Forrester on Real Estate Law

No nonrefundable deposits in California real estate contracts

Kevin Forrester — Sun, 14 Feb 2010 12:51:50 -0800

Sometimes buyers and sellers agree in real estate purchase and sale contracts that the buyer's deposit will be "nonrefundable." Or a point may be reached in a transaction where the seller's interest in consummating the deal seems to exceed the buyer's interest in completing their "due diligence". In order to persuade the seller that the buyer is committed to the deal, the parties may then agree that some or all of the buyer's deposit will be "passed through" to the seller or retained in escrow on a nonrefundable basis.

Certainly the greater the buyer's "investment" in the deal, as represented by their releasing their deposit to the seller before close of escrow, the greater the likelihood the buyer will actually close the deal?

Perhaps.

But the recent decision by the California 4th District Court of Appeal in Kuish v. Smith (PDF) (February 3, 2010) ---- Cal.Rptr.3d ----, 2010 WL 373225 serves as a reminder of the fact that under California law nonrefundable deposits are not nonrefundable.

The Kuish and Smith Agreement:

In January of 2006, Bradford Kuish agreed to purchase William W. Smith, Jr. and Rhonda Lynn Smith's Laguna Beach residence for the sum of $14 million. Their agreement consisted of an offer, nine counteroffers, and escrow instructions that required Mr. Kuish to make a total of $620,000 in nonrefundable deposits to escrow. (The agreement was not an option contract and contained no liquidated damages provisions.) Escrow was to close on September 15. Mr. Kuish completed his deposits by April 21, and requested escrow cancellation on September 18.

The Smiths agreed to cancel escrow in October, sold their Laguna Beach property for $15 million to a backup buyer in November, refused to return Mr. Kuish's $620,000 nonrefundable deposit ($400,000 of which had already been "passed through" escrow to them in accordance with the parties' agreement), and litigation commenced.

The Kuish v. Smith Decision:

The court of appeal reversed the trial court and held that allowing the Smiths to keep the buyer's $620,000 "nonrefundable" deposit in the context of a rising market would constitute an invalid forfeiture:

In the context of a rising market, which was the circumstance of the instant case, an interpretation of the nonrefundable term of the agreement as precluding the return of plaintiff's deposit above and beyond any damages suffered by defendants as a result of plaintiff's breach would render that provision unenforceable. As discussed ante, “ ‘any provision by which money or property would be forfeited without regard to the actual damage suffered would be an unenforceable penalty.’ “ ( Freedman, supra, 37 Cal.2d at pp. 21-22, 230 P.2d 629.)

(Kuish v. Smith (PDF), emphasis added.)

The court further held that that no part of the $620,000 deposit constituted "separate and additional consideration" for the Smiths' agreement to extend the escrow period, and that the buyer's "deposit would have been nonrefundable in a falling market to the extent [the Smiths] were able to show damages under Civil Code section 3307." (PDF)

“Without the benefit of a valid liquidated damages clause, the seller may retain the deposit only to the extent that actual damages were incurred according to [Civil Code section] 3307. A deposit, however, can serve as a fund from which the seller obtains whole or partial reimbursement for actual losses. [Citation.] [¶] The seller must refund the excess over actual damages to the buyer, regardless of whether the breach was innocent or willful. [Citation.] This is true whether the buyer paid the deposit directly to the seller or into an escrow account. [Citation.] The deposit gives the seller the practical advantage of shifting the burden to the buyer to show that the seller's retention of the deposit constitutes unjust enrichment.” (1 Cal. Real Property Remedies and Damages, supra, § 4.69, p. 350.)

(Kuish v. Smith (PDF), emphasis added.)

My thoughts:

Deposits in California real estate contracts are not made nonrefundable by calling them nonrefundable. They are made nonrefundable only to the extent that they are available to compensate for a seller's actual damages after a buyer's breach, or to the extent that they are covered by a valid and enforceable liquidated damages provision. Sellers and their agents rely at their peril upon their own labeling of deposits as "nonrefundable" to determine refundability.

Loan Modification Step One: Do Your Homework

Kevin Forrester — Tue, 02 Feb 2010 06:00:00 -0800

The California Department of Real Estate initiated over 2000 investigations involving loan modification complaints last year, record numbers of real estate licensees either surrendered their licenses or had their licenses revoked, and the worst part is, most of the people who received "Desist and Refrain" orders from the DRE were not even licensed.

The California State Legislature has, since October of last year, prohibited anyone providing any loan modification services from charging any kind of advance fee, yet the loan modification scams continue.

Borrowers who are in danger of default or foreclosure as a consequence of the public or their own private economic downturn should very carefully evaluate their financial options before seeking out any fee-based or nonprofit loan modification help.

Loan modification step one is, do your own homework. An excellent starting point for your investigation is the DRE's comprehensive Consumer Alert, Fraud Warnings for California Homeowners (PDF) republished in November of last year (after California outlawed advance fees) and its consumer tips for working directly with your lender on loan modification (PDF). These publications are loaded with good information and links to other resources without charge.

Petition for Review of Burlage vs. Superior Court Denied

Kevin Forrester — Fri, 22 Jan 2010 23:16:21 -0800

On January 21, 2010, the California Supreme Court declined to review the Second District's upholding of a trial court's vacation of an arbitrator's award under Code of Civil Procedure 1286.2. Arbitration decisions, indeed, may have become more appealable in California for reasons discussed earlier on this site.

Help Haitians by Contributing to ShelterBox

Kevin Forrester — Sun, 17 Jan 2010 12:18:01 -0800

We can all help with Haitian earthquake relief by helping those who are already en route or on the ground in Haiti delivering essential aid. Great numbers of Haitians need shelter right now.

"ShelterBox is a disaster relief charity which provides aid in the form of ShelterBoxes. ShelterBox has responded to more than 75 disasters in almost 50 different countries, including the Boxing Day tsunami, Hurricane Katrina, and the Pakistan and China earthquakes." (Facebook.)

Please read what Fran Monks has written about ShelterBox at her site HOW TO MAKE A DIFFERENCE.

And then make a difference by contributing to ShelterBox at ShelterBoxUSA, or at any of the affiliated international websites linked to the ShelterBox home site.

Thank you.

Kevin Forrester

(ShelterBox was designated as a Global Rotary Club P roject in 2009.)

Afghanistan 2008:

Security follows the note, but only the note can foreclose

Kevin Forrester — Mon, 02 Nov 2009 16:47:35 -0800

Much has been written recently on the subject of mortgage foreclosure under the rubric “show me the note,” which suggests that a consequence of the widespread practice of, first, originating and, second, pooling and reselling mortgage obligations, is that many of these mortgages may have become unenforceable. This claim is based, in part, upon the fact that many notes have been “separated” from the mortgages or deeds of trust that secure them, and, in part, upon the fact that many notes have simply been lost.

The suggestion that this current state of confusion will ultimately redound to the benefit of borrowers is, however, overstated.

“A real property loan generally involves two documents, a promissory note and a security instrument. The security instrument secures the promissory note. This instrument ‘entitles the lender to reach some asset of the debtor if the note is not paid. In California, the security instrument is most commonly a deed of trust (with the debtor and creditor known as trustor and beneficiary and a neutral third party known as trustee). The security instrument may also be a mortgage (with mortgagor and mortgagee, as participants). In either case, the creditor is said to have a lien on the property given as security, which is also referred to as collateral.’” Alliance Mortgage Company v. Rothwell (1995) 10 Cal.4th 1226, 1235.

When a loan is sold, the promissory note is assigned to whoever buys the note, together with the note’s security. The security follows the note automatically. (California Civil Code § 2936 (enacted 1872).)

“Similarly, this has long been the law throughout the United States: when a note secured by a mortgage is transferred, ‘transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter.’ Carpenter v. Longan, 83 U.S. 271, 275 (1872).” In re Vargas (2008) (PDF) 396 B.R. 511, 516, emphasis added.

Under California Civil Code section 2934, assignees of mortgages and deeds of trust can record their assignments, but there is no provision for recording assignments of promissory notes. In a simple transaction, therefore: Lender A makes a loan to Borrower B, and immediately sells and delivers the note, and records an assignment of the trust deed securing the note to Investor C, and tells Borrower B that their note has been sold. If Borrower B stops making payments to Investor C, Investor C (the note holder) instructs the trustee of its trust deed (the neutral third party) to foreclose on Borrower B.

If Investor C would then sell their note to Investor D, and Investor D to Investor E, and so forth and so on, each sale would require the recording of another assignment and the transfer of the original note to its new owner.

Simple, except a problem of keeping track of the note and security arose when the transaction described above was multiplied hundreds of thousands of times. The recording of assignments of hundreds of thousands of deeds of trust over and over again became tedious, and expensive, so a new private entity entitled “Mortgage Electronic Registration Systems, Inc.” (“MERS”) was created to enable mortgages and deeds to trust to be assigned only once (to MERS).

“MERS, Inc., is an entity whose sole purpose is to act as mortgagee of record for mortgage loans that are registered on the MERS System. This system is a national electronic registry of mortgage loans, itself owned and operated by MERS, Inc.’s parent company MERSCORP, Inc.” In re Kang Jin Hwang (2008) 396 B.R. 757, 761, emphasis added.

MERS became the “neutral third party” of choice because the promissory notes secured by the mortgages and deeds of trust assigned to MERS could be re-sold over and over again without the inconvenience of re-recording assignments of the mortgages and deeds of trust.

Simple, except someone forgot to keep track of the notes, and many notes got lost, never assigned, assigned and never transferred, or in some other way “separated” from the documents that secured them.

As recently as August 2009, the Supreme Court of the State of Kansas, in the case of Landmark National Bank v. Kesler, acknowledged “in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable.”

“’The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan [becomes] ineffectual when the note holder [does] not also hold the deed of trust.’ Bellistri v. Ocwen Loan Servicing, LLC (PDF), 284 S.W.3d 619, 623 (Mo. App. 2009).” Landmark National Bank v. Kesler, emphasis added.

As a practical matter, the Supreme Court of Kansas may be right in the sense that the note-holder cannot foreclose until they become re-connected with the holder of the deed of trust securing their note. But, because the security always follows the note, this should not be taken to mean that the holder of a valid promissory note cannot, as a legal matter, eventually enforce their note. Their note’s enforcement will only be delayed until the history of the note is traced to the bona fide holder, and that bona fide holder determines that a breach has occurred and authorizes the neutral third party holding their security, to foreclose.

And eventually may take a very long time because, as explained above, there is no vast database of promissory notes and their holders, while there is a vast database of security instruments held by neutral third parties, MERS in particular.

MERS is left with the ability, but not the right to foreclose. Without the note, MERS is entitled to do nothing but hold the beneficiary's security. Unfortunately, in California at least, the vast majority of foreclosures are conducted non-judicially by way of trustee sales. MERS, as a neutral third party, for example, may receive instructions from a “beneficiary” named in their vast database (who may or may not hold the original promissory note) that one of the beneficiary's notes is in default, and initiate and complete a non-judicial foreclosure without ever having the note in hand. (Trustees are not required to take possession of the original note and deed of trust when asked to initiate a foreclosure. California Trust Co. v. Smead Inv. Co. (1935) Cal.App.2d 432, 434-435.)

On the subject of “show me the note,” a borrower being foreclosed upon non-judicially will have no opportunity to say “show me the note” to anyone who matters, unless the borrower ends up in bankruptcy court seeking a stay, or in Superior Court seeking an injunction. In either case, the borrower’s counsel or the court should ask the foreclosing party to “show them the note” to confirm that the beneficiary or its agent is, in fact, “in court” and entitled to relief from stay, or entitled to foreclose.

So “show me the note” is not the answer to every borrower’s wish, but it is a fair question to be asked of all foreclosing parties, who each should be required to enforce their bona fide legal rights in accordance with established law, not the law of convenience. The fact that insufficient care was taken to preserve the bona fides of any mortgage transaction should not be allowed to create a windfall for either borrower or lender. Each should be required to negotiate the terms of foreclosing or re-financing based upon their actual transaction, not upon the transaction they wish they had.

California Legislature prohibits all advance fees by loan modification service providers

Kevin Forrester — Mon, 12 Oct 2009 15:02:53 -0800

Governor Schwarzenegger today signed Senate Bill 94 which could effectively eliminate all fee-based loan modification services provided by real estate licensees, attorneys, or anyone else in the State of California. By its terms (PDF), the Bill prohibits the charging of advance fees as follows:

(a) Notwithstanding any other provision of law, it shall be unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following:

(1) Claim, demand, charge, collect, or receive any compensation until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.

(2) Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.

(3) Take any power of attorney from the borrower for any purpose.

(Civil Code Section 2944.7, emphasis added.)

In addition to Senate Bill 94's prohibition on charging any advance fee for loan modification services, any person seeking to provide loan modification services for any fee must, before entering into any fee arrangement with a borrower, provide the following statement to the borrower in not less than 14-point bold type:

It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.

(Civil Code Section 2944.6(a) , emphasis added.)

It is important to note that the Governor vetoed the more onerous Assembly Bill 764, that would have conditioned the collection of fees upon the completion of loan modification, with the following veto message:

Although I support the prohibition of individuals charging advance fees for mortgage loan modifications, I do not agree with the provision of this bill that will only allow fees to be collected if a modification is successful. This could adversely affect legitimate businesses that provide loan modification services. As such, I am signing SB 94 that accomplishes this prohibition against advance fees without unnecessarily harming legitimate companies.

The impact upon legitimate loan modification service providers is unknown and unknowable at this time.

Senate Bill 94 was an "urgency" bill that went into effect immediately upon signing. Whether SB 94 will "unnecessarily harm" - to use the Governor's words - legitimate fee-based loan modification service companies currently operating in the marketplace remains to be seen. Because loan-modification negotiations are typically measured in months, not days or weeks, it may be unreasonable to expect a real estate licensee or lawyer or anyone else to work for months on behalf of a borrower without compensation, and without any security for being compensated, until after fully performing each and every service contracted to be performed on behalf of the borrower.

The video press conference promoting this legislation indicates that Senate Bill 94 was a reaction to scammers and con artists taking advantage of borrowers impacted by the current mortgage crisis. The unfortunate side-effect of SB 94 is to paint all real estate licensees and attorneys who happen to provide loan modification services with the same brush as the scammers and con artists. The borrowing public is now left with a choice between:

self-help ("call your lender"); or
non-profit and government-funded service providers; or
for-profit loan modification companies that are ready, willing and able to act like non-profits until after their work is done.

Non-profits are an important source of help to distressed borrowers, but It remains to be seen whether the public will be well-served by Senate Bill 94.

Arbitration decisions may have become more appealable

Kevin Forrester — Sun, 20 Sep 2009 13:15:53 -0800

Private arbitration decisions are not typically appealable in California, except in cases where:

1. The agreement to arbitrate specifically provides a right of appeal.

2. Our Courts of Appeal effectively provide a right of appeal.

The recent decision of the California Second District Court of Appeal, entitled Burlage v. Superior Court (August 31, 2009) (PDF) 177 Cal.App.4th 166, may open the door a bit wider to appeals of private arbitration decisions.

The California rule on private arbitrations is described this way by the California Supreme Court in Cable Connection, Inc. v. DIRECTV, Inc.:

“'Because the decision to arbitrate grievances evinces the parties' intent to bypass the judicial system and thus avoid potential delays at the trial and appellate levels, arbitral finality is a core component of the parties' agreement to submit to arbitration. Thus, an arbitration decision is final and conclusive because the parties have agreed that it be so. By ensuring that an arbitrator's decision is final and binding, courts simply assure that the parties receive the benefit of their bargain.'” Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334 at 1355, quoting Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 at 10.

The Cable Connection court emphasized "that parties seeking to allow judicial review of the merits, and to avoid an additional dispute over the scope of review, would be well advised to provide for that review explicitly and unambiguously." Cable Connection at 1361, emphasis added.

The agreement to arbitrate in Burlage did not provide a right of appeal.

What happened in Burlage v. Superior Court:

The Burlage dispute involved an actual encroachment of a house's pool and fence on adjoining property owned by a country club, which encroachment was allegedly known by the seller, but not disclosed to the buyer at time of sale. Before the arbitration, where the purchasers sought damages for the diminution in value of "their property and for the cost of moving the pool and fence that were on the encroaching land they now owned", the purchasers moved to exclude evidence of the fact that a title company had, subsequent to the sale, purchased a lot-line adjustment from the adjoining country club for the sum of $10,950, thereby curing the encroachment.

The arbitrator granted this motion to exclude evidence of the "fix" and, after 12 days of testimony, awarded the purchasers $552,750 in compensatory damages, $250,000 in punitive damages, and $732,570 in attorney's fees and costs. The sellers moved to vacate this award under Code of Civil Procedure section 1286.2(a)(5) on the ground that the sellers were "substantially prejudiced" by the arbitrator's refused to hear "evidence material to the controversy." Both the trial court and the Burlage court of appeal, with one justice dissenting, agreed.

Code of Civil Procedure 1286.2 "Grounds for vacation of award" provides, in pertinent part, that:

(a) Subject to Section 1286.4 [dealing with notice and opportunity to be heard], the court shall vacate the award if the court determines any of the following:
. . .

(5) The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.

(Emphasis added.)

While the majority of the Burlage panel agreed that the sellers were substantially prejudiced by the arbitrator's evidentiary ruling, the dissenting justice stated that:

"The arbitrator's ruling unquestionably precluded the admission of evidence of mitigation of damage. The exclusion, however, was the product of the arbitrator's determination that the law does not permit consideration of evidence of mitigation in a land fraud case following the close of escrow. Right or wrong, it was a legal ruling which, under both Moncharsh and Cable Connection, precludes judicial review."

By effectively reviewing, and reversing, this arbitrator's evidentiary ruling under the authority of CCP 1286.2, the Burlage majority, as pointed out by the Burlage dissenter, effectively draws into question all evidentiary rulings by all arbitrators.

My thoughts:

There is nothing in the majority opinion that clarifies what evidentiary rulings are reviewable under 1286.2, and which ones are not. Burlage, therefore, seems to encourage the final resolution of private contract arbitrations by courts of appeal, rather than by private arbitrators, a result seemingly inconsistent with the choice of private arbitration in the first place.

UPDATE:

September 30, 2009: Hat tip to Victoria Pynchon for letting us know that the Second District Court of Appeal has granted a petition for rehearing in Burlage.

UPDATE:

October 20, 2009: After rehearing, the Second District again upheld the trial court's vacation of the arbitrator's award in Burlage for the reasons discussed above. The Burlage v. Superior Court Opinion after Rehearing (PDF), 178 Cal.App.4th 524, contains some new language but is substantively unchanged from the court's August 31, 2009 opinion (PDF), 177 Cal.App.4th 166.

(The August 31, 2009 opinion is vacated by the October 20, 2009 opinion.)

UPDATE:

December 1, 2009: Thanks to Greg May at The California Blog of Appeal we now know that the petitioners in Burlage have filed a petition for review in the California Supreme Court. (Petition denied, January 21, 2010.)

No free looks in California real estate contracts

Kevin Forrester — Sun, 06 Sep 2009 23:14:18 -0800

In the buying and selling real estate, "unconditional" offers to purchase are a rarity. An offer to purchase is nearly always "conditional," in the sense that a buyer's obligation to buy depends upon - is conditioned upon - the occurrence of certain events, such as the buyer obtaining financing, receiving seller disclosures, performing inspections and the like. It would be a mistake, however, to believe that the right to inspect is the same thing as a "free look."

The California Residential Purchase Agreement and Joint Escrow Instructions (Form RPA-CA Revised 11/07) (the "California RPA") sets forth buyers' inspection and investigation rights as follows:

Paragraph 7 states that "[u]nless otherwise agreed . . . the Property is sold . . . subject to Buyer's investigation rights." (Paragraph 7A(i)(b))

And,

Paragraph 9 states that "Buyer's acceptance of the condition of, and any other matter affecting the Property, is a contingency of this Agreement as specified in this paragraph and paragraph 14B. Within the time specified in paragraph 14B(1), Buyer shall have the right at Buyer's expense unless otherwise agreed, to conduct inspections, investigations, tests, surveys and other studies ("Buyer Investigations"), including, but not limited to, the right to: (i) inspect for lead-based paint and other lead-based paint hazards; (ii) inspect for wood destroying pests and organisms; (iii) review the registered sex offender database; (iv) confirm the insurability of Buyer and the Property; and (v) satisfy Buyer as to any matter specified in the attached Buyer's Inspection Advisory (C.A.R. Form BIA)." (Paragraph 9A, emphasis added.)

And,

The Buyer's Inspection Advisory (made part of the California RPA through Paragraph 9, above) describes a vast array of components, conditions, restrictions, hazards, locations and other matters that the Buyer is advised to inspect or investigate and, effectively, approve before being obligated to buy the property.

And,

Paragraph 14 provides that the Buyer has 17 (or other "fill in the blank" number of) days to complete all Buyer Investigations (Paragraph 14B(1)), and either remove the applicable contingency, or cancel the agreement (Paragraph 14B(3)).

It might appear from the above contract language that a buyer has 17 (or other specified number of) days to "investigate" every conceivable aspect of the property that the buyer has conditionally agreed to buy, and, thereafter, to decide, in the buyer's absolute and unrestricted discretion, to either remove the "Buyer Investigation" contingency, or cancel the agreement. These imagined buyer rights to cancel are commonly, and mistakenly, referred to by agents as the buyer's "17-day free look."

Buyers, however, do not have unrestricted rights to "change their minds" under the California RPA.

When buyers and sellers enter into agreements to buy and sell real property, their agreements include, as a matter of law, an implied covenant (promise) of good faith and fair dealing, which means that each party will do everything reasonably contemplated by the terms of their agreement to accomplish its purpose, and that no party will do anything to impair or destroy the rights of the other to realize the benefits of their agreement. (See Brown vs. Superior Court (1949) 34 Cal.2d 559, 564-565; and Frommoethelydo vs. Fire Insurance Exchange (1986) 42 Cal.3d 208, 214.) This implied promise operates to fill gaps in agreements between buyers and sellers, where their agreement is silent or ambiguous, and has no effect upon terms that are explicit.

Because the California RPA does not explicitly say that the buyer has an absolute and unfettered 17-day right to cancel, and because it can fairly be argued that an agreement giving the buyer an unrestricted right to change their mind would be "illusory" (that it would be no agreement at all), the implied covenant of good faith and fair dealing steps in to supply the missing term: Each party's promise to work in good faith to realize the benefits of their written agreement is implied as a matter of law.

Buyers and sellers are, in other words, required by the implied covenant to act reasonably. And it is unreasonable to believe that a seller has an obligation to sell while a buyer has no obligation to buy under the terms of a California RPA.

As part of an overall form revision, the California Association of REALTORS is considering adding the following "good faith" language to Paragraph 14 of the California RPA:

"Any removal of contingencies or cancellation under this paragraph by either Buyer or Seller must be exercised in good faith and in writing."

This new language would make explicit the good faith obligations of the buyer and seller to each other under the California RPA, which obligations are already implied by the covenant of good faith and fair dealing. The further beneficial effect of this amendment would be to reduce or eliminate the suggestion that the California RPA provides buyers with a 17-day "free look."

Buyers and sellers are now as a matter of law, and will under the amended California RPA be explicitly required to deal with each other at arm's length and in good faith for their mutual benefit.

California Foreclosure Help for Consumers

Kevin Forrester — Tue, 25 Aug 2009 01:10:01 -0800

ForeclosureInfoCA.org is a valuable website created through the joint efforts of the Public Interest Clearinghouse and the State Bar of California to provide mortgage foreclosure information, such as where to go for assistance when foreclosure is a possibility, general information on mortgages and loans, links to various agency web sites on California's foreclosure processes and timelines, counseling for worried homeowners, options for homeowners who can't make their payments, and information on tenants' rights when a landlord is facing foreclosure.

The ForeclosureInfoCA website should be consulted by every homeowner, tenant and real estate agent impacted by the California residential mortgage crisis.

All things considered, in mediation and settlement

Kevin Forrester — Tue, 11 Aug 2009 00:44:12 -0800

What do you and I mean when we say "all things considered?"

The weather, we say, is good, "all things considered;" a new car, we say, isn't bad, "all things considered;" a dinner, a movie, a vacation, a job, a new house, a day of the week, a month of the year, a year, a decade, an enemy, a friend, a family member, a city, a town, an old pair of shoes, all can be described with the words: "all things considered."

But what do we really mean?

Do we mean "all things considered" when we say "all things considered?" No. We mean the opposite. When we say: nice day, week, husband, wife, daughter, son, pair of shoes, "all things considered," we mean in spite of the weather, their criminal conviction, their tendency to lie, to tell the truth, to sell drugs, to buy shoes, or to hurt our feet. We mean to say all things not considered, and we mean to say we have considered those other things, too.

"All things considered" is a simple acknowledgment of the fact that life is not simple, that true perfection in life is nonexistent, that things might be better or worse for others, maybe most others, that things might be better for us, maybe a lot better, maybe a lot worse, but, given all of these irrefutable facts of which we acknowledge the absolute truth, we are accepting, no, pleased, no, thrilled, no, overjoyed with the current state of our life, the weather, this day, this pair of shoes, or whatever - all things considered - and we are looking forward to what tomorrow may bring.

Unless tomorrow brings a presidential election, an armed conflict overseas (whether or not we are a combatant), a lawsuit (in which we are a named party), a mediation conference (in which we may be required to acknowledge, as we already do in every other aspect of our lives, that certain facts take precedence over certain other facts), or any other circumstance in which we choose to pretend that all facts are created equal and, frankly, must all be considered.

"All things considered," then, is a comfortable lie, a euphemism, that enables us to live our daily lives. We often hear or say words to the effect that: "if you think too long or too hard, consider all of the options, evaluate all of the consequences, then you will never get married, divorced, have children, go to college, drop out of college, get a new job, buy a new car, get a haircut or anything else." But, we do get our hair cut, have children, change jobs, and basically live our daily lives because we understand that we cannot consider all things and accomplish anything.

Until we go to mediation. Then we make believe, or pretend to believe, or actually believe, that everything matters, and if not everything, then only those things that matter to the other party, or parties, do not matter to us, and vice versa. During mediation we forget the lie of "all things considered" that so well lubricated our lives before mediation and, will again after mediation ends. During mediation we require not only that all facts be considered, but also that all facts be demonstrated if not beyond any doubt, then beyond any reasonable doubt, and if any such fact can be so demonstrated to be true then, and only then, can such a fact be relegated to the pile of facts not relevant to the resolution of the matter in dispute.

Unless you are the mediator; if you are the mediator, then you are charged with achieving a settlement of the matter in dispute in the minds of the disputing parties on terms acceptable to the parties, all things considered. And the mediator means all things considered in the usual sense, not the literal sense, because the mediator knows from experience the truth of the statement that nothing can be settled if all things are considered.

All things considered, then, to the mediator means discovering from the parties through questioning, through listening, through divine guidance, or through any appropriate means necessary what things in fact and in truth matter to each of the parties. Once the parties' truth is discovered, if it is discovered, then the mediator knows what things may be useful to any settlement and can attempt to help the parties find common ground on those things.

It can be and has been argued that a problem with mediation is that the parties' truth is not the actual truth, that there is a problem with "deception" in mediation, that the problem is the parties are trying to fool the mediator, and the mediator is trying to fool the parties and the lawyers are trying to fool everybody, and there is, well, something just not right about all of that tomfoolery; whatever happened to "the whole truth and nothing but the truth?"

Whatever happened is that "the whole truth and nothing but the truth" doesn't fit mediation. It fits litigation (somewhat), but it requires a Code of Evidence and a Code of Civil Procedure and the Rules of Court to make it fit, and it is very expensive and subject to appeal and takes a very, very, very long time. What happed is the realization that "all things considered" does not always mean "all things considered." It sometimes means that some facts take precedence over others, and that some facts do not matter at all, today, at this time, in this context, to this settlement.

Settlement is defined as an adjustment of doubts and differences. If the mediator is unable to successfully discover from the parties those things, out of all things, to be considered relevant today, to this settlement, then the settlement track will be circular, and endless, and there will be no adjustment of doubts and differences, and the mediation will fail.

The parties will then be left with "the whole truth and nothing but the truth," as an alternative, as an option. Maybe, all things considered, it is a better option. Maybe, all things considered, it is the only option. If a search for the whole truth and nothing but the truth is your quest, then perhaps you should seek it through litigation in the first place, because proof is not the goal of mediation. The parties in mediation already know the truth of the matter. They don't require the proof of the matter. Mediation is a quest for settlement, for an adjustment of the doubts and differences existing between parties, today, in this case, in a manner acceptable to all of the parties, nothing more, and nothing less, all things considered.

Neutrality in mediation: Which side are you on?

Kevin Forrester — Fri, 17 Jul 2009 18:15:54 -0800

They say in Harlan County
There are no neutrals there.
You'll either be a union man
Or a thug for J.H. Blair.

Which side are you on, boys, which side are you on?

Which Side Are You On? was written by Florence Reece in 1931 and performed by Natalie Merchant in 2003. Hat Tip to Scott H. Greenfield over at Simple Justice.

There are no neutrals in mediation. Mediators, although sometimes referred to as a "neutrals", are, indeed, advocates. We are just not your advocate.

"Which side are you on, boys?"

To the extent that your interests and those of your mediator correspond, the mediator is on your side, but no further. Your mediator's goal and function and interest is in resolving your dispute with any opposing party on terms that you both, or you all, can accept; on that date, at that time, in the mediator's forum, but on your terms. Mediators are not interested in preparing your case for trial. We are interested in preparing your case for settlement. Toward that end, we are advocates for the facts of the matter, and for a just, durable settlement based upon those facts, and for nothing else.

We are advocates for acting reasonably and truthfully and for achieving peace; and we acknowledge that lasting peace is not always achieved through settlement.

We are not advocates for "ties" or for achieving "neutral ground." Mediation is not neutral ground. It is a battleground existing under a white flag of truce, not surrender. It is your last chance to choose to settle your case on your own terms, or not. Mediators are there to help you choose wisely, and for no other reason.

Partial disclosures to not protect sellers

Kevin Forrester — Mon, 23 Feb 2009 00:57:27 -0800

Walter Samuelson and his wife became the first owners of a three-story condominium in Woodland Hills in 1983, and during the period of their ownership, until 1999, observed intermittent events of water intrusion into their unit and at other places within the condominium complex. This water intrusion and flooding led to two lawsuits, the first by the homeowner's association and individual unit owners against to the developer, alleging design and construction defects, and the second against the company conducting repairs, for ineffective repairs.

Mr. Samuelson served on the homeowner's association board from 1993 until 2001, and had knowledge of these lawsuits. By the end of 1998, the second lawsuit was settled, and the repairs conducted pursuant to the second lawsuit were completed. Mr. Samuelson observed no further serious water intrusion problems thereafter.

When Walter Samuelson sold his condominium in the fall of 2001, he disclosed, on a real estate transfer disclosure statement, the flooding and drainage problems that occurred during heavy rains, his listing agent noted and disclosed water damage in the garage, and advised the buyer to obtain a physical inspection from a licensed contractor, and the home inspection service hired by the buyers reported leakage, moisture and staining problems at the property. When asked by the buyers about these problems, Mr. Samuelson described the repair measures that had been taken to correct the problems, but did not disclose the two lawsuits.

The buyers then purchased Mr. Samuelson's condominium in July of 2002, experienced flooding (and first learned of the two lawsuits) in January of 2005, and sued Mr. Samuelson, the homeowner's association, and others, for breach of contract, misrepresentation, and related actions in August of 2005.

Mr. Samuelson moved for summary judgment, arguing that he had disclosed to the buyers, and the buyers were aware of all material facts concerning water intrusion in his unit. And the trial court agreed, finding "that there was sufficient disclosure of defects" by Mr. Samuelson, and that no triable issue of material fact existed concerning his alleged misrepresentation or failure to disclose.

The court of appeal agreed only that Mr. Samuelson's disclosures concerning the water intrusion and repairs were legally sufficient, but disagreed that Mr. Samuelson had no other disclosure obligations. The court held that there was a triable issue of fact "as to whether disclosure of the prior lawsuits would have been material" to the buyers, and therefore should have been disclosed.

Specifically, the California Second District Court of Appeal found that Mr. Samuelson "owed a common law ‘duty to disclose information materially affecting the value or desirability of the property.' (Kovich v. Paseo Del Mar Homeowners' Assn. (1996) 41 Cal.App.4th 863, 866, 48 Cal.Rptr.2d 758.) " and held that the question of whether Mr. Samuelson should have disclosed the two lawsuits was an issue suitable for trial. Calemine v. Samuelson (2009) (PDF) 171 Cal.App.4th 153, 165, emphasis added.

Calemine v. Samuelson, decided February 17, 2009, is a reminder of the critical importance to residential real property sellers and their agents of disclosing all known facts about the condition and history of the property for sale. We've considered the "The Great Disclosure Obligation Dilemma" before on this site and have learned that buyers are entitled to base their buying decision upon no less than all of the facts about a property that they and their agent can observe, and all of the facts that a seller and their agent know.

"Making Your Case, The Art of Persuading Judges"

Kevin Forrester — Tue, 13 Jan 2009 01:46:25 -0800

Justice Antonin Scalia and Bryan A. Garner have produced a delightful, and indispensible, guide for practicing attorneys in "Making Your Case, The Art of Persuading Judges"; a text which begins with the following admonishment:

"To lighten the journey, we have adopted a conversational style that includes occasional contractions and remarks more flippant or colloquial than one would normally encounter in legal commentary. The reader who feels that some of these indulgences fall short of the formality and sobriety expected of a jurist should attribute all of them to the other author, and assume that they have been included under protest."

Antonin Scalia and Bryan A. Garner, Making Your Case, The Art of Persuading Judges, at xix - xx (Thomson/West 2008).

The authors' journey with the reader continues in this style through 115 sections in the space of 206 pages, with each section containing a different fact of advocacy that will be ignored by counsel at their peril. The advice contained in this book applies equally at every point in the judicial process, beginning with pre-trial motions and ending with arguments before the Supreme Court of the United States.

Your time with Making Your Case will be time well spent.

UPDATE - March 16 - March 20, 2009

Justice Scalia sits down with Peter Robinson of the Hoover Institution in these 5 short video segments of "uncommon knowledge"

Confidential settlement agreements may not remain confidential

Kevin Forrester — Sat, 22 Nov 2008 17:56:04 -0800

We have learned that mediation confidentially is protected in California by contract law, by the plain meaning of statutory law, and by our highest state court’s confirmation that our statutory law means what it says. But what about our settlement agreements; what about the anticipated results of our mediations, are they confidential too?

The answer, as found by the Second California District Court of Appeal in the case of In re Estate of Thottam (2008) (PDF) 165 Cal.App.4th 1331, is that it depends upon the agreements of the parties and the plain meaning of the applicable statute.

Evidence Code Section 1123 provides that:

A written settlement agreement prepared in the course of, or pursuant to, a mediation, is not made inadmissible, or protected from disclosure, by provisions of this chapter if the agreement is signed by the settling parties and any of the following conditions are satisfied:

(a) The agreement provides that it is admissible or subject to disclosure, or words to that effect.

(b) The agreement provides that it is enforceable or binding or words to that effect.

(c) All parties to the agreement expressly agree in writing, or orally in accordance with Section 1118, to its disclosure.

(d) The agreement is used to show fraud, duress, or illegality that is relevant to an issue in dispute.

In other words, a settlement agreement is "not made inadmissible" (is not confidential) if the agreement provides that it is admissible, the agreement provides that it is enforceable, the parties to the agreement agree to its disclosure, or the agreement is used to show fraud, duress, or illegality.

The importance of these distinctions was made clear in Estate of Thottam, which involved a dispute among siblings regarding the distribution of assets from their deceased mother’s estate. Before the mediation of this dispute, all three siblings and the mediator signed a “mediation and facilitation confidentiality agreement.”

During mediation, a chart was prepared showing assets along the left margin and including three columns, one for each sibling. The chart was filled in to designate specific allocations of the listed assets, and each sibling signed and dated their respective column at the top of the chart and initialed each entry in their column. (No other "settlement" language was contained on the chart.)

After mediation, one of the siblings, Peter, prepared two agreements concerning the estate assets, both of which included the chart prepared in mediation, and neither of which would be signed by the other siblings. The other siblings, Elizabeth and Jameson, took the position that no agreement was reached in mediation.

Litigation ensued. Elizabeth refused to answer Peter’s deposition questions concerning the chart prepared during mediation or discussions about the chart during mediation. Elizabeth sought a protective order and Peter sought to compel Elizabeth’s testimony.

Peter’s motion to compel was granted, based upon the fact that the “mediation and facilitation confidentiality agreement” between the parties stated that:

“'all matters discussed, agreed to, admitted to, or resulting from' the mediation would '(1) be kept confidential and not disclosed to any outside person (excluding spouses), (2) shall not be used in any current or future litigation between us (except as may be necessary to enforce any agreement resulting from the Meeting), and (3) shall be considered privileged and, as a settlement conference, non-admissible under the California Evidence Code in any current or future litigation between us.'”

Estate of Thottam at 1334.

The judge granting the motion to compel deposition testimony decided that the exception to the mediation privilege found in Evidence Code 1123(c) was satisfied by the parties’ agreement highlighted above. In other words, the court found that parties can agree to disclosure of a written settlement agreement before reaching or even discussing a written settlement agreement.

The chart was in.

The trial judge disagreed, taking the position that the Evidence Code 1123(c) could only be satisfied by a disclosure agreement executed after the parties had reached their settlement agreement.

The chart was out, and with it Peter’s evidence that the siblings had reached any agreement in mediation.

The Court of Appeal, however, disagreed with the trial court, holding that there is no requirement that a section 1123(c) agreement concerning disclosure be made “at or after the time of settlement.” The court further found that the chart was a written settlement agreement for purposes of Evidence Code 1123(c), and remanded the case for a new trial. Estate of Thottam at 1343.

The chart was back in.

So, yes, a settlement agreement is confidential (“inadmissible”), unless (1) the agreement provides that it is admissible, or (2) the agreement provides that it is enforceable, or (3) the parties to the agreement agree to its disclosure before, at, or after the time of settlement, or (4) the agreement is used to show fraud, duress, or illegality.

Mediators are advised to review their mediation and confidentiality agreements in light of this decision.

Facts matter in mediation and trial

Kevin Forrester — Sat, 15 Nov 2008 18:17:30 -0800

Everyone is entitled to their own opinion,
but not their own facts.

Senator Daniel Patrick Moynihan (1927-2003)

Durable settlements and wining trial strategies rest on a foundation of facts.

Your opinion of the opposing party will get you into the courtroom or the mediation conference room. But remember that the quality of your facts will determine the quality of your settlement or your litigation result, and plan accordingly.

The reality of preparing for mediation and trial

Kevin Forrester — Sun, 19 Oct 2008 18:28:38 -0800

War is not an independent phenomenon, but the continuation of politics by different means.

Karl (Carl) von Clausewitz (1780-1831)

The statement that 'war is a continuation of politics by other means' is important not because Clausewitz said it but because it reflects a fundamental reality.

Christopher Bassford, Clausewitz in English: The Reception of Clausewitz in Britain and America, 1815-1945, Chapter 4 (New York: Oxford University Press, 1994).

The fundamental reality of litigation, mediation, arbitration and trial is that each is a continuation of the other, and the best results in mediation are achieved by those best prepared for war.

Parties who attend mediation knowing the facts of their case, their likelihood of proving the facts that matter, their litigation budget, and their closing argument are more likely than not to settle. Your ability to secure a durable settlement increases in direct proportion to your readiness, willingness, and ability to fight. Mediation is not a place to find out the value of your case, it's a place to find out if you're going to settle the case you have.

To secure peace is to prepare for war.

Karl (Carl) von Clausewitz

Preparation secures peace in mediation by defining and enabling choices.

Your settlement should be an option, not a consequence of mediation.

9/11/01 - Never Forget

Kevin Forrester — Thu, 11 Sep 2008 14:38:26 -0800

No man is an island, entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend's or of thine own were; any man's death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bell tolls; it tolls for thee.

John Donne (1572-1631)

A Travesty of Justice?

Kevin Forrester — Thu, 28 Aug 2008 18:49:05 -0800

The November 2007 "confidential means confidential" post on this site includes a link to attorney Michael Young's "Mediation Gone Wild" web page, which chronicles the consequences of breaching mediation confidentiality in the Florida case of Doe, et al vs. Joseph R. Francis et al.. "Girls Gone Wild" founder and defendant Joseph Francis has now filed suit in Los Angeles Superior Court to set aside the mediated settlement of that now almost 5-year-old case, and the CPR @ ADR Blog picks up the story with the rhetorical flourish: "Travesty of Justice"?

Study finds that settling is often better than trial

Kevin Forrester — Tue, 12 Aug 2008 03:18:00 -0800

A study of 2,054 cases that went to trial from 2002 to 2005, concludes that parties in litigation can, and more often due, win without fighting.

“The lesson for plaintiffs is, in the vast majority of cases, they are perceiving the defendant's offer to be half a loaf when in fact it is an entire loaf or more,” said Randall L. Kiser, a co-author of the study and principal analyst at DecisionSet, a consulting firm that advises clients on litigation decisions.

Defendants made the wrong decision by proceeding to trial far less often, in 24 percent of cases, according to the study; plaintiffs were wrong in 61 percent of cases. In just 15 percent of cases, both sides were right to go to trial - meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.

The problem in every case, of course, is knowing which ones should be tried and which ones should be settled.

The moral of the above study, at least for plaintiffs, may be that the settlement offer you just received from the other side really is the high point of your case.

Negotiating an Olympic victory

Kevin Forrester — Sun, 10 Aug 2008 14:58:15 -0800

In 1984, the . . . Soviets were recruiting countries to retaliate for the United States’ decision to stay away from the 1980 Moscow Games, a boycott that 61 other countries joined. The Soviets announced on May 8, 1984, that their team would not come to Los Angeles because of fears for their athletes’ safety, claiming they had agreements from 100 countries to do the same.

Ueberroth said he saw the list. At the top was China.

His response was to assemble a team of envoys who could appeal to officials in undecided countries and persuade them to come. [Charles] Lee, a federal prosecutor in Los Angeles who is not Chinese but speaks fluent Mandarin, took a small group to China. Ueberroth asked a woman on his staff, Agnes Mura, to lead a group to Romania; she had been born there. Ueberroth went to Cuba.

“People think of the Olympics as a corporate structure,” said Bob Ctvrtlik, who played for the United States volleyball team at the ’84 Games and is now a member of the International Olympic Committee. “It really is not. It relies on relationships. It relies on trust. It relies on people who can cut through cultural differences and find common ground. That was the brilliance of that program.”

Ueberroth was unable to sway Fidel Castro — he keeps a framed copy of a headline from an article in The Los Angeles Times that read, “Ueberroth Strikes Out in Cuba.” But Lee’s visit was a triumph, and Mura delivered the perhaps more stunning news later in May that tiny Romania would defy the Soviet boycott.

Only 14 countries boycotted the 1984 Games.

Current U.S. Olympic Committee Chairman Ueberroth believes that China’s agreement to attend the 1984 Olympic Games in Los Angeles saved not only the 1984 Games, but all the ones to follow.

China’s attendance was obtained by intermediaries, through meetings, and conversation.

Peter Ueberroth achieved an Olympic victory through negotiation.