The Letter of the Law: January 2013
IN THIS ISSUE:
REAL ESTATE: Marijuana Dispensaries Blowing Up in Smoke
CONSTRUCTION: Can an Intervening Insurance Company Sue for Breach of Contract?
REAL ESTATE: California Court Finds Deed of Trust Enforceable Despite Failure to Name a Trustee
Marijuana Dispensaries Blowing Up in Smoke
By: Anna Greenstin Kudla
The medical use of marijuana is a hot topic in California. The regulation of dispensaries has generated numerous land use regulations, and landlord-tenant disputes now before the California Supreme Court. Dispensary regulation creates a mechanism for local government oversight of medical marijuana cultivation and distribution. Local state government enforcement includes zoning and conditional use permitting under the purview of the City Council. There are a number of legal issues that arise for landlords, tenants, employers, dispensaries, growers, and individual users of medical marijuana. Although the sale of marijuana is legal in California for medical purposes per the Compassionate Use Act, the sale and use of marijuana is a federal offense. Business and property owners have found that legal assistance is required in maneuvering through the conflict of state versus federal law.
In 1996, California voters approved Proposition 215, the Compassionate Use Act (CUA), allowing medical patients in California the right to obtain and use marijuana. The intent of the CUA was to provide patients with terminal illness and sever health conditions access to the use of medical marijuana, which is not to be confused with recreational use. However, the CUA did not address specific issues of enforcement. In 2003, the California legislature passed Senate Bill (SB) 420, establishing the Medical Marijuana Program clarifying some of these issues, including the establishment of a voluntary state medical marijuana identification card (MMIC). The MMIC identifies the cardholder as a person protected under the provisions of Proposition 215 and SB 420. It is used to help law enforcement identify the cardholder as being able to legally possess certain amounts of medical marijuana under specific conditions. Dispensaries must require customers to maintain a MMIC. Controversy arises as to whether the MMIC is valid, and whether the dispensaries strictly sell to MMIC holders.
Landlords must protect themselves with a proper lease agreement when leasing to a dispensary. While the sale of marijuana (for medical purposes per the CUA) is legal in California, the sale and use of marijuana is a federal offense. United States Attorneys in California have targeted medical marijuana cooperatives on the grounds that they are selling marijuana to the public, as well as MMIC holders. The prosecutors target dispensaries by threatening property owners with civil forfeiture of their property if they continue to allow it to be used to further a federal crime. In fear of losing ownership, landlords are forced to evict tenants. Abrupt lease cancelations, if not permitted in the lease itself, result in unlawful eviction lawsuits. Many local courts have held that landlords may not evict a tenant based on a section of California law that provides for terminating a lease when the tenant has used the property for an “unlawful purpose.” ( California Code of Civil Procedure §1161(4).) Courts have held that “unlawful purpose” must be understood solely with respect to state law, not federal law. If the tenant-dispensary complies with the provisions of the Compassionate Use Act, its activity is not “unlawful” under state law and the eviction is not upheld. Landlords should be educated about ordinance, zoning, and permitting restrictions in specific areas before allowing the operation of a dispensary. A standard lease agreement is not enough to protect the landlord from the dichotomy of state verses federal law. The landlord should insist to have the right of eviction based on a violation of any law, federal included. As discussed below, even though a tenant may have a valid business permit, a local ordinance may prevent that specific business operation.
Tenants Beware (City Ordinances Can Be a Nuisance)
Just as City ordinances differ from county to county, so do court orders regarding operating a medical marijuana facility. For example, the City of Temecula was successful in stopping a dispensary from operating in commercial zoning area, while the City of Lake Forrest was defeated in similar circumstances.
Cooperative Patients Services, Inc. (“CPSI”) operated a “Therapeutic Cannabis (Medical Marijuana) Patients’ Resource Center,” for a couple of years before Temecula filed a complaint to abate CPSI’s dispensary. The City of Temecula claimed that CPSI is a public nuisance and sought to prohibit the landlord, Evergreen Ventures, Inc. (“Evergreen”) from continuing to allow the dispensary to operate. The trial court issued a temporary restraining order prohibiting CPSI and Evergreen from operating a business without a valid business license or certificate of occupancy.
On October 9, 2012, the Court of Appeals, (in a case that has yet to be published, City of Temecula v. Cooperative Patients Services, Inc., 2012 WL 4788107 (Cal. App. 4 Dist)), confirmed the trial court’s ruling. The Appellate Court issued a ruling prohibiting CPSI from operating a medical marijuana dispensary. The court upheld zoning and city ordinances which prohibit medical marijuana dispensaries in commercial zoning districts. A violation of any provision of the Municipal Code shall be deemed a public nuisance which may be abated by the city attorney in a civil judicial action. Since, CPSI’s property is located in the Service Commercial Zone, they were forced to stop doing business. CPSI appealed arguing that the municipal ordinance on which Temecula relies is preempted by state law. The court held that Temecula’s city ordinances trumpeted the Medical Marijuana Program Act (Health & Saf.Code) and the Compassionate Use Act of 1996 (CUA).
However, on February 29, 2012, in the case of The City of Lake Forest v. Lake Forest Wellness Center (2012 WL 676644 (Cal. app. 4 Dist) also an unpublished case), Orange County lost its fight against the medical marijuana dispensaries. The Lake Forest Wellness Center successfully appealed a trial court’s order granting a preliminary injunction enjoining their medical marijuana activities in this nuisance abatement proceeding. Lake Forest Wellness Center and the Independent Collective of Orange County argued that medical marijuana dispensaries are authorized by Health and Safety Codes. The California Appellate court held that the City’s asserted blanket, per se ban on medical marijuana dispensaries contradicts state law and furnishes no valid basis to obtain a preliminary injunction. Rather, the City must show a dispensary did not grow its marijuana on-site, or otherwise failed to comply with applicable state medical marijuana law or permissible local regulations.
Whether you are a landlord seeking legal advice regarding the enforcement actions against commercial property owners for tenant activities, or a tenant dealing with evictions based on ordinance violations, Kring & Chung’s knowledgeable counsel can assist you. Our attorneys have many years of experience in drafting lease agreements, and resolving landlord tenant disputes. Should you need assistance in preparing, negotiating or revising a lease agreement or simply need legal assistance with obtaining a business permit, please do not hesitate to contact us.
Can an Intervening Insurance Company Sue for Breach of Contract?
By: Michelle L. Wiederhold
A recent case questioned the legal basis for an intervening insurance company, on behalf of its suspended developer insured, to directly sue subcontractors for various causes of action including: indemnity, breach of warranty, declaratory relief, negligence, and most notably breach of contract for failure to obtain additional insured endorsements and duty to defend. In the case, the insurance company is not the contracting party – as in most cases – yet is suing as though it is a direct party to the contract. This gives rise to the question:
Does an intervening insurance company have any legal basis for bringing breach of contract causes of action against subcontractors?
The short answer, Yes. An intervening insurance company has a legal basis for bringing a breach of contract cause of action against subcontractors. Although there are no cases directly on point, Western Heritage Ins. Co. v. Superior Court, (2011) 199 Cal.App.4th 1196, does provide insight into the rights and remedies of an intervening insurance company. Western Heritage involved claims of negligence and breach of contract against Grateful Home Care, Inc. (GHC) and its employee (Reyes) which resulted in the death of GHC resident. Western Heritage Insurance Company (WHIC) insured GHC and its employees. Upon tendering the case to WHIC, WHIC proffered a defense for both GHC and Reyes. Reyes’ counsel filed an answer on her behalf. However, it was later stricken and default entered against Reyes because it appeared she permanently left the country.
A defaulted party, like a suspended corporation, has no legal rights or remedies before a court until the default is set aside or the suspended corporation pays its taxes. ( Mackie v. Mackie (1960) 186 Cal. App.2d 825; Cal. Rev. & Tax Code § 23301.) Since a default was entered against Reyes, WHIC requested to intervene on Reyes’ behalf to protect its own interests as insurer of GHC’s employees. The trial court denied WHIC’s motion to intervene on the theory that a defaulted party is unable to contest liability. Therefore, the insurance company is not permitted to defend its insured’s liability, but is allowed to litigate damages assessed against the insured.
The Court of Appeal overturned the trial court’s denial. It did so on the following basis:
“It is therefore apparent that an intervening insurer is not limited to those defenses to which its insured might be restricted due to the procedural default. The entire purpose of the intervention is to permit the insurer to pursue its own interest, which necessarily include the litigation of defense its insured is procedurally barred from pursuing.”
Accordingly, an intervening insurance company may utilize the same defenses available to its insured had the insured not been procedurally barred. This leads to the subsequent question:
Is a breach of contract cause of action considered a “defense?”
The answer is dependent on the terms of the insurance policy. Many insurance policies commonly use commercial general liability forms regarding assignments. If a policy contains a broad assignment of rights, an insurance company may stand in the shoes of its insured and sue for breach of contract (including failure to obtain additional insured endorsements, and breach of a duty to defend). The breach acts as a defense to any potential liability the insured may face, and thus the potential liability of the insurance company itself.
On the other hand, if an insurance policy does not contain a broad assignment of rights, a determination as to whether the breach of contract claim is a defense would be necessary. We turn to Bramalea and Patent Scaffolding for guidance. These cases ponder and suggest if a windfall or affirmative recovery will occur, then the claim must cease. In addition, should the claim being sought by the insurance company not be directly and contractually linked to the damages sought by plaintiffs, it would be unjust to allow the insurance company to bring such a claim. ( Bramelea California, Inc. v. Reliable Interiors, Inc. et al.(2004) 119 Cal.App.4th 468; Patent Scaffolding Co. v. William Simpson Const. (1967) 256 Cal.App.2d 506, 511.)
Suppose the intervening insurance company sues for 1) Breach of Contract – Additional Insured Obligations, 2) Breach of Contract – Duty to Defend, and 3) Breach of Express Warranty. Where the breach of contract action can be directly linked to the damages sought by plaintiffs (i.e. breach of express warranty), this is considered a defense, and allows an intervening insurance company to continue the claim. Otherwise, it would prevent the intervening insurance company from arguing but for the breach of express warranty by the subcontractor, it would not be defending against plaintiffs’ claims for damages to their property.
Conversely, where the breach of action is for failure to provide additional insured endorsements (AIE) to the contractor, or a breach of contractual duty to defend (we are presuming here a duty to defend is inherent and taken as a given), we believe a court will find this claim to be an affirmative recovery action and not a defense. This leads into a two part question on whether the court will determine the claim an affirmative recovery or a defense.
Is there a link to the damages sought by plaintiffs and the claim, and under what theory does the insurance company claim it has a right to bring such a claim?
On one hand, the argument may stand if an insurance company is entitled to sue, and later receives a judgment for breach of contract for a subcontractor’s failure to provide an AIE to the contractor and/or its failure to defend the contractor, it could be considered unjust and a windfall to the insurance company. An insurance company is paid a premium to defend its insured against losses. Based on the above-mentioned theory of recovery, the insurance company is now recouping those loses and keeping the premiums paid (i.e. a windfall). On the other hand, an insurance company may have an argument it is a third party beneficiary to the contract in that it is excess to any AIEs and a subcontractor’s duty to defend the claims. These arguments as a third party beneficiary would be speculative and challenging. Either way, it will be a question for the trier of fact.
What should a subcontractor do if sued by an intervening insurance company for breach of contract?
A subcontractor should ensure the intervening insurance company does have a legal basis for suing under the theory of breach of contract. Although it appears an intervening insurance company does have the right to bring breach of contract causes of action, some may be outside the rights afforded to the insurance company.
California Court Finds Deed of Trust Enforceable Despite Failure to Name a Trustee
Can there be a trust without a trustee? If the trust instrument is a California deed of trust, the answer is now yes.
In Shuster v. BAC Home Loans Servicing, LP (2012) WL 5984222, the plaintiff/borrowers had borrowed the sum of $670,000, executing a deed of trust as security for the loan. The deed of trust failed to name a trustee. After the borrowers defaulted, the beneficiary recorded a substitution of trustee “substituting” a new corporate trustee. The substituted trustee held a non-judicial foreclosure sale of the property. The borrowers then filed suit, seeking to set aside the sale. The borrowers argued in their lawsuit that the failure to name a trustee in the deed of trust converted the deed of trust to a mortgage and, therefore, the beneficiary could foreclose, if at all, only by means of a court-supervised judicial foreclosure. The trial court and the Court of Appeal disagreed, finding that “the naming of the trustee is irrelevant to the creation of the deed of trust, so long as a trustee is named prior to the foreclosure.”
The Shuster decision is consistent with prior California case law and commentary adhering to the view that a deed of trust is nothing like an ordinary, express trust. In fact, the California courts previously have held that the trustee under a deed of trust is not a true trustee at all and, therefore, is not subject to the general legal principles governing express trusts. (See Lupertino v. Carbajal (1973) 35 Cal.App.3d 742, 747.) Among other things, a trustee under a deed of trust does not act in a fiduciary capacity and is considered the common agent of both parties. Other courts and commentators have characterized the duties of a trustee under a deed of trust as being purely ministerial in nature. ( See Pro Value Properties, Inc. v. Quality Loan Servicing Corp. (2009) 170 Cal.App.4th 579, 583.) Moreover, as a matter of convenience, the appointed trustee is typically the title company whose form document is being used to create the deed of trust, even though the title company typically has not consented to being named as trustee. It makes sense, then, that the court in Shuster would find the parties’ initial failure to appoint a trustee to be without legal consequence, so long as a trustee was properly named prior to the foreclosure proceedings.
The Shuster decision is also another example of the courts’ general willingness to uphold a non-judicial foreclosure sale against a legal challenge, perhaps in recognition of the fact that the borrowers defaulted after all and, in many cases, would likely default again if the sale were set aside. In short, it is only the rare defect of substance, and not mere form, that will justify the remedy of setting aside an otherwise properly-conducted sale.
Michelle A. Philo Becomes Associate at Kring & Chung
Kring & Chung is pleased to announce that Michelle A. Philo has joined its Irvine, CA office as an Associate attorney. Ms. Philo practices general civil litigation, business transactions, and probate. She is an active member of the Orange County Women Lawyers Association, the Orange County Bar Association Young Lawyers Division, and the American Bar Association Young Lawyers Division.