Usury Laws

Investor’s loan for the Tenancy in Common (TIC) partnership to acquire real estate not subject to usury laws

Reported by: Alex Gomory

A real estate broker located property which he acquired with an investor, holding title as tenants in common (TIC). The down payment was funded entirely by funds from the investor.  The investor’s contribution was given a priority return by structuring it as a second trust deed note at rates exceeding usury limits, secured by a second trust deed on the property signed solely by the broker. The syndicated investment proved unprofitable and the investor foreclosed on his note and trust deed in order to recover full ownership of the property at the trustee’s sale, wiping out the broker’s ownership interest in the property. The broker demanded compensation from the investor for his loss, claiming the loan, as evidenced by the terms of the note, was usurious since the interest rate charged exceeded the usury limits when originated. The investor claimed the usury law did not apply since their mutual purchase of the property qualified their TIC partnership as a joint venture, a judicially created exception from usury laws. A California court of appeals held the loan made by the investor was not subject to usury laws since the funds structured as a loan were advanced by a partner in a joint venture, as evidenced primarily by their co-ownership of the property as TIC and that the funds advanced and evidenced by the note and trust deed were used to purchase their joint ownership of the property.  [Junkin v. Golden West Foreclosure Service, Inc, et al. (January 5, 2010) _CA4th_]

LLC Membership

LLC members may report rental losses as business related under material participation rules

Reported by: Alex Gomory

A non-managing limited liability company (LLC) member materially participated in the management of the LLC as authorized by the LLC operating agreement. The member sought to write off his share of the operating losses of the LLC as business related losses, which the IRS disallowed. The member challenged the disallowance of loss deduction, claiming the LLC’s losses were deductible as business related losses, not passive income losses, since he actively participated in the management and operation of the LLC. The IRS claimed the non-managing member’s interest in the LLC was that of a limited partner’s interest in a limited partnership as the member had limited liability and thus the loss was conclusively considered a passive income loss, not a business income loss, regardless of the degree of the member’s participation in the LLC.  A United States Tax Court held the non-managing LLC member’s share of the LLC’s operating losses were business related income losses since the LLC member’s non-manager status entails a general partner not a limited partner interest for income and loss reporting, and as a general partnership, interest is subject to the rules of material participation in the management of the LLC to qualify his share of the LLC losses as a business related.  [Garnett v. Commissioner of Internal Revenue (June 30, 2009) _USTC_]

Unlawful Detainer (UD) Action

Tenant’s temporary relocation for repairs not a permanent relinquishment

Reported by: Alex Gomory

A landlord served a tenant of a rent-controlled apartment with a 60-day notice requiring the tenant to temporarily vacate the premises for the landlord to make necessary city-mandated repairs. The tenant refused to vacate, and the landlord filed an unlawful detainer (UD) action to remove the tenant. The tenant entered into an agreement giving the landlord possession of  the premises on the condition the landlord pay the tenant’s relocation expenses and return possession of the property within 90 days as provided by rent control ordinances for completion of repairs. When the tenant tried to return after 90 days, the landlord refused to allow the tenant to retake possession, claiming the tenant had forfeited his tenancy since the tenant agreed to give the landlord complete possession of the unit in response to the landlord’s UD action. The tenant demanded the landlord pay him the present worth of the difference between the rent he was paying the landlord and the future rents he will be charged in a new apartment as a result of being forced to permanently relocate, claiming the landlord wrongfully retained possession of his apartment. A California court of appeals held the landlord must pay the tenant a sum equal to the difference between what the tenant would have paid for the remainder of his tenancy under rent control and the amount the tenant will pay at a new apartment since the possession the landlord received for the purposes of making repairs under rent control ordinances in a UD action did not constitute a permanent relinquishment of leased property necessary to terminate the tenancy. [Chacon v. Litke (January 19, 2010) _CA4th_]

Notice of Default/Notice of Trustee’s Sale

A recorded Request for NOD and NOTS by any junior lien holder is required to receive a notice of excess sales funds

Reported by: Alex Gomory

An owner of property defaulted on his mortgage payments, and the lender foreclosed resulting in the property being sold at a trustee’s sale. The foreclosure yielded more sales proceeds than the balance due on the loan.  A junior lienholder who had not recorded a Request for notice of default (NOD)/ notice of trustee’s sale (NOTS) was not advised on the availability of net proceeds from the sale. Not finding a recorded Request for an NOD filed by any junior lienholders, the foreclosure trustee delivered the excess proceeds to the owner. The junior lienholder later became aware of the excess proceeds and made a demand on the trustee for the funds, claiming the trustee had breached his statutory duty by not researching the public records to determine the junior lien holder was entitled to the sale proceeds. The trustee refused to pay the junior lienholder, claiming a trustee is not responsible for notifying persons with an interest in the property junior to the trust deed being foreclosed unless they have recorded a Request for notice of NOD/NOTS.  A California court of appeals held the foreclosure trustee was not liable to the junior lienholder for any part of the excess sales proceeds since the junior lienholder’s sole method for obtaining any notices — be they NODs, NOTS or for excess funds — from a foreclosing trustee is to record a Request for NOD/NOTS, which they did not. [Banc of America Leasing & Capital, LLC v. 3 Arch Trustee Services, inc. (December 11, 2009) _CA4th_]


HOA demand for arbitration must conform to clause in CC&Rs to enforce a refusal.

Reported by: Alex Gomory

A homeowners association’s (HOA) covenants, conditions and restrictions (CC&Rs) stated that all disputes between a homeowner and the HOA must be resolved through a three-person arbitration process in which both parties select an arbitrator, and the two chosen arbitrators then select a third arbitrator. The HOA disputed an owner’s behavior, and demanded the owner enter arbitration before a single arbitrator selected by the HOA. The owner refused, and the HOA sought to compel arbitration, claiming the owner was required to comply with their demand for arbitration since arbitration was required to resolve disputes under the CC&Rs. The owner claimed he had not violated the CC&Rs by refusing to arbitrate since the HOA’s demand did not conform to the three-person arbitration requirement. A California court of appeals held the HOA could not compel arbitration since the HOA’s demand for arbitration had not been stated in the form required by the CC&Rs. [Mansouri v. The Superior Court of Placer County (2010) 181 CA4th 633]

Tax Assessment

Improvement district assessment allocated based on benefits to each lot

Reported by: Alex Gomory

A local agency commissioned an improvement project for the benefit of property owners in a specific district. To allocate costs to owners as assessments to pay for the project, the agency divided the district into “benefit zones,” based on variations in the anticipated cost of implementing the project in the different areas. The benefit zones were then allocated a portion of the total cost based on each zone’s pro rata share of the benefits. The local agency then imposed a property benefit assessment on each individual lot within each benefit zone. Assessment amounts for individual lots varied from zone to zone depending on how much an individual lot would benefit from the allocation of costs with that zone. Owners claimed the agency’s practice of assessing different rates for individuals in different benefit zones rendered the assessment invalid since it required neighboring properties to pay disparate amounts for the same expected benefits. The local agency claimed assessing each property for its share of the total cost of improvement at different rates was proper since the assessment had been assigned to specific zones in proportion to that zone’s actual cost of implementing the project. A California court of appeals held the local agency’s assessment first by zones then by lots within the improvement district was invalid since the allocation of costs among property owners was not based solely upon each lot’s expected benefit from the entire project. [Town of Tiburon v. Bonander (2009) 180 CA4th 1057]

Tying Arrangements

An exclusive listing with a seller is not an illegal tying arrangement

Reported by: Alex Gomory


A seller entered into an exclusive right to sell agreement employing a real estate broker stating the broker would be paid a fee in the event the property sells during the listing period. During the listing period, the seller and a buyer entered into a purchase agreement containing a provision for payment of a fee to the broker. After closing, the buyer made a demand on the broker for the fee he was paid in the sales transaction, claiming the combination of the price paid to acquire the property under the purchase agreement which included a provision for the payment of a broker’s fee was an illegal tying arrangement since the buyer was forced to fund payment of the unwanted service of the seller’s broker as part of the purchase price. The broker claimed the tying of the fee due under the seller’s listing agreement to the purchase agreement entered into by the buyer was enforceable since making payment of the fee contingent on the buyer’s purchase did not restrict competition or the services of different brokers in the local market. A California court of appeals held the broker fee agreement under an exclusive right to sell listing was enforceable when coupled with a buyer’s purchase of the property since the co-existence of the seller’s listing and the payment of a broker’s fee under a purchase agreement did not restrict the activities of any competitor of either the seller or the broker in the local market. [Blough v. Holland Realty, Inc. (July 9, 2009) _F3d_]

Editor’s note — See first tuesday Form 102, Seller’s Listing Agreement – Exclusive Right to Sell, Exchange or Option