Construction

Builder recovers losses caused by defective plumbing parts

A builder used plumbing materials supplied by a manufacturer to construct improvements. One of the parts used was improperly manufactured and malfunctioned in many of the buildings, causing water to leak, which damaged the structures. The builder paid to replace the defective material and repair the damage caused by the leaks. The builder then made a demand on the manufacturer to recover his costs incurred replacing the defective parts and repairing the damage caused by them. The manufacturer claimed the builder was barred from recovery since only a property owner can recover losses that do not involve personal injury or property damage. The builder claimed he was eligible to recover his costs of replacement and repair, since a manufacturer is liable for costs incurred by a builder due to the manufacturer’s negligence. A California appeals court held the builder was entitled to recover his costs to replace the defective plumbing materials and repair the damage they caused since the manufacturer was negligent in producing the materials. [Greystone Homes, Inc. v. Midtec, Inc. (2008) 168 CA4th 1194 ]

Default, Equity Purchase, and Foreclosure

Equity purchase laws apply to sales approved by a bankruptcy trustee
A seller-in-foreclosure under bankruptcy protection sold his residence to an investor at a price lower than its market value under a sale-leaseback agreement with an option to repurchase the property at a higher price. The sale was approved by a trustee on behalf of the bankruptcy court. The seller-in-foreclosure remained in possession of the premises but was unable to repurchase the property on its expiration. The investor served him with a notice to vacate. The seller-in-foreclosure sued to quiet title, claiming the purchase agreement did not conform to the Home Equity Sales Contract Act (HESCA), and the investor acquired the property at a price below its market value. The investor claimed the sale was authorized by the equivalent of a court order, and thus exempt from equity purchase laws, since the sale had been approved by a bankruptcy trustee acting on behalf of a court. A California appeals court held the sale by a seller-in-foreclosure was not exempt from HESCA since equity purchase law only excludes purchases by an investor at a sale ordered by a court and the exemption does not apply to sales of property merely approved by a bankruptcy trustee. [Spencer v. Marshall (2008) 168 CA4th 783]

Trustee’s recording of NOD is privileged
A seller carried back a note and trust deed on the sale of a property. The buyer later paid off the note based on a payoff demand from the seller. A reconveyance of the trust deed was never recorded. Later, the seller handed the trustee a request to record a Notice of Default (NOD) together with copies, although not the originals, of the note and trust deed, claiming the note had not been fully paid. The trustee recorded a notice of default. The buyer informed the trustee the debt had been satisfied and handed him the beneficiary’s payoff demand and evidence of payment in full. The trustee did not rescind the NOD. The buyer incurred expenses clearing his title of the trust deed and NOD. The buyer then sued the trustee to recover money losses for slander of title, claiming the trustee had breached his duty of care by failing to record a rescission of the NOD after being informed the note was fully paid. The trustee claimed he was not liable for failing to rescind the NOD since an NOD is a privileged form of communication. The buyer claimed the privilege protection was not available to the trustee to defend his failure to rescind since the trustee had a duty to initially obtain the original note and to rescind the NOD on notice of payment in full. A California appeals court held the trustee was not liable for slander of title since performance of trustee foreclosure procedures, including recording or rescinding a NOD, are privileged communications which immunize the trustee from liability so long as the trustee is not acting maliciously.

Also at issue in this case:

Trust deed beneficiary is liable for wrongful foreclosure
A seller carried back a note and trust deed on the sale of a property. The buyer later paid off the note based on a “payoff demand” from the seller. A reconveyance of the trust deed was never recorded. Later, the seller handed the trustee a request to record a Notice of Default (NOD) together with copies of the note and trust deed, wrongfully claiming the note had not been fully paid. The trustee recorded a NOD. The buyer incurred expenses clearing his title of the NOD. The buyer then sued to recover his money losses from the seller for slander of title based on the seller’s recording the NOD and the breach of his statutory duty to cause the trust deed to be reconveyed. The seller claimed he was not liable for wrongfully initiating foreclosure since delivery of notices related to foreclosure are privileged communications so long as the trustee acts in good faith. The buyer claimed the seller was not eligible for privilege protection since the seller’s trustee, not the seller, had recorded the protected notices. A California appeals court held the buyer was to recover his money losses from the seller, since the seller was a beneficiary under a trust deed, not a trustee responsible for recording protected notices of default, and a beneficiary’s actions are not protected. [Kachlon v. Markowitz (2008) 168 CA4th 316]

FHA-Insured Lending

FHA recovers loss from seller who funded buyer’s downpayment

A buyer was unable to fund the down payment as required on an FHA-insured loan. The seller then advanced the funds for the down payment so the transaction would close. On closing, the seller signed a HUD-1 settlement statement addendum stating that he had not advanced the down payment. The FHA insured the purchase-assist mortgage obtained by the buyer to fund the purchase price. The buyer later defaulted on the FHA-insured loan, and the lender made a claim for recovery under the FHA insurance. The government then claimed the seller was liable for treble its money loss on the buyer’s default since the seller’s misrepresentation on the settlement statement caused the FHA to insure the loan. The seller claimed he was not liable for the FHA losses since his funding the buyer’s downpayment had not caused the buyer’s default or the FHA’s loss. A United States Court of Appeals held the seller was liable for treble the FHA insurance payment under the lender’s claim since anyone whose fraudulent actions have a material effect on the FHA’s decision to insure a loan is liable for a default on the loan, and the failure of the buyer to make a down payment was material to his motivation to pay. [United States of America v. Eghbal (December 5, 2008)__F3d___]

Editors Note – For an example of an FHA-1 settlement statement addendum, see first tuesday Form 402-1.

Legal Aspects

Lis pendens on out of state litigation is void
A buyer entered into an agreement with a seller to purchase property located in California. Before the buyer completed the purchase, the seller cancelled the agreement. The buyer sued in an out-of-state court to require performance on the purchase contract, and recorded a lis pendens in California giving public notice that the action concerned the buyer’s claim to an interest in the real estate. The seller moved to quiet title, claiming the lis pendens was void since a lis pendens cannot be recorded to give notice of a lawsuit filed in another state. The buyer claimed the lis pendens was valid since a lis pendens on litigation from another state is not specifically prohibited by California law. A California appeals court held the lis pendens was void since the right to record a lis pendens does not extend to lawsuits filed in other states. [The Formula Inc. v. Superior Court of Mono County (2008) 168 CA4th 1455 ]

Property Management

Rent uncollectible without certificate of occupancy
A tenant entered into a lease agreement and took possession of a residential unit on which the landlord had not obtained a certificate of occupancy. The tenant failed to pay the rent, and the landlord served him with a three-day notice to pay rent or quit. The tenant did not vacate the premises, and the landlord sought to evict the tenant and recover the unpaid rent. The tenant claimed he did not owe any rent under the lease agreement since a residential lease agreement is void without a certificate of occupancy. The landlord claimed the tenant was liable for the unpaid rent since he had failed to make the payments called for in the lease agreement. A California appeals court held the tenant owed no rent to the landlord since without a certificate of occupancy the transfer of possession under the residential lease agreement was an illegal act, not eligible for compensation. [Espinoza v. Calva (December 16, 2008) __CA4th___]