California Litigation Attorney Blog

BankruptcyBankruptcy is often the court of last resort when bad actors have tried to perpetrate financial schemes to avoid paying their debts. For example, some debtors attempt to transfer their assets or those of an entity they control with the intent to delay or hinder a creditor in collecting on a debt. In legal parlance, this is known as a fraudulent transfer.

When an fraudulent transfer occurs before a debtor files for protection under the United States Bankruptcy Code, creditors should promptly protect their rights to ensure that the bankruptcy does not discharge the debtor’s liability for their fraudulent transfer or the underlying debt. Specifically, creditors should consult with counsel to consider filing a timely adversary complaint for non-dischargeability under 11 U.S.C. § 523(a)(6) or (a)(4)- two differing theories to obtain a finding that the bankruptcy discharge will not impact the debt owed to the creditor.

1. Willful and Malicious Injury to the Property of Another 11 U.S.C. § 523(a)(6)

One way to obtain a non-dischargeability judgment is to establish the elements of Section 523(a)(6) of the Bankruptcy Code, which provides that a debtor cannot discharge a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.”

a.  Willful Injury Requirement

In the Ninth Circuit, “§ 523(a)(6)’s willful injury requirement is met only when the debtor has a subjective motive to inflict injury or when the debtor believes that injury is substantially certain to result from his own conduct.” Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). Both aspects of the willfulness standard inquire into the debtor’s subjective state of mind, and both can be proven by circumstantial evidence. Id. at 1144-47 & n.6. “The Debtor is charged with the knowledge of the natural consequences of his actions.” Ormsby v. First Am. Title Co. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010); see Su, 290 F.3d at 1146 (“In addition to what a debtor may admit to knowing, the bankruptcy court may consider circumstantial evidence that tends to establish what the debtor must have actually known when taking the injury-producing action.”).

In 2013, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) affirmed a case where “the state court explicitly determined that Vazquez . . . fraudulently transferred Alliance’s assets, ‘virtually the entire business,’ to All Blueprint ‘for the sole purpose of hindering [AAA’s] efforts to collect its judgment.’” Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez), 2013 WL 6571693, at *4-6 (9th Cir. BAP Dec. 13, 2013) (unpublished). The BAP “agree[d] with the bankruptcy court that the state court’s finding regarding Vazquez’s subjective motive for transferring Alliance’s assets meets § 523(a)(6)’s willfulness requirement. In other words, the state court’s finding that Vazquez sought to hinder AAA’s collection efforts is tantamount to a finding that Vazquez intended to harm AAA by transferring all of Alliance’s assets to All Blueprint.” Id.

In 2014, the BAP found that, with the state court “finding of actual fraudulent transfer, it follows that Gould intended to cause injury to Red Hill or believed that injury was substantially certain to occur with his conduct of transferring Learning Tree’s funds to LTU Extension to prevent Red Hill from levying on its 1998 Judgment.” Gould v. Red Hill Enters. (In re Gould), BAP No. CC-13-1437-KiLaPa (B.A.P. 9th Cir. Aug. 25, 2014) (unpublished). Thus, tracking the required state law elements of an actual (intentional) fraudulent transfer in the state where the transfer occurred should be sufficient to meet the willful injury element.

b. Malicious Injury Requirement

With respect to malice, a debtor’s conduct is malicious for purposes of § 523(a)(6) when the conduct “involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.” Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001). “Malice may be inferred based on the nature of the wrongful act.” Ormsby v. First Am. Title Co. (In re Ormsby), 591 F.3d 1199, 1207 (9th Cir. 2010). “To infer malice, however, it must first be established that the conversion was willful.” Id.

In 2013, the BAP addressed a debtor where the state court, in ruling on the fraudulent transfer claim, “explicitly found that Vazquez’s conduct was wrongful. This wrongfulness, furthermore, is self-evident given the very nature of Vazquez’s conduct in transferring Alliance’s assets for the purpose of hindering AAA. The state court also found his conduct intentional. The intentional nature of Vazquez’s conduct is reflected in the state court’s account of Vazquez conspiring and plotting with Huerta to interfere with AAA’s collection efforts. That the act of hindering AAA’s collection efforts necessarily harmed AAA also is self-evident.” Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez), 2013 WL 6571693 (B.A.P. 9th Cir. Dec. 13, 2013) (unpublished).

The BAP continued that there was no “genuine doubt that Vazquez had no just cause or excuse for his conduct. He apparently asserted in the state court that he transferred Alliance’s assets to All Blueprint because he desired to set up Huerta in a reprographics business separate and independent from Alliance, but the state court in its findings unequivocally rejected this assertion. In any event, even if there had been any truth to this assertion, it would not as a matter of law constitute just cause or excuse for Vazquez’s wrongful acts, given Vazquez’s specific intent to harm AAA.” Id.; see Gould v. Red Hill Enters. (In re Gould), BAP No. CC-13-1437-KiLaPa (B.A.P. 9th Cir. Aug. 25, 2014) (unpublished; cited only for persuasive value, if any) (“As for the ‘malicious’ prong, a wrongful act is self-evident given the nature of Gould’s conduct in transferring Learning Tree’s funds to LTU Extension for the purposes of hindering Red Hill’s collection efforts”).

c.  Alternative: State Court Preclusion

It is sometimes the case that the creditor has already obtained a state court finding of actual fraudulent transfer. In those cases, the creditor is well positioned to apply preclusion. In 2014, the BAP, in an unpublished opinion, found that “[a] judgment for ‘actual’ fraudulent transfer can satisfy the elements for a willful and malicious injury.” Correia-Sasser v. Rogone (In re Correia-Sasser), BAP No. AZ-13-1461-KiTaPa (B.A.P. 9th Cir. Aug. 19, 2014).

The BAP cited to another unpublished opinion in Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez), 2013 WL 6571693, at *4-6 (9th Cir. BAP Dec. 13, 2013) as “affirming [the] bankruptcy court’s ruling that creditor’s judgment for actual fraudulent transfer under Cal. Civ. Code § 3439.04(a)(1) satisfied the elements for a willful and malicious injury under § 523(a)(6), so issue preclusion was properly applied.” Just days after Correia-Sasser, the BAP affirmed that a fraudulent transfer finding was preclusive of liability under § 523(a)(6). Gould v. Red Hill Enters. (In re Gould), BAP No. CC-13-1437-KiLaPa (B.A.P. 9th Cir. Aug. 25, 2014).

This case law in the Ninth Circuit establishes that the requirements of § 523(a)(6) should apply to most actual (intentional) fraudulent transfers.

2. Embezzlement Under § 523(a)(4)

In certain circumstances, the facts giving rise to a fraudulent transfer may also meet the requirements for non-dischargeability under Section 523(a)(4), which excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”

As the Ninth Circuit held, “[c]learly, a debt can be nondischargeable for embezzlement under 523(a)(4) without the existence of a fiduciary relationship.” In re Littleton, 942 F.2d 551, 555 (9th Cir. 1991); see 4-523 Collier on Bankruptcy P 523.10 (“[t]he phrase ‘while acting in a fiduciary capacity’ clearly qualifies the words ‘fraud or defalcation’ and not ‘embezzlement’ or ‘larceny’”).

The Ninth Circuit case of In re Littleton, 942 F.2d 551, 555-56 (9th Cir. 1991) found that, “[u]nder federal law, embezzlement in the context of nondischargeability has often been defined as ‘the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come.’” Id. (citing Moore v. United States, 160 U.S. 268, 269 (1885)).

Littleton found that “[e]mbezzlement, thus, requires three elements: (1) property rightfully in the possession of a nonowner; (2) nonowner’s appropriation of the property to a use other than which [it] was entrusted; and (3) circumstances indicating fraud.” In Littleton, the creditor “contend[ed] that when the individual debtors did not segregate the proceeds and did not pay [creditor], they intended to defraud [creditor], and therefore the debtors embezzled the proceeds.” Littleton found that “[w]hether the debtors intended to defraud [creditor] is a question of fact.”

In Littleton, the “bankruptcy court held that [the creditor] did not meet its burden of proof on the embezzlement claim.” The BAP affirmed, finding that “at all times the debtors acted with the intent to benefit the corporation by securing financing so that the company could pay all its debts . . . negates any contention that the debtors intended to defraud [the creditor]. The Ninth Circuit in Littleton affirmed, stating that, “[g]iven the bankruptcy court’s finding that the debtors applied their entire effort and resources to make the business survive and that this was their dominant motivation, it was not clearly erroneous for the BAP to hold that the debtors did not act with the intent to defraud [the creditor].”

The application of Littleton may be helpful if the debtor took all of the funds from a defunct business. However, if the business had a potential future that might repay the funds, Littleton may not be very helpful as it is difficult for courts to determine whether a debt is a run of the mill breach of contract, or an embezzlement of funds.

These cases establish that creditors with a debt owed by an individual or corporation where a fraudulent transfer occurred should promptly consult a bankruptcy attorney if their debtor files for bankruptcy protection.

Special thanks for Bankruptcy Debtor’s Counsel Ori Blumenfeld for inspiring this blog post.

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As a general rule, California malicious prosecution actions are dicey propositions insofar as they always subject the plaintiff to a potential Anti-SLAPP motion from the defendant pursuant to California Code of Civil Procedure section 425.16.   At a minimum, such a motion requires the plaintiff to immediately produce admissible evidence establishing the malicious prosecution claim.  The failure to produce such evidence causes the dismissal of the case and may result in the plaintiff having to pay the defendant’s reasonable attorney fees for bringing the motion.   Malicious prosecution cases arising out of family law court matters are even more problematic.

As a general rule, for public policy reasons plaintiffs are not entitled to bring malicious prosecution actions stemming from matters originating in the family law courts. Bidna v. Rosen (1993) 19 Cal.App.4th 27.  A very narrow exception to the Bidna rule was carved out by Nicholson v. Fazeli (2003) 113 Cal.App.4th 1091, wherein a wife was permitted to maintain a malicious prosecution complaint against a Trust (which had previously filed a cross-complaint in the wife marital dissolution action) because the Trust’s cross-complaint did not implicate any family law issues (i.e., it did not specifically involve allegations related to marital status, child custody, spousal support, or the division of community property).  Because the Trust’s cross-complaint was a fairly rare animal (the vast majority of all family law court pleadings will involve some family law issue), parties contemplating filing a malicious prosecution action arising out of a family law court are strongly advised to consult with an attorney to obtain advice before filing a complaint that might be immediately dismissed and, even worse, might subject the party to paying the other side’s attorney fees.

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Some seem to think that a creditor plaintiff always has to sue to collect a debt in the debtor defendant’s county of domicile.  While the latter’s county is proper venue, it may not be the only proper venue.  There may be more than one county in which one properly may file suit.

Often, contract documents will specify that venue is proper in one specific county.  Generally, that would control.

However, improper venue is a waivable defect.  The plaintiff may sue in the “wrong” county.  However, if the defendant does not file a motion to change venue to the proper county, the defendant would be stuck with the “wrong” county.

What happens if no venue is specified in the contract documents?

Generally, that means the county in which the creditor plaintiff is situated would be the proper county in which to sue.  This is because performance under the contract, e.g. payment, is due where the creditor is.  So, even if the debtor defendant is in another county, the plaintiff can sue in his/her/its home county.  (See Hale v. Bohannon (1952) 38 Cal. 2d 458, 467 [9].)

Venue (and jurisdiction) rules can be tricky.  As with most aspects of the law these days, one needs to hit the books (or the computer, as the case may be).

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Some seem to think that merely depositing a Notice of Pending Action [fn] is sufficient to give constructive notice of the contents of the law suit to which it refers.

 

Not so, as the court in Dyer v. Martinez (2007) 147 Cal. App. 4th 1240 reminds us.  In order to impart constructive notice, the lis pendens must be properly indexed so that it may impart notice via a diligent title search.  If it is not indexed at the time of recordation of a subsequent recording (e.g., of a deed) or is improperly indexed so that it could not be “located”, it is a nullity as to a third party for value without actual or inquiry notice.

 

For well over 100 years, this has been the long-standing rule for a number of policy reasons, as discussed in the Dyer case and in others.  In this way, a Notice of Pendency of Action differs from the automatic bankruptcy stay of which notice need not be given to be effective.

 

Obviously, this rule can be trumped if the third party is not innocent, or should have known of the pending claim, or actually did know.  That’s another discussion for another day.

 

Moral of the story:  record the notice ASAP and make sure it’s properly indexed ASAP.  Also, if one has notice that a property may be conveyed away (e.g., there’s a For Sale sign on it), file suit, record the lis pendens and give notice to the owner and the realtor(s), immediately.

 

[fn] (The terms lis pendens, notice of pendency of action and notice of pending action are used interchangeably.)

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California’s Proposition 13 is well known to real property owners.  It generally caps property taxes at about 1% of the property’s purchase price, which the County Tax Assessor terms its “base year value.”  Property taxes typically only increase 2% per year over the base year value. But what happens when a property’s value drops below the base year value? Fortunately, the California legislature enacted Proposition 8, codified in Revenue & Taxation Code § 51, to allow for temporary property tax reductions when a property’s value falls.

Proposition 8 (“Prop. 8”) requires the County Assessor to tax property based upon the lower of the base year value or the current market value. Unfortunately, after allowing a one year reduction following an assessment appeal, some Assessors would allow a property’s Prop. 8 reduced value to revert to the higher base year value the next year unless an owner filed annual appeals.

To address this problem, Rev. & Tax. Code § 51(e) was amended in 1996 to require Assessors to annually reappraise and reassess after a Prop. 8 reduction. This duty continues until the fair market value recovers to the base year value.  Additionally, an Assessor may not condition the annual reappraisals upon the filing of annual assessment appeals.

Despite this change to Rev. & Tax. Code § 51(e), Assessors often ignored it. Assessment appeals can take several years. Some Assessors would refuse to retroactively reappraise a property’s value for the years the Assessment Appeals Board appeal had been pending. Some did not conduct annual reappraisals of any kind, thereby taking the position that property owners must file annual appeals which are explicitly not required by Rev. & Tax. Code § 51(e).

It was inevitable that this would lead to a lawsuit.  And, so we have a detailed examination of Rev. & Tax. Code § 51(e) and its legislative history in El Dorado Palm Springs v. Riverside County Board of Supervisors (2002) 104 Cal.App.4th 1262.

In the El Dorado case, the owner appealed for a value reduction for a particular year. It took four years before the appeal was granted. The owner had not filed appeals for the years after the initial appeal had been filed.  When the owner asked the Assessor for a similar reduction for all four years before the decision, the Assessor refused, arguing that the owner was required to file annual appeals (which the El Dorado court terms “protective appeals”) while the first application was pending.

On appeal, the California District Court of Appeal ruled that the Assessor was wrong and that it had a mandatory duty to retroactively reappraise the property for the intervening and subsequent years under Rev. & Tax. Code § 51(e) without requiring annual appeals. The court stated that “…after a property owner has been granted a Proposition 8 reduction for a prior tax year, section 51 dispenses with the usual requirement to file an assessment appeal.El Dorado Palm Springs v. Riverside County Board of Supervisors, supra,104 Cal.App.4th at 1268.

Twelve years after the El Dorado court clarified an Assessor’s duties under Rev. & Tax. Code § 51(e), some Assessors are still not in compliance. Some continue to neglect their mandatory duty to conduct retroactive reappraisals for the years the initial appeal was pending and some appear to be ignoring the requirements of Rev. & Tax. Code § 51(e) entirely by refusing to consider the reduced Prop. 8 value for any years after the reduction without the filing of unnecessary and costly annual appeals.

Once property owners discover that the Assessor will not comply with the reappraisal requirement, many attempt to file appeals for the years between the first year a reduction was requested and when the reduction was granted. Owners will often then discover that their local Assessment Appeals Board dismisses such appeals as untimely, even though they were not required to file any appeals after the first appeal under Rev. & Tax. Code § 51(e). The only way to resolve the situation is to challenge the Assessment Appeals Board’s decision to dismiss the “untimely” appeals and the Assessor’s refusal to comply with its mandatory reappraisal and reassessment duty after a Prop. 8 reduction.

While contesting this matter likely requires a California tax assessment appeals attorney, property owners may find that their reduced taxes exceed the cost of an attorney. Since each case is different and timeliness is important, contact an attorney promptly to learn whether legal action may be to your benefit.

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Scales of JusticeOnce again, I have a cautionary tale about the perils of NOT mediating a dispute.

Recently, I served on the “mandatory fee arbitration” panel for a county bar association.  That’s a body that handles disputes between clients and their lawyers over the latter’s charges to the former.  

In this recent case, the client did not want to meet with the other side to discuss settlement informally.  And, he did not want to mediate.  Instead, he wanted to litigate fully.

The problem was his claim against the other side was far from certain.  And, the other side had a significant claim against him. 

The client did not prevail on his claim.  While he did defense the other side’s counterclaim against him, he was ordered to pay a significant portion of the other side’s attorneys fees and costs. 

Naturally, the client did not want to pay his lawyers what he owed them.  In other words, he wanted to convert the matter into a de facto contingency, thereby making his lawyers his partners on the downside, after the fact.

What should the lawyers have done, for both the client’s sake and for their own? 

They should have insisted that the client meet with the other side to explore settlement and, if he did not want to, send written confirmation of their strong advice and the client’s decision not to follow it (i.e., a CYA letter).  Later, it became clear that the matter had exploded in its scope.  At that point, they again should have insisted that the client mediate.  If he still did not want to, a CYA letter should have been sent along with a demand for a large retainer– that focuses the client every time.

The lawyers were not confrontational enough with the client, who was a “one off” – the kind that often proves problematic for a lawyer.  Such clients have hidden expectations and are not above rewriting history.  More to the point, they often don’t have the money to pay for full-blown litigation.  So, the lawyer who early and often insists on attempts to settle a matter does the client and himself a big favor.

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Deed Record - Real Estate - Real PropertyCalifornia escrows perform an important role in modern real estate and business transactions. While escrow holders are not exempt from negligence, many escrows have made such an argument, contending that they cannot commit negligence so long as they follow the escrow instructions.

One court summarily rejected the arguments of a “malfeasant escrow holder [that attempted] to dictate the nature of the litigation . . . and to claim immunity from tort liability . . . .” Virtanen v. O’Connell (2006) 140 Cal.App. 4th 688, 699.

This ruling reflects that escrow holders have two, separate duties: “It is elemental that the duty of an escrow holder is [1] to comply strictly with the instructions of its principal and [2] to exercise reasonable skill and ordinary diligence with respect to the employment. If the escrow holder fails to follow his instructions or acts negligently, he may be liable for any loss occasioned thereby.” Diaz v. United Cal. Bank (1977) 71 Cal.App. 3d 161, 166.

Indeed, these independent (though potentially overlapping) duties are highlighted by Kirk Corp. v. First Am. Title Co. (1990) 220 Cal.App. 3d 785, 806, which explained that there are two duties: “An escrow holder . . . must comply strictly with the instructions of the principals . . . . Similarly, it is the duty of the escrow holder to exercise ordinary skill and diligence in his employment and if he acts negligently, he is liable for any loss proximately occasioned by such negligence.”

The California Supreme Court explained that “[i]t is the duty of an agent to obey the instructions of his principal and exercise in his employment reasonable skill and ordinary diligence, and, if defendant violated instructions or acted negligently . . . , it would ordinarily be liable for any loss occasioned by its breach of duty.” Rianda v. San Benito Title Guarantee Co. (1950) 35 Cal. 2d 170, 173.

The California Supreme Court also found that, “[u]pon the escrow holder’s breach of an instruction that it has contracted to perform or of an implied promise arising out of the agreement with the buyer or seller, the injured party acquires a cause of action for breach of contract. Similarly, if the escrow holder acts negligently, it would ordinarily be liable for any loss occasioned by its breach of duty.” Amen v. Merced Cnty. Title Co. (1962) 58 Cal. 2d 528, 532.

Other cases have explained the two duties of an escrow holder: “It is the duty of an escrow holder to comply strictly with the instructions of his principal . . . . Likewise, it is the duty of an escrow holder to exercise ordinary skill and diligence in his employment, and if he acts negligently he is responsible for any loss occasioned thereby . . . .” Colonial Sav. & Loan Asso. v. Redwood Empire Title Co. (1965) 236 Cal.App. 2d 186, 190-91; see Common Wealth Ins. Systems, Inc. v. Kersten (1974) 40 Cal.App. 3d 1014, 1030 (“[a]n escrow holder . . . must comply strictly with the instructions of the principals . . . . Similarly, it is the duty of the escrow holder to exercise ordinary skill and diligence in his employment and if he acts negligently, he is liable for any loss proximately occasioned by such negligence”); Wade v. Lake Cnty. Title Co. (1970) 6 Cal.App. 3d 824, 828 (“The duty of an escrow holder is to comply strictly with the instructions of his principal. . . . It is also the duty of an escrow holder to exercise reasonable skill and ordinary diligence in his employment, and if the escrow holder acts negligently, it is ordinarily liable for any loss occasioned by its breach of duty”); Hannon v. Western Title Ins. Co. (1989) 211 Cal.App. 3d 1122, 1127 (“if the escrow holder acts negligently, it would ordinarily be liable for any loss occasioned by its breach of duty”)

These dual responsibilities are illustrated by an appeal where summary judgment in favor of an escrow holder was affirmed, finding that the evidence in support of the motion “demonstrate[s] an absence of an essential element of [plaintiff’s] case, namely, failure of [the escrow holder] to follow instructions or that [escrow holder] acted negligently.” Axley v. Transamerica Title Ins. Co. (1978) 88 Cal.App. 3d 1, 10.

While escrow holders may cite to Lee v. Title Ins. & Trust Co. (1968) 264 Cal.App. 2d 160, 163, which found that “no liability attaches to the escrow holder for his failure to do something not required by the terms of the escrow or for a loss incurred while obediently following his escrow instructions,” this sentence begins with “it is generally held that . . . .”

In fact, this same quote from Lee appears in Axley v. Transamerica Title Ins. Co. (1978) 88 Cal.App. 3d 1, 9, immediately preceded by the proposition that “[i]t is also the duty of an escrow holder to exercise reasonable skill and ordinary diligence in its employment, and if the escrow holder acts negligently, it is ordinarily liable for any loss occasioned by its breach of duty.”

This area of law is stated plainly by California Jurisprudence: “An escrow holder must exercise reasonable skill and ordinary diligence in its employment; if the escrow holder acts negligently, it is liable for any loss proximately occasioned by that negligence.” 30 Ca. Jur. Escrows (3rd. ed. 2014) § 17; see 12 Witkin Sum. Cal. Law Real Property § 305 (an “escrow holder, like any agent, is liable to either principal (vendor or purchaser) for negligent performance”).

Litigants should encourage the California Court of Appeal to make clear that an escrow holder can be held liable for negligence and other tortious conduct, even while following escrow instructions.

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Too often, potential clients lack the ability to determine how they should select an attorney. Here are some guideposts to help clients select a California attorney.

1. Attorney Discipline

The California State Bar has an easy to use attorney search to research attorneys. This search will reveal any attorney discipline issues, which should be a red flag to potential clients. It will also show where the attorney attended law school and where they obtained their undergraduate degree. It will also reveal their years of experience as well as their official address. This may be helpful to determine if the attorney is meeting you at a satellite or shared office.

2.  Practice Areas

Another important consideration is whether the attorney you might hire is knowledgeable in the practice area in which the client seeks legal advice. There are many attorneys who will take whatever comes in the door. Unfortunately for the clients, this means that the attorney may be learning a new area of law at the client’s expense. Be wary of attorneys that appear to be practicing in numerous, unrelated practice areas, or who have no website to help you understand where their strengths may be.

3. Attorney Referrals

Be careful of asking friends for an attorney referral. These friends may have been their attorney’s only successful case, or may simply represent a personal connection between the friend and the attorney.

More stock should be placed in attorney referrals, as the attorney is likely a better judge of their fellow attorney. However, some attorney referrals may simply represent a referral relationship. Asking multiple attorneys for referrals may be a wise idea.

4. Reviews

Reviews on the Internet can be a dangerous source of information. Sometimes, these reviews are fake, or may simply represent an attorney who has expended extra time to ask clients to leave positive reviews, perhaps because they are not busy with existing clients.

Slightly more stock should be placed in reviews that come from other attorneys. These reviews can show a potential client the primary practice areas of the attorney, which can be helpful for the client to evaluate the attorney’s qualifications.

5. Attorney Web Site

Attorney web sites are an excellent source of information to help you understand the attorney’s practice areas. The quality of the web site may also be a reflection of the law practice. Attorneys without web sites can leave the client guessing about that attorney’s history and practice areas.

In short, there are many ways to determine whether an attorney is the right fit for you and your case. Use all available methods to make sure you have made the right decision. If you’re ever unsure if you hired the right attorney, seek independent counsel.

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Warning to the real estate industry: a widespread fraud is currently underway that could cost you and your client tens, or even hundreds, of thousands of dollars.

The Scam

The scam is simple: the scammer obtains access to information concerning a pending real estate transaction, using this information to impersonate a party to the transaction to provide fraudulent wire instructions.

Spoofing

Often times, this scam involves a compromised email account of an individual to a real estate transaction (e.g., the agent, escrow, lender, broker, title insurer, seller, buyer, etc.), which the scammer uses to obtain information concerning a pending transaction.

To assume the identity of a party to the real estate transaction, the scammer may send an email that appears to be from a legitimate sender (jsmith@calescrow.com). It is commonly believed that an account must be compromised to send an email that appears to be from that account. This is not the case.

The scammer may also purchase a domain name (e.g., jsmith@calescrow.us) that appears very similar to the legitimate domain name (jsmith@calescrow.com). The scammer may also have control of a compromised email account of a party to the transaction. Under either of these two scenarios, the scammer can send and receive communications with the victim.

Fraudulent Wire Instructions Email

The email will generally inform the buyer/lender of the wiring instructions (or new wiring instructions). With the wiring party expecting an email with escrow instructions from escrow, the broker or the agent, the wiring party may have no reason to think twice about this email.

If the scammer has an ability to read all emails with a buyer, they may be able to convincingly assume the identity of a party to the transaction, picking up where the last email left off (“I’m glad the terminate inspection went well. The new wire instructions are attached.”). With the wiring party having no reason to believe the e-mail to be fake, the wiring party may act on the email without any further confirmation.

Damages

This scam can cause a buyer’s deposit, down payment or even the entire balance of the contract to be wired to the scammer’s bank account. The resulting loss of hundreds of thousands of dollars may give rise to legal liability. Lawyers may consider negligence and breach of fiduciary duty claims, in addition to other causes of action.

How the Hackers/Phishers Compromise an Email Account

Although some may refer to the scam artist as a hacker, they may simply have gained access to the email account by phishing, which involves any number of methods to gain a username and password. This can include sending a link to a website that appears to be a login page to Google, Yahoo, Hotmail, AOL or other popular services. Phishers may be able to determine an email password by using a program to repeatedly guess the password (cracking). They may also utilize spear phishing techniques where the recipient receives an email that appears to come from someone that they know. Another technique is to load a virus on the recipient’s computer, which may come by way of an email attachment or even a download from a website that appears to have a legitimate purpose (Trojan horse).

Warnings

Broad warnings started in 2012, with specific warnings of this precise real estate escrow wire scam beginning in late 2013. The scam was named the “man-in-the-email-scam” by the FBI as it is a variation on the man-in-the-middle scam. Attorney Artin Betpera wrote an excellent description of this scam, warning real estate professionals to avoid free email addresses. Other warnings have been issued by the American Land Title Association, Chicago Title and many other sources. Although this blog post focuses on the real estate industry, the man-in-the-email scam has also impacted other industries.

Fraud Prevention

Professionals should take steps to ensure the security of email communications, including, but not limited to:

  • Avoiding business with any party that uses a free email service
  • Using encryption in emails and attachments
  • Warning buyers/lenders of this potential fraud before it occurs
  • Consulting a computer security expert
  • Training employees on computer security
  • Installing appropriate software to prevent or detect the security issues that give rise to this scam

If you’ve been victimized by this scam, consult an attorney to discover if you may have legal rights.

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When a probate judge cleared the way for the $2 billion sale of the Clippers not only Shelly Sterling came away as a winner. Donald and Shelly’s silent partners, the federal and California governments, were also in for their share of the sale. The Internal Revenue Service and the California Franchise Tax Board will reap a windfall for Donald’s racist comments to his mistress.

Sterling originally bought the Clippers in 1981 for $12 million. At the current maximum federal capital gain tax rate of 25% the sale should generate almost a half a billion dollars for the IRS coffers. In addition, the FTB should get over $200 million, given California’s top tax rate of 12.30%. California, unlike the federal government, does not have a lower rate for capital gain income. That should pay for about 100 yards of Jerry Brown’s bullet train to nowhere.

That is not Donald Sterling’s only tax problem. Sterling also reportedly lavished his girlfriend, V. Stiviano, with a series of gifts including a Ferrari, two Bentleys, a Range Rover and a $1.4 million apartment. Under established federal case law, payments to mistresses are considered “gifts” subject to gift taxes paid by the giver and not compensation income for “services rendered” taxable to the recipient. Currently, every taxpayer has a life time exemption of $5,340,000. Meaning the first $5,340,000 of gifts given are not subject to gift or estate taxes. One wonders whether Donald Sterling reported the gifts to the IRS and whether Shelly agreed to “split” the gift to lower the hit on each of their lifetime exemptions for gift tax.

Lastly, NBA Commissioner Adam Silver fined Sterling $2.5 million. The tax question is whether the fine, if ever paid, would be deductible as a business expense or not deductible as a personal expense. I would argue that it would be a business expense as it is related to the Sterling’s basketball business, but the IRS may think otherwise. In either case Sterling’s silent partners will get their share of proceeds of the sale or Sterling will be in even deeper water.

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The article below appeared in the California Real Property Journal, the Official Publication of the Real Property Section of the State Bar of California. A PDF of the article is available here.

California Real Property JournalVolume 32, Number 2, 2014

Mortgage Shotgunning and the Priority of Trust Deeds

By Scott Talkov

This article reviews recent California case law concerning the priority of trust deeds among lenders targeted by the real estate fraud known as mortgage shotgunning. The cases reveal a district split among the California Courts of Appeal when evaluating cases with identical facts. In these cases, the county recorder’s delay in indexing recorded documents gives rise to a claim from the holder of the second duly recorded interest that it did not receive constructive notice of the first duly recorded lienholder’s interest. The author recommends that the California Supreme Court resolve this circuit split by establishing that the first duly recorded interest by a bona fide purchaser or encumbrancer be declared first in priority pursuant to California’s statutory race-notice recording system.

  1.                Mortgage Shotgunning Fraud

The real estate fraud known as “mortgage shotgunning” or “mortgage slamming” occurs when a homeowner obtains multiple loans secured by the same home in order to receive loan proceeds that, in combination, greatly exceed the value of the real property.[1] The homeowner commits fraud by failing to inform each lender that s/he has obtained multiple loans secured by the same property. The homeowner[2] then absconds with the proceeds of the multiple loans on the same property.[3]

This species of real estate fraud, declared to be an “alarming trend” in 2009,[4] is difficult to detect because of the delay between the trust deed recordation date and the date on which the recorded trust deed is available for discovery by title searchers. Each lender is thereby led to believe that it will have a fully-secured, first-priority trust deed. Indeed, defrauding parties generally use multiple title insurers, notaries, escrow companies and lenders to reduce the chance of fraud detection before the defrauding party can abscond with the funds.

After falling victim to this fraud, lenders find themselves in a dispute over which lender has a fully-secured, first-priority interest in the subject property. Those without a first-priority lien hold a less-secure, potentially worthless interest in the real property.[5]

The resulting litigation between victimized lenders (often funded by their respective title insurers) has been decided differently in California’s Fourth District Court of Appeal (Riverside) and Second District Court of Appeal (Los Angeles). Each district has reached opposite conclusions as to the priority of competing trust deeds recorded by victims of mortgage shotgunning. This district split raises fundamental questions about California’s race-notice recording system. In these cases, good faith purchasers (encumbrancers) without notice of an existing trust deed, have recorded their trust deeds shortly after the recordation of an immediately preceding trust deed. Each case also involved a claim that the date on which the county recorder indexes the trust deed changes the priority of those interests from the assumed priority under the race-notice system. However, the two courts reached opposite conclusions, creating a district split that should be reconciled by the California Supreme Court.

  1.                The Race-Notice Recording System

The recording priority of trust deeds in California (and many other states) is governed by the state’s race-notice recording statutes, which allow a lender or purchaser to obtain an interest in real property that has priority over another interest in the same real property by:

  • Acquiring the interest as a bona fide encumbrancer (i.e., lender) or purchaser for valuable consideration, meaning that s/he pays consideration in exchange for an equity or fee interest in certain real property, while possessing neither actual knowledge nor constructive notice of a previously created interest in that property; and
  • “First duly record[ing]” the interest, meaning that the lender or purchaser records the granting instrument before any competing interest in the property is recorded.[6]

In California, these rules were codified long ago in 1872. Specifically, Civil Code section 1213 states that recorded documents provide constructive notice to third parties, thereby preventing anyone with a subsequently recorded interest from wresting title to the property from the holder of current title without paying value for that interest.

Central to the disputes in mortgage shotgunning litigation, Civil Code section 1107 provides that “[e]very grant of an estate in real property is conclusive against the grantor, also against every one subsequently claiming under him, except a purchaser or incumbrancer who in good faith and for a valuable consideration acquires a title or lien by an instrument that is first duly recorded.”

Another pivotal statute in these disputes is Civil Code section 1214. This statute reads in relevant part, “[e]very conveyance of real property . . . is void as against any subsequent purchaser or mortgagee of the same property . . . in good faith and for a valuable consideration, whose conveyance is first duly recorded.”[7] The essence of Civil Code section 1214 lies at the heart of mortgage shotgunning litigation. It “renders an unrecorded conveyance void as to subsequent bona fide purchasers who record their title first.”[8]

When lenders record their secured interests in real property and fund a loan with hundreds of thousands of dollars (or more) in consideration, only to later find that their interests may be worthless, litigation frequently ensues. In such litigation, lenders with a “duly recorded” deed of trust often assert that a recorded document does not provide notice to third parties until it is indexed by the county recorder, perhaps several days after recordation. This argument tests the very purpose of the race-notice recording system.

  1.                Simultaneously Recorded Trust Deeds Are Equal in Priority

The California Court of Appeal has been called upon twice in recent years to determine the priority of simultaneously recorded trust deeds.[9] Although neither case mentions “mortgage shotgunning,” the fact that they involve bona fide encumbrancers disputing the priority of their lien rights in the same real property suggests that that this form of mortgage fraud gave rise to the disputes.

In 2011, the California Second District Court of Appeal in Los Angeles issued a published opinion in First Bank v. East West Bank in which lenders with loans secured by the same residential real property dropped off their trust deeds at the Los Angeles County Registrar-Recorder/County Clerk before it opened, causing both trust deeds to be file stamped as if they were recorded at 8:00 A.M. the same morning.[10] One lender claimed that its trust deed was first in priority because its deed had been indexed first.[11] The court rejected this argument, finding that it “would disrupt the statutory scheme to make priority turn on the random act of indexing,” a process that allows the county recorder to find instruments in its computerized database.[12] Instead, the court deemed the lenders to hold interests of equal priority in the subject property. This decision drew considerable attention among mortgage attorneys, including Golden Gate University Professor of Law Roger Bernhardt, who wrote an article advising lenders on how to deal with tied priority.[13]

In 2012, the California Fourth District Court of Appeal in San Diego authored an unpublished opinion in Baer v. Douglas.[14] In Baer, two trust deeds were time and date stamped as though they were recorded at the same moment in time. One lender contended that its lower recording number indicated an earlier priority, and should break the tie. The court rejected this argument, finding that neither the sequence of the recording numbers stamped by the recorder on the parties’ simultaneously recorded trust deeds nor the sequence of the page numbers where the trust deeds appear in the official records, determined the relative lien priority of each trust deed. Instead, the court upheld the holding and reasoning in First Bank,that the time of recordation is the only relevant factor in determining priority.[15] In other words, indexing plays no role in the court’s analysis.

These cases highlight the unwillingness of courts to disrupt the conclusion dictated by the race-notice system, that the first, duly recorded interest maintains priority over others, even when two trust deeds are both recorded “first.” While each of these cases involved a determination that each of the defrauded lenders would share in the loss, a more difficult problem arises when courts must decide which defrauded lender will take no loss whatsoever, with all other defrauded lenders bearing the full loss.

  1.                Districts Are Split as to Which Trust Deed Has Recording Priority Among Trust Deeds Recorded at Different Times by Good Faith Purchasers Without Notice

Although simultaneous recording raises fascinating legal issues, more frequently, multiple interests in the same real property are recorded close in time, but not concurrently, and neither interest holder has actual or constructive notice of the other interest at the time its deed records. Courts addressing this fact pattern in two unpublished cases have reached opposite conclusions as to which trust deed has priority over the other, an issue due for resolution by the California Supreme Court.

  • Simental: The First Duly Recorded Interest Wins

In 2010, the California Fourth District Court of Appeal in Riverside decided the case of Simental v. Inyo-Mono Title Co. Profit-Sharing Plan.[16] In Simental, two bona fide encumbrancers paid value for what they each thought was the trust deed in first lien position on a parcel of real property. The later-recording party argued that it did not have constructive notice of the first-recorded trust deed because that deed had not been indexed by the county recorder when the later-recording party recorded its interest. The Simental court determined that “the question is not whether [the later-recording party] had constructive notice” of the first-recorded trust deed, but rather, who recorded first.[17]

            Simental made the rule quite clear, concluding that the first-recorded trust deed “won the race to the recorder’s office.” Hence, the lender under the first-recorded trust deed held the lien in first priority on the subject property.[18]

  • Bank of East Asia: The Second Duly Recorded Interest Wins

In 2013, the California Second District Court of Appeal in Los Angeles came to the opposite conclusion in Bank of East Asia U.S.A. N.A. v. Javaherian.[19] The facts of that case were identical to those in Simental:

The [Javaherian] deed of trust was recorded in the recorder’s office on March 2, 2005. The Bank’s deed of trust was recorded in the recorder’s office on March 3, 2005. The [Javaherian] deed of trust was indexed in the recorder’s office records on March 5, 2005, and the Bank’s deed of trust was indexed on March 7, 2005.[20]

Based on these facts, the Bank argued that its deed of trust had priority over the Javaherian deed of trust, because the Bank had no actual or constructive notice of the Javaherian deed of trust.

After quoting First Bank v. East West Bank extensively, the Court of Appeal reasoned that “[a]lthough the [Javaherian] deed was recorded first, it failed to provide subsequent purchasers and encumbrancers with constructive notice until it was indexed. Therefore, when the Bank’s deed of trust was duly recorded, the Bank was not charged with constructive notice of the prior deed of trust and the Bank’s interest is not subject to the [Javaherian] deed of trust.”

The court concluded that the second-recorded trust deed had priority, reasoning that “[b]etween the two innocent parties in this case, Javaherian was in the best position to protect her interest by promptly recording the [Javaherian] deed of trust and verifying that it had been properly indexed.”[21] Apparently, the court was critical that Javaherian did not record her deed of trust upon execution on February 7, 2005, but recorded her deed of trust nearly a month later, on March 2, 2005. In contrast, the Bank executed its deed of trust on February 28, 2005, and recorded it three days later, on March 3, 2005.

No statute or precedent provides a balancing test in a situation involving two innocent lenders, nor does any test determine which party is in the “best position” to protect its interest by promptly recording and/or verifying the indexing of its trust deed. Either party could have done so here.

Further, even if Javaherian had undertaken such an effort, the situation would not have changed. For example, if Javaherian had verified on March 5 or 6, 2005, that the Recorder’s Office had indexed her trust deed, Javaherian would not have had notice of the Bank’s trust deed recorded on March 3, 2005. This is because the Recorder’s Office did not index the Bank’s trust deed until March 7, 2005. Such an analysis of the facts is at odds with the court’s reasoning that Javaherian’s interest should be subordinate because she “was in the best position to protect her interest by promptly recording [her] deed of trust and verifying that it had been properly indexed.”[22] By implication, this case seems to question the race-notice statutes in California.

In light of the district split created by Simental and Bank of East Asia, the California Supreme Court should address this issue to provide clarity for courts, attorneys, lenders and title insurers.

  1.                Author’s Recommended Approach: The First Duly Recorded Interest Should Prevail

The disparate outcomes of the recent mortgage shotgunning cases raise the issue of whether the first duly recorded interest should prevail. The author argues that it should.

Some courts have decided, and many litigants have argued, that later-recording interests should be first in priority because the first-recorded interest did not provide constructive notice to the later-recording parties. These arguments rely upon “[t]he purpose of our recording statutes[, which] is to give notice to prospective purchasers or mortgagees of land of all existing and outstanding estates, titles, or interests in it whether valid or invalid, which may affect their rights as bona fide purchasers and so as to protect them before they part with their money.”[23]

However, the recording statutes further encourage such notice by “penaliz[ing] the person who fails to take advantage of recording.”[24] Indeed, the severe penalty found in Civil Code section 1214 grants priority to the “first duly recorded” interest without regard to whether third parties have constructive notice of that interest at the moment of recordation or at any time thereafter. As such, the statute embodies the “race” of the race-notice recording statutes by encouraging all parties to promptly record their interests. Hence, the statute serves as the tiebreaker in all disputes between interests in real estate because it dictates that the first duly “recorded” interest prevails.

The argument made by later-recording lenders, such as the lender in Simental, that lack of constructive notice is sufficient to obtain priority misses the point. Race-notice recording statutes seek to provide constructive notice. They may not do so instantly or perfectly, but the system aims to provide this type of notice nonetheless. However, whether a subsequently recorded lienholder has constructive notice of an earlier lien on the same real property is not determinative of the priority of a duly recorded interest.[25]

In fact, the modern reality of the title insurance industry is that title insurance companies maintain their own title plants to search recorded instruments. As such, the litigation in this area of law seemingly results from private title searches performed earlier than the date on which the funds were issued or from delays in the indexing of instruments by private title plants—not from reliance on the indexing function of the county recorder.

  1.                Equitable Subrogation as an Alternative Theory to Decide Priority

Lenders facing a complete loss of principal on a secured investment have developed creative arguments in their attempt to avoid the harsh consequences of the race-notice rule. One theory that a recording party may rely upon is the doctrine of equitable subrogation.

In 2012, the Fourth District Court of Appeal in Santa Ana applied equitable subrogation to resolve a dispute between lenders regarding the priority of their trust deeds in J.P. Morgan Chase Bank, N.A. v. Banc of America Practice Solutions, Inc.[26] In Chase, the borrower sought to re-finance his house with a senior lien in favor of Chase. Unbeknownst to Chase, the borrower simultaneously obtained a business loan that was to be secured by a junior lien on his house in favor of Banc of America. Contrary to Banc of America’s understanding and the borrower’s intentions, Banc of America secured its lien first, followed thereafter by Chase paying off the pre-existing deeds of trust and recording what it thought would be a senior deed of trust. California’s “first in time, first in right” system of lien priorities dictated that Chase had a junior lien, absent judicial intervention.

Instead, the court found that this rule “is not without exceptions,” quoting Civil Code section 2897 to find that “[o]ther things being equal, different liens upon the same property have priority according to the time of their creation.”[27] The court found that this exception for equitable subrogation was best stated by the California Supreme Court in 1928:

One who advances money to pay off an encumbrance on realty at the instance of either the owner of the property or the holder of the incumbrance, either on the express understanding, or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first lien on the property, is not a mere volunteer; and in the event the new security is for any reason not a first lien on the property, the holder of such security, if not chargeable with culpable and inexcusable neglect, will be subrogated to the rights of the prior encumbrancer under the security held by him, unless the superior or equal equities of others would be prejudiced thereby, and to this end equity will set aside a cancellation of such security, and revive the same for his benefit.[28]

Because Chase paid off the pre-existing liens except that of Banc of America, the only question for the court was whether Banc of America’s “equities are equal to or greater than Chase’s.”[29]

Finding that “[e]quitable subrogation looks to the intentions of the parties,” the court found that Chase’s later-recorded trust deed was senior to Banc of America’s earlier-recorded trust deed because that order of priority was “exactly what [the parties] bargained for.”[30] Indeed, Chase expected to receive a senior trust deed, and Banc of America expected to receive a junior trust deed.

Although the Chase court noted that “constructive notice, as opposed to actual notice, does not forestall application of equitable subrogation,”[31] it seems unlikely that the court would have reached the same result if Chase had simply relied upon the borrower’s representation that the trust deed would be senior without conducting any title search to find that Banc of America had recorded its trust deed. In this case, the Banc of America trust deed was “intervening” in the sense that it was filed after Chase began its loan process, though it was recorded over two months before Chase recorded its trust deed.

As explained above, equitable subrogation requires that the party claiming the doctrine is “not chargeable with culpable and inexcusable neglect.”[32]  If Chase had delayed too long before recording its trust deed, the excusable neglect requirement in equitable subrogation would suggest that the doctrine should not be applied.

Moreover, as between lenders in mortgage shotgunning situations, equitable subrogation cannot be asserted. Specifically, equitable subrogation is available “unless the superior or equal equities of others would be prejudiced thereby.”[33] In the context of mortgage shotgunning litigation between lenders, each lender has equal equities as each lender intended to have first priority. Hence, equitable subrogation should not apply, because neither lender intended to hold a junior interest in the property. As such, granting priority to a later-recording interest would violate the principal that equitable subrogation cannot be applied when it would be to the prejudice of a party with equal equities, namely the earlier-recording lender. This situation is contrast to the situation in Chase, where the first-recording party expected to hold a junior lien, but unexpectedly held a senior lien.

Thus, in mortgage shotgunning situations where each lender does not have notice of the other’s security interest in the subject real property, and is unaware that they may hold a junior interest, the first-recording party has superior equity. This alone should prevent application of equitable subrogation.

  1.                Proposal for Electronic Recording

Many of the issues complained of in mortgage shotgunning litigation could be resolved by a publicly-accessible electronic recording system.

Such a system would allow a user to log on, choose the relevant assessor’s parcel number for the applicable property, and upload the document. In addition, the county recorder could instantly produce a receipt showing all documents recorded prior in time to the user’s document, including those that are still pending human review by the county recorder. Under this system, if no such documents exist, a lender could fund loans worry-free, provided that courts uniformly agree that first in time is first in right. If another user submitted a document one second later, that user would see the newly uploaded document preceding his or hers, thereby providing constructive notice to the subsequent lender not to fund the loan.

  1.                Final Lesson: Record Promptly

Until and unless changes are made, lenders, title companies, and their counsel should learn from the existing case law in this area. The lesson is clear: a lender should promptly record its secured interests in real property to protect its priority. Moreover, lenders and title officers may be wise to conduct another title search several days after recording and before funding the loan (if possible), to determine if any earlier-recorded documents have been indexed. Finally, the decision in Bank of East Asia suggests that yet another title search should be conducted several days after the operative trust deed has been indexed, to determine whether a competing trust deed was later-recorded.

 

[1] See Core Logic, Mortgage Fraud Prevention and Detection Resource Guide (2d ed. 2012), available at http://www.corelogic.com/downloadable-docs/mortgage-fraud-prevention-and-detection-resource-guide.pdf.

[2] A homeowner without an existing lien on the property can engage in mortgage shotgunning by simply accepting multiple payments to purchase or refinance their property.

[3] Although mortgage shotgunning raises a number of interesting legal issues, this article focuses solely on the litigation between lenders under the race-notice statutory scheme in California.

[4] Mortgage Fraud News, Fannie Mae Mortg. Fraud Program, Apr. 2009, available at https://www.fanniemae.com/content/news/mortgage-fraud-news-0409.pdf.

[5] California’s anti-deficiency laws would seemingly be unavailable to protect the perpetrator of mortgage shotgunning fraud as “[t]he defense of sections 580b and 580d proscribing deficiency judgments is not available to the trustor as a defense to an action by the beneficiary for fraud.” Glendale Fed. Sav. & Loan Ass’n v. Marina View Heights Dev. Co., 66 Cal. App. 3d 101, 139 (1977).

[6] See Civil Code §§ 1107 and 1214.

[7] Although these two statutes are often cited concurrently, Civil Code section 1107 relates to a “grant of an estate,” which would include grant deeds. On the other hand, section 1214 relates to “[e]very conveyance of real property,” which includes trust deeds.

[8] Burkart v. Coleman (In re Tippett), 542 F.3d 684, 688 (9th Cir. 2008); accord 27 Cal. Jur. Deeds of Trust § 136. See Winding v. NDEX West, LLC, No. 11-16506, 2013 U.S. App. LEXIS 21548, at 2, 2013 WL 5739351 (9th Cir. Oct. 23, 2013) (citing Civil Code section 1214 in noting that “the date of recording determines priority of liens in California”).

[9] Baer v. Douglas, No. D057811, 2012 Cal. App. Unpub. LEXIS 2091, 2012 WL 917190 (Mar. 19, 2012) (unpublished); First Bank v. E. W. Bank, 199 Cal. App. 4th 1309 (2011).

[10] First Bank, 199 Cal. App. 4th at 1311.

[11] Indexing presumably occurs in the order that the interests are numbered, even though such unique identifiers may reflect interests that are deemed recorded at the same moment in time.

[12] No argument was made in this case that lenders or title insurers utilize or rely upon the county recorder’s indexing system, as opposed to the title plants maintained by title insurers.

[13] Roger Bernhardt, Living with Tied Priority (Jan. 3, 2012), http://www.rogerbernhardt.com/index.php/ceb-columns/321-living-with-tied-priority-first-bank-v-east-west-bank.

[14] Baer, No. D057811, 2012 Cal. App. Unpub. LEXIS 2091, 2012 WL 917190.

[15] Id.

[16] Simental v. Inyo-Mono Title Co. Profit-Sharing Plan, No. E048891, 2010 Cal. App. Unpub. LEXIS 4414, 2010 WL 2354225 (Jun. 14, 2010) (unpublished).

[17] Id., No. E048891, 2010 Cal. App. Unpub. LEXIS 4414, at 14, 2010 WL 2354225.

[18] Id., No. E048891, 2010 Cal. App. Unpub. LEXIS 4414, at 15, 2010 WL 2354225.

[19] Bank of East Asia U.S.A. N.A. v. Javaherian, No. B242079, at 7, 2013 Cal. App. Unpub. LEXIS 422, at 10-11, 2013 WL 206127 (Jan. 18, 2013) (unpublished).

[20] Id., No. B242079, at 2-3, 2013 Cal. App. Unpub. LEXIS 422, at 3-4, 2013 WL 206127.

[21] Id., No. B242079, at 7-8, 2013 Cal. App. Unpub. LEXIS 422, at 10-11, 2013 WL 206127.

[22] Id.

[23] City of Los Angeles v. Morgan, 105 Cal. App. 2d 726, 733 (1951) (citation to recording statutes omitted).

[24] As the California Department of Real Estate explains to real estate brokers, “[t]he general purpose of recording statutes is to permit (rather than require) the recordation of any instrument which affects the title to or possession of real property, and to penalize the person who fails to take advantage of recording.” Cal. Dep’t of Real Estate, Reference Book: Information Relating to Real Estate Practice, Licensing and Examinations, ch. 5 Title to Real Property 51 (2010), available at http://www.dre.ca.gov/files/pdf/refbook/ref05.pdf.

[25] The absence of notice is a necessary, but not sufficient, requirement for status as a bona fide purchaser or encumbrancer. See First Bank v. E. W. Bank, 199 Cal. App. 4th 1309, 1314 (2011) (“The absence of notice is an essential requirement in order that one may be regarded as a bona fide purchaser.”).

[26] JP Morgan Chase Bank, N.A. v. Banc of Am. Practice Solutions, Inc., 209 Cal. App. 4th 855, 860 (2012). See Adam M. Starr, When “First in Time” Isn’t Early Enough: California Court of Appeal Reaffirms the Doctrine of Equitable Subrogation, Cal. Real Prop. J., vol. 31, no. 2, 2013, available at http://mhgm.com/our-resources/articles/When-First-In-Time-Isn-t-Early-Enough-California-Court-of-Appeal-Reaffirms-the-Doctrine-of-Equitable-Subrogation; see also Roger Bernhardt, Equitable Subrogation: A Sensible Remedy, but Don’t Count on It (Nov. 30, 2012), http://www.rogerbernhardt.com/index.php/ceb-columns/338-equitable-subrogation-chase-bank-v-banc-of-america.

[27] Chase, 209 Cal. App. 4th at 860.

[28] Simon Newman Co. v. Fink, 206 Cal. 143 (1928).

[29] Chase, 209 Cal. App. 4that 862.

[30] Id.

[31] Id. at 861.

[32] Id. at 862 (quoting Simon Newman, 206 Cal. at 146).

[33] Id.

The author would like to thank this Journal’s Editor-in-Chief, Teresa B Klinkner; his real estate law professor, Dale Whitman; Reid & Hellyer, APC Senior Attorney James J. Manning, Jr., Coblentz Patch Duffy & Bass LLP Attorney Misti M. Schmidt, Locke Lord LLP Attorney Allison Harris and Andrade & Associates Attorney Brett K. Wiseman for their suggestions and feedback on this article. This article is dedicated to Doris Warner, whose commitment to education made this contribution possible.

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With many Inland Empire residents hitting hard times, bankruptcy petition preparers have offered their services to help debtors file for bankruptcy. Hiring a bankruptcy attorney may be a much better decision in the long run.

Increased Use of Bankruptcy Petition Preparers

BankruptcyAs reported by the U.S. Courts, there has been an increased use of bankruptcy petition preparers in recent years, which the courts describe as a “concern.” The Bankruptcy Court for the Central District of California, which includes Riverside and San Bernardino counties, even keeps a list of bankruptcy petition preparers that have been enjoined (prohibited) from preparing bankruptcy petitions.

What is a Bankruptcy Petition Preparer?

A bankruptcy petition preparer (often known as a “BPP”) is as a person who is not an attorney or employed by an attorney who prepares a petition or any other document for filing by a debtor in a bankruptcy court or district court. 11 U.S.C. § 110(a).  The charge typically allowed for preparing a bankruptcy petition is no more than $200, which does not include the court filing fee.

A Bankruptcy Petition Preparer Cannot Provide Legal Advice

As the United States Trustee for the Central District of California explains, “a bankruptcy petition preparer may only type forms.” If they go further, they risk violation the prohibition on offering “legal advice,” which includes:

  1. whether to file a file a bankruptcy petition;
  2. whether filing under Chapter 7, 11, 12 or 13 is most appropriate;
  3. whether the debtor’s debts will be discharged in bankruptcy;
  4. whether a debtor will be able to retain their home, car, or other property after filing for bankruptcy;
  5. the tax consequences of filing for bankruptcy, including whether tax claims will be discharged;
  6. whether the debtor may or should promise to repay debts to a creditor or enter into an agreement to reaffirm a debt (e.g. a mortgage on a house or loan on a car);
  7. advice concerning how to characterize the nature of the debtor’s interests in property or the debtor’s debts; or
  8. advice concerning bankruptcy procedures and rights.

See 11 U.S.C. § 110(e)(2).

Why is the Government Concerned About Bankruptcy Petition Preparers?

The courts and the U.S. Trustee’s office are concerned that bankruptcy petition prepapers may not properly serve debtors who need their services. Notably, too many bankruptcy petition preparers provide legal advice by advising debtors which chapter of the bankruptcy code is best for them, the nature and extent of their property, which exemptions might apply and whether a bankruptcy will discharge their debts.  Even the use of “software that prepares bankruptcy petitions” by a bankruptcy petition prepaper is also the unauthorized practice of law.  In re Reynoso, 477 F.3d 1117 (9th Cir. 2007).

The bankruptcy trustees and U.S. Trustee’s office are skilled at detecting petitions that were prepared with the assistance of a bankruptcy petition preparer when they fail to list their name. When these petitions are detected, the remedies can be severe.

Advice to Debtors: Hire a Bankruptcy Attorney

More importantly, why would a debtor want to file a bankruptcy without obtaining proper legal advice from an individual who is legally allowed to provide such advice?

Debtors may believe they are saving money, but too often, this minor savings results in a a legal mess. For example, a debtor may realize after their petition is filed that bankruptcy was not the right solution to their problems because they have property that must be turned over to the bankruptcy trustee or that all of their debts may not be discharged. They may even find themselves accused of lying on their bankruptcy petition, which has serious consequences.

These are all issues that can be addressed before you file for bankruptcy by consulting with a bankruptcy attorney.

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