Ryan C. Squire
Garrett & Tully, P.C.
Zi C. Lin
Garrett & Tully, P.C.
Motunrayo D. Akinmurele
Freeman, Freeman & SmileyPhone: 310-255-6170
Here are five important cases which affect real estate in California in 2021. We apologize if your favorite case was excluded. It has been a turbulent year.
In re Brace, 9 Cal. 5th 903 (2020)
Presumptions pertaining to, and transmutations between community property and separate property clarified.
Married couples commonly use community funds to purchase real property and take title as "husband and wife, as joint tenants." Under 11 U.S.C. Section 541(a)(2), property of the bankruptcy estate includes "[a]ll interests of the debtor and the debtor's spouse in community property as of the commencement of the case." Whether property can be characterized as community property is the key issue when one spouse files for Chapter 7 bankruptcy protection, and the other spouse does not. If the property is community property, then it is part of the bankruptcy estate, which means the entirety of the property could be sold by the Chapter 7 trustee for the benefit of the creditors.
Clifford Brace and Ahn Brace held title to two properties as "husband and wife, as joint tenants." Only Clifford filed for Chapter 7 bankruptcy protection, Ahn did not. The bankruptcy trustee sought a declaration that the two properties were community property, which would put the properties entirely into the bankruptcy estate.
The 9th U.S. Circuit Court of Appeals certified a question of law to the California Supreme Court -- "whether the form of title presumption set forth in Evidence Code Section 662 applies to the characterization of property in disputes between a married couple and a bankruptcy trustee when it conflicts with the community property presumption set forth in Family Code Section 760."
The California Supreme Court held:
1. For property acquired in or after 1975, the presumption in Family Code Section 760 that property is community property applies. This presumption applies to a dispute between one or both spouses and a bankruptcy trustee. "For joint tenancy property acquired during marriage before 1975, each spouse's interest is presumptively separate in character."
2. The presumption in Evidence Code Section 662 that the owner of the legal title is the owner of the full beneficial title does not apply when it conflicts with the community property presumption in Family Code Section 760.
3. For property acquired with community funds in or after 1985, the titling of a deed as a joint tenancy is not sufficient to transmute the property into separate property under Family Code Section 852, there must be a written declaration that expressly states the character or ownership of the property is being changed. For property acquired before 1985, "the parties can show a transmutation from community property to separate property by oral or written agreement or a common understanding."
The 9th Circuit adopted the California Supreme Court's holding in In re Brace, 979 F.3d 1228 (2020).
MES Investments, LLC v. Dadson Washer Serv., Inc., 56 Cal. App. 5th 451 (2020)
Laundry machine room is not a "residential unit."
The Court of Appeal held that where a tenant's (Dadson Washer Service's) lease for a coin-operated laundry machine room was not duly recorded in a West Hollywood apartment complex property's chain of title, it still constituted a valid property right enforceable against a subsequent purchaser (MES Investments) who acquired the apartment building with notice of the lease.
The lease's initial term had expired, but it had an automatic renewal provision. MES filed a declaratory relief action to void the lease, on the ground that the automatic renewal provision violated Civil Code Section 1945.5, which makes an "automatic renewal" provision of a lease "for the hiring of residential real property" voidable "by the party who did not prepare the lease" unless the renewal provision is printed in "at least eight-point boldface type" and notice of the provision appears "immediately prior to the place where the lessee executes the agreement." It was undisputed that Dadson, the tenant, prepared the lease and the automatic renewal provision did not meet the requirements of Section 1945.5.
The Court of Appeal affirmed the trial court's judgment in favor of Dadson, which found that: (1) despite the fact that the lease was not properly recorded, MES had notice of the lease (including a large sign on a wall adjacent to the laundry machines which said "Dadson") before escrow closed and was not a bona fide purchaser who acquired the property free of the lease; and (2) Section 1945.5 did not apply because the lease was not for the "hiring of a residential unit" as the laundry machine room did not constitute a residential unit.
Seila Law LLC v. CFPB, 140 S. Ct. 2183 (2020)
Lesser federal executive officers can be removed by the president without cause.
The Consumer Financial Protection Bureau was created by Congress in the wake of the 2008 financial crisis to protect consumers from misleading financial products marketed to American households, including credit cards, student loans, and mortgages. Congress transferred the administration of 18 existing federal statutes to the CFPB, including the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Truth in Lending Act. The CFPB has broad powers, including the authority to conduct investigations, issue subpoenas and civil investigative demands, initiate administrative adjudications, prosecute civil actions in federal court, and issue binding decisions in administrative proceedings. So far, the agency has obtained over $11 billion in relief for more than 25 million consumers.
The CFPB is led by a single director, who is appointed by the president with the advice and consent of the Senate, for a five-year term, during which the president may remove the director only for "inefficiency, neglect of duty, or malfeasance in office."
The CFPB served a demand (essentially a subpoena) on Seila Law LLC, a California-based law firm that provides debt-related legal services to clients. The demand sought information and documents related to the firm's business practices. Seila Law asked the CFPB to set aside the demand on the ground that the agency's leadership by a single director removable only for cause violated the separation of powers doctrine. When the CFPB declined, Seila Law refused to comply with the demand, and the CFPB filed a petition to enforce the demand in district court. The district court and the 9th Circuit found against Seila Law, who appealed to the U.S. Supreme Court.
The high court granted certiorari and reversed, concluding that CFPB's leadership by a single director removable only for cause violated the separation of powers doctrine. The court held that lesser executive officers such as the CFPB director derive their power from the president's executive power under Article II of the U.S. Constitution, and must remain accountable to the president
However, the provisions protecting the director from removal are severable from the provisions governing the CFPB's authority. Thus, the CFPB may continue operating, but its director is removable by the president.
How did the justices vote? Chief Justice John Roberts delivered the opinion of the court with respect to Parts I, II, and III, in which Justices Clarence Thomas, Samuel Alito, Neil Gorsuch and Brett Kavanaugh, joined. The chief justice also delivered an opinion with respect to Part IV, in which Justices Alito and Kavanaugh joined. Justice Thomas filed an opinion concurring in part and dissenting in part, in which Justice Gorsuch joined. Justice Elena Kagan filed an opinion concurring in the judgment with respect to severability and dissenting in part, in which Justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor joined.
Vasquez v. LBS Financial Credit Union, 52 Cal. App. 5th 97 (2020)
Abstracts of judgment with debtor's name transposed did not impart constructive notice.
Purchasers brought a quiet title action against judgment lienholder seeking declaratory and injunctive relief regarding the property purchased from the seller, against whom the lienholder had recorded abstracts of judgment that transposed seller's first and middle names.
The seller's name was "Guillermo W. Guerrero." The abstracts of judgment identified the seller/judgment debtor as "Wilbert G. Guerrero."
The lienholder maintained that the purchasers were not bona fide because they were allegedly on constructive notice of its abstracts of judgment, claiming the "red flag" was that the seller's middle name appeared as his first name on page 10 of the purchase agreement.
The trial court found in favor of the purchasers, holding that the abstracts of judgment recorded by the lienholder were improperly indexed and not locatable by a proper search. The court found compelling the purchasers' expert's testimony that the abstracts of judgment were essentially outside the chain of title of the subject property. This supported the finding that the purchasers had no actual or constructive notice of the abstracts of judgment.
The Court of Appeal affirmed the trial court's ruling.
The court held that it was not the purchasers' obligation to search the index of property records for documents that incorrectly used the seller's middle name as a first name. Therefore, the purchasers did not have constructive notice of abstracts of judgment recorded against the seller with first and middle names transposed.
The court also reaffirmed the doctrine of Orr v. Byers, 198 Cal. App. 3d 666 (1988), that for purposes of indexing and title searching, close is not good enough. A subsequent buyer or lender is not on constructive notice of the claims of a third party who holds an abstract of judgment, where that abstract of judgment is recorded against a debtor using a spelling of the debtor's name that slightly differs from how the debtor held record title to real property.
Instead, the burden is on the lienholder to record the abstracts of judgment against the owner under the name appearing on the title to his or her property, not on the purchasers to identify the lienholder's abstracts recorded on a variation of the owner's/seller's name using his middle name as a first name.
Moreover, it is a common misconception that the public can simply "look up title on a computer." In point of fact, the recording laws and the rules for searching the grantor-grantee index were developed decades or even centuries ago. Performing a true and proper title search entails far more than just "looking it up on a computer."
Finally, the court's discussion of inquiry notice is also instructive. The spelling used in the abstract only appeared in one place in the purchase documents -- beneath a signature line. Yet the signature itself did not contain the name found in the abstract. Further, the signature was consistent with the name typed everywhere else and the signatures signed everywhere else. The court explained the average typical homebuyer could reasonably conclude this was simply a typographical error rather than a pseudonym, and not inquiry-provoking.
Zieve, Brodnax & Steele, LLP v. Dhindsa, 49 Cal. App. 5th 27 (2020)
Surplus proceeds from foreclosure sale should be paid to a junior lienholder only to the extent the junior lien actually encumbered the property.
This case involved a dispute over who was entitled to the surplus proceeds generated at a foreclosure sale.
The property was owned by cotenants. Cotenants may sell or encumber their undivided interest without the consent of the other cotenants. Through a complicated series of transactions, one cotenant owned 75% of the fee, and the other owned 25%. A senior deed of trust encumbered 100% of the fee. The cotenant who held the 75% interest encumbered the property with a junior deed of trust.
Ultimately, the senior deed of trust foreclosed. The foreclosure sale generated surplus proceeds -- more than enough to pay off the senior deed of trust in full. Civil Code Section 2924k details how surplus proceeds are to be distributed, and in what order of priority. Here, although the foreclosure extinguished the junior lien, the junior was entitled to a share in the surplus proceeds.
A literal reading of Section 2924k could lead to the conclusion that a junior lienholder -- holding a lien against any interest in property, no matter how small -- would be entitled to all of the surplus proceeds. And the trial court awarded 100% of the surplus proceeds to the junior lender. The Court of Appeal reversed, holding that the junior lender was only entitled to 75% of the surplus proceeds. The cotenant who held a 25% interest was entitled to the other 25%. The court relied on the principles set forth in Caito v. United California Bank, 20 Cal. 3d 694 (1978).
This seems like a fairly straightforward ruling. However, the court was faced with a significant question over whether the enactment of Section 2924k altered the principles set forth Caito, decided 12 years before Section 2924k was enacted. The court concluded that Section 2924k did not alter the principles in Caito. The court held that Section 2924k could not be read literally as awarding a junior lienholder all surplus proceeds regardless of the percentage interest its deed of trust encumbered. Rather, Section 2924k had to be harmonized with other statutes and with Caito. The court concluded Section 2924k did not abrogated Caito even though Section 2924k's terms, read literally, might have suggested otherwise. Thus, although Section 2924k states that surplus proceeds must be paid to "the outstanding balance of obligations secured by any junior liens," the court concluded this meant surplus proceeds should be paid to a junior lienholder only to the extent the junior lien actually encumbered the property sold in foreclosure.