The note and deed of trust essentially require the homebuyer (now the homeowner) to pay X amount per month for each consecutive month, in an amortized amount, over the life of the loan (usually 30 years).  This can vary in some cases, but the payment obligation is virtually the same in all cases.  According to the loan docs, it the homeowner fails to make the required payments, the lender, who also freely entered into the agreement, can declare a default and call the loan due.   The lender is entitled to, and often does, foreclose.

In the loan docs, notably the note and deed of trust, the homeowner has agreed to give the property back to the lender if the lender proves the homeowner did not fulfill the payment obligation.  When the lender forecloses on the property and the homeowner leaves the property or home, the homeowner has fulfilled his or her obligations under the loan. 

In short, the homeowner agreed a) to pay the loan back to the lender, or b) to give the property back to the lender.  When the latter option is excercised by the lender, the homeowner, unless he or she tried to stop the latter option from happening for no real reason, has ethically performed according to the loan agreement with the lender.  The contractual obligation and the moral obligation was fulfilled, just not in the manner the lender ideally hoped for when they freely signed the loan docs.
Remember, the loan docs do not state that the homeowner has to pay the loan amounts under any specific conditions, such as if he or she has adequate money to pay, or doesn’t have money to pay, or when the property is underwater or not.  It just says the homeowner has to pay, and if he/she doesn’t, the lender gets the house back. 

There are related consequences that the homeowner, when he/she signs the loan docs, agrees to as well.  California is not a recourse loan state, so first deeds of trust do not come back to homeowners in the form of a deficiency judgment.  However, the homeowner will suffer some form of credit repercussions, which is part of the deal.   A contractual obligation and a moral obligation, both which the homeowner, when defaulting on their loan and giving up the property, has satisfied in full.

Time will tell exactly how much California receives from the allocated funds, or in what manner the funds can be used as approved by the feds.  The amount of TARP funds allocated to the homeowners (and perhaps would-be homeowners as well)?  $1.5 billion.  Total. Not $1.5 billion per desperate state.  $1.5 billion for everyone, including our state, which could swallow that paltry amount in minutes with its needs. 

There clearly is not enough money allocated in this proposed program to truly repair the loss of equity many homeowners have suffered in their property in relation to their loans on the property.  Perhaps some assistance to the banks in approving short sales?  Oh, I forgot, they already subsidize the banks by compensating many of them for losses on property. 

I would suggest attempting to use funds to draw down principals on loans for homeowners in a short refinance (principal reduction).  If this works on a small scale, then a larger version, perhaps with real money, could be implemented next year.  Just an idea.

Yes, the Obama camp acknowledged the problem.  Just not that it’s a big problem. 

Why a one-year maximum?  Because in my opinion even one year may work to strip creditors of their right to get paid.  Anything beyond that would make it even more difficult for the creditor or the creditor’s attorney to manage the claim and make sure it’s paid.  

In reality, most leases will probably carry an option to extend, or even an option to purchase, which takes it out of this rule and requires the administrator to seek approval.  In those cases, the court will often hear from the creditor, who of course is given notice, and determine if the approval of the proposed lease arrangement would be of benefit to the estate and would still be fair to the creditor. 

The Probate Code section where approval is not required is 9942.  Section 9942 is the section which imposes a requirement of approval.  Section 9960 et seq.  govern an additional procedure where an option to purchase is included in the proposed lease agreement.

If you missed it, and live in the El Dorado Hills, Cameron Park, or Folsom areas, or even nearby areas such as Sacramento or Placerville, let myself or Jody Durkett know so that we can make sure  you are informed of our next seminar. 

          A good example of this which is important in today’s real estate climate, is where the estate has a security interest in real estate to cover a loan (by way of a promissory note) made by the decedent (that is still due and owing).  Instead of requiring a foreclosure of the real property, the Probate Code allows the representative to accept a deed in lieu of foreclosure, but only upon approval by the court.  In gaining this approval, the representative must file a petition and show to the court why it is advantageous to just accept the deed in lieu of foreclosure.

          Probate Code Section 9850  is the statute requiring the petition, and it states that approval is only granted after clear and convincing evidence is presented to the court.  Though acceptance of a deed in lieu of foreclosure is allowed in probate, it is only permitted when the judge is comfortable with the particular situation, and only on terms and conditions imposed by the judge.

          The case of White Lighting Company v. Wolfson, a 1968 case,  reflects the reasoning of many other cases which have, for the most part, held that contracts which could have possibly been performed within one year are not subject to the statute of frauds.  Much of the legal reasoning behind the “one-year” exception has evolved from employment contract cases, as in Wolfson, however, the same analysis would apply to most business contracts and real estate contracts.

          The Wolfson court stated: “To fall within the words of the provision, therefore, the agreement must be one of which it can truly be said at the very moment it is made, ‘This agreement is not to be performed within one year’; in general, the cases indicate that there must not be the slightest possibility that it can be fully performed within one year.” The court went on to reason that when the employee’s employment relationship with the employer was terminated, the employee had completely performed, and the employer’s performance consisted of nothing more than compensating the employee.  Interestingly, the oral agreement which the employee was attempting to enforce here, stated that he would receive a bonus for company profits over a certain amount in one year.  The argument could be made, and was made, that by its terms it could not have been “performed” within one year, literally.  The court, however, focused on the at-will nature of the relationship–since it could be terminated by either party within one year, it does not fall within the statute of frauds.  

          I’m not sure I agree with the reasoning.  Nevertheless, the lesson holds true regardless of how the courts interpret the “one-year” exception–get the terms in writing ahead of time and avoid litigation over the validity of the agreement. 

In the case of Derrick v. C.W.R. Ford Co. , a lessee offered to lease real property upon certain conditions. The property consisted of a storefront and a basement in Oakland. The lessee wrote these terms down in a letter and sent it to the landlord.  The landlord responded with a separate letter, with some new, rather minor, terms.   Eventually, the parties agreed to the arrangement, which was for ten years.   The minor term(s) included the requirement that the tenant pay for any alterations and obtain a bond in doing so.  For three years, the tenant paid rent and leased the property.  Then, the landlord sold the building.  There never was a formal written agreement which any of us would refer to as “the lease agreement”.  Just the letters, and receipts for rent payments.

The new owner subsequently attempted to increase the rent.  The lessee didn’t agree, because it thought that it had a prior, enforceable agreement.  The new owner then brought unlawful detainer proceedings (an eviction process).  In the end, the appellate court was asked to determine if the back-and-forth of letters between the lessee and the original owner was sufficient to take the “agreement” out of the statute of frauds. 

The court held that the statute of frauds did not apply here, since the parties clearly agreed to the arrangement laid out in the prior letters.  The fact that there were minor variances from the letters was not significant since it is sufficient to have letters, receipts, and similar evidences of writing in order to establish an enforceable agreement in writing.

Two things to remember.  One, this line of reasoning does not only apply to real estate contracts or arrangements, but to other commercial agreements as well.  Two, it is not wise to ever assume that a court will enforce an informal exchange of writings in the same manner as a formal agreement.  As I mentioned earlier, this exception is fact-intensive.  Here, it was sufficient.  In many circumstances it is not. 

Most importantly, getting to the point where a court must make this determination is rather expensive.  It’s much less expensive to have the agreement drawn up first, with all essential terms agreed to at the outset.

California Civil Code Section 1624 provides a list of contracts which must be in writing to be enforceable.  Subsection (d) of that section states the following as included in that list:  “An agreement for the leasing for a longer period than one year, or for the sale of real property, or of an interest therein; such an agreement, if made by an agent of the party sought to be charged, is invalid, unless the authority of the agent is in writing, subscribed by the party sought to be charged.”

This subsection is well-known for requiring real estate contracts to be in writing.  What it does not require, however, is that every contract which involves real estate, in any manner, to be in writing.  Take the 1961  California Supreme Court case of Pollyanna Homes, Inc. v. Berney, 56 Cal.2d 676, where the court held that a contract for the installation of off-site improvements adjacent to real property that was also being purchased, did not come within the statute of frauds, since it was not for the sale or leasing of real estate, and it was not to be performed within one year. 

In that case, there was a related obligation for the purchase and sale of property, which in my opinion made it a close call for the court.  However, the rule is often strictly interpreted when it comes to real estate.  Keep in mind that in most cases where there is a written, long-term lease of real estate, which is often the case in commercial as well as residential lease arrangements, the statute of frauds may come into play under Section 1624.

Why is there litigation if the contract was not in writing?  Often one of the parties, and sometimes both parties, claim that the writing was not necessary or that there was a written agreement but certain terms were not made part of that agreement because the parties understood the agreement to include that term.  That may be the case in some instances (this is a separate topic I’ll discuss later, called the parol evidence rule), but not always. 

If you are contemplaing an agreement with someone to buy or sell real estate, or to do anything involving property, get it in writing.  It’s not a bad idea to always have an experienced attorney look at the agreement or perhaps draw it up for you.  It can save  you a great deal of money later if there is ever a question of what you and that other person really meant.

I’m referring to the mistake of NOT naming all persons or entities with a subordinate interest as defendants.  In a judicial foreclosure, a common mistake made by some attorneys is to leave out the name of a person who holds a junior interest. 

Many attorneys will order a litigation guaranty from a reputable title company; others rely on doing their own property title search prior to filing the complaint.  Still, there are a few who don’t even bother.  Now, if an attorney doesn’t search before filing, the easiest way to proceed is to search in the course of discovery and amend the complaint to properly add the new defendant.  If there is no prejudice to the defendants or the proposed defendant, this would and should resolve the dilemna.  But there are some who fail to conduct simple due diligence even at this point.

What’s the damage if an interested person is not named?  That lien survives the foreclosure.  That is, the plaintiff (on a credit bid, or a subsequent buyer, takes title subject to this “forgotten” lien.  Not a pretty mistake.  Not a pretty outcome.