Letter of the Law: August 2011

IN THIS ISSUE:

CONSTRUCTION: Recovery Against A Contractor's Surety Bond

REAL ESTATE: New Law Prohibits Second Mortgage Lenders From Pursuing a Deficiency After an Approved Short Sale

EMPLOYMENT LAW: Modified Comparative Negligence in Nevada


Recovery Against A Contractor's Surety Bond

By: Timothy J. Broussard

Today's economic environment has created challenges in construction, particularly for subcontractors. The construction industry recession has led to insolvency of builders and general contractors. When builders do not pay subcontractors, remedies available for a subcontractor become challenging. Typically, a subcontractor has no contractual relationship with the owner as it contracts only with a general contractor. Absent a proper lien (Preliminary 20-day Notice), a subcontractor has few remedies against the owner.

One remedy for a subcontractor is to recover against the insolvent contractor's surety bond. A contractor's surety bond is not an insurance policy. It does not afford the protections of an insurance policy. Limits of recovery for the surety bond are $7,500 for contractors and $12,500 for owners. There are several factors to consider:

Statute Of Limitations (Time Limitations)

It is important to commence a lawsuit within two years from expiration of the bond. The claim procedures could take several months to resolve. Also, payment on the bond is first come, first served. Therefore, a speedy claim procedure is necessary.

Burden of Proof

Recovery against the contractor's surety bond is set forth in California Business and Professions Code § 7000-7120. A surety's liability is established by statute. Liability of a surety bond is premised upon a proven violation of Bus. & Prof. Code § 7000. There are two primary violations when a subcontractor is not paid: (a) Diversion of Funds, and (b) Willful and Deliberate Failure to Pay.

A. Diversion of Funds

To establish "Diversion of Funds," a subcontractor is required to show the owner paid the contractor in full and these funds were specifically marked to pay for the work of this subcontractor. (Bus. & Prof. Code § 7108.) Depending upon the surety, the burden of proof can be challenging. A subcontractor will need the assistance of the owner to show evidence of payment.

B. Willful and Deliberate Failure to Pay

Another method to establish liability is to show "willful or deliberate" acts of failure to pay. "Willful or deliberate failure to pay" money due for services when a contractor has sufficient funds, establishes liability by statute. (Bus. & Prof. Code § 7120.) However, a surety will deny a claim if one fails to establish "willful or deliberate" acts by the defaulted contractor. For example, a contractor may plan to pay the subcontractor, but it is unable to pay because of unforeseen circumstances. This contractor may have received sufficient funds, but the surety may deny the claim because there was no "willful and deliberate" act required by statute. Regardless, if a contractor was paid in full for the project, it will be difficult for the surety to argue later that the defaulted contractor's failure to pay was not a "willful and deliberate." However, some sureties take the above stance.

Multiple Surety Bonds

A defaulted contractor may have multiple bonds over a length of time or changed sureties. If the damage occurred during multiple bond periods, a subcontractor may be eligible to seek recovery against multiple bonds. However, the dates of damage by the subcontractor will need to occur within these dates.

Conclusion

Making a claim on a bond must be carefully considered. The subcontractor may have remedies against the defaulted contractor's license bond and multiple bonds may exist. If a subcontractor has properly served a Preliminary 20-Day Lien on the project, Mechanic's Lien and/or Stop Notice procedures against the owner should be first considered. However, recovery of the surety bond against a defaulted contractor can be a wise method to reduce a subcontractor's loss.


New Law Prohibits Second Mortgage Lenders From Pursuing a Deficiency After an Approved Short Sale

By: Anna Greenstin Kudla

Homeowners who are "upside-down" on their loans and want to avoid foreclosure recently received a tremendous benefit from California Governor Jerry Brown. On July 15, 2011, Senate Bill 458 was signed into law extending the anti-deficiency protections of Senate Bill 931. Senate Bill 458 prohibits any deficiency judgment to be requested or rendered for senior or junior liens after a Short Sale of one-to-four residential units.

The previous Senate Bill 931 allowed a homeowner to sell his home at a value less than the existing mortgage, requiring the senior lienholder to accept the sale as a full payment of the existing obligation. The difficulty with Senate Bill 931 was that if the junior lienholders did not forgive the debt, the secondary loan on the property turned into personal debt after the Short Sale was completed. Many junior lienholders sold the lien to debt collectors who proceeded to seek the deficiency from the seller after the Short Sale was completed. This practice is now illegal. Pursuant to Senate Bill 458, all the lenders that agree to a Short Sale must accept the agreed upon Short Sale payment as full payment of the outstanding balance of all loans.

It is important to note that Senate Bill 458 does not apply to: (1) Properties that are residential rentals, commercials, vacant, and retail; and (2) Trustors that are corporations, limited liability companies, limited partnerships, or political subdivisions of the state. The lenders are permitted to seek damages if there is fraud, or if there are other properties intertwined with the loan. In addition, this does not change the process of a Short Sale. The homeowner must still apply and obtain approval from all the lenders. Depending on the homeowner, applying for a Short Sale may have drawbacks. For instance, the seller must disclose his entire financial status honestly and accurately, risking the chance that the lenders may deny the request for a Short Sale and proceed with the foreclosure.

With regards to credit score, unless the bank has specifically agreed not to report delinquent payments or the shortage of the sale, the homeowner's credit score will reflect delinquencies and collections. Real estate agents should not give legal advice to clients facing foreclosure, nor assure sellers involved in the Short Sale process that their credit rating will not suffer adverse effects. Sellers of Short Sales must also seek tax advice before entering into a Short Sale contract. There could be tax ramifications due to debt forgiveness.

It is unclear how new laws will affect the lenders' business practice, and what impact it will have on an already declining market. Sellers, buyers, and agents should seek legal advice prior to proceeding with a Short Sale. In order to protect both parties in a purchase agreement, an addendum should be drafted extending time frames to accept and/or decline a Short Sale pending lender approval, time to obtain legal evaluation, and time to speak with a qualified CPA. In addition, financial obstacles affecting title must be disclosed to buyers involved in Short Sale process. (See Kring & Chung's November 2010 Newsletter discussing Notices under Holmes v. Summers.)

Kring & Chung, LLP has many qualified attorneys to assist with real estate disputes, transactions and concerns.

Anna Greenstin Kudla is an Associate with Kring & Chung, LLP's Irvine, CA office.

Modified Comparative Negligence in Nevada

By: Monica Dean

Nevada follows a variation of the Modified Comparative Negligence Theory, which is a partial legal defense that reduces the amount of damages that a plaintiff can recover in a negligence-based claim based upon the degree to which the plaintiff's own negligence contributed to cause the injury. Specifically, Nevada Revised Statutes ("NRS") 41.141(a) states in relevant part:

"In any action to recover damages for death or injury to persons or for injury to property in which comparative negligence is asserted as a defense, the comparative negligence of the plaintiff or his decedent does not bar a recovery if that negligence was not greater than the negligence or gross negligence of the parties to the action against whom recovery is sought."

Consequently, an injured party can only recover if it is determined that his or her fault does not reach 51%. Under NRS 41.141, a plaintiff who is 50% at fault is not barred from recovery, but his damages are reduced by his own percentage of negligence. See Moyer v. United States, 593 F. Supp. 145 (D.Nev.1984). In other words, a plaintiff may have caused half of the accident and still recover damages from the court, but if it is found that the plaintiff's fault was responsible for more than half of the accident, that plaintiff is barred from receiving any damages determined by the court. We must note, however, that Nevada juries rarely find Plaintiffs to be more than 50% negligent and therefore almost never completely bar their claims.

Thus, in a two-party car accident, a defendant whose negligence constituted 50% of the total causal negligence in connection therewith, is liable to the plaintiff for 50% of her damages. State Farm Auto Ins. Co. v. Commissioner of Insurance, 114 Nev. 535, 542 (1998). In a personal injury negligence-based claim, defendants can use Nevada's Modified Comparative Negligence Theory as a partial and/or complete defense if there is sufficient evidence to support a finding that the Plaintiff's alleged injuries were caused in part or in whole by the Plaintiff's own negligence.

In contrast to a negligence-based claim, Nevada's Modified Comparative Negligence statute can not be interpreted to include strict products liability in a class of actions in which contributory negligence may be asserted as a defense. Young's Mach. Co. v. Long, 100 Nev. 692 (1984). Thus, defendants in a strict products liability action cannot use the ordinary contributory negligence of the plaintiff as a defense to lessen their potential exposure for the plaintiff's alleged damages. However, Nevada recognizes assumption of risk and misuse of product defenses in a strict products liability actions.

Kring & Chung Announces New Associate Christopher Stipes

Kring & Chung, LLP is proud to announce the addition of Christopher Stipes as an associate. Stipes will be primarily practicing construction defect litigation out of Kring & Chung, LLP's Sacramento office. Stipes was born and raised in New York, and earned his bachelor's degree in English from the University at Albany in 2004. Stipes attended McGeorge School of Law and earned his J.D. in 2010. He graduated as a member of the Roger J. Traynor Honor Society, and was an editor on the McGeorge Law Review. While with the Law Review, Stipes published a short article, "Heard it Through the Grapevine: Chapter 28 Saves California Wine Competitions from Prohibition-Era Law," 40 McGeorge L. Rev. 303 (2009). Stipes also studied Fundamental Rights in Europe and America under Associate Justice Anthony Kennedy in Salzburg, Austria.

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