The Letter of The Law: March 2014

REAL ESTATE LAW: Disclosure Guidelines: What Should I Disclose When Selling My House?

REAL ESTATE LAW: The Power of a Sham

EMPLOYMENT LAW: Firing Both Parties Involved in the Sexual Harassment Complaint is Not a Solution

BUSINESS LAW: Will 2014 Finally Be the Year That Nevada Gets a Court of Appeal?

Disclosure Guidelines: What Should I Disclose When Selling My House?

By: Kenneth C. Chung

As a general rule, all sellers of residential real estate property containing one to four units in California must complete and provide written disclosures to the buyer. The most commonly used form for such disclosures is the Transfer Disclosure Statement that the sellers will complete and sign.

What must be disclosed? Under California law, all material facts that affect the value or desirability of the property must be disclosed to the buyer. There is no specific definition or rule on what is considered to be a material fact. The circumstances of each case will be evaluated in determining whether the undisclosed fact was material or not. A fact will generally be deemed material if it has a significant and measurable effect on the value of the property. For example, if a buyer would not have purchased the property or would have paid less for the property had the buyer known about the undisclosed fact, then such fact would generally be deemed material which the seller was legally required to disclose. Examples of material facts that must be disclosed include structural problems with the house, soil problems, a leaking roof, unpermitted construction, neighborhood noise problems, and anything else that a buyer would deem to be important. If there is any doubt about whether a fact should be disclosed, then that fact should be disclosed so that the seller may be protected against the claim that the undisclosed fact was material and was intentionally concealed.

When should the disclosure be made? It's best to give the disclosures to the buyer as soon as possible so the buyer can make an informed decision. If a buyer will cancel the purchase because of the disclosed fact, it is better to know that earlier so that the seller may quickly put the property back on the market. The California Association of Realtors Residential Purchase Agreement requires the seller to provide all disclosures within seven days from when the purchase agreement has been accepted. Many sellers will prepare all disclosure documents prior to listing their property so that everything is ready to be presented as soon as an offer is accepted. Even after a buyer has waived all purchase contingencies, the buyer will have an additional five days to cancel the purchase transaction from the date that he receives a late disclosure. This cancellation period may vary depending on what is stated in the contract. Therefore, it is to the seller's benefit to provide the disclosures as soon as possible after accepting the offer.

Does the seller have to make disclosures when the property is being sold "AS-IS"? The answer is YES. A common misunderstanding by sellers is that disclosures are not necessary if the buyer agrees that the property is being purchased in its "as-is" condition. An "as-is" sale generally means that the buyer is accepting the defects on the property that are visible. The "as-is" sale does not excuse the seller from failing to disclose material facts or conditions that are not easily visible. For example, generally structural or soil problems are not visible to an ordinary person. Therefore, if the seller is aware of such problems, they must be disclosed to the buyer regardless of the "as-is" sale. The safer practice in an "as-is" sale is to include visible problems in the disclosure so as to avoid the possible argument as to whether a problem was visible or not. For example, although a defect on the floor may clearly be visible after the seller has moved out, the buyer claims that it was previously covered by a rug or furniture and thus was not visible.

Does the seller have to disclose a defect that has been repaired? Whether the seller must disclose a prior defect which the seller believes has been repaired is not currently clear under the law. Some court decisions state that if the defect was repaired, then the buyer would not be damaged from the seller's failure to disclose the prior defect and therefore the seller should not be liable. However, in another court decision, the court ruled that the seller was required to disclose prior mudslides on the property even though the seller believed it had been repaired. In addition to the uncertain state of the law, the other issue is how certain must the seller be that the defect was properly and fully repaired so as to avoid disclosure. As most sellers are not engineers or contractors, a defect that the seller honestly believes has been repaired may be susceptible to future recurring failures. Under these circumstances, defects that the seller believes have been fully repaired should still be disclosed to the buyer.

Death in property: Details that you do not need to disclose include whether a prior occupant had Acquired Immune Deficiency Syndrome (AIDS) or whether someone died on the property, as long as the death occurred more than three years before the current potential buyer's purchase offer. However, if a buyer asks you if anyone died at the property, you must still answer truthfully even if the death occurred more than three years before.

What happens if a seller fails to make required disclosures? If a required disclosure is not timely made, then the buyer will have the right to cancel the purchase within the time period stated in the contract. If required disclosures are not made at all, the seller may then be responsible for the cost of repairs and other damages resulting from the undisclosed defect. A seller could also be ordered by the court to take back the property and to reimburse the purchase price and other damages to the buyer. A seller can be held responsible for the buyer's attorney's fees. If the seller intentionally concealed a material disclosure, then the seller may also have to pay punitive damages to the buyer.

Since the consequences of failing to disclose may be quite significant, a seller's duty to disclose should be taken very seriously. In addition to avoiding the potential legal and monetary consequences, the seller will have the benefit of having peace of mind after making the required disclosures. The buyer may file a lawsuit against the seller for fraud and concealment for a period of three years from when the problem is discovered or when it reasonably could have been discovered. Therefore, rather than worrying about a potential lawsuit for three years, the better choice is to make all legally necessary disclosures. In some cases, what a seller believes to be a serious defect may not be as important to a buyer, or the defect can sometimes be resolved by negotiating a repair credit to the buyer during escrow. Sellers should consult with an experienced real estate attorney regarding any disclosure questions, and for assistance in documenting any settlements with the buyer.

Kenneth W. Chung is the managing partner of the real estate litigation and transactions department at Kring & Chung, LLP. He is a licensed real estate broker and has been licensed since 1986. He can be reached at (949) 261-7700 or kchung@kringandchung.com

THE POWER OF A SHAM

By: Anna Greenstin Kudla

Sham Guaranty Defense is a distinct way individual guarantors, partners, trustors/trustees, corporate executives and shareholders can avoid liability when an underlying loan is in default. While this defense may be influential in assisting a select few in certain situations, it is rarely used because it applies only in limited circumstances.

Application of the Sham Guaranty Defense requires proving that the guarantor is actually the principal obligor and thus entitled to the same unwaivable protection of the anti-deficiency statutes. Civil Code § 2787 defines a true guarantor as, "one who promises to answer for the debt, default, or miscarriage of another." A Sham Guaranty arises when a principal obligor purports to take on additional liability as a guarantor. Below are some examples of how California courts have made distinctions (between different types of borrowers and/or guarantors) in the application of the Sham Guaranty Defense.

Trustors and Trustees. If a trust is the principal borrower and the guarantees are executed by the Trustors and Trustees of that trust, the guarantees may be considered unenforceable. Asserting a Sham Guaranty requires proof that the principal obligor of the debt, the trust, is a mere pass-through entity that does not award any separation or protection to the trust principals or the guarantors.

The most well-known, and highly cited case in this area is Torrey Pines Bank v. Hoffman (1991) 231 Cal.App.3d 308. In the Torrey Pines matter, a husband and wife, who were the trustors, trustees and the primary beneficiaries of their revocable living trust, signed personal guarantees in connection with a construction loan to their personal trust. The court applied the "instrumentality" test, defined as whether the trust was "anything other than an instrumentality used by the individuals who guaranteed the debtor's obligation, and whether such instrumentality actually removed the individuals from their status and obligations as debtors." ( Id. at 320) The court determined that the structure of the trust made no significant distinction between the guarantors and the borrower. Thus, the husband and wife were deemed the primary obligors that could not guaranty their own debt. Therefore, the guarantees were deemed unenforceable.

This pivotal case does not protect all trusts. In Torrey Pines the court recognized that the greater the degree of separation between trustors, trustees and beneficiaries that exists, the more difficult it will be to establish guarantor protection. Such was the case in the matter of Talbott v. Hustwit (2008) 164 Cal.App.4th 148. In the Talbott case the court made several distinctions. For example, the husband and wife guarantors were secondary, not primary, beneficiaries of their trust. Moreover, they were not the named trustees, but rather used a limited liability company as trustee, thus limiting their personal liability for their trust's obligations. In Talbott, the court deemed the husband and wife as true guarantors because the trust arrangement "actually removed the[m] from their status and obligations as debtors." ( Id. at 153) Therefore, the guarantees were deemed enforceable.

Partners. Similarly if a partnership is the principal borrower, guarantees signed by the partners may be held to be a Sham. In Riddle v. Lushing (1962) 203 Cal.App.2d 831, real property was purchased in the name of a partnership. The promissory note and deed of trust were signed by each partner. The partners also individually guaranteed the note. The partnership defaulted. The court focused on whether the transaction created different liabilities for the partners as guarantors. Since, by law, partners were already jointly and severally liable for debts of the partnership, the court permitted the "guarantors" to invoke the protections of anti-deficiency law.

The above examples relate to real estate properties, individuals and partners. To draft an exhaustive article addressing various loans, lender's responsibilities, and the many defenses that can be applied to corporate executives and shareholders, would require this author to draft a dissertation. We urge you to contact Anna Greenstin Kudla, or any of the litigation attorneys at Kring & Chung, to discuss what defenses or claims could be asserted on behalf of or against, borrowers and guarantors.

Firing Both Parties Involved in the Sexual Harassment Complaint is Not a Solution

By: Laura C. Hess

A recent California court decision, Mendoza v. Western Medical Center Santa Ana, (2014) 222 Cal.App.4th 1334, highlights the mistakes an employer can make when handling a sexual harassment complaint.

Employers always need to do a good faith investigation, even if the allegations appear to be "he said/she said." When employers terminate a long-term, well-performing employee after he or she has complained about sexual harassment, they run the risk of a being sued for wrongful termination.

In Mendoza, the plaintiff, a male nurse, worked for a hospital for 20 years. He had an excellent work history. Plaintiff alleged he was sexually harassed by a newly hired male supervisor. Both men are gay.

The supervisor claimed plaintiff initiated sexual banter with him, that plaintiff consented to the conduct, and moreover that the supervisor was a reluctant participant to the sexually charged conduct. The hospital decided to terminate both employees for engaging in inappropriate and unprofessional behavior.

Plaintiff sued on the grounds that California law prohibits terminating an employee because he made a complaint about sexual harassment. ( Gov. Code § 12940)

At trial, the jury found in favor of the plaintiff, awarding him over $283,000. The appellate court overturned the verdict and ordered a new trial because of errors in the jury instructions.

In doing so, the court pointed out, "The lack of a rigorous investigation by defendants is evidence suggesting that defendants did not value the discovery of the truth so much as a way to clean up the mess that was uncovered when Mendoza made his complaint." It pointed out several flaws in the investigation, such as interviewing the complainant and the accused at the same time rather than separately, not interviewing co-workers, and not using an impartial, trained investigator.

The court noted that a "more thorough investigation might have disclosed additional character and credibility evidence for defendants to consider before making their decision." In a sharply worded footnote, the court said that just because the two parties offer conflicting versions of what happened, this does not relieve the employer of the responsibility to make a good faith decision.

During argument, the employer's lawyer asked what employers must do when two employees provide conflicting accounts. "Our answer is simple," said the court:

"[E]mployers should conduct a thorough investigation and make a good faith decision based on the results of the investigation. Here, the jury found this did not occur. Hopefully, this opinion will disabuse employers of the notion that liability (or a jury trial) can be avoided by simply firing every employee involved in the dispute."

The law requires employers to conduct a prompt, good faith, thorough, and neutral investigation. Mendoza highlights the fact that it is not a "solution" for employers to just fire everyone, rather than try to determine what really happened.

Will 2014 Finally Be the Year That Nevada Gets a Court of Appeal?

By: Merielle Enriquez

Many out-of-state attorneys are often surprised to find that Nevada lacks an intermediate court, or a Court of Appeal. Under the current model, every single appeal from decisions rendered by any of Nevada's District Courts is reviewed by the Nevada Supreme Court. According to reports by the Las Vegas Sun, the Nevada Supreme Court has one of the heaviest caseloads in the nation. This results in a lengthy backlog in the appeals process. Parties often have to wait for months, or in some cases, over a year, to have their appealed issue resolved. Based on data complied with the Nevada State Bar President, the Nevada Supreme Court docket for the year 2012 consisted of 2,500 cases, or 357 for each of the seven Justices. In short, many of our Nevada colleagues are wondering whether 2014 will finally be the year that voters approve the creation of a Nevada Court of Appeal.

In November 2010, 53% of the voters rejected a ballot initiative calling for the creation of a Nevada Court of Appeal. However, when Nevada attorneys were exclusively polled, 78.2% reported that they were in favor of establishing an appeals court.

Support for an intermediate court has grown in strength over the last few years and proponents of the issue are again pushing for this initiative on the upcoming November 2014 ballot.

The proposed new intermediate court would operate under a "push down" model first established in New Mexico. Under this model, all appeals would still be filed with the Nevada Supreme Court. The Nevada Supreme Court would then assign the cases to the intermediate court where it can best be managed. Proponents of this measure argue that this model will allow for a speedier resolution of appealed issues, increased efficiency in the legal process, and will give the Nevada Supreme Court more time to examine cases calling for more intensive review, such as cases involving constitutional issues. Moreover, the increase in written, published opinions would be of great value. Written opinions are important to the legal process because they demonstrate the evolution of Nevada's common law.

If an intermediate court is created, the Nevada Court of Appeal would occupy existing space in the Regional Justice Center located in Las Vegas to minimize the cost to taxpayers.

The population of Nevada has grown significantly in the last two decades and it is time for Nevada's legal system to catch-up with the needs of the populace. Nevada was once a small rural state, but is now home to over 2.7 million people. From the time Nevada became a state in 1864, to roughly August, 1977, the Nevada Supreme Court oversaw 10,000 cases. However, in the following thirty years, more than 40,000 cases were filed.

Senate Joint Resolution 14, which calls for an amendment to Nevada's Constitution to allow for the creation of an intermediate court, received a unanimous vote in both houses. Accordingly, Nevada voters will once again be faced with the decision to approve the creation of the Nevada Court of Appeals this November.

NEWS AND EVENTS:

Announcing Our New Partner, Merielle Enriquez

Kring & Chung, LLP is pleased to announce the promotion of Merielle Enriquez to Partner in our Las Vegas, Nevada office.

Ms. Enriquez has been an integral part of the management and growth of the Las Vegas office since joining the firm in June of 2009. Her practice is focused upon the defense of our clients and carriers in high exposure complex general liability matters, as well as family law and business litigation cases.

"Merielle Enriquez has demonstrated her unwavering dedication and loyalty to our clients and to our firm's mission statement of providing excellence in all matters, and her work ethic is second to none," said Robert Mougin, managing partner of the Las Vegas office. Ms. Enriquez received her bachelor's from San Diego State University and her Juris Doctor from California Western School of Law.

Kring & Chung LLP Recognized in Orange County Business Journal

Kring & Chung, LLP has once again been named to the Orange County Business Journal's 2014 list of largest law firms in Orange County. Kring & Chung made the list, ranking No. 47 with 20 attorneys. Rankings are based on the number of attorneys located in each of the firm's Orange County office. Kring & Chung, LLP is a full service firm servicing U.S. and international clients. Our experienced attorneys focus on corporate, business, employment, construction, real estate, and intellectual property.

Upcoming Score Seminar - Avoiding Employment Related Litigation

On March 19, 2014 at 6:00 PM, Allyson Thompson of our Irvine office will be presenting an employment law seminar. Here's your chance to get input regarding your business legal employment questions. This workshop covers the potential pitfalls of employment issues and how these mistakes can lead to costly litigation. The seminar will take place at National University located at 3390 Harbor Blvd., Costa Mesa. There is no cost for this seminar.

Energy Savings Performance Contracting - A Roadmap to Entering, and Pitfalls to Avoid

Partner Kyle Kring and Associate Matthew Reynolds will present, Energy Savings Performance Contracting - A Roadmap to Entering, and Pitfalls to Avoid on April 10, 2014 at the Small School Districts' Associations Annual Conference. With the passage of Proposition 39, the California Clean Energy Jobs Act, $381 million will be awarded to local education agencies including school districts for energy efficiency and clean energy projects. Kring & Chung has significant experience in Energy Savings Performance Contracting ("ESPC"). We will provide impartial technical advice as to the ESPC process, how to explore potential projects and start planning, what to be aware of during the process, how to select reliable contractors, documents for procurement, financial concerns of guaranteed energy savings, and important contractual provisions in Energy Savings Performance Contracts.

Kring & Chung has helped many school districts throughout California, Oklahoma and Idaho with lawsuits involving Energy Savings Performance Contracting. To learn more about this practice area, please visit our website at www.kringandchung.com.

The 31st Small School Districts' Associations Annual Conference will take place at McClellan Conference Center in McClellan Park, CA from April 9-11, 2014.