In June 2005, Monica Sciarratta (“Borrower”) obtained a loan in the amount of $620,000 from Washington Mutual Bank.  In April 2009, Chase Bank (“Chase”), the servicer of the loan, recorded an assignment of the loan and transferred it to Deutsche Bank National Trust Company (“Deutsche”).  In that same month, Borrower began defaulting on the loan.  Chase began foreclosure proceedings.  In November 2009, Chase recorded another assignment of the loan and transferred the loan to Bank of America (“BoA”), notwithstanding the fact that it had already been assigned to Deutsche.  On the same day, the trustee recorded a Trustee’s Deed Upon Sale on behalf of BoA naming BoA as the foreclosing beneficiary.  The Trustee’s Deed noted that BoA was winner at the foreclosure pursuant to a credit bid.  In December 2009, Chase records another assignment of the loan purporting to correct the assignment made in April.  Prior to the foreclosure sale, the Borrower filed a lawsuit in federal court.  Eventually, in May 2012, that case was dismissed.  In February 2013, the Borrower once again filed a lawsuit in state court.  There, the Borrower alleged that BoA was not the lender of record for the loan as Chase had transferred the loan to Deutsche.  Further, as Chase had transferred all of its interest to Deutsche, the second transfer was void as a matter of law as Chase had nothing to transfer.  In response, BoA filed a demurrer to the complaint alleging that the case was barred by the previous federal case and because the Borrower did not allege any harm.

Initially, the trial court denied the demurrer and allowed the case to proceed.  However, after the demurrer, BoA filed a motion for judgment on the pleadings on the same arguments raised in the demurrer.  Somewhat confusingly, the Court granted that motion finding that the Borrower did not allege harm.  The Court then gave the Borrower leave to amend the complaint.  The Borrower then filed another complaint which BoA once again demurred to again.  The Court granted the demurrer without leave to amend.  The Borrower then appealed the decision.

 THE DECISION:

The California Court of Appeals for the Fourth District reversed the lower courts’ rulings and held a borrower is automatically prejudiced by a foreclosure by a third party and does not need to specify any other damages.  Here, the Court noted that the California Supreme Court’s decision in Yvanova v. New Century Mortgage Corp. has largely held that a foreclosure by a third party is actionable.  While it may be true that the Borrower would be unable to pay the loan, that was not relevant to the analysis of whether the borrower had been damaged.  Further, it would be against good policy to prohibit a borrower from challenging any third party from foreclosing as the borrower only owes a debt to the specific lender and only that lender has the right to foreclose.  Finally, the Court noted that Chase could not assign the Loan to BoA as it had already assigned all of its rights to Deutsche.  Accordingly, the public record showed that BoA was not the holder of the loan and did not have the right to foreclose.

WHY THIS DECISION IS IMPORTANT:

This case follows the reasoning in the Yvanova decision.  It is likely that more cases will continue to be decided in favor of borrowers allowing them to challenge more foreclosure sales.  The court explicitly stated that there was a strong policy reason to allow a borrower to challenge a void foreclosure sale as California has a nonjudicial foreclosure procedure that does not involve the court system.  The court rejected the lender’s arguments as the natural extension of it would be to allow any third party to foreclose as long as a debt was owed and largely escape any consequences.

COMMENT:

Given the Yvanova decision, this case, and likely many similar ones in the pipeline, we expect that lenders will be more and more careful in making assignments of the loan.  It is unclear why Chase recorded the second and third assignments instead of requesting that Deutsche record the assignment and avoiding the void transfer.  However, given the likelihood of borrowers prevailing on these claims, lenders will likely work to clean up the recording issues and work with each other to prevent further cases such as these from happening.

Sciarratta v. U.S. Bank, 247 Cal.App.4th 552 (2016)

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Juan Juarez (“Tenant”) lived in a rent-controlled apartment complex owned by Boston LLC (“Landlord”) for more than 15 years.  Although his lease required him to obtain renter’s insurance, Tenant did not obtain the insurance.  After 15 years of not having insurance, on a Friday before a holiday weekend, Landlord served a three-day notice to perform or quit to obtain insurance.  Tenant then obtained insurance, but after the three-day period expired.  As Tenant did not obtain insurance until after the expiration of the three-day notice, Landlord filed an unlawful detainer suit to evict Tenant.

At the trial court level, the Court ruled in favor of Landlord.  Tenant then appealed the decision to the appellate division of the superior court.  There, the appellate division affirmed the trial court’s ruling finding that Tenant had breached the lease and therefore could be evicted on that ground.  In addition, the Court held that since the lease contained a forfeiture clause in the lease stating that any breach was sufficient grounds for termination of the lease, it did not matter if the breach was of a material term.  Tenant appealed again to the appellate court.

 THE DECISION:

The California Court of Appeals for the Second District reversed the lower courts’ rulings and held that a lease can only be terminated for a material breach of the lease.  The Court noted that previous cases have held that there must be a breach of a material term before a lease can be terminated.  It cited previous cases where a minor default was determined to be insufficient to terminate a lease.  The Court noted that while this case was different because of the forfeiture clause, the Court refused to enforce the forfeiture clause in this instance because it was against public policy and needed to be strictly construed.  The Court noted that free market principles have limited applicability in residential lease agreements because landlords have disproportionately more power than tenants in those agreements.  As such, courts generally favor tenants as they have less bargaining powers and hold landlords to a higher standard.

WHY THIS DECISION IS IMPORTANT:

In order to overcome previous decisions that required a breach of a lease, many landlords included a forfeiture provision in the lease.  However, this decision confirms that such a provision does not change the underlying law and is insufficient to allow a termination of a lease for a minor breach.  While this case dealt with a lease of a rent controlled apartment, there is no reason to believe that it would not apply to all residential units.

COMMENT:

This was perhaps the best case possible for a tenant to bring to challenge the forfeiture provision.  Here, the tenant had not complied with the insurance term of the lease for 15 years.  Further, the insurance provision only benefited the tenant and the landlord was unable to articulate a reason why not having insurance harmed the landlord.  Finally, while giving a 3-day notice on a Friday before a national holiday was technically legal, the court noted that the landlord was gaming the system and was possibly retaliating as there was no reasonable way for the tenant to obtain insurance in time.

Boston LLC v. Juarez, 245 Cal.App4th 75 (2016)

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AirBNB (and similar rental sites) have been omnipresent in the news for the last few years.  Controversy has arisen in many cities as regulations and restrictions have been implemented.  The recent case of Chen v. Kraft is an example how these restrictions can impact landlords and tenants.

In Chen v. Kraft, Chen (“Landlord”) filed an unlawful detainer complaint against Kraft (“Tenant”), asserting that Tenant failed to comply with multiple 10-day notices to cease using the attic of the premises and stop subletting the unit to subtenants or short term renters.  The property was zoned R-1 and was subject to the Los Angeles Rent Stabilization Ordinance.  Los Angeles prohibits short-term rentals in homes that fall within the R-1 zone.

Tenant’s affirmative defenses included the following: the “attic” plaintiff referred to was actually a “loft” which was part of the rental agreement with plaintiff’s predecessor in interest; the Los Angeles Municipal Code permitted the “sharing of the premises”; plaintiff’s predecessor in interest expressly permitted her to use the premises as an Airbnb location; and plaintiff breached the warranty of habitability.

Landlord filed a motion for summary judgment, arguing that Tenant was operating an illegal bed and breakfast or transient occupancy.  Tenant argued that there were triable issues of fact, including as to the nature of the occupancy of the Airbnb guests, the approval of such use, the circumstances under which the premises may be restricted from use, and waiver by Landlord’s predecessor.

The Trial Court granted Landlord’s motion, holding there was no triable issue of any material fact, and that Tenant’s use of the premises as a vacation rental violated the zoning ordinance.  Tenant appealed.

THE DECISION

The Appellate Court affirmed the Trial Court decision.  The Appellate Court determined that Landlord established all of the elements of unlawful detainer based on the theory of illegal purpose.  Essentially, a landlord is entitled to evict a tenant if they are using the premises for an unlawful purpose.  Since the Municipal Code was clear that short term rentals were not allowed in premises zoned R-1, the Tenant’s Airbnb listings and rentals were unlawful, and Tenant failed to comply with the notices to quit.  Tenant’s argument that the prior landlord allowed the rentals was not dispositive, as such approval was an illegal contract and therefore void and unenforceable.

WHY THIS DECISION IS IMPORTANT

This decision confirms that municipal ordinances control over contracts between parties.  Even though the prior landlord expressly approved the short term rentals, the new landlord was able to evict the tenant after she failed to comply with the 10-day notice provided.

COMMENT

This case is another strike on Airbnb.  Between court decisions and cities continually passing ordinances that limit, tax, restrict or all-together ban short term rentals, Airbnb and similar providers are facing an uphill battle.

Moreover, the tenant here could have remained in the property had she stopped listing the premises on Airbnb after receiving the notice to quit, however her decision to continue the short term rentals was her downfall.

To learn more about the legal issues surrounding short-term rentals, including how to determine if you can list your property on Airbnb and how to find local & city restrictions on short-term rentals, check out our recent webinar: Real Estate Law in the Sharing Economy.

Chen v. Kraft (2016) 243 Cal. App. 4th Supp. 13

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In 2004, Ms. Brown borrowed $450k and secured that loan with a deed of trust against her property in Oakland, California.  The beneficiary under that deed of trust was Washington Mutual Bank, F. A.

WAMU failed in 2008 and the FDIC sold WAMU’s assets to JP Morgan Chase Bank, N.A.  This sale included Ms. Brown’s loan and was memorialized in a September 2008 Purchase and Assumption Agreement (P&A Agreement).

In March of 2011, the foreclosing Trustee, California Reconveyance Company (“CRC”) recorded a Notice of Default for Chase stating Brown was in arrears for slightly over $60k.  One month later, Chase Bank assigned the deed of trust to Deutsche Bank.  CRC remained the trustee.  Two months later, CRC recorded a notice of sale.

In January of 2012, Brown filed the first of three lawsuits challenging the foreclosure.  She voluntarily dismissed the first two.  Each time, CRC republished its notice of sale.  Finally, in July 2013, CRC executed a third notice of sale and two days later Brown filed her third lawsuit challenging this foreclosure sale.  In her complaint, she alleged that the deed of trust assignment to Deutsche Bank was invalid and the foreclosure proceedings were initiated without authority.

Additionally, after the defendants successfully demurred to the complaint, she amended it to allege various other allegations, including violation of the California Homeowner Bill of Rights (HBOR), which had gone into effect Jan. 2013.

The defendants again demurred.  The trial court sustained the demurrer without leave to amend and dismissed the case.  The trial court found that Ms. Brown’s causes of action for cancellation of the instruments, foreclosure by entity lacking a beneficial interest (allegedly Deutsche Bank) and that the declaratory relief sought failed for three reasons: 1) the causes of action were barred as a matter of law because there is no recognized cause of action that allows a borrower to test the legal authority of the entity commencing foreclosure in a preemptive action, 2) Brown lacked standing and 3) Brown’s allegation that Deutsche Bank lacked authority to enforce the deed of trust was contradicted by matters subject to judicial notice (the P&A Agreement).

THE DECISION:  AFFIRMED. The appellate court decision began by reciting the overview of California’s non-judicial foreclosure process and then briefly looked at the issues of standing and whether a borrower can bring a preemptive action to challenge an entity’s (usually a lender or trustee) authority to foreclose.  The Brown court noted that the Supreme Court in Yvanova expressly declined to address the validity of preemptive actions.  Then, the Brown court went on to state that under Yvanova’s determination that a borrower has standing in the post-foreclosure timeframe that it is likely that a borrower in a pre-foreclosure challenge would have sufficient injury to confer standing.  However, the Brown decision made it clear that even in noting those two issues of standing and preemptive actions, it was affirming the lower court’s decision on separate grounds.

Specifically, the Brown court found that nowhere in the briefing did Brown “present any reasoned argument…” that the P&A Agreement should be interpreted any differently than how it is written, wherein in plainly transfers WAMU’s assets to Chase.  Clearly, this case turned on the record before the court and Brown’s facts lacked any viability as compared with those facts found in Yvanova.  In Yvanova, the entity purportedly transferring its assets had long ago gone through a bankruptcy and been dissolved, leading to a inference of forgery.  Brown’s mere allegation was not sufficient to counter the plain reading of the P&A Agreement itself.

Why this case is important:  The Yvanova decision had been long awaited, but in the end was a very narrow holding.  Subsequent decisions suggest that Yvanova offered little guidance to issue of borrower preemptive actions.

COMMENT:   This opinion placed great weight on the P&A Agreement, which was part of the record as a matter of judicial notice.  Prudent practitioners know that most judges would be reluctant to take notice of the actual contents of the agreement and instead limit the judicial notice to the existence of the record itself.  Here, the opinion clearly analyzed the context of the P&A Agreement and transfer wording.  This is essentially a fact finding and usually beyond the scope of judicial notice.  At one point in the opinion, the appellate court noted that Brown had failed to challenge trial court’s determination that the P&A was proper subject for judicial notice, and went on to include a footnote.

Brown v. Deutsche Bank National Trust Company, as Trustee, etc. ., et al Opinion filed May 9, 2016 (First District A144339)

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Beginning in early 2015, the Federal Aviation Administration (“FAA”) introduced a new program, NextGen, which rerouted flight paths in the South Bay and Peninsula in an effort to improve airport infrastructure, air traffic management, and provide nearly $133 billion in benefits to airports, airlines, and passengers.  NextGen was implemented with the intention to drastically advance airport technology, resulting in more efficient travel.  With NextGen, information is transmitted to pilots via satellite, keeping them more up to date about their own positions.  This has led to an increase in the amount of airplane traffic and has caused pilots to take more direct routes, which in turn has led them to fly over new areas.  Some of these new areas include Bay Area homes, resulting in San Francisco International Airport receiving more than 150,000 noise complaints in 2015.

Meanwhile, the California real estate market experienced one of its best years in recent history, with home sales increasing by 7.6 percent over the prior year.   There were 13,030 sales of homes in Santa Clara County in 2015, while the median home price in San Mateo County increased 16.8 percent.  This spike in home purchases coupled with the implementation of NextGen has caused a record number of airplane noise complaints to be recorded.  With home prices being as high as they are, new and old residents alike in the Bay Area expect to be able to enjoy their home without the incessant interruption of airplane noise.  Airplane noise has been reported to occur over some South Bay and Peninsula homes as often as every two minutes during peak hours.

For over a year, thousands of residents have voiced their complaints to local airports to no avail. On April 4, 2016, U.S. representatives Anna Eshoo, Jackie Speier, and Sam Farr announced the formation of the Select Committee on South Bay Arrivals, a committee formed to combat the effects of the NextGen program. The committee consists of 12 elected officials who are working with stakeholders to mitigate the increase in airplane noise and to find solutions to help ease the intrusion into the lives of residents in the South Bay and Peninsula.

Currently, the acceptable noise level under federal law is 65 decibels, near the level of sound a vacuum cleaner emanates. In comparison, the NextGen program has caused airplane noise in some areas around the South Bay and Peninsula to be equivalent to someone vacuuming your home every two minutes.  Congresswoman Anna Eshoo has urged the FAA that the federal level for acceptable noise is outdated and is not in line with the true effect on South Bay and Peninsula communities.

At an event sponsored by our firm and hosted by the Silicon Valley Association of REALTORS® on May 6, Congresswoman Anna Eshoo was the featured speaker and discussed the committee’s current plans in combating NextGen. With the FAA being required to provide survey information on the noise effect on communities by the end of the year and proposals being made by the committee, there is hope in sight. Community meetings have been scheduled by the committee to allow residents to hear the proposals being made by the committee, and to contribute their input. Meetings are scheduled to be held in Santa Cruz on May 25, San Mateo on June 15, and Santa Clara on June 29 of 2016.

Many realtors in the area are concerned due to the real estate law implications the NextGen program has. The potential for a decline in property value and disclosure issues concerning the increase in airplane noise is at the forefront of realtors’ minds all over the Bay Area. Airplane noise is something that certainly should be disclosed, and our firm regularly assists and counsels realtors and sellers on disclosure duties. A revamp in the entire airplane business that results in airplane noise every two minutes in some areas is certainly something that a buyer should be made aware of.  Stay tuned to see if the FAA will be forced to reconsider their NextGen program.

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As predicted, El Niño arrived in California and brought some much needed precipitation with it.  This past winter brought the most rain California has had in quite awhile, with many major reservoirs in better shape than they have been in years.  Despite the warm welcoming El Niño received, there is a downside to the wet winter.  Following El Niño is another weather phenomenon by the name of “La Niña”.  La Niña, which means The Little Girl in Spanish, is the climate condition that typically follows an El Niño period.  La Niña usually consists of cooler than normal temperatures and below average precipitation, opposite of what El Niño brought to California this winter.

This can be concerning for Californians for reasons other than an ongoing drought.  With spring being the busiest time of year for the real estate market, dry weather conditions can pose some issues to buyers and sellers alike.  Spring climate provides many aesthetic benefits to realtors in marketing a home, but it also can hide potential pitfalls.  During El Niño, there was a spike in water related disputes in real estate transactions, with the increase in rainfall highlighting defects in the property that were not previously exposed due to the drought.   The decrease in rainfall presented by La Niña can make the discovery of water related defects difficult once again.

Of the water related disputes we’ve encountered this winter, roof leaks were the most common.  During a dry period, leaky roofs are not a focus of the parties involved in a transaction, which comes back to bite everyone involved when heavy rainfall occurs.  There are some preventative measures to detect these defects during this spring and summer.

The first step would be to do an outdoor inspection of the roof.  Unless a roof is brand new, an inspection is highly recommended, whether you are purchasing or currently own your home.  Many causes of leaks are apparent by the condition of the exterior of the roof, including deformed shingles, excess cement buildup, broken gutters, cracks or tears in the roof itself, and even chimney damage.  Spending money now on a quality roof inspector can save thousands on litigation, repairs, and stress.  It is also important to get roof inspections periodically if you are a homeowner.  Commonly, real estate purchase agreements include a roof certification, providing the buyer with a 2-3 year life expectancy for the roof.  Beyond that guarantee, it is up to the buyer to have periodical inspections to ensure their roof is in good condition.

Regular roof inspections can also benefit homeowners when they decide to sell their home. California law requires sellers to complete a form called a “Transfer Disclosure Statement”, which discloses known material defects or issues with the home that may affect the buyer’s decision.  Roof defects are considered material and must be disclosed to a prospective buyer.  Failure to disclose a defective roof to a buyer may cause the seller to be responsible for the cost to repair the roof, the buyer’s attorney fees, and other miscellaneous fees depending on the level of concealment by the seller. Regular roof inspections will make the seller aware of defects and allow them ample time to cure those defects prior to the sale of their property.

The second way roof damage can be detected is from the inside of the home.  Given that El Niño provided California with a steady flow of rainfall, there is no doubt that defective roofs were exposed.  A leaky roof is not always immediately apparent however.  Obvious signs of leakage include peeling paint, ceiling damage, and moisture stains.  Potential buyers and current homeowners should take it a step further and look into their attic this spring and summer.  Sometimes leaks in the roof are absorbed by the insulation in the attic, preventing leak detection for months.  Another less obvious sign is an increase in your energy consumption.  The accumulation of moisture in your home due to the leak can cause a decrease in ventilation.

These are just some of the things to keep in mind now that El Niño is over. With the potential of La Niña and water damage concerns being neglected, we may see an increase in disputes in the future.  Being more conscious of water related issues during the dry months may save you a substantial amount of time and money when the rain comes again.

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Margaret Foster (“Foster”) lived in the same apartment in San Francisco for more than 40 years.  In 2011, her building was bought by W.J. Britton & Co., Inc. (“Britton”).  As part of new management, Britton sent each tenant a new set of house rules.  In those rules, the tenants were required to share the back yard equally, maintain their own garbage service, keep all of their personal property inside, and use a laundromat instead of washing clothing in their sinks or tubs in their apartment.  Britton notified each of the tenants at the complex that they were required to accept the new house rules or they could give 30 day notice to move out.  Previously, Foster’s tenancy included garbage service, two parking spaces, personal space in the backyard, additional storage space outside her unit, and the right to use her porch for laundry and storage.  Foster refused to sign the new house rules and instead filed a lawsuit stating that Britton could not evict Foster for refusing to agree to the new rules and that San Francisco’s rent control ordinance, specifically Rule 12.20, barred any eviction of a tenant refusing to agree to new house rules.  In response, Britton contended that the Rent Board’s rule conflicted with California law and the Rent Board’s authority.  The Rent Board joined the lawsuit.

At the trial court level, the Court ruled in favor of Foster finding that California law did not preempt the Rent Board’s rent control ordinance.  Specifically, the Court noted that Rule 12.20, which provides that a landlord may not evict a tenant for refusing to accept new obligations or changes, is not preempted by California law.  As such, Britton could not require Foster to sign the new rules nor evict her for refusing to sign them.  Britton then appealed the ruling.

THE DECISION:

The California Court of Appeals for the First District affirmed the trial court’s ruling and held that California has traditionally held that substantive rent control ordinances may be a permissible exercise of a city’s authority.  The Court noted that this was different from rent control ordinances that create procedural barriers, such as requiring a landlord to obtain a certificate from the city prior to evicting a tenant.  Here, since Rule 12.20 does not require additional procedural actions from the landlord, the state laws do not preempt it and Rule 12.20 is therefore valid.

WHY THIS DECISION IS IMPORTANT:

This decision provides guidance to cities on how to craft rent control ordinances that will survive challenge.  The decision reaffirmed that cities have the power to enact substantive rent control ordinances that restrict the grounds that a landlord may evict a tenant for.  However, a city will have great difficulty in defending an ordinance that delays the eviction process or makes a landlord jump through more hoops.  As for San Francisco landlords and tenants, this decision makes clear that changing a lease will be very difficult without agreement of all of the parties involved.

COMMENT:

San Francisco landlords need to be very careful on the terms of the lease.  As changing the lease in the future is very difficult, they should spell out all of the terms of the lease and all of the services provided by the landlord at the outset.  This likely applies in other rent control cities also.

Foster v. Britton, 242 Cal.App.4th 920 (2016)

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Supreme Court Upholds Controversial San Jose Affordable Housing Ordinance

by Ashlee Adkins April 1, 2016 Landlord/Tenant Disputes
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The Bay Area is known worldwide for a multitude of things, including being the hub of technological advancements, cultural diversity, and championship sports teams.  One of the more recent phenomena however doesn’t have to do with any of those things.  Currently, two Bay Area cities claim two of the top three spots for the costliest […]

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Court Makes it Easier to Strip Mortgages

by Henry Chuang March 30, 2016 Mortgage Issues
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Robert and Darlene Blendheim (“Blendheim”) were borrowers who obtained two mortgages from HSBC Mortgages Services in the amounts of $347,900 and $90,474.  In 2007, the Blendheims filed for Chapter 7 bankruptcy protection and obtained their discharge.  The day after receiving their discharge, they filed for Chapter 13 bankruptcy protection in order to restructure their debts.  […]

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Seller is Refusing to Close Escrow? Know Your Options

by Ashlee Adkins February 29, 2016 Broker/Realtor
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If you’ve recently purchased a home, or are looking to buy, you know how tough the market is.  The competition is intense, with there being more buyers than sellers.  Finally, your offer on your “dream home” has been accepted. The paperwork is drafted and signed by both parties, life couldn’t be better. That is, until […]

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