drop of blood.

In present-day United States, the contract between Shylock and Antonio allowing Shylock to take a pound of Antonio’s flesh would never be enforced.  Antonio might remain liable for money, but he would not be required by a U.S. Court of law to give up his life or a portion of his body as provided by the contract.  However, even though the precise terms of the agreement between Shylock and Antonio would not be enforced, the concept of a surety is valid under U.S. law.

Some borrowers have used a surety to help them buy a home.  These sureties are often parents or other family members who have agreed to help another family member buy a their property.  In these situations, the buyer is often unable to qualify for the kind of loan that would be needed in order to buy a home.  The surety either has the good credit or the income that the borrower lacks.  As a result, parents or others often “co-sign” on a loan to other family members.

In most purchases of residential real estate, this “co-signing” occurs by having the surety act as a “co-borrower.”  This is different from a situation where the parents or other family members act as a “surety.”  California law has specific rules, protections, and defenses that apply to sureties.  When a family member acts as a “surety,” then these specific protections, rules and defenses would apply.  However, most residential home loans are set up so that the “surety” actually signs as a “co-borrower.”  In these situations, the family member actually goes on title as an owner, and signs the promissory note and deed of trust as a borrower, or “co-borrower.”  This means that the family member isn’t just guaranteeing payment by the borrower; instead, the family member is actually a borrower in the primary sense.  It means the family member has borrowed money at the same time as the buyer, and the borrowed money has been used to buy a property (or to refinance a loan secured against such a property).  This means that for liability purposes, the buyer and his or her family member will in most cases be treated the same, and the “co-signing” family member will not receive any special treatment nor any special protections or defenses.

If borrowers have “sureties,” “guarantors” or “co-signers”, then such borrowers often want to “look out” for their sureties, and they are often concerned about the consequences to the surety if the borrower cannot repay the loan as agreed.

The term “co-signer” is actually an informal term that is commonly used to refer either to a “Surety,” a “Guarantor” or a co-borrower.  California law has for the most part eliminated differences between a  “Surety” and a  “Guarantor.”  But the consequences for a “surety” and a “Co-borrower” may be different.

The California Civil Code provides a number of protections and defenses for sureties.  But these protections may not apply to a situation where a family member or friend acts as a “co-borrower” instead of as a guarantor or surety.  When a friend or family signs as a “co-borrower”, then that person is actually a borrower of the money.  In such situations, the “co-borrower” will generally sign the promissory note or other loan document, along with the deed of trust.  Many times the lender will require that the “co-borrower” actually become an owner of the property and that they go on title, even when the “co-borrower” is primarily acting as a surety or guarantor. In such situations, it is very likely that if the buyer/borrower defaults, that the “co-borrower” will be treated as a borrower for many, most, or all purposes.

For example, a default in loan payments can negatively affect a borrower’s credit rating.  Such a default may not negatively affect a surety’s or a guarantor’s credit rating, but such a default would almost certainly affect the credit rating of a “co-borrower.”   Some foreclosures and short sales can produce a negative tax consequence for a borrower.  Professional tax advice would need to be obtained as to whether a “co-borrower” would also experience negative tax consequences.  However, any potential negative consequences following a default may be different for a surety than for a co-borrower.  In some situations, a surety may be relieved of liability if a creditor changes the obligation of the borrower – but a “co-borrower” may not receive this benefit.

Suretyship, guarantor and co-borrower situations can be complex, and the legal principles, statutes, and cases that apply to such situations can also be complex.  Persons involved in suretyship, guarantor or co-borrower situations should consult competent legal counsel and should obtain professional tax advice.

Deal Points Can Be Critical

So when is a deal not a deal?  The answer is, it depends.

Sometimes it seems like half of the law is tying down loose ends.  And sometimes it seems like the other half consists of getting written commitments so people don’t change their minds.

Here’s a good example.

A Seller sold a house to a Buyer.  After the sale was completed, the Buyer filed a lawsuit against the Seller, claiming breach of contract, misrepresentation, negligence and negligent misrepresentation by the Seller.

Both of the parties were represented by attorneys.  The attorneys agreed, with court approval, that the claims would be submitted to “binding arbitration.”

Binding arbitration is a substitute for trial.  In binding arbitration, an arbitrator makes a decision or renders an award in favor of one of the parties.  This arbitrator isn’t usually a judge.  It can be an attorney, but it’s not necessary that an arbitrator be an attorney.  The arbitrator can be anybody the parties agree to.

The matter was decided by an arbitrator at “binding arbitration” and the arbitrator rendered an award of $55,475 in favor of the Buyer.  The Buyer asked the Court to make the award enforceable, but the Seller objected.  The Seller claimed that he had never agreed to binding arbitration.  The Seller apparently may have agreed to non-binding arbitration, but not to binding arbitration.

The Court had to make a decision whether or not the binding arbitration award was valid and enforceable.  In order for the award to be valid, it was necessary that the parties have agreed to submit the matter to binding arbitration.  The Seller claimed that he had never agreed to binding arbitration, and the Buyer wasn’t able to provide the court with definite proof that the Seller had agreed to binding arbitration.  The Court held that an attorney’s agreement to binding arbitration is insufficient to commit the client to binding arbitration.  Because the Seller’s attorney had agreed to binding arbitration, but because there was no proof that the Seller himself had agreed, the Court found the arbitration award unenforceable. Giving up a right to trial is a substantial right, and the Court wasn’t satisfied that the Seller had ever actually given up his right to a trial.  The case is reported as Toal v. Tardif (2009) 178 Cal. App. 4th 1208.

That’s a tough spot for the Buyer.  The Buyer had spent all of the time, money, and attorneys fees necessary to get through arbitration and receive an award, only to find out that the award was no good.  As far as the Buyer was concerned, this was a done deal. But due to an uncertainty, this Buyer lost his entire award.

Sometimes legal proceedings seem like a ponderous, complex, over-the-top process.  But it’s exactly these types of situations that cause lawyers to spend so much time confirming every arrangement, crossing every “t” and dotting every “i”.  It can be surprising, frustrating and disappointing to think that you’ve got a solid deal in place, only to later find out there’s an infirmity.

The foregoing article is provided for general information purposes and should not be used in connection with any specific legal matter.  Persons with legal issues or matters should consult competent legal counsel.

Robert B. Jacobs is an attorney, mediator and arbitrator with over 30 years of litigation experience.  He mediates business, real estate, construction, personal injury, wrongful death, employment, trust and probate cases.  He is a designated Super Lawyer and holds an AV rating with Martindale-Hubbell.  He was the 2020 chair of the ADR section of the Contra Costa County Bar Association and the co-chair of the ADR section of the Alameda County Bar Association. Since 2018 he has been an update author for the CEB treatise Real Property Remedies and Damages. He is an adjunct law professor at Hastings College of the Law in San Francisco.  Reach him at [email protected]

Written Contracts are Best

Words are slippery.

My father never went to law school.  He worked as an English professor for 39 years.  To the best of my knowledge, he never went to trial, and I suspect he never set foot in a courtroom.  But he gave me one of the best legal gems I’ve ever run across, which is this: “Words are slippery.”

There’s no flash, no glamour to that sentence.  But it drives right to the heart of the matter.

These days, attorneys sometimes refer to this concept as “He said, she said.”  In other words, it can be hard to prove just what was said in a given transaction.  When words are spoken, and one party relies on those words, then problems can result if the person who spoke the words denies them after circumstances have changed.  Sometimes memories fade.  Sometimes people just aren’t honest.  Sometimes people weaken and bend when an economic opportunity arises, but previously spoken words get in the way.

We’ve all seen it.  People make promises to each other, and then when payday comes, it can be just too expensive or difficult to stand by the promise.  It can be very, very difficult, or very, very expensive to stand by some promises.

This problem isn’t new.  It goes clear back to the dawn of recorded history.  One of the earliest recorded frauds is found in the Bible at Genesis chapter 29, where a bait and switch fraud involving a marriage is described in some detail.

The problem of broken promises, or fabricated promises, has a rich history in the laws of America and England.  Part of this history is reflected in a law commonly known as the “Statute of Frauds.”  This law provides, in part, that an oral agreement to sell real estate is unenforceable unless the promise is written.  This means that an oral promise to sell a house or other real estate to someone may be completely unenforceable even though the oral promise was actually made.

The Statute of Frauds has many exceptions, and application of that law can be difficult and quite complex.  The best rule of thumb is that person who buy real estate should always use a written contract.  An even better rule of thumb is that such buyers would do well to have their contracts reviewed by an attorney.